The decision
is Brumfield v. IBG, LLC, opinion by Judge Taranto, joined by Judges
Prost and Hughes. The case involved four
patents, relating to “improved graphical user interfaces for commodity trading
and methods for placing trade orders using those interfaces” (p.3), owned by
Trading Technologies International, Inc. (TT).
(They are now owned by a trust of which Mr. Brumfield, the appellant named
in the caption, is the sole trustee. The
court refers to “TT” as the entity in interest throughout.) TT alleged that IBG infringed various claims of
these patents, and that “the instrument of the alleged infringement was the
BookTrader module (trading tool) that is part of IBG’s Trade Workstation
Platform (TWS), software that traders load onto their computers and use for
buying and selling on exchanges, such as commodities exchanges” (p.11). The district court found the asserted claim
of two of the patents in suit invalid for lack of patentable subject matter,
however, a conclusion that the Federal Circuit now affirms (and that I will
omit for present purposes). The matter
went to trial on five method claims and one computer readable medium (CRM)
claim of the ’304 Patent, and three method and two CRM claims of the ’132
Patent. The jury found these claims infringed
and not invalid, and awarded $6,610,985 in damages. TT nevertheless challenges the judgment, on
the ground that the district court improperly excluded TT’s expert’s damages theory
as it related to foreign activities (in which case the damages awarded presumably
would be undercompensatory.) In
particular, the district court, uncertain whether the Supreme Court’s decision
in WesternGeco LLC v. ION Geophysical Corp., 485 U.S. 407 (2018), overrules
the Federal Circuit’s decision in Power Integrations, Inc. v. Fairchild Semiconductor
International, Inc., 711 F.3d 1148 (Fed. Cir. 2016), had excluded testimony
that apparently would have at least partly based the reasonable royalty due for
the domestic infringement of the claims in suit on the value the patentee would
have expected to derive from foreign activity that was enabled by the domestic
infringement. WesternGeco specifically
held that a U.S. patent owner can recover damages, where the defendant violates
Patent Act § 271(f) by exporting components from the United States to be
combined abroad, and the resulting extraterritorial combination deprives the
patent owner of the profit it would have earned on extraterritorial sales it
would have made but for the infringement; it did not expressly address the
question of whether the analysis would the same or different when the act of domestic
infringement is the (much more common) violation of § 271(a) (making, using,
selling in the United States), although I and (some) others have argued that
the reasoning of the opinion would apply in this context as well.
In
what may prove to be a landmark opinion, the Federal Circuit concludes that WesternGeco
overrules Power Integrations , and that a reasonable royalty awarded for domestic infringement that enables
further activity abroad may under some circumstances reflect the value to the infringer
of that subsequent foreign activity. So
the district court was wrong on this issue; but unfortunately for TT, the court
also concludes that because the expert’s model was premised on domestic manufacture,
and the plaintiff hadn’t proven that any infringing domestic manufacture by the
defendant actually caused the defendant to gain any foreign benefit, the expert’s
testimony on this matter was correctly excluded.
In
concluding, as it does, that “[f]or a determination whether patent damages are properly
awarded in a particular case based partly on conduct abroad, the decision in WesternGeco
established a framework
of analysis that necessarily supersedes the analysis set forth in our earlier
decision Power Integrations” (p.25), the court’s analysis is consistent
with what I argued in my article Extraterritorial
Damages in Patent Law, 39 Cardozo Arts & Enter. L.J. 1 (2021). In particular:
The first doctrinal issue before us
is whether the WesternGeco framework applies when the direct
infringement in question (either itself or as a component of indirect infringement)
is one of the acts at issue here accused of infringing under § 271(a). We
readily conclude that it does.
Nothing 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). Under WesternGeco we must examine the
particular acts alleged to constitute infringement under particular statutory
provisions to determine if the allegations focus on domestic conduct. Section
271(a) provides that “whoever without authority makes, uses, offers to sell, or
sells any patented invention, within the United States or imports into the United
States any patented invention during the term of the patent therefor, infringes
the patent.” 35 U.S.C. § 271(a) (emphases added). At least the making, using,
offering to sell, and selling provisions are expressly limited to domestic
acts. . . .
If the exporting covered by §
271(f)(2) is a domestic act for purposes of the extraterritoriality analysis,
as WesternGeco held, so too are the § 271(a)-covered acts at issue in this
case. The WesternGeco extraterritoriality framework for damages under §
284 therefore applies to the infringement under § 271(a) here. . . .
We also conclude that the WesternGeco
framework applies to a reasonable-royalty award, not just a lost-profits award,
under § 284, though its application must reflect the established differences in
standards for the two types of awards. . . .
This case involves a reasonable
royalty, and repeatedly articulated standards frame how the particular issue
presented here is properly formulated. . . .
Those principles point to a minimum
requirement for a patentee seeking reasonable-royalty damages based on foreign
conduct that is not independently infringing. Under the foregoing principles,
the hypothetical negotiation must turn on the amount the hypothetical infringer
would agree to pay to be permitted to engage in the domestic acts constituting
“the infringement.” 35 U.S.C. § 284. If the patentee seeks to increase that
amount by pointing to foreign conduct that is not itself infringing, the
patentee must, at the least, show why that foreign conduct increases the value
of the domestic infringement itself—because, e.g., the domestic
infringement enables and is needed to enable otherwise-unavailable profits from
conduct abroad—while respecting the apportionment limit that excludes values beyond
that of practicing the patent. This kind of causal connection, framed in terms
of the agreement-to-pay aspect of a hypothetical negotiation, is a necessary
beginning—we need not here say it is sufficient—for a foreign-conduct analysis
in a reasonable-royalty case. Cf. Carnegie Mellon, 807 F.3d at 1307
(noting that defendant’s sales abroad were “strongly enough tied to its
domestic infringement as a causation matter to have been part of the
hypothetical-negotiation agreement,” before moving on to apply extraterritoriality
standards based on Power Integrations, now superseded by WesternGeco)
(pp. 33-37).
