Introduction

The Federal Circuit’s recent decision in Brumfield v. IBG LLC[1] made clear what the Supreme Court hinted at in WesternGeco LLC v. ION Geophysical[2]:  For any domestic act of infringement, a patent holder may request compensation for internationalharms.  The Supreme Court had established this rule in WesternGeco for the recovery of lost profits in connection with infringement under Section 271(f), and the Federal Circuit recognized in Brumfield that there is no reason for reasonable royalties and other types of direct infringement to be treated differently.[3]

The purpose of this article is to examine the immediate strategic implications of Brumfield, and the potential long-term significance of the case within the evolving landscape of patent damages.  The potential expansion of patent damages under Brumfield has added significance in the context of current patent litigation trends.  Reasonable royalty damages have become the default approach in most cases, especially in cases involving non-practicing entities.[4]  The Supreme Court’s decision in TC Heartland LLC v. Kraft Foods Grp. Brands LLC—which tightened venue rules for patent infringement actions against domestic defendants—incentivizes patent holders to bring infringement actions against foreign companies.[5] In combination, this means that more patent cases are likely to involve requests for reasonable royalties against multi-national corporations, which will almost always implicate Brumfield.

History of Extraterritorial Patent Damages

1. Pre-WesternGeco

   Prior to the Supreme Court’s decision in WesternGeco, there was an understanding that patent holders could not recover damages for foreign harm.  This is reflected in the Federal Circuit’s decision in Power Integrations, Inc. v. Fairchild Semiconductor Int'l, Inc., where the Federal Circuit rejected a plaintiff’s attempt to recover lost profits for worldwide sales.^[6] Specifically, the plaintiff argued that the jury was correct to award damages based on worldwide sales (including foreign sales) of infringing chips.[7] According to the plaintiff, it was entitled to recover lost foreign sales that it “would have made but for [the defendant]’s domestic infringement,” because “it was foreseeable that [the defendant’s] infringement in the United States would cause [the plaintiff] to lose sales in foreign markets.”[8] In support, the plaintiff cited the Federal Circuit’s statement in Rite-Hite Corp. v. Kelley Co. that, “[i]f a particular injury was or should have been reasonably foreseeable by an infringing competitor in the relevant market, broadly defined, that injury is generally compensable absent a persuasive reason to the contrary.”[9]  The Power Integration court, however, rejected the plaintiff’s argument, holding that “[i]t is axiomatic that U.S. patent law does not operate extraterritorially to prohibit infringement abroad,” and that the law provides no “compensation for a defendant’s foreign exploitation of a patented invention, which is not infringement at all.”[10] The court viewed “the entirely extraterritorial production, use, or sale of an invention patented in the United States [as] an independent, intervening act that, under almost all circumstances, cuts off the chain of causation initiated by an act of domestic infringement.”[11]

   The Federal Circuit subsequently applied this holding from Power Integrations (which was a lost profits case), to reasonable royalties. In Carnegie Mellon Univ. v. Marvell Tech. Grp., Ltd., the Court held it is not proper to include chips made and delivered abroad in the royalty base, “unless those chips can fairly be said to have been sold here.”[12] In reaching this conclusion, the Federal Circuit noted that, under Power Integrations,it is not sufficient that “the damages-measuring foreign activity have been factually caused, in the ordinary sense, by domestic activity constituting infringement under § 271(a).”[13] Thus, the Federal Circuit reasoned, “[a]lthough all of Marvell’s sales are strongly enough tied to its domestic infringement as a causation matter to have been part of the hypothetical-negotiation agreement,” in the absence of domestic making or using, or of importing, the foreign sales cannot be used as a direct measure of the royalty.[14] The court specifically noted that “[a]s a practical matter, given the ease of finding cross-border causal connections, anything less would make too little of the presumption against extraterritoriality that must inform our application of the patent laws to damages.”[15]

2. WesternGeco Changes Course

   The Supreme Court’s decision in WesternGeco strongly departed from the Power Integrations line of Federal Circuit cases on extraterritoriality, at least in the context of lost profits for infringement under Section 271(f)(2).  Infringement under Section 271(f)(2) provided a unique opportunity for the Supreme Court to assess damages for foreign harms because Section 271(f)(2) specifically prohibits providing components of a patented invention “knowing that such component is so made or adapted and intending that such component will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States.”  35 U.S.C. § 271(f)(2). In WesternGeco, the plaintiff owned patents for a system used in surveying the ocean floor, and the plaintiff alleged that the defendant infringed these patents under 35 U.S.C. §§ 271(f)(1) and (f)(2) by exporting components for use in a foreign country in a way that would infringe if done in the United States.  As a result of this export, the plaintiff alleged that it lost contracts in foreign countries, and a jury agreed, awarding lost profits.

