Argument analysis: Breyer and Kagan seek middle ground on damages for patent infringing exports

The justices’ second argument this morning was WesternGeco v Ion Geophysical Corp., a case that requires the justices yet again to consider Section 271 of the Patent Act. Although the Patent Act generally does not apply to conduct outside the nation’s borders, that section imposes a narrow (and controversial) exception that permits a suit for infringement of a domestic patent when components are made in the United States and shipped abroad for assembly into the patented device.

The particular question here involves the damages available to the patentholder. Ordinarily, in a purely domestic patent case, the patentholder would be entitled to both a reasonable royalty (what the infringer would have paid if it had licensed the technology from the patentholder) and lost profits (opportunities lost because of the infringement). Here, for example, the infringer (the respondent ION) was ordered to pay a royalty of about $12 million for manufacturing and shipping components that, when assembled, would infringe patents of petitioner WesternGeco. Separately, the lower court ordered ION to pay damages of about $90 million that WesternGeco would have earned if it had been able to sell service contracts to the overseas purchasers of the assembled devices. Although at first glance the two parts of the award seem to overlap, all agree that the damage award would be proper if all of the activity occurred domestically. The narrow question for the justices is whether WesternGeco can get both the royalties and the lost profits damages.

As a group, the justices seemed far from settled on a resolution. About the only thing that seemed clear from the argument was that few if any of the justices are ready to accept WesternGeco’s argument that it is more or less automatically entitled to the damages – that the enactment of Section 271 (labeling ION’s conduct infringement) is enough to justify the full range of conventional patent remedies without regard to the location of the conduct. Justice Neil Gorsuch, for example, commented to Paul Clement (representing the patentholder) that “you don’t have a … lawful monopoly to use this technology abroad. That doesn’t belong to you. …. And so why would you get lost profits … because of a third party’s use entirely abroad? …. Your patent doesn’t run to the high seas, and so your uses aren’t protected there.”

In a similar vein, Justice Stephen Breyer was pervasively worried about the “comity” implications of the dispute – the concerns other countries might have with an American rule imposing large damages for commercial activity outside the borders of the United States and wholly lawful in the country where it occurs. So, for example, at one point he asked Zachary Tripp (appearing for the government in support of the patentholder) to consider what might happen if:

France ha[d] this law that you want here, right? Joe Smith goes to France one day and he makes a tiny particle, which it turns out violates somebody else’s French patent. He ships it back to the United States, where it forms a small part of a very large and valuable gizmo. And all of a sudden, we discover that he’s paying the entire profits of the entire gizmo industry to some French company that had a small patent on a small part. Now all I have to do is generalize from that and I think, my God, we have a lot of problems here.

For Breyer, the entanglement with foreign commerce was troubling: “I can see how that would, in fact, upset foreign countries a lot, because, after all, it wasn’t even a violation of any foreign patent law.” Returning to that theme repeatedly, Breyer emphasized his concern about the potential backlash from a decision in favor of the patentholder. “I mean, if we can have a law like this, so can every other country. … I mean, suppose 10 countries do this. I try to think about that and I see chaos or confusion. And that point, I think part of comity is, what happens if everybody does it?”

At the same time, several justices were reluctant to protect the infringer entirely under a so-called presumption against extraterritorial reading of statutes – a presumption that the Patent Act should not be read to apply overseas without Congress’ explicit approval. Justice Samuel Alito, for example, thought such a ruling could not be reconciled with the text of the statute:

If you have a liability provision that says there is liability for acts that are committed abroad, what sense does it make to say, well, although Congress thinks there should be liability for these acts committed abroad, we have to analyze the remedial provisions separately to see whether they wanted any remedy for these acts that are committed abroad?

Alito’s resistance to the infringer’s argument is particularly disheartening for the infringer, because Alito wrote the court’s last major decision on the presumption against extraterritoriality.

Similarly, Justice Anthony Kennedy repeatedly pressed Kannon Shanmugam (who defended the lower court ruling protecting the infringer) to admit that he was seeking to protect his client from the consequences of its infringing behavior: “[Y]our position is that the petitioner is not entitled to full compensation for its injury? That’s your position?”

Justice Ruth Bader Ginsburg seemed to reach a similar position from a different baseline, suggesting that copyright law would contemplate fully compensatory damages in a case like this one: “Isn’t that exactly how the copyright law is applied under the so-called predicate act doctrine? The copyright owner can get damages flowing from the exploitation abroad of domestic acts of infringement. Isn’t this an application to the patent field of the same doctrine?”

You might think that a stark division would flow from the tension between the comments of Ginsburg and Kennedy (concerned about departing from the routine norm of full compensation) with the comments of Gorsuch and Breyer (concerned about the broad reach of American law necessary to provide full compensation). But Breyer and Justice Elena Kagan seemed to be pushing for a middle ground, in which courts would use tort-law concepts of “proximate cause” to limit free awards of damages for conduct only tenuously related to the domestic activity of the infringer. Kagan, for example, suggested to Shanmugam that his parade of horribles was nothing more than a “classic law school proximate-cause hypo. I mean, that’s what that hypo is. And it suggests that if there’s a problem here, it’s a problem about where you draw the causal line. It’s not a problem about some categorical extraterritoriality rule.” Welcoming Kagan’s suggestion, Breyer explained near the end of the argument that a proximate-cause limitation on the ready availability of lost profits in cases like this one would resolve his concerns about comity: “If you have a tough proximate-cause law, … you will stop people from being fully compensated, but the reason you do it is because you’re afraid with 92 district courts and juries and so forth, it’ll get out of control and be a kind of major problem with other countries.”

In the end, then, I expect a fair amount of back and forth among the justices before they come to rest on this one. I wouldn’t expect the kinds of virulent dissents that we see so commonly in late-June decisions, but I do think it will take quite a while for the justices to settle on positions from such disparate starting points.

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