Microsoft takes patent case before Supreme Court

Microsoft presented oral arguments Wednesday before the U.S. Supreme Court in a 6-year-old patent lawsuit filed by AT&T whose outcome could require U.S. software companies to pay fines for patent-infringing software assembled in other countries.

At issue in the case is how the court will interpret an obscure section of U.S. patent law, Section 271F, which says that if a U.S. company makes product components in the U.S and supplies them to companies overseas — and the products assembled from those components result in patent infringements — the company must pay patent damages for products assembled overseas as well as those made stateside.

AT&T originally filed the case in federal court in New York in 2001 claiming that Microsoft infringed on one of its patents for digitally coding and decoding speech in its Windows OS. AT&T set out to recover damages not only from copies of Windows manufactured in the U.S., but also those made in other countries from the master disk of Windows that was sent to those countries and used to assemble computers with the OS installed.

The U.S. Court of Appeals for the Federal Circuit in July 2005 upheld a lower-court ruling that Microsoft is liable to pay fines for foreign sales of patent-infringing software even if it was originally created in the U.S.

In court Wednesday, Former U.S. Solicitor General Theodore B. Olson, an attorney with Gibson, Dunn & Crutcher, argued Microsoft’s case, which claims that the patent law was aimed at closing a loophole that allowed companies to manufacture all of the components of patented inventions in the U.S., but avoid patent liability by assembling those U.S.-made components in other countries.

“We believe this law was applied improperly by the lower court to find liability based solely on computers manufactured overseas,” Microsoft General Counsel Brad Smith said in a statement. “A U.S. patent was never meant to apply to conduct that takes place entirely abroad.” Therefore, Microsoft is asking that the Surpeme Court reverse the lower-court ruling.

In a statement, Abha Divine, president and CEO of AT&T Knowledge Ventures, said the company believes that all U.S.-based sources of innovation, including the software development community, can benefit from patent laws that allow for “appropriate and fair” protection of all new inventions and technologies.

The outcome of the case will depend on how the Supreme Court interprets the words “components” and “supplies” in the law, said John E. Daniel, partner in law firm Kramer Levin Naftalis & Frankel’s Intellectual Property Department in New York.

“Some people have a concern that [the lower court ruling] seems to be beyond what was intended,” he said. “When [Congress] passed the legislation, it was thinking of making physical components, not software. The comeback is, ‘What’s the difference?’ You still make copies, and Microsoft makes money based on people selling those copies.”

Microsoft has had some unusual allies in this case, such as its former nemesis the U.S. government and competitor Yahoo, both of whom have filed briefs in support of the vendor’s argument. Companies fear that a precedent may be set that will potentially cost U.S. software companies millions of dollars in fines.

There is also a concern that U.S. companies will take their research and development offshore to avoid fines, Daniel said.