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LimeGreenIP News

US Patents and the potential global monopoly effect for software

Earlier this summer, the Supreme Court held that the Patent Act’s damages provision, 35 U.S.C. 284, allowed a patent holder to recover foreign lost profits when patent infringement liability is based on 35 U.S.C. 271(f)(2). WesternGeco LLC v. ION Geophysical Corp., 138 S. Ct. 2129 (2018).

Section 271(f)(2) 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.” In contrast, the Federal Circuit has held that a company that makes or sells an entire infringing device within the United States is not liable for lose sales in foreign markets under section 271(a). Power Integrations, Inc. v. Fairchild Semiconductor Int’l, Inc., 711 F.3d 1348, 1370 (Fed. Cir. 2013). Thus, by allowing the recovery of foreign lost profits, WesterGeco creates a new incentive for patent plaintiffs to find liability based on sales of infringing components.

In the wake of the Court’s opinion, however, uncertainty remains with respect to whether the sale of software will constitute sale of an infringing component. Software is inoperative alone, but rather must be combined with appropriate hardware. Therefore, it would seem to qualify as a component. In light of WesternGeco, is software developed in the U.S. also “supplied in or from the U.S.?” If that software is then installed on foreign devices abroad, does that expose the software developer to world-wide lost profit damages for infringement of a competitor’s U.S. patent?

In WesternGeco LLC v. ION Geophysical Corp, WesternGeco owns four patents relating to a system for surveying the ocean floor that used lateral-steering technology to produce higher quality data than previous survey systems. WesternGeco did not sell or license its technology, but used it itself to perform surveys pursuant to contracts from oil and gas companies. At some point, ION Geophysical Corporation began selling a competing system, by manufacturing the components in the United States and shipping them to companies abroad for assembly into a surveying system indistinguishable from WesternGeco’s. At trial, WesternGeco proved that it had lost 10 specific foreign 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.

In an opinion authored by Justice Thomas, the Court upheld the award of lost profits from the foreign survey contracts, rejecting the defendant’s argument that this was an extraterritorial application of the damages statute. Invoking its discretion, the Court skipped step 1 of the extraterritoriality analysis – i.e., whether the presumption against extraterritoriality has been rebutted – thereby avoiding the question of extraterritoriality with respect to the patent statute generally. Instead, the Court reasoned that because the infringing conduct – supplying components of an infringing system – occurred in the United States, this case involved a “domestic application” of the statute, even if other conduct occurred abroad. With respect to the foreign lost profits, the Court emphasized that injury and damages were “separate legal concept[s].” Thus as long as the injury occurs domestically, a patent owner may recover lost foreign profits as damages.

A strong dissent, authored by Justice Gorsuch and joined by Justice Breyer, argued that divorcing damages and infringement inquiries would allow a single infringing product made in the U.S. to springboard into foreign liability that wildly outstrips the domestic infringement. To illustrate, the dissent posited the hypothetical situation where a company develops a prototype microchip in a U.S. lab, but manufactures and sells the chip in a foreign country. Under the majority’s approach, the dissent argues, a patent owner could obtain a monopoly over foreign markets through its U.S. patent.

In the case of software, the scenario posed by the dissent is even more prescient, as software is often developed in the U.S. and then replicated across devices worldwide. The issue of whether software may constitute an infringing component under § 271(f) was addressed by the Court over 10 years ago in Microsoft Corp. v. AT & T Corp., 550 U.S. 437 (2007), but its tension with WesternGeco LLC v. ION Geophysical Corp and its outmoded reasoning casts significant doubt as to whether the Court rule the same way today.

In Microsoft Corp. v. AT & T Corp., 550 U.S. 437 (2007), the Court held that liability under section 271(f) did not extend to computers made in another country, when loaded with Windows software copied abroad from a master disk or electronic transmission dispatched from the United States. AT&T argued that by providing the master disks and dispatching electronic transmissions to foreign manufacturers, Microsoft “supplie[d] … from the United States,” for “combination” abroad “components” of AT & T’s patented speech processor. In an opinion authored by Justice Ginsburg, the Court held that what Microsoft supplied was “[a]bstract software code [] without physical embodiment,” and thus not a component within the meaning of section 271(f). The Court likened “software detached from an activating medium” to a blueprint, which though may contain precise instructions for the construction and combination of the components of a patented device, was itself not a combinable component of that device. In a footnote the Court left for a later day the issue of whether software supplied on installation disks constitute a “component” under section 271(f). Justice Alito went further, arguing in a concurring opinion, joined by Justices Thomas and Breyer, that when concerning a physical device (i.e., the computer), section 271(f) is most naturally read to mean a physical part of the device, such that a copy of software is not itself a component that was exported from the United States.

So where do these two cases leave us? Critically, the Court in Microsoft Corp. v. AT & T Corp explicitly declined to hold, as a general matter, that software could never be a component under section 271(f), leaving open the door for future case law on this issue. Furthermore, in light of software’s increased importance in modern products (e.g. compare the functionality of a smartphone to a “dumb” cell phone), the notion that the software running on the product is not a component of that product is increasingly in tension with modern reality. Software’s new predominance in the modern economy and its new distribution methods may motivate the Court to cabin its holding in Microsoft Corp. v. AT & T Corp to the facts of that case, if not reverse it outright, which could result in broader liability for sale of infringing software.