July 10, 2007
As manufacturing moves across national borders, the territorial restrictions of patent law are tested. In the computer industry, computer software used in various electronic devices manufactured abroad passes across U.S. borders with a click of a mouse.
In particular, how far does the territorial reach of U.S. courts extend when protecting the rights of a patent holder who has suffered infringement in the United States?
Late this spring, the U.S. Supreme Court issued several important decisions affecting patent law,1 including Microsoft Corp. v. AT&T Corp., US, 127 SCt 1746, 167 LEd2d 737 (2007), which interpreted the reach of the component export provisions of the patent law as they relate to the software development industry.
In Microsoft Corp. v. AT&T Corp., the Supreme Court ruled that computer software that infringes a domestic patent that is sent from the United States to a foreign manufacturer either electronically or on a master disk for copying by a foreign recipient for installation on computers made and sold abroad cannot be considered patent infringement under 35 USC §271(f).2
Section 271(f) generally considers infringement as occurring when one "supplies" from the United States a patented invention's "components" for "combination" abroad.
Background
In 2004, AT&T brought an infringement action against Microsoft in the U.S. District Court for the Southern District of New York. See AT&T v. Microsoft, 2004 U.S. Dist. LEXIS 3340 (SDNY, March 5, 2004). AT&T alleged that Microsoft infringed upon its speech codecs-a codec is a device or program capable of performing encoding and decoding on a digital data stream or signal. The word codec may be a combination of any of the following: 'Compressor-Decompressor,' 'Coder-Decoder,' or 'Compression/Decompression algorithm'-patent when it produced copies of its Windows operating system abroad (containing the infringing code) that had been replicated from a master version sent from the United States.
The copies from the master version were copied for installation on foreign-assembled computers and sold to foreign consumers.3 Microsoft stipulated that by installing Windows on its own computers during the software development process, it directly infringed AT&T's patent, and that by licensing copies of Windows for computers sold in the United States, it induced infringement of AT&T's patent; however, Microsoft denied any liability based on the master disks and electronic transmissions it dispatched to foreign manufacturers for installation on computers abroad. Microsoft v. AT&T, 127 SCt at 1753.
Microsoft moved for summary judgment, claiming that 35 USC §271(f), which prohibits foreign assembly of infringing goods "supplied" from the United States, was inapplicable in this case. Microsoft argued that its acts fell outside the scope of §271(f) because the software contained on its master disks was merely "intangible information" and not a "component" as defined under §271(f). Microsoft also contended that since the replication of the software took place abroad, the Windows software installed on foreign computers could not be deemed to have been "supplied" from the United States as required by the statute.
The trial court denied Microsoft's motion for partial summary judgment, rejecting its arguments that the software contained on the master disks was not a "component" and that foreign-replicated copies were not "supplied" from the United States as contemplated under the statute. Based upon the entry of a stipulated final judgment, the district court found Microsoft liable for patent infringement under §271(f) for those activities abroad, while expressly reserving Microsoft's right to appeal that issue.
On appeal, the U.S. Court of Appeals for the Federal Circuit affirmed the district court's decision, ruling that the "software code alone qualifies as an invention eligible for patenting, and that the statutory language did not limit §271(f) to patented 'machines' or patented 'physical structures,' such that software could very well be a 'component' of a patented invention for the purposes of §271(f)." AT&T Corp. v. Microsoft Corp., 414 F3d 1366,1369 (Fed. Cir. 2005).
In an issue it deemed one of first impression, the appellate court also interpreted the meaning of "supplied" under §271(f). Taking an expansive view of the statute, the court held that software exported from the United States that is then intentionally replicated abroad from a master version sent from the United States may be deemed "supplied" from the United States for purposes of 271(f).
The Supreme Court Decision
In reversing the Federal Circuit, the Supreme Court ruled that because Microsoft does not export from the United States the copies of the software actually installed on the foreign computers and does not "supply" from the United States "components" of the relevant computers, it is therefore not liable for infringement of the plaintiff's speech processing patent under §271(f) of the Patent Act. While the Court determined that a copy of Microsoft's operating system software could qualify as a "component" under the statute, the Court found that the copies of the software made from a master dispatched from the United States and actually installed on the foreign computers were not themselves "supplied" from the United States.
In reaching its conclusion that Microsoft's liability did not extend to foreign-made computers loaded with Windows software that was copied abroad from a master disk or electronic transmission sent by Microsoft from the United States, the Court analyzed two questions: (1) when and in what form, does software qualify as a "component" under §271(f); and (2) were components of the foreign-made computers "supplied" by Microsoft from the United States?
As to the first question, the Court stated that it was important to distinguish between "abstract" software code detached from any medium and computer-readable software encoded on a medium such as a CD-ROM, noting that it was unable to determine whether the Federal Circuit regarded as a component software in the abstract, or a copy of software. Microsoft v. AT&T, 127 SCt at 1754, n.10. In making this distinction, the Court began its inquiry by construing §271(f)'s terms in accordance with their ordinary or natural meaning.
