The Pathway to Foreign Damages for Patent Infringement

“The Power Integrations case illustrates that there is growing discontent with the current regime that permits companies to circumvent liability for patent infringement despite considerable and concerted efforts to capture a share of the U.S. market for their products.”, smartphones, laptops, medical devices, among other end products, contain scores of individual components supplied by vendors. For end products sold domestically, vendors for the components are often U.S. companies. They design and develop their products in the United States. They deploy teams of marketing and sales personnel in the United States to win incorporation of their components into end products for the U.S. market. They enter general business agreements in the United States with end product companies in the United States. They comply with U.S. certifications, standards and qualifications that make their components fit for the U.S. market. They provide customer support in the United States to end customers located in the United States. In short, they actively compete for a share of the U.S. market for their technological components.

Yet, when it comes to facing liability for patent infringement, they claim to be exempt. They claim they don’t make any products in the United States—the products are made by contract-manufacturers located abroad. They claim they don’t actually sell any products in the United States either—the actual purchase orders and invoices, as well as shipment and delivery for specific units, occurs between foreign subsidiaries and contract manufacturers, also located abroad.

A case currently pending before the Federal Circuit could upset these tactics: Power Integrations, Inc. v. Fairchild Semiconductor Int’l, Inc., 2019-1246, 2019-1247 (Fed. Cir.).  At the heart of the case is the question of whether patent law has grown out-of-sync from the supply-chain realities of making, selling and marketing technological components for end use in the United States today. For instance, invoicing and shipment for particular units may be farmed out abroad. That creates an ostensibly easy way for companies selling technological components to claim they are neither making nor selling any product in the United States. But it ignores that domestic infringement can nevertheless cause foreign damages. Indeed, the recent decision of the Supreme Court in WesternGeco LLC v. ION Geophysical Corp.138 S. Ct. 2129 (2018) expressly held that foreign damages caused by domestic infringement are recoverable.

Power Integrations v. Fairchild

In Power Integrations v. Fairchild, which is currently on appeal at the Federal Circuit for the third time, the issue is whether a patent holder can collect damages incurred abroad that are caused by infringement occurring in the United States. The case pits the presumption against extraterritorial application of U.S. laws against conventional common-law notions of causation for tortious conduct. The plaintiff’s contention is that, although an act of infringement must occur domestically, the recognizable damages that flow from that act need not be limited to U.S. sales only.

Power Integrations (PI) originally sued Fairchild in 2004 for infringement of patents related to power supplies for electronic devices. PI claimed that Fairchild was its main competitor, and also claimed that Fairchild copied PI’s patents. Before doing so, PI allegedly supplied 100% of the chips for certain Samsung phone chargers. Customers such as Samsung were purportedly only interested in buying chips that could be incorporated into products sold in the U.S. market.

Thus, PI argued that Fairchild’s infringement in the United States was necessary for Fairchild to enter the market at all. This included purportedly manufacturing chips in the United States to specifically meet the needs of Samsung’s phone contractors, as well as deploying a U.S. sales force to offer infringing products to Samsung.

Eventually, PI argued, Fairchild managed to capture a substantial portion of PI’s business. That resulted in lost sales as well as price erosion—PI was allegedly forced to reduce the price of its chips in response to Fairchild’s alleged infringement.

The case went to trial, and the jury originally awarded over $33 million for PI’s lost profits, price erosion and reasonable royalties. The district court cut that award down to approximately $6 million on the ground that most of Fairchild’s allegedly infringing sales were made abroad.

PI did not dispute that Fairchild’s sales were made abroad. Rather, it argued that but for Fairchild’s infringement in the United States—which was needed to capture Samsung as a customer—Fairchild never would have made those foreign sales. PI therefore claimed that Fairchild’s U.S. infringement was the proximate cause of PI’s lost profits and other damages suffered abroad.

The district court rejected this theory. And the Federal Circuit did as well. On appeal, the Federal Circuit acknowledged that PI’s damages were essentially premised on a “foreseeability” theory—namely, that “it was foreseeable that Fairchild’s infringement in the United States would cause Power Integrations to lose sales in foreign markets.”  Power Integrations, Inc. v. Fairchild Semiconductor Int’l, Inc., 711 F.3d 1348, 1370 (Fed. Cir. 2013). Nonetheless, the Federal Circuit held that, even if Fairchild’s foreign sales were the direct, foreseeable result of its domestic infringement, the patent statute does not provide “compensation for a defendant’s foreign exploitation of a patented invention, which is not infringement at all.” Id. at 1371.