   The Federal Circuit initially reversed the award of lost profits in WesternGeco, holding that Section 271(f) does not allow recovery for lost foreign sales, but the Supreme Court disagreed.  Instead, the Supreme Court concluded that the award of lost profits was appropriate under the second step of the Court’s two-step analysis for determining questions of extraterritoriality.[16] Skipping the first step about “whether the presumption against extraterritoriality has been rebutted,” the Court focused on “whether the case involves a domestic application of the statute.”[17]  And the Court answered this question in the affirmative—the award of lost profits was a domestic application. “[T]he focus of § 284, in a case involving infringement under § 271(f)(2), is on the act of exporting components from the United States,” which is a domestic act.[18]  Finally, the Court alluded to potential questions about “the extent to which other doctrines, such as proximate cause, could limit or preclude damages in particular cases,” but declined to address these issues. [19]

   Justice Gorsuch, joined by Justice Breyer, dissented. While acknowledging Section 284’s provision of “damages adequate to compensate for the infringement,” Justice Gorsuch viewed the foreign lost sales as an improper expansion of U.S. patent rights because using the subject of a U.S. patent to compete with the patentee in a foreign country is not “infringement” under U.S. patent law.[20] The dissent further hypothesized scenarios where a company makes an infringing prototype microchip in a U.S. laboratory and becomes liable for lost foreign profits because making the prototype enabled foreign competition.[21]  In response to these concerns, the majority noted that the dissent “wrongly conflates legal injury with the damages arising from that injury.”[22]

3. Brumfield Confirms New Direction Post-WesternGeco

Almost six years after WesternGeco, the Federal Circuit was presented in Brumfield an opportunity to confirm the scope of the Supreme Court’s rulings. The plaintiff in Brumfield sued defendants IBG and Interactive Brokers for infringement of patents on related to graphical user interfaces for commodity trading.[23] On appeal, the parties disputed (inter alia) the district court’s exclusion of a reasonable royalty theory that purported to calculate foreign damages foreseeably caused by the defendant “making” accused software in the United States.[24]  The district court disallowed this approach because it did not view WesternGeco as overruling the Federal Circuit’s holding under Power Integrations, prohibiting lost profits for foreign sales under Section 271(a).[25]  The plaintiff appealed the district court’s conclusion that WesternGeco did not apply to damages in question.

The Federal Circuit began its analysis of this issue with a detailed summary of the WesternGeco opinion, and concluded that “[n]othing about the WesternGeco analysis of § 284, the damages provision, or about § 281, the cause-of-action provision, is altered when ‘the infringement’ at issue is infringement under § 271(a) rather than § 271(f).”[26] Thus, the Federal Circuit held that “[t]he WesternGeco extraterritoriality framework for damages under § 284 therefore applies to the infringement under § 271(a).”[27] Similarly, the Federal Circuit recognized that “the [Supreme] Court’s statutory analysis did not distinguish the forms of damages,” and thus WesternGeco also applied to reasonable-royalty awards, not just lost-profits awards.[28]

In addition, taking note of the WesternGeco’s suggestion that “other doctrines, such as proximate cause,” may limit damages based on foreign conduct, the Federal Circuit spent several paragraphs addressing how proximate cause may be implicated in foreign damages cases.[29]  The Federal Circuit observed that the Supreme Court have defined proximate causation as more than but-for causation, and how it may depend on the nature and foreseeability of the harm, as well as the statutory context.[30] Ultimately, rather than providing answers, the Federal Circuit provided questions that if identified as needing to be addressed in future cases: 

• “[W]hether the ‘reasonable, objective foreseeability’ presumptive standard for lost profits is applicable where the damages are for a (non-established) reasonable royalty, whose conceptual foundation is notably different from that of lost profits,” and
• What room is there to consider the “long-recognized general avoidance of extraterritorial reach” in application of proximate cause, without contradicting WesternGeco.

