A summary of the Supreme Court decision, Microsoft Corp. v. AT&T Corp.,

US Court Decision (5) Microsoft Corp. v. AT&T Corp., No. 05-1056 (April 30, 2007).

Background

Facts:

AT&T (patentee) owns a patent directed to a computer used to digitally encode and compress recorded speech; i.e. speech “codecs”. Microsoft’s Windows operating system has the potential to infringe AT&T’s patent because Windows incorporates software code that, when installed in a computer, enables the computer to process speech in the manner claimed by the patent. Microsoft develops the Windows software code in the United States. Microsoft sells Windows to foreign manufacturers. Microsoft sends to each of the manufacturers a master version of Windows, either on a disk or via encrypted electronic transmission. The foreign manufacturers then use the master version to generate computer-readable copies of the software, and then install the computer-readable copies into the computers they sell. The foreign-made computers are then sold to users abroad.

35 U.S.C. 271(f)(1)

35 U.S.C. 271(f)(1): Whoever … supplies or causes to be supplied in or from the United States … the components of a patented invention, … , in such a manner as to actively induce the combination of such components outside the United States?c shall be liable as an infringer.

AT&T alleged Microsoft is liable under 271(f) for its foreign installations.

AT&T alleged Microsoft was liable for infringement of AT&T’s patent by sending a master version of Windows to foreign manufacturers. Specifically, AT&T alleged that Microsoft “supplie[d]?c from the United States,” for “combination” abroad, “components” of AT&T’s patented speech-processing computer, and, accordingly, was liable under 271(f).

Microsoft responded it was not liable for foreign installations.

Microsoft argued that unincorporated software, because it is intangible information, cannot be typed a “component” of an invention under 271(f). Microsoft also urged that the foreign-generated copies of Windows actually installed abroad were not “supplie[d]?c from the United States.”

U.S. District Court and U.S. Court of Appeals for the Federal Circuit

The District Court rejected Microsoft’s arguments and held Microsoft liable under 271(f). A divided Federal Circuit panel affirmed. The Federal Circuit panel majority held that in the context of software technology, the act of “copying” is subsumed in the act of “supplying” under 271(f). The panel majority thus held that computer-readable copies made abroad from a master version exported from the United States may be deemed “supplied” from the United States for the purposes of 271(f).

U.S. Supreme Court reversed the Federal Circuit ruling.

The U.S. Supreme Court reversed the Federal Circuit’s ruling. The U.S. Supreme Court held: because Microsoft does not export from the United States the computer-readable copies of Windows installed on the foreign-made computers in question, Microsoft does not “suppl[y]?c from the United States” “components” of those computers, and therefore is not liable under 271(f).

U.S. Supreme Court Analysis

First question: First, when, or in what form, does software qualify as a “component” under 271(f)?

The Supreme Court looked to the plain language of section 271(f). The Supreme Court explained that section 271(f) applies only to “such components” as are combined to form the “patented invention” at issue. The patented invention in this case is AT&T’s speech-processing computer apparatus. Viewed in this context, Windows software code remains uncombinable until it is made as a computer-readable “copy,” e.g., a CD-ROM. The Supreme Court reasoned that software code, uncoupled from a medium such as a CD-ROM disk, is not a usable, combinable component of a computer apparatus. In answering this first question then, the U.S. Supreme Court held that a computer-readable copy of Windows, and not Windows software code in the abstract, qualifies as a “component” under 271(f).

Second question: were “components” of the foreign-made computers involved in this case “supplie[d]” by Microsoft “from the United States”?

conventional reading of 271(f)’s text, the answer would be “No,” because the foreign-made computer-readable copies of Windows actually installed on the computers were “supplied” from places outside the United States. Section 271(f) prohibits the supply of components “from the United States . . . in such manner as to actively induce the combination of such components.” The Supreme Court further explained that under this formulation, the very components supplied from the United States, and not copies thereof, trigger 271(f) liability when combined abroad to form the patented invention at issue. The Supreme Court thus held that “components” (computer-readable copies of Windows) of the foreign-made computers involved in this case were not themselves “supplied” by Microsoft from the United States. “Indeed, those copies did not exist until they were generated by third parties outside the United States.”

Conclusion:

Microsoft is not liable for damages for computers made abroad that include installation copies of Windows made abroad.

Comments:

1.It is important to note that the U.S. Supreme Court stated that its opinion does not address whether software code in the abstract can be a component of an intangible method or process that qualifies as a ‘patented invention’ under 271(f). Thus, in future cases, patentees can still argue that software (intangible) is a component of a method or process invention (intangible). Whether supplying software in the abstract in such situation would constitute contributory and/or induced infringement remains unanswered.

2.This case is a boon for software developing companies that ship software code in the abstract from the U.S. to foreign OEMs outside the U.S. that in turn copy the software code onto computer-readable disks and install those disks into computers. Prior to this Supreme Court decision, there was concern that such software developing companies would have to move their R&D operations abroad in order to avoid liability for infringement. This Supreme Court decision set aside that concern. Thus, companies that supply software code for overseas copying and installation are not subject to infringement because the Supreme Court holds that supplying software code does not constitute supplying a “component” of the patented invention (here, a speech-processing computer).

3.Prior to this Supreme Court decision, some U.S. patent owners, such as AT&T in this case, interpreted U.S. patent law (Section 271) to have extraterritorial reach to foreign-made copies of software. The U.S. Supreme Court disagreed, saying U.S. patent law “governs domestically but does not rule the world?c” The Court reasoned that “foreign law alone, not United States law, currently governs the manufacture and sale of components of patented inventions in foreign countries. If AT&T desires to prevent copying in foreign countries, its remedy today lies in obtaining and enforcing foreign patents.”