Patent Law Practice Center

Supreme Court rules patent owners can recover lost foreign profits

At the end of the recent Supreme Court term, the Court  issued a decision in WesternGeco LLC v. ION Geophysical Corp., which in a 7-2 decision ruled that a patent owner may recover lost foreign profits for infringement under 35 U. S. C. 271(f)(2).  The question decided, as set forth in the opinion by Justice Thomas, writing for the majority, was: “The question in this case is whether these statutes allow the patent owner to recover for lost foreign profits.” Thomas simply answered the question in the opening paragraph saying: “We hold that they do.”

The dispute between WesternGeco, a company that develops technology for surveying the ocean floor, and ION Geophysical Corporation, a competitor, dates back to late 2007. In late 2007, ION began manufacturing components for its competing surveying system and shipping them to companies abroad. Those companies combined the components to create the surveying system that was indistinguishable from WesternGeco’s patented systems.

WesternGeco sued for patent infringement under §§271(f)(1) and (f)(2). At trial, WesternGeco proved that it had lost 10 specific survey contracts due to ION’s infringement. The jury found ION liable and awarded WesternGeco damages of $12.5 million in royalties and $93.4 million in lost profits. ION filed a post-trial motion to set aside the verdict, arguing that WesternGeco could not recover damages for lost profits because §271(f) does not apply extraterritorially. The District Court denied the motion. 953 F. Supp. 2d 731, 755–756 (SD Tex. 2013).

On appeal, the Federal Circuit found ION liable for infringement under §271(f)(1) but reversed the award of lost-profits damages under §271(f)(2). WesternGeco LLC v. ION Geophysical Corp., 791 F. 3d 1340 (2015). The Federal Circuit had previously held that §271(a), the general infringement provision, does not allow patent owners to recover for lost foreign sales. See Power Integrations, Inc. v. Fairchild Semiconductor Int’l, Inc., 711 F. 3d 1348 (Fed. Cir. 2013). The Federal Circuit reasoned that Section 271(f) should be interpreted the same way.

While the Supreme Court acknowledged that courts ordinarily presume that statutes apply only within the territorial jurisdiction of the United States, quoting Foley Bros. v. Filardo, 336 U.S. 281, 285 (1949), Justice Thomas explained there is an established two-step framework to decide questions of extraterritoriality. RJR Nabisco, Inc. v. European Community, 136 S.Ct. 2090 (2016). While ordinarily courts address the first step first, in this case the Supreme Court exercised its discretion to forgo the first step and address the second prong of the test. They did this, no doubt, because they concluded that the conduct relevant to the statutory focus was domestic.

Justice Thomas explained:

Section 271(f)(2) focuses on domestic conduct. It provides that a company “shall be liable as an infringer” if it “supplies” certain components of a patented invention “in or from the United States” with the intent that they “will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States.” The conduct that §271(f)(2) regulates—i.e., its focus—is the domestic act of “suppl[ying] in or from the United States.” As this Court has acknowledged, §271(f) vindicates domestic interests: It “was a direct response to a gap in our patent law,” Microsoft Corp., 550 U. S., at 457, and “reach[es] components that are manufactured in the United States but assembled overseas,” Life Technologies, 580 U. S., at ___ (slip op., at 11). As the Federal Circuit explained, §271(f)(2) protects against “domestic entities who export components . . . from the United States.” 791 F. 3d, at 1351.

Thomas would go on to rather emphatically state: “The conduct in this case that is relevant to that focus clearly occurred in the United States, as it was ION’s domestic act of supplying the components that infringed WesternGeco’s patents.”

Supreme Court says IPR is constitutional

On the morning of Tuesday, April 24th, the U.S. Supreme Court issued a decision in Oil States Energy Services, LLC v. Greene’s Energy Group, LLC  that upheld the constitutionality of inter partes review (IPR) proceedings at the Patent Trial and Appeal Board (PTAB). The Supreme Court applied the public rights doctrine to the government’s grant of a patent, finding that patent validity trials need not take place in an Article III court nor did they violate the Seventh Amendment, which ensures a person’s right to a jury trial. The majority opinion was authored by Justice Clarence Thomas. Justice Neil Gorsuch authored a dissent to which Chief Justice John Roberts concurred.