After discussing WesternGeco and determining that the district court was wrong to rely on Power Integrations to exclude the damages in question, the Federal Circuit nevertheless affirmed the district court’s exclusion.  The Federal Circuit noted that the foreign damages in question rested on the plaintiff’s allegation of “making” the patented computer readable medium (CRM), but the plaintiff and its expert “have pointedly not focused on making an individual memory-device unit,” and instead, they focused on the underlying software being “designed and made” in the United States.[31]  Because infringement lies in making a particular copy of software on a CRM—not designing software in the abstract—the plaintiff had failed to connect the foreign damages to any domestic act of infringement.[32] Thus, while still confirming the importance of WesternGeco and opening the door for foreign-based damages in reasonable royalties, the Federal Circuit nevertheless affirmed the exclusion of such damages in this case.

Immediate Applications of Brumfield

Because Brumfield allows patentees to potentially include foreign conduct in a reasonable royalty analysis, damages calculations in cases involving multi-national defendants will likely be higher and more complicated.  It is easy to envision scenarios for multi-national defendants where a plaintiff would argue that foreign conduct “increases the value of the domestic infringement itself,”[33] such as when products manufactured in the United States are exported within a multi-national defendant’s operations and sold internationally.  This means that there may be new disputes over the nexus between foreign activity and domestic acts of alleged infringement.

The Brumfield decision itself does not establish the outer bounds of what foreign conduct may be fairly said to “increase[] the value of the domestic infringement,” but as noted above, the Federal Circuit emphasized that this question may be governed by the application of proximate cause.[34]  And, while there are many unanswered questions about how proximate cause should be applied in this context (discussed more in the following section), the Federal Circuit’s reference to the “reasonable, objective foreseeability” standard in Rite-Hite suggests that this standard may be a useful starting point for evaluating the connection between domestic acts of infringement and foreign conduct.[35]

While the treatment of some foreign conduct could be straightforward—like the international sale of infringing products that were manufactured domestically—it is inevitable that plaintiffs and defendants will disagree about when foreign harms and benefits are the “reasonab[ly], objective[ly] foresseab[le]” results of domestic infringement.  For example, could it be objectively foreseeable for domestic commercial success to increase a multi-national companies’ international brand value?  If domestic infringement allows a multi-national company to attract international customers, could sales to that international customer be the result of domestic infringement?  Or, could it be objectively foreseeable for the domestic use of infringing software to improve logistics and performance internationally?  Resolving such disputes will be highly fact-specific, which means that there will be potential new realms of discovery to consider in cases with multi-national defendants. 

Besides directly disputing when foreign conduct can be considered in the reasonable royalty analysis, the new damages considerations under Brumfield will bring additional complexities to other common disputes in cases with multi-national defendants.  As one example, currently patentees tend to sue foreign entities and deny any interest in collecting damages from their domestic affiliates, with the goal of avoiding necessary party rules that would implicate strict domestic venue requirements.[36]  However, drawing stark divisions between different corporate affiliates like this may complicate a plaintiff’s later attempt to argue foreign conduct by different affiliates is proximately caused and foreseeable from the acts of domestic infringement.  As another example, the added focus on foreign conduct under Brumfield will also likely renew focus on when “sales” and “offers to sell” may constitute domestic acts of infringement.[37]  Lastly, disputes about the parties and scope of the hypothetical negotiation may become more common, as these factors may strongly influence what foreign conduct can be considered under Brumfield.  Plaintiffs may want to argue that multi-national defendants would negotiate collectively, with a view to the enterprise-level profits and losses, while defendants are more likely to propose entity-specific negotiations.

Future Challenges Following Brumfield

As the Federal Circuit noted in Brumfield, there is more work to be done in terms of defining the potential application of proximate cause for using foreign conduct in a reasonable royalty analysis.  Refining the boundaries of this test will not be straightforward, as there is some inherent contradiction to requiring proximate causation within a reasonable royalty analysis.  Conceptually, when a harm is proximately caused by the tort of patent infringement, damages for the harm should be directly recoverable—without recourse to the hypothetical negotiation of a reasonable royalty.  This is how lost profits are handled already.  A reasonable royalty is supposed to be an alternative floor for patent infringement damages, which does not require proof of “but for” or proximate cause.  Requiring a plaintiff to show proximate cause within the reasonable royalty analysis arguably changes the reasonably royalty from a “floor,” to simply an alternative way to describe ordinary damages.

