Federal Circuit reverses lost profits on overseas activities

On July 2, 2015, in WesternGeco L.L.C. v ION Geophysical Corp., Case 13-1527, the Federal Circuit reversed almost $100 million in lost profits due to the "infringing" activity being outside of the United States and therefore not an infringement at all. Specifically, the defendant ION exported components that were combined by ION's customers into a larger system, overseas, for performing marine geophysical surveys for the Oil & Gas industry. The plaintiff, WesternGeco, argued that it lost profits from 10 lost surveys that utilized these systems. The "lost surveys" all occurred outside of the United States. At trial, and on appeal, ION argued that because these surveys were outside the jurisdiction of U.S. patent law, while WesternGeco could receive a royalty on the component exports, it was not entitled to lost profits. WesternGeco countered by arguing that "but for" ION's activities in the United States, it would have made the profits from the lost surveys - whether overseas or not - and thus the lost profits were "rooted in" United States activity.

In a 2-1 majority opinion, the Federal Circuit panel held that the jury award of lost profits was inappropriate and must be reversed. The Court held that "the presumption against extraterritoriality is well-established and undisputed." Even though infringement was under 271(f), which explicitly relates to overseas activity, "Section 271(f) does not eliminate the presumption against extraterritoriality. Instead, it creates a limited exception." WesternGeco had argued that 271(f) should have a broader reach than 271(a) for purposes of damages, but the Court reasoned that 271(f) activity should be treated the same, and lead to the same result, as if the defendant had sold an entire apparatus under 271(a): "Just as the United States seller or exporter of a final product cannot be liable for use abroad, so too the United States exporter of the component parts cannot be liable for use of the infringing article abroad." The stated concern from the majority was that if U.S. patents could be used to obtain profits from overseas activity, a U.S. patent would in effect confer a worldwide exclusive right.

Judge Wallach dissented, opining that while infringement may be barred outside of the United States for U.S. patents, damages should not be so limited. He cited multiple cases where foreign sales were accounted for in U.S. damages, noted that "convoyed sales" may provide an avenue for recovery (since for convoyed sales, the additional product is by definition noninfringing), and expressed concern that a party may be unable to ever recover lost profits in a scenario where the activity is on the "high seas," outside of all jurisdictions.

The majority countered these points in its opinion. The majority opined that the cases cited in the dissent were not "remotely similar" in that none of them involved a claim for lost profits from the use abroad of items manufactured outside the United Sates. Regarding the convoyed sales point, the majority noted that WesternGeco did not raise a convoyed sales argument, and thus the record did not support convoyed sales as a possible basis for additional damages. On the issue of whether lost profits could ever be recoverable on the high seas, the majority again noted the record contained insufficient evidence (such as where the survey services were contracted from or signed, or where the survey ships themselves were flagged). The majority concluded its lost profits analysis by holding "[i]n any event, the possible failure of liability provides no basis for ignoring the presumption against extraterritoriality."