Justice Thomas’ majority opinion starts off by noting that Congress has authorized administrative processes at the U.S. Patent and Trademark Office to reconsider and cancel patent claims decades prior to the enactment of the Leahy-Smith America Invents Act (AIA) of 2011, the law which created IPRs and other post grant proceedings at the PTAB. Notably, Congress created ex parte reexamination proceedings in 1980 and the Court noted that those proceedings continue today. Congress also created inter partes reexamination in 1999, though those proceedings were phased out with the enactment of the AIA.

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Supreme Court decides Oil States

The United States Supreme Court recently decided  Oil States v. Greene’s Energy, which asked whether post-grant challenges to issued patents at the Patent Trial and Appeal Board (PTAB) of the United States Patent and Trademark Office (USPTO) are constitutional under Article III and the Seventh Amendment of the U.S. Constitution. In a 7-2 decision, the Court found that inter partes review (IPR) challenges are constitutional.

The Trump Administration argued that patents are a government franchise, and that is, in fact, what the Supreme Court ruled. Indeed, Justice Thomas, writing for the majority, said that all inter partes review involves is “reconsideration of the Government’s decision to grant a public franchise.” Thus, patents are not property rights despite what the statute says to the contrary, and despite the fact that the Supreme Court themselves have ruled to the contrary previously.

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U.S. Argues Patents are a Public Right in Oil States

In going through the Department of Justice brief in Oil States, you will find no fewer than seven different places where the government makes the argument that patents are a public right, and not private property as they are ordinarily considered. This is interesting because the patent statute itself refers to patents as having all the same attributes of personal property, and at various times the Supreme Court has themselves equated patents to real estate.

Notwithstanding, the Federal Government argues patents are a public right throughout its Oil States brief, as shown from the passages that follow:

DOJ Oil States brief at pg. 13

The justification for patents is not that an inventor has a natural right to preclude others from making or using his invention, but that patent protection will ultimately benefit the public by providing an incentive to innovate. Governmentally-conferred franchises designed to serve such purposes create “public rights,” whose scope and continuing effectiveness may be resolved by non-Article III tribunals.

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SCOTUS takes IPR constitutionality challenge in Oil States

To the surprise of many, the United States Supreme Court has granted certiorari in Oil States vs. Greene’s Energy Group, et al. From a substantive standpoint, this dispute is between the parties to an inter partes review (IPR) proceeding conducted by the Patent Trial and Appeal Board (PTAB). By taking this case, the Supreme Court will address the constitutionality of having an Article I tribunal extinguish patent rights under the post grant proceedings created by the America Invents Act (AIA).

The Supreme Court granted certiorari only on the first question presented: “Whether inter partes review – an adversarial process used by the Patent and Trademark Office (PTO) to analyze the validity of existing patents – violates the Constitution by extinguishing private property rights through a non-Article III forum without a jury.”

The grant of certiorari in this case is particularly noteworthy given that the United States was asked by the Supreme Court for its views and opined in its brief that the petition should be denied.

The argument that inter partes review is unconstitutional can be traced back all the way to 1898 when the Supreme Court issued its decision in McCormick Harvesting Mach. Co. v. Aultman & Co., 169 U.S. 606 (1898). In that case, the Supreme Court held that once a patent is granted, it “is not subject to be revoked or canceled by the president, or any other officer of the Government” because “[i]t has become the property of the patentee, and as such is entitled to the same legal protection as other property.”

The phrasing of the question taken by the Supreme Court could be quite telling. Over the last several years, 8 of the 9 Supreme Court Justices have signed on to an opinion that has recognized that a patent confers either an exclusive or valuable property right. Thus, it would hardly seem a stretch to suggest that the Court, or at least the required four Justices necessary to take a case, have some reason to suspect that the extinguishing of a exclusive, valuable property through a non-Article III forum without a jury violates the Constitution.

While many will undoubtedly have varied opinions as to the importance of this decision by the Court to take this case, the truth is that any decision by the Supreme Court in Oil States simply cannot make things any worse for patent owners. The PTO already considers patents to be a public right, and post grant challenges, particularly inter partes review and covered business method review, are killing patent claims at exceptionally high rates.

This case will be argued during the October 2017 term, with a decision by the end of June 2018. In the coming months there will be much more analysis as the party briefs and amici are filed. Stay tuned.

For instant industry reaction please see: Industry Reaction to SCOTUS Granting Cert. in Oil States.