Extraterritorial Damages: Mitigating Risks and Threats to Business Continuity
“Shrimp, whether boiled, broiled, barbecued or fried, are a gustatory delight, but they did not evolve to satisfy man’s palate.”
Patent infringement is generally confined to acts that occur within the United States borders (per 35 U.S. Code § 271). The Supreme Court of the United States has provided guidance on this issue in several key cases. In 1972, in the Deepsouth v. Laitram matter, the Court maintained this position when it held that Laitram’s right to exclude under its patent grant did not extend to the exportation of manufacturing components of Deepsouth’s infringing shrimp deveining machine for assembly and use abroad. In that ruling, the Court held that the word “makes” as used in 35 U.S.C. § 271(a) did not extend to the manufacture of the constituent parts of the accused deveining apparatus.
However, in the 2018 matter of WesternGeco LLC v. ION Geophysical Corp., the Court held that WesternGeco could recover lost profits for infringement under 35 U.S.C. § 271(f)(2) for ION’s manufacture and export of a competing system used to survey the ocean floor. This portion of the statute makes it an act of infringement to supply components of a patented invention from the U.S. for assembly abroad, knowing that such combination would infringe the patent if it occurred in the U.S. The decision allowed WesternGeco to recover lost profits damages for ION’s sales outside the U.S. so long as the initial act of supplying components from the U.S. was infringing.
This ruling, however, left open two questions:
1. Could this same rationale be applied to obtain damages for foreign sales for cases of infringement under Section 271(a) (e.g., making, using, selling, or offering to sell the patented invention)?
2. Is an award of reasonable royalty damages allowable under the same theory as the lost profits claim in WesternGeco?
In March 2024, the U.S. Court of Appeals for the Federal Circuit addressed both questions.
In Harris Brumfield v. IBG LLC, the Federal Circuit affirmed the district court’s decision that the WesternGeco framework applies to reasonable royalty awards (not just lost profits) and that a reasonable royalty would be the amount a hypothetical infringer would pay to engage in the domestic acts constituting the infringement. As a result, the law is now clear that a successful patent holder may recover damages based on entirely foreign sales if a domestic act of infringement under Section 271(a) is the “proximate cause” of those sales. However, Brumfield did include an ironic twist: namely, the plaintiff’s damages analysis on foreign transactions was still excluded in this specific instance.
Unlike the other precedents discussed, the allegations in Brumfield pertained neither to the sea nor crustaceans born therein, but rather a patented platform for use in commodities trading. Defendants here were accused of infringing a myriad of patents, with claims including systems, methods, and “computer readable mediums.”
Plaintiff’s damages expert calculated damages using several royalty bases. Two of these, including “making a copy of the accused products via a server located in the United States”; and “sale of the accused products in the United States via the user’s entry into a Customer Agreement;” were allowed by the district court. An additional royalty base capturing defendants’ “‘making’ the accused products in the United States with foreign damages,” argued that the software was “developed” domestically, and therefore a structure including monthly foreign active users of the product was permissible. The district court disagreed with this particular application of extraterritoriality, and the Federal Circuit affirmed the exclusion on appeal. Regardless, after hearing from plaintiff’s expert on the two permitted theories, the jury awarded over $6.6 million in damages based on a reasonable royalty of “…10 cents per commodity-futures unit sold by users in the United States” via the accused module.
In the wake of Brumfield and WesternGeco, we expect extraterritoriality to feature more prominently in many cases. It follows directly that parties can expect plaintiffs to seek damages calculations based on foreign revenues, which, at a minimum, will lead to more frequent discovery requests and disputes relating to whether discovery into foreign sales is appropriate and whether the appropriate causal connection has been shown. In calculating reasonable royalty damages, experts should consider the impact of the “proximate cause” issue on any claim for recovery based on foreign sales and ensure that the royalty structure used is carefully aligned with the infringement theory. Finally, parties with international patent coverage should consider issues relating to exhaustion and double recovery when simultaneously asserting related foreign patents and develop an appropriate litigation strategy.
Economically, multinational organizations should evaluate their component export/import behaviors to avoid any infringement pitfalls. Companies may wish to further de-risk their position in supply chains by seeking contractual indemnity from foreign partners to mitigate exposure to extraterritorial damages.
Though the Federal Circuit has offered some clarity, extraterritoriality in U.S. patent litigation remains a nuanced area of law. The WesternGeco and Brumfield cases represent significant developments, allowing patent holders to recover damages for foreign activities tied to infringing acts in the U.S. Businesses must navigate these complexities carefully to avoid potential liabilities and protect their intellectual property rights globally. If you would like to learn more about extraterritorial damages in patent litigation or have any other questions on damages related topics, please reach out to Justin Lewis, Nick Baciu or Dale Salton (justin@truestconsulting.com / nick@truestconsulting.com / dale@truestconsulting.com).
[1] Deepsouth Packing Co., Inc. v. Laitram Corp., 406 U.S. 518 (1972)
[2] WesternGeco LLC v. Ion Geophysical Corp. (In re WesternGeco LLC), 889 F.3d 1308 (Fed. Cir. 2018).
[3] Brumfield v. IBG LLC, No. 22-1630 (Fed. Cir. 2024)