IP Law Daily, TOP STORY—Fed. Cir.: WesternGeco’s $93M award for lost profits reversed on appeal, (Jul 2, 2015)

By Mark Engstrom, J.D.

WesternGeco was not entitled to lost profits for the extraterritorial use of an infringing device that exploration companies used to facilitate searches for deep-sea oil and gas reserves, the U.S. Court of Appeals for the Federal Circuit has ruled (WesternGeco LLC v. ION Geophysical Corp., July 2, 2015, Dyk, T.). Although the appellate court found that WesternGeco was the rightful owner of the patents in suit, and thus had standing to sue ION Geophysical for the direct infringement of those patents, lost profits could not be awarded for damages that arose from the loss of contracts for extraterritorial services. A jury award of $93 million in lost profits was therefore annulled. The judgment of the trial court was affirmed in part and reversed in part. Circuit judge Evan Wallach dissented on the issue of damages.

Background. WesternGeco sued ION Geophysical for infringement of U.S. Patent Nos. 6,691,038; 7,080,607; 7,162,967; and 7,293,520. The asserted claims of all four patents were system claims that involved “seismic streamer control and positioning” technologies that facilitated the search for oil and gas deposits that lay beneath the ocean floor. A jury found that ION had infringed all of the asserted claims for each of the four patents. The jury awarded $93.4 million in lost profits and $12 million in reasonable royalties.

On appeal, ION argued that WesternGeco lacked standing to sue ION for the infringement of three of the four patents in suit because WesternGeco was not the rightful owner of those patents. ION also argued that the district court: (1) applied an incorrect standard in granting summary judgment on a single claim under 35 U.S.C. §271(f)(1); (2) failed to give a proper jury instruction; and (3) allowed WesternGeco to make improper references to the court’s summary judgment order. According to ION, the court’s decisions “infected the trial” on ION’s liability. Finally, ION argued that lost profits were impermissibly awarded for extraterritorial conduct.

WesternGeco filed a conditional cross-appeal, which argued that, if the court ruled in favor of ION, the court should set aside the damages award because the district court had erred when it prevented WesternGeco’s damages expert from testifying on the issue of a reasonable royalty. WesternGeco also challenged the district court’s refusal to award enhanced damages for willful infringement.

Ownership. ION argued that WesternGeco did not own the ’607 patent, the ’967 patent, and the ’520 patent, and thus lacked standing to assert them.

After the district court reviewed the parties’ arguments regarding the chain-of-title, it concluded that WesternGeco’s evidence was sufficient to prove ownership. The Federal Circuit reviewed the evidence regarding the chain of title and concluded that the district court’s findings were not clearly erroneous.

Infringement. The district court granted summary judgment of infringement to WesternGeco, under 35 U.S.C. §271(f)(1), on claim 18 of the ’520 patent. The jury found that ION had infringed the remaining claims under §271(f)(1). In addition, the jury separately found that ION had infringed all of the asserted claims—including claim 18—under 35 U.S.C. §271(f)(2).

First, ION argued that the district court misconstrued the “actively induce” requirement of §271(f)(1) when it granted summary judgment to WesternGeco on claim 18 of the ’520 patent. The Federal Circuit court declined to address the question of whether the district court had applied the correct standard under §271(f)(1) because the jury had clearly found ION liable—under §271(f)(2)—for the infringement of every asserted claim.

Second, ION challenged the lack of limiting jury instructions regarding infringement under §271(f)(2). The district court held that, under §271(f)(1) and §271(f)(2), WesternGeco had to prove that ION had intended that the infringing components be combined abroad. In granting summary judgment on claim 18, the district court ruled in favor of WesternGeco. The Federal Circuit found that the jury was entitled to know that. Because ION’s proposed jury instruction would have precluded that knowledge, the proposed instruction was overly broad. For that reason, the district court did not err in refusing to accept ION’s proposed instruction.

Lost profits. The Federal Circuit noted that WesternGeco domestically manufactured its “Q-Marine” system—the commercial embodiment of its patented technologies—and performed seismic surveys abroad. ION manufactured the infringing “DigiFIN” system domestically, but shipped it overseas—to customers who performed seismic surveys in competition with WesternGeco.

WesternGeco argued that ION’s customers would not have been able to win the ten survey contracts that WesternGeco had identified—surveys that generated over $90 million in profit—if the customers were not given access to ION’s infringing DigiFINs. ION argued that WesternGeco could not receive lost profits based on its failure to win those contracts.

The court noted that §271(f) imposed liability on domestic entities that shipped infringing components abroad (with the requisite intent), just as if those components had been manufactured in the United States. Significantly, nothing indicated that Congress had intended to extend U.S. patent law to cover extraterritorial uses of articles that were created from exported components.