To illustrate the limitations on using proximate cause in the reasonable royalty context, it is helpful to differentiate between harm to the plaintiff, and benefits to the defendant.  Traditionally, the Georgia-Pacific analysis for a reasonable royalty is be influenced by both harm and benefits,[38] and theoretically (maybe even intuitively) the same proximate cause requirements under Brumfield could be applied to both foreign harm and foreign benefits.  However, harm to the plaintiff that is proximately caused by infringement is potentially directly recoverable, i.e. as lost profits.  Further complicating the situation, a plaintiff is generally not allowed to recover both a reasonable royalty and lost profits for the same act of infringement.[39]  So, while proximate cause may be a suitable mechanism to identify foreign benefits to consider in a reasonable royalty, limiting foreign harms in a reasonable royalty to those that are proximately caused by the infringement would likely be overly restrictive (and duplicative of lost profits damages).

At an even higher level, the discussion of proximate cause in Brumfield raises a more challenging question: why would proximate causation be used for foreign conduct in a reasonable royalty analysis, but not domestic conduct?   Nothing in the Supreme Court’s extraterritoriality analysis in WesternGeco required application of proximate cause, nor is there a clear statutory basis to treat foreign conduct and domestic conduct differently in a reasonable royalty.  So, if the types of foreign conduct that may be considered in a reasonable royalty are defined by proximate cause, then there is a reasonable argument that the same test should apply to domestic conduct.  Importing causation requirements into the reasonable royalty framework would have far reaching effects, likely making damages cases more complex to present. 

Because of the foregoing complications and despite the Federal Circuit’s extensive discussion of proximate cause in Brumfield, there is reason to doubt whether proximate cause will become a part of reasonable royalty analysis in the future. It is important to recognized that the Federal Circuit cabined its discussion of proximate cause as a question, and with express recognition of the different “conceptual foundation[s]” for lost profit and reasonable royalty damages.[40]  Similarly, the Supreme Court’s reference to “the extent to which […] proximate cause[] could limit or preclude damages” in a footnote of WesternGeco made more sense in that context because WesternGeco was a lost profits case, not a reasonable royalty case.[41]  And while Brumfield suggested that proximate cause and apportionment could be dual requirements for reasonable royalty awards,[42] there would be substantial duplication between the doctrines of apportionment and proximate cause in a reasonable royalty—apportionment already establishes when certain benefits and outcomes can or cannot be considered for purposes of calculating a reasonable royalty.[43]  If proximate cause does become a driving force within the calculation of reasonable royalties, it is fair to wonder whether apportionment would still have a separate role in reasonable royalty analysis, or would showings of proximate cause swallow the current apportionment requirements.

Defining the contours of Brumfield will not only be important for domestic patent disputes; Brumfield could have a significant role in global disputes over standard essential patents. The expansion of reasonable royalty damages under Brumfield could add fuel to the growing global competition between jurisdictions to establish world-wide royalties for standard essential patents, which has already fueled an increase in competing anti-suit injunctions and anti-anti-suit injunctions.[44]   Using Brumfield, patent holders may argue that the global impact from practicing a standard essential patent should be considered, which (if successful, despite obvious apportionment concerns) could theoretically open the door for U.S. juries to establish worldwide royalty rates for standard essential patents.  Opening the door for global royalties to be decided by a jury would only increase the importance of selecting a favorable jurisdiction for these disputes, both for patent holders and for standard implementers.

Conclusion

The Federal Circuit’s decision in Brumfield is remarkable in three ways: for its structure, for its immediate strategic impact, and for its potential to shape future developments in patent law.  First, structurally, it is remarkable that the Federal Circuit went out of its way in Brumfield to announce an expansion of patent damages for foreign conduct, in a decision upholding the district court’s exclusion of such expanded damages.  Second, the potential under Brumfield to include foreign conduct in the calculation of a reasonable royalty has strategic implications, especially in cases against multi-national defendants—which are becoming more common.  Third, the suggestion in Brumfield that proximate cause may become part of reasonable royalty analysis has its own implications, as this could dramatically change how reasonable royalties are approached in patent damages.  For these reasons, it is clear that Brumfield will not be the last word on these subjects and it will be important for all patent practitioners to watch closely as courts across the nation engage with this new precedent.

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