Microsoft Corporation v. AT&T Corporation

Following the Supreme Court's decision in Microsoft Corporation v. AT&T Corporation, one question predominates-"What Will Congress Do?" 

Why?  Because the Microsoft Court explicitly left to Congress the task of protecting certain U.S. patent rights in light of the realities of current software distribution. Specifically, Microsoft addressed the applicability of 34 U.S.C § 271(f) to computer software.  Using strict statutory interpretation, as well as a concern for territorial comity, the Court refused to extend § 271(f) to the foreign software distribution pattern the facts presented.

At issue--Microsoft's distribution of its software to foreign computer manufacturers.  Microsoft supplies those foreign manufacturers with a "golden master"-- the Windows operating code in its final form--for replication and installation on computers made and sold abroad. Foreign computers are loaded with software copied from the golden master after it has left the United States.

AT&T argued the golden master was an infringing component supplied from the United States for combination abroad.  Under § 271(f), export of such an infringing component gives rise to a claim for reasonable royalties on foreign sales. (The parties agreed that Windows infringed AT&T's patent on computers manufactured in the United States). In Eolas Technologies Inc. v. Microsoft Corporation--a case we tried--the Federal Circuit had affirmed that Microsoft's "golden master" distribution system met the component-combination terms of § 271(f) and required payment of a reasonable royalty.

 Here, the Supreme Court disagreed.

The Court first determined that abstract software can not generally be a "component" until or unless it is expressed in a physical embodiment-that is in computer readable copy on an extant disc.  Without some such tangible medium, said the Court, a foreign computer has nothing with which to "combine," establishing software installation as the point of combination for statutory purposes.

Using a rigid definition of "supplied," the Court ruled that § 271(f) requires that the actual components to be combined -that is the disks themselves- must originate from the U.S.  A master copy would not suffice to invoke the statute's protections, even if all the copies come from it.  Because here, only foreign-generated copies of the "golden masters"-and not the master themselves-were combined (installed) on the foreign computers, the Court deemed § 271(f) inapplicable. 

The Court recognized that its decision creates a "loophole" in the statute given current technologic realities.  It justified that loophole, in part, on its historical reluctance to extend U.S. law to foreign activities.  Interestingly, a majority declined to comment upon whether the statute would be triggered if a copy was sent from the U.S., that copy was installed on a foreign computer, but then later removed (three Justices concluded it would not).  A lone dissent unsuccessfully urged the Court to adopt a pragmatic ruling based upon the technical realities of the "loophole."

The Microsoft decision will have an impact that extends beyond software patent law.  The Court has essentially blessed at least this particular form of free ridership. Certainly, other industries (such as biotech) will attempt to take advantage of their own replication advancements to ride along. On the other hand, the Court's reluctance to comment upon the disk removal situation suggests that there may be other forms/business models of software distribution which would satisfy the "supplied" and "combination" language.  Regardless, patent holders, and holders of patents related to software in particular, will need to re-examine the scope of their foreign patent portfolios, as well as the full range of business torts and copyright claims if they wish to maintain a U.S. cause of action.

And, what about the possibility of a legislative response? Given the right wording, new patent legislation could render the Microsoft decision moot.  Despite the Court's explicit invitation, no such white-knight legislation seems forthcoming.  Recent patent reform legislation toyed with the removal of § 271(f).  While the section ultimately remained intact, there's little chance that the current Congress will strengthen a section it previously considered eliminating.

So what Congress will probably do is nothing.  That nothing is either fortunate or unfortunate depending upon the viewer's place in the technology patent food chain. For the patent holder, the loophole created for Microsoft's golden disk weans infringement-based royalties from abroad. For foreign distributors, that loophole could be seen as the next technology buffet.

The articles on our Website include some of the publications and papers authored by our attorneys, both before and after they joined our firm. The content of these articles should not be taken as legal advice.