In Power Integrations, Inc. v. Fairchild Semiconductor Int’l, Inc., 711 F.3d 1348 (2013), the Federal Circuit explained that U.S. patent law did not provide compensation for a defendant’s “foreign exploitation” of a patented invention. The Power Integrations court found “neither compelling facts nor a reasonable justification” for finding that a patentee was entitled to “full compensation” in the form of damages from the loss of foreign-market sales that purportedly were a foreseeable result of infringing conduct in the United States. The “entirely extraterritorial production, use, or sale” of an invention that was patented in the U.S. was an independent, intervening act that, under almost all circumstances, “cut off the chain of causation that was initiated by an act of domestic infringement,” the court explained.

WesternGeco argued that Power Integrations was applicable to infringement under §271(a)–(b), not infringement under §271(f). The court disagreed. Section 271(f) did not eliminate the presumption against extraterritoriality; it created a limited exception to it. By its own terms, §271(f) operated to attach liability to domestic entities who exported components that they intended to be combined in a “would-be infringing manner abroad.” The court emphasized that liability attached in the U.S.; the act of exporting the components from the U.S. created the liability.

A construction that would allow the recovery of foreign profits would make §271(f), which covered components, broader than §271(a), which covered finished products. In fact, §271(f) was designed to put domestic entities who exported components for assembly into a final product in a position that was similar to domestic manufacturers who sold the final product domestically, or who exported the final product. Just as a domestic seller or exporter of a final product could not be liable for extraterritorial use, so too the U.S. exporter of the component parts could not be liable for the use of the infringing article abroad.

WesternGeco’s conditional cross appeal. WesternGeco challenged the district court’s grant of ION’s motion to exclude an expert from testifying about a reasonable royalty. According to WesternGeco, the court had improperly adopted the rule that a profit-eliminating royalty was per se unreasonable.

The Federal Circuit concluded that the district court had adopted “no such absolute rule” and further concluded that the district court did not abuse its discretion in excluding the expert. According to the Federal Circuit, the district court expressly based its ruling on the fact that the proposed royalty was both profit eliminating and revenue eliminating. In fact, the proposed royalty was so high that it would have exceeded ION’s revenue four fold.

WesternGeco cited no case in which the Federal Circuit had held that a reasonable royalty could exceed the market price for the patented invention by a factor of four. Accordingly, the Federal Circuit saw no error in the district court’s discretionary decision to exclude the expert from testifying about a reasonable royalty.

WesternGeco also challenged the district court’s refusal to award enhanced damages for willful infringement after the jury decided that WesternGeco had shown that ION actually knew, or should have known, that its actions constituted patent infringement. The trial court noted that the jury determined whether the subjective prong was satisfied, but the trial court determined whether the objective prong was satisfied. After carefully reviewing ION’s non-infringement and invalidity defenses, the district court concluded that those defenses were “not unreasonable by clear and convincing evidence,” were “not objectively baseless,” and were “reasonable.”

In the Federal Circuit’s view, WesternGeco failed to show that the district court had erred in concluding that ION’s defenses were reasonable. In fact, WesternGeco gave “relatively little attention” to that issue. Instead, WesternGeco argued that: (1) ION was not successful with any of its defenses and (2) ION did not raise any of its defenses on appeal. Significantly, however, enhanced damages were awarded based on unreasonable conduct, not on a lack of success.

Finally, WesternGeco argued that: (1) ION’s customers brought the asserted patents to ION’s attention and voiced their concerns about the possibility of infringement and (2) ION was so concerned about the possibility of infringement that it hesitated to enter into indemnity agreements with its customers.

According to the Federal Circuit, those arguments were relevant to a subjective inquiry; they were not relevant to the objective inquiry of whether WesternGeco had objectively reasonable defenses. Whether appellate court’s review was de novo or deferential, the Federal Circuit found no error in the district court’s determination.

Dissent. Circuit Judge Evan Wallach agreed with the majority’s rulings on standing, infringement, and willfulness, but dissented on damages. In an effort to respect the presumption against the extraterritorial application of U.S. law, the majority “erroneously decline[d] to consider” lost foreign sales under 35 U.S.C. §271(f), Judge Wallach opined. In Judge Wallach’s view, the patent statute required courts to consider lost foreign sales as part of their damages calculations.

The case is Nos. 2013-1527, 2014-1121, 2014-1526, and 2014-1528

Attorneys: Gregg F. Locascio (Kirkland & Ellis LLP) for WesternGeco LLC. David J. Healey (Fish & Richardson, P.C.) for ION Geophysical Corp.

Companies: WesternGeco LLC; ION Geophysical Corp.

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