According to the Court, the statute, as written, applies only to components that are "combined" in whole or in part to form the patented invention; therefore, it was necessary to determine whether software in the abstract as opposed to a copy of software, was combinable. Abstract software code, according to the Court, "is an idea without physical embodiment," comparable to a blueprint or template. As such, it does not match the statute's categorization of "components amenable to combination." Id. at 1755.
Simply put, software detached from any activating medium (e.g., a CD-ROM) remains uncombinable until it is expressed as a computer-readable "copy." Thus, the Court concluded that a copy of Windows, not Windows in the abstract, qualifies as a "component" under §271(f).
Having determined that copies of the Windows software (and not the master disk itself) qualified as a component under §271(f), the Court next turned to the question of whether the software installed on the foreign computers was "supplied" from the United States. Although the Court acknowledged that copying software abroad is "easy and inexpensive," this fact was irrelevant to determining whether the component was "supplied," from the United States.
Interpreting the statute, the Court found that the very components supplied from the United States-as opposed to copies of components-trigger §271(f) liability when combined abroad. In the instant case, the Court found that the copies of Windows installed on the foreign computers "were not themselves supplied from the United States," and did not in fact exist until they were generated by third parties outside the United States. Id. at 1757. In short, the Court held that in the absence of explicit statutory text, the Court could not equate replication of software abroad of a master disk dispatched from the United States as an act of "supplying" under the statute.
Buttressing its reasoning, the Court also commented that any doubt that Microsoft's acts fell outside the ambit of §271(f) would be resolved by the general presumption against applying U.S. laws, particularly the Patent Act, extraterritorially. Id. at 1758.
Closing a Loophole?
AT&T contended that restricting §271(f) to only disks copied in the United States created a "loophole" by which software makers could escape liability, such that "any manufacturer that depends on U.S.-developed software gains substantial savings (e.g., avoidance of patent royalties) by locating its manufacturing facilities abroad." Respondent's Brief, at p. 49. Indeed, in its brief, AT&T claimed that were the Court to reverse the Federal Circuit, there would be "few if any exceptions, [when a] software 'component' could ever be 'supplied' from the United States in a manner that would trigger Section 271(f)," "[effectively] treating the software industry differently from all other industries by precluding any meaningful application-indeed, any application at all-of Section 271(f) to the supply of software components abroad." Respondent's Brief at p. 41.
In response, the U.S. solicitor general filed an amicus brief arguing that imposing liability for a single transmission of software from the United States to a foreign country "upsets the balance struck by Congress, and forecloses a technology-neutral application of Section 271(f), by denying companies that design software in the United States any avenue of competing abroad without the risk of massive patent liability under United States law for foreign sales." Amicus Brief of the United States on Writ of Certiorari, at p. 15. Accordingly, it was the government's position that remedies for such acts lie in obtaining and enforcing foreign patents, not in applying the Patent Act extraterritorially.
Conclusion
Cognizant of the important policy concerns present in this case, the Court believed that closing any such "loophole" is "properly left for Congress to consider, and to close if it finds such action warranted." Id. at 1759. As the Court also stated, beyond the language of the Patent Law Amendments Act of 1984, which enacted §271(f) to prevent infringers from exploiting a prior loophole in the patent law,4 Congress chose not to address other "arguable gaps" in the statute outlined by AT&T. Id. at 1759-60. The Supreme Court has returned this critical policy issue to Congress. Future legislation may tackle the problem of exported software that has been found infringing in the United States.
About the Authors
Richard Raysman and Peter Brown are partners at Thelen. They are co-authors of "Computer Law: Drafting and Negotiating Forms and Agreements" (Law Journal Press).
Endnotes
1 See e.g., KSR Int'l Co. v. Teleflex Inc., US, 127 SCt 1727, 167 LEd2d 705 (2007) (computer-controlled accelerator patent that does no more than yield predictable results from the combined elements of prior patents in the same field and is the product of ordinary innovation is obvious under 35 USC §103 and ineligible for patent protection).
2 35 USC 271(f) reads:
(1) Whoever without authority supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention, where such components are uncombined in whole or in part, in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.
(2) Whoever without authority supplies or causes to be supplied in or from the United States any component of a patented invention that is especially made or especially adapted for use in the invention and not a staple article or commodity of commerce suitable for substantial noninfringing use, where such component is uncombined in whole or in part, 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, shall be liable as an infringer.
3 To facilitate international distribution of Windows, Microsoft, like many other software companies, uses one of two methods: master disks or encrypted electronic transmission. Microsoft's "golden" master disks are master CDs that contain the machine-readable object code of the software. Encrypted electronic technology, on the other hand, involves sending the software code in the form of an encrypted electronic transmission via the Internet, which is then downloaded and installed onto the foreign computers.
4 See Patent Law Amendments of 1984, S. Rep. No. 98-663, pp. 2-3 (1984) (describing §271(f) as a response to the Supreme Court's decision in Deepsouth Packing Co. v. Laitram Corp., 406 US 518 (1972) (no infringement where final assembly and sale is abroad).
This article has been republished, with permission, from the July 10, 2007 edition of The New York Law Journal ©2007 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited. For information, contact 212-545-6111 or visit www.almreprints.com.
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