Export Market Beware! Recent Supreme Court Cases Expand Damages and Create New Confusion About Liability For Exporting Parts for Assembly Overseas

Written by: Michael P.F. Phelps

The U.S. automotive parts industry is a poster child for modern commercial globalization.  Parts and assemblies are passed within and across borders from one supply tier to the next to feed automobile manufacturing plants around the world.  The network is so vast and intermixed that it’s hard to pinpoint any particular single point of origin for an assembled automobile, other than to identify it nominally as “American,” “German,” or the like.  And this trend towards globalization is growing faster than ever, with the last decade seeing growth in U.S. automotive part exports nearly doubling.[1]

This shift towards the export market warrants a close look at two significant Supreme Court cases that demonstrate how the U.S. patent system deals with the exportation of parts that are assembled into products overseas.  In Life Technologies v. Promega[2], the Supreme Court held that exporting a single commodity good cannot run afoul of §271(f)(1)’s prohibition against exporting a “substantial portion” of a claimed invention, but the Court’s rationale leaves muddy water in its wake.  Second, in WesternGeco v. ION Geophysical,[3] the Court paved the way to seek lost profit damages tied to foreign activities in export cases.

Life Technologies v. Promega

Under §271(f)(1), it is an act of infringement to export “all or a substantial portion of the components of a patented invention” so as to induce the combination of the components in a way that would infringe if assembled in the U.S.  In Promega the Supreme Court held that a single component of a multi-component invention cannot, as a matter of law, constitute a “substantial portion of the components” of an invention.  While the determination that “one is never enough” seems rather limited, the Promega decision creates significant implications for the export market.

To begin with, manner in which the Court reached its decision makes it seemingly impossible to pin down how many components would satisfy the “substantial portion” requirement.  The Promega Court considered whether the term “substantial portion” is intended to be a solely quantitative measure of the number of components, or combination of a quantitative measure and a qualitative evaluation of the importance of the components.  At the end of the day, the Court rejected the argument that §271(f)(1) requires a qualitative measure of the component’s value, and found instead that the term “substantial” “is most reasonably read to connote a quantitative measure.”[4]  Thus, the Court held that the phrase “substantial portion of the components” requires plural components, and one component can never be enough.[5]

Having adopted the quantitative interpretation of “substantial,” the task of future litigants and courts will be to decide how many components are required to rise to the level of “substantial.”  But if we are talking a pure numbers game, how can one say what percentage of the components is “substantial?”  Doing so would seem to require either adopting a purely subjective interpretation of what “substantial” means, or taking the forbidden approach of looking to the qualitative importance of the particular components in question.  Except in those cases in which a single component is exported, no easy answer is in sight.

A second implication of Promega is that it creates the opportunity to draft predatory patent claims that surround the base invention with a lengthy recitation of ancillary features, with the specific intention of enforcing against exporters of ancillary parts.  For example, a patent claim ostensibly directed to a novel clutch actuator could include a lengthy recitation of generic clutch features.  Such a claim could be used to target U.S. competitors exporting otherwise generic clutch parts to countries where they are known to be combined with knockoff clutch actuators.  Such a claim can potentially supplant the need to obtain and enforce multiple foreign patents overseas, or help fill gaps in a foreign patent portfolio.

WesternGeco v. ION Geophysical

After muddling through the aftermath of Promega, WesternGeco is refreshingly straightforward.  In WesternGeco, the Supreme Court addressed the measure of damages available to a prevailing patentee under 35 U.S.C. §284,[6] in an action under 35 U.S.C. §271(f)(2).  The dispute centered around ocean surveying contracts that WesternGeco lost due to ION’s sale of non-commodity components of the invention to the patentee’s competitor.  At the Federal Circuit, these lost contracts were compared to lost foreign sales under 35 U.S.C. §271(a), for which lost profit damages are not available under Federal Circuit precedent, and the Federal Circuit overturned the jury award of lost profits.

The Supreme Court reversed.  The issue was whether the presumption against territoriality is rebutted in the context of §284 damages for infringement under §271(f)(2).  Stated briefly, the Court found that the focus of §284 is to provide a remedy for infringement, and the infringement defined in §271(f)(2) focuses on the domestic conduct of supplying the goods with the intent to have them combined overseas.[7]  Thus, the Court found that ION’s domestic act of supplying the components of the patented combination can give rise to a claim for lost profit damages relating to the “foreign” uses of that combination, i.e., the lost surveying contracts.[8]

WesternGeco provides the opportunity in export cases under §271(f)(2) to attempt to escalate the damages award from the statutorily mandated minimum of a “reasonable royalty” to a more favorable and expansive lost profits measure which includes profits lost outside of the continental United States.  Furthermore, the logic applied in WesternGeco applies equally well to actions under §271(f)(1) (and perhaps other subsections of 271), so it can be expected that lost profits may be sought under those cases as well.

[1] See the 2016 Top Markets Report, Automotive Parts, published by the U.S. Department of Commerce’s International Trade Administration, indicating that exports in automotive parts nearly doubled from 2009 to 2015 .

[2] Life Technologies Corp. v. Promega Corp., 580 U.S. ___ (2017).

[3] WesternGeco LLC v. ION Geophysical Corp., 585 U.S. ____ (2018).

[4] Life Technologies, slip op. at 6.

[5] See id. at 8.

[6] 35 U.S.C. §284 provides a generic damages remedy for all infringement actions under §271: “Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.”

[7] See WesternGeco, slip op. at 7.

[8] See id. at 8.