The
court goes on to note, however, that there has to be proximate cause in
addition to cause-in-fact, and that the proximate cause analysis as it relates
to reasonable royalties may be tricky:
The foregoing authorities [various Supreme
Court decisions] raise questions about the proper approach to determining,
based on “other doctrines, such as proximate cause,” WesternGeco, 585
U.S. at 417 n.3, when foreign conduct can properly play a role in calculating
patent damages. One such question is whether the “reasonable, objective
foreseeability” presumptive standard for lost profits, Rite-Hite, 56
F.3d at 1546, is applicable where the damages are for a (non-established)
reasonable royalty, whose conceptual foundation is notably different from that
of lost profits. Another question concerns the long-recognized general
avoidance of extraterritorial reach that is an aspect of the statutory context.
. . . What, if any, room is there to take that consideration into account in
applying the proximate-cause requirement, itself not addressed in WesternGeco,
without contradicting the Supreme Court’s ruling in WesternGeco? We need
not and do not here suggest answers to, or further explore, those or other
questions (pp. 39-40).
For
my own ruminations on proximate cause and royalties in this context, see my
article above at pp. 39-42, 51-52.
The reason
the court doesn’t need to explore those issues for now is its factual
conclusion that the expert had not shown “the needed causal relationship to the
foreign conduct for which recovery is sought” (p.40). The asserted infringement on which the expert
relied was “Making the Accused Product,” but that (the court says) cannot refer
to the method claims in suit, because you don’t “make” a method (p.41). The expert’s analysis therefore would have
had to refer to the CRM claims, but the expert did not focus on the defendant’s
making of “an individual memory-device unit,” but rather its TWS BookTrader
software—“software in the abstract”—which was not itself claimed in the patents
in suit (pp. 41-42). The expert’s
analysis therefore didn’t start from an act of domestic infringement, i.e., “making
a claimed CRM (or method)” (p.42). Instead—if
I am understanding this correctly—the expert sought to include the foreign use
of copies of the TWS BookTrader software in the royalty base (see p.16),
but without tying that use to a predicate act of infringing domestic
manufacture. At least, I think that’s
the gist of it. The court further
observes:
We may assume (without deciding)
that IBG had to make early CRMs domestically (or practice the claimed method)
as part of its process of developing its software and that the value of such
development work to IBG might reflect prospective foreign-earned revenue for
the resulting product. Cf. Carnegie Mellon, 807 F.3d at 1294, 1297, 1307
(referring to payment for domestic infringement that is part of development
work that, when completed, would produce large foreign revenues). In this case,
however, according to TT and Ms. Lawton, IBG’s development of its BookTrader product
meeting all claim limitations occurred before TT’s patents issued: TT accused
IBG of marketing its BookTrader product before July 20, 2004, which caused infringement
to begin precisely when the ’304 patent issued. On that premise, IBG’s making
of CRMs in the initial creation of a BookTrader product meeting all claim
limitations was not infringing under § 271(a), and IBG therefore did not need
to pay TT anything for that work, which could not properly be included in the
calculation in the hypothetical negotiation held “just before” July 20, 2004. .
. .
Later domestic making of
BookTrader-containing CRMs (or practicing of the claimed methods) could be infringing,
of course, and properly be subject to a royalty. But TT was permitted to
introduce evidence that some foreign users of BookTrader obtained their copies
from domestic acts of making a copy or selling. FRE 702 Opinion, 2021WL
5038754, at *2. The only disallowed proposal therefore had to involve making
copies abroad for foreign users (and foreign sales).
On TT’s and Ms. Lawton’s premise
that pre-July 20, 2004 versions of TWS BookTrader met the limitations of the
’304 and ’132 patents’ claims, TT has not offered a concrete, coherent account
of why, in the hypothetical negotiation, the royalty for new domestic acts of
making claimed CRMs (or practicing claimed methods), starting July 20, 2004,
would have properly been increased to reflect the prospective making and sale
of CRMs abroad for use abroad. On the noted premise, IBG, even before the
patents issued, already had CRMs containing TWS BookTrader that met the
patents’ limitations. “[N]either export from the United States nor use in a
foreign country of a product covered by a United States patent constitutes
infringement.” Johns Hopkins University v. CellPro, Inc., 152 F.3d 1342,
1366 (Fed. Cir. 1998). And TT has not argued that the making of CRMs abroad
would be infringing, even if the software installed abroad came from the United
States, either under § 271(a), see Centillion Data Systems, LLC v. Qwest Communications
International, Inc., 631 F.3d 1279, 1288 (Fed. Cir. 2011); Deepsouth,
406 U.S. at 527, or under § 271(f), see Microsoft, 550 U.S. at 449–50
(software itself is not a “component” under § 271(f)). . . .
IBG might of course infringe by
domestically making new CRMs containing upgraded versions of TWS BookTrader.
But TT has not shown how value added by the upgrades would be properly added to
the royalty in light of the apportionment requirement to avoid charging for
value not attributable to the claimed invention. In particular, TT has not
explained how such upgrade value would be anything but the value of features
beyond what is required by the patent claims . . . . (pp. 43-45).