WesternGeco v. ION Geophysical

Meanwhile, in 2018, the Supreme Court issued its decision in WesternGeco LLC v. ION Geophysical Corp. PI has now claimed that the WesternGeco decision implicitly overruled the Federal Circuit’s 2013 Power Integrations decision. The district court has already agreed, and certified that question for appeal to the Federal Circuit.

In WesternGeco LLC v. ION Geophysical Corp., 791 F.3d 1340 (Fed. Cir. 2015). the plaintiff, WesternGeco, performed underwater ocean surveys for oil companies. WesternGeco used its own patented device to perform the surveys. By contrast, the defendant, ION Geophysical, manufactured components for an infringing device, and shipped them to customers abroad for manufacture. Those customers, in turn, performed the surveys on behalf of oil companies.

WesternGeco sued ION Geophysical for patent infringement. WesternGeco sought to recover damages for ten lost services contracts, totaling $90 million in lost profits, that it claimed it would have won but for ION Geophysical’s infringement. The Federal Circuit disagreed. It held that WesternGeco could not recover lost profits for services performed abroad without violating the presumption against extra-territorial application of U.S. laws. The Court essentially followed the reasoning it laid out in its earlier 2013 Power Integrations decision.

WesternGeco had technically asserted infringement under section 271(f) of the patent statute, rather than 271(a). The Federal Circuit explained that the purpose of 271(f) was to close a loophole where infringers previously sought to avoid “making” an infringing device within the United States by intentionally exporting the components for manufacture abroad. Thus, the Court held that nothing within 271(f) evidenced Congress’ intent to depart from the traditional presumption against extraterritorial application of patent laws.

The Supreme Court reversed, The Court acknowledged that the case raised a presumption against extraterritoriality but asked whether the case nevertheless involves a “domestic application of the statute,” which would be evident from review of “the statute’s focus.” The Court explained that a “statute’s focus” includes the conduct it seeks to regulate as well as the interests it seeks to vindicate. If that conduct occurs domestically, then the case involves a permissible domestic application of the statute that rebuts the presumption against territoriality.

Turning to the statute at issue, the Court found that section 284 of the patent statute provides: “the court shall award the claimant damages adequate to compensate for the infringement.” From this, the Court concluded that the statute’s focus was “infringement.” Likewise, the Court reasoned that the primary purpose is to afford patent owners “complete compensation” for infringement.

The Court acknowledged, however, that there are several different types of infringement. The Court therefore turned to section 271(f)(2), which was the specific type of infringement at issue in WesternGeco’s case. There, the Court found that the focus of this specific statute is on domestic conduct. Namely, section 271(f)(2) provides that it shall constitute infringement to supply components of a patented device “in or from the United States.” In a similar vein, the Court found that section 271(f) also vindicates domestic interests—namely, to protect against domestic entities circumscribing liability by exporting components of a patented-device for assembly abroad.

Accordingly, the Court held that the conduct being regulated by section 271(f)(2) is supplying “in or from the United States.” Given this, WesternGeco’s recovery of lost profits, even for foreign services contracts, did not violate the presumption against territoriality.

The import of WesternGeco remains in dispute, and as discussed below, the scope of that dispute is now being litigated between PI and Fairchild at the Federal Circuit.

Back to Power Integrations

In light of the Supreme Court’s decision in WesternGeco, PI asked the district court to apply the same rationale to its case against Fairchild. The district court agreed that WesternGeco implicitly overruled the Federal Circuit’s 2013 Power Integrations decision. The court reasoned that the Supreme Court’s analysis of section 284 in view of section 271(f)(2) has equal applicability to section 271(a), which is the relevant type of infringement at issue in PI’s case against Fairchild. The district court therefore certified an interlocutory appeal so that the Federal Circuit could address this precise question.

That appeal is now pending before the Federal Circuit, and both parties have filed opening briefs. (Case No. 19-1246). Oral argument has yet to be scheduled, but the outlines of each side’s arguments are clear. Starting with the appellant, Fairchild makes three arguments for why WesternGeco did not overrule the Federal Circuit’s ruling on extraterritoriality in the 2013 Power Integrations decision.

