September 7, 2018

By Micheal Binns and Amy Hinson

Thanks to a U.S. Supreme Court ruling, manufacturers and other industrial companies are now able to use their U.S. patents to better protect themselves overseas, opening the door to higher profits. However, along with the increased rewards for some, come increased risks for others. Manufacturers that are not thoroughly vetting whether their foreign products infringe on U.S. patents could now be subjected to steep damages.

How the Ruling Extends U.S. Patent Law

The U.S. Supreme Court’s ruling this summer in WesternGeco v. ION Geophysical Corp. has created this new reality. Writing for a 7-2 majority, Justice Clarence Thomas stated that a patent owner can “recover for lost foreign profits” when another company “ships components of a patented invention overseas to be assembled there.” The Supreme Court reversed a lower court ruling that had said the patent owner couldn’t recover profits it would have earned overseas – after all, U.S. patent law doesn’t apply there. The Supreme Court thought otherwise, at least for part of U.S. patent law.

The law at issue was subsection 271(f) of the U.S. Patent Act, which makes it an act of infringement to ship patented components from the United States with the intent that they be combined abroad in an infringing manner. Justice Thomas wrote that since the components were supplied from the United States, the punishment counts as a domestic application of the Patent Act.

A Financial Boon with the Right Patent Strategy

The Supreme Court’s ruling could create a significant financial boon for patent holders in the manufacturing industry, especially those that have foreign competitors. Companies that have made the investment to protect their intellectual property can now target sales outside of the U.S., increasing their bottom line. Essentially, this increases the value of patents – and the importance of engaging with outside counsel to maximize patent portfolios. That doesn’t mean simply adding as many patents as possible. Rather, manufacturers should partner with counsel to determine which inventions or technology are the most critical to their business, and then prioritize patent filings and budgets based on those determinations.

In addition, the WesternGeco ruling highlights the need for companies to get a second opinion on whether they are currently infringing or have the potential to infringe on U.S. patents. This should be an essential step in the creation of any new product or component. Under the old legal regime, some companies chose not to make that investment because they were exclusively assembling and selling products overseas. Now, those types of sales are subject to U.S. patent law regardless of where they occur. Outside counsel can provide thorough non-infringement opinions to mitigate that risk.

Did the Supreme Court Open a Hole It Intends to Fill?

In fact, the risk – and reward for those with strong patent portfolios – may go beyond the foreign assembly and sale of U.S. components. Although the Supreme Court case focused on subsection 271(f) of the Patent Act, the dissenting justices warned that the ruling opens a hole in the limits for international patent infringement. As Justice Neil Gorsuch stated in his dissent, “Permitting damages of this sort would effectively allow U.S. patent owners to use American courts to extend their monopolies to foreign markets.”

The key question is whether lower courts will apply the Supreme Court’s logic for 271(f) to other parts of the Patent Act. Subsection 271(a), for example, makes it an act of infringement to make, use, offer to sell, or sell a patented invention “within the United States.” Lower courts have said that if you make the finished product in the U.S. but sell it abroad, the patent owner can’t sue for lost profits based on those overseas sales – again, U.S. patent law doesn’t apply there.

Some legal commentators have argued that the Supreme Court may overrule that line of thinking as well. If not, companies that supply component parts to be assembled abroad will be subject to stricter punishments than those who simply take a finished U.S. product and sell it abroad. This issue will likely lead to more litigation and could further intensify the risk-reward equation.

Regardless, it should not change the fundamental strategy that manufacturers and other industrial companies utilize with their patents. By partnering with counsel to maximize the value of their patent portfolio and ensure non-infringement, businesses can make the most out of the WesternGeco ruling and any subsequent decisions to follow.

Micheal L. Binns is a partner in Parker Poe’s Atlanta office. Micheal is a registered patent attorney practicing primarily in the area of intellectual property litigation. Contact Micheal at michealbinns@parkerpoe.com.

Amy Allen Hinson is a partner in Parker Poe’s Manufacturing & Distribution Industry Team in Greenville, South Carolina. Amy serves as a strategic business partner to clients on all of their intellectual property needs. Contact Amy at amyhinson@parkerpoe.com.