Fairchild Describes Dangers of Extending WesternGeco to Section 271(a)

First, Fairchild argues that WesternGeco was expressly limited to an interpretation of infringement under section 271(f)(2). Given that, WesternGeco cannot be interpreted to apply to section 271(a). In other words, Fairchild contends that WesternGeco and Power Integrations cannot be construed to be clearly contrary applications of the law since, technically, they each addressed different laws.

Second, Fairchild argues that sections 271(a) and 271(f)(2) focus on different conduct, and a straightforward application of the reasoning of WesternGeco to section 271(a) will yield the same holding as Power Integrations. Section 271(f)(2) specifically focuses on exportation of components of an invention, and the conduct in WesternGeco’s case was indisputably domestic. Thus, damages incidental to that foreign conduct were permissible. By contrast, section 271(a) focuses on manufacture and sale of completed inventions within the United States. Because the sales at issue in PI’s case against Fairchild were unequivocally foreign sales, they cannot be recoverable.

Finally, Fairchild identifies numerous policy considerations that it claims caution against reading WesternGeco to reach section 271(a). First, opening the door to recovery of worldwide damages for patent infringement would undermine international comity and force the United States to engage in “patent imperialism.” Second, if worldwide sales can be reached under section 271(a), that runs the danger of duplicative recoveries—patent-holders could recover the same damages through enforcement of domestic and foreign patents. Third, worldwide damages resulting from infringement of U.S. patents would compel companies to abandon any commercial activity in the United States.

Power Integrations: The Damages Provision Contemplates Complete Compensation

Turning to PI, it makes the case for why the reasoning of WesternGeco necessarily applies to infringement under section 271(a). PI argues that the primary purpose of the patent statute’s damages provision, just like many damages laws, is to afford the infringed complete compensation. Whereas the infringing act may have territorial constraints, the damages that naturally flow from that domestic act do not.

Indeed, the majority in WesternGeco articulated this principle clearly. In response to two dissenters contending that the patent statute does not permit damages awards for foreign lost profits, the majority reasoned that their “position wrongly conflates legal injury with the damages arising from that injury.”

This principle is best illustrated by the actual damages deemed recoverable by the Supreme Court in WesternGeco. The defendant, ION Geophysical, sold components for assembly abroad, but the Supreme Court did not limit WesternGeco’s damages to these precise activities. Rather, WesternGeco was permitted to collect its lost profits for service contracts that, as far as the record suggests, were entirely international. The Supreme Court therefore confirmed that those international contracts could serve as the basis for WesternGeco’s damages because ION Geophysical’s domestic infringement caused those foreign losses by WesternGeco.

Against this, PI contends that many of Fairchild’s policy concerns are red herrings. PI claims that concerns about international comity are exaggerated—this dispute, like many patent disputes, is one solely between U.S. companies. PI also argues that there is nothing settled about the Federal Circuit’s reasoning in the 2013 Power Integrations case. Rather, the reasoning of WesternGeco is more in line with traditional common-law notions of causation, which already contemplate what sorts of damages naturally flow from but-for and proximate causation. Finally, concerns about duplicative recoveries can be easily cured with rules precluding them.

In sum, PI’s argument is that the fault of the Federal Circuit’s reasoning in the 2013 Power Integrations case is not about what constitutes infringement, but more precisely about what constitutes causation. The weight of authority holds that damages be assessed so as to make a patentee whole. Though the statute defines the injury (infringement) as something that must occur within the United States, neither the statute nor the common-law notions of causation confine the damages flowing from that injury to domestic sales alone.

Indeed, this is precisely what the Supreme Court held in WesternGeco. Therefore, according to PI, the Federal Circuit’s conflation of where the injury must occur as defining the base of recoverable damages must be corrected.

Weighing the Possibilities

The Power Integrations case illustrates that there is growing discontent with the current regime that permits companies to circumvent liability for patent infringement despite considerable and concerted efforts to capture a share of the U.S. market for their products. The case highlights how the Federal Circuit has cabined the scope of recoverable damages in a manner that is not consistent with traditional, common-law notions of causation.

If this case breaks in favor of patentees, that could open up a pathway to recovering damages arising out of foreign sales. The Supreme Court in WesternGeco expressly recognized that domestic infringement can cause and permit recovery of damages abroad.

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