Microsoft v. AT&T (05-1056)


Oral argument: February 21, 2007

Appealed from: United States Court of Appeals for the Federal Circuit (July 13, 2005)

AT&T sued Microsoft over code in the Microsoft Windows operating system. Microsoft stipulated that it had infringed upon AT&T's patent with regard to domestically produced computers, but it contested liability under 35 U.S.C. § 271(f) with regard to foreign- produced computers that did not enter the U.S. market. Specifically, Microsoft claims that copies of Microsoft Windows, which were copied from its U.S. master disks, were not “supplied” from the United States as required by 35 U.S.C. § 271(f). Microsoft bases its argument on the history of Section 271(f) , its relation to Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518 (1972), and the presumption against extraterritoriality, which prohibits the courts from applying law to foreign conduct unless Congress clearly expressed its intention to do so. The Federal Circuit disagreed with Microsoft and held for AT&T. The Supreme Court’s decision in this case could reveal the Court’s fundamental approach to software related patents with the potential of drastically altering the software industry worldwide. The decision could alter the delicate role that patents play in encouraging innovation, protecting inventors, and driving our technology-based economy.

Question(s) presented

Title 35 U.S.C. § 271(f)(1) provides that it is an act of direct patent infringement to “suppl[y]. . . from the United States . . . components of a patented invention . . . in such manner as to actively induce the combination of such components outside of the United States.”

In this case, AT&T Corp. alleges that when Microsoft Corporation’s Windows software is installed on a personal computer, the programmed computer infringes AT&T’s patent for a “Digital Speech Coder” system. AT&T sought damages not only for each Windows-based computer made or sold in the United States, but also, under Section 271(f)(1), for each computer made and sold abroad. Extending Section 271(f)—and consequently, the extraterritorial application of U.S. patent law—the Federal Circuit held that Microsoft infringed under Section 271(f)(1) when it exported master versions of its Windows software code to foreign computer manufacturers, who then copied the software code and installed the duplicate versions on foreign-manufactured computers that were sold only to foreign consumers. The questions presented are:

(1) Whether digital software code—an intangible sequence of “1’s” and “0’s”—may be considered a “component[] of a patented invention” within the meaning of Section 271(f)(1); and, if so,

(2) Whether copies of such a “component[]” made in a foreign country are “supplie[d] . . . from the United States.”

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Issues

Whether Microsoft will have to pay damages to AT&T for each and every Windows computer sold in a foreign market, given that such Windows computers sold in the U.S. would infringe upon AT&T's patent.

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Facts

In 1981, Bell Laboratories employees Dr. Bishnu Atal and Joel Remde filed an application to patent a “Digital Speech Coder”, which would become indispensable to the international telecommunications industry and unavoidable in the daily lives of most of the world’s population. Brief for Respondent at 7. This system was adopted as a standard by the International Telecommunications Union and is still widely used in mobile phones, computers, videoconferencing software, and other speech transmission applications. Id; Brief for Petitioner at 3. This voice compression system converts analog voice signals into digital signals, shrinking the amount of information necessary to transmit the voice while also delivering unprecedented voice quality.

In 1984, AT&T, which owned Bell Laboratories at the time, received Patent No. 4,472,832 (Reissue Patent 32,580) for the system. (For a more straightforward presentation, see Google Patents). The patent covers the combination of software code and a general- purpose computer in a system that performs the compression, and the inventors included an example of this code in the patent. See ‘580 Patent Appendix A; Brief for Respondent at 8. The patent expired in 2001. Brief for Respondent at 7. AT&T also holds patents for this system in Canada, France, Germany, Great Britain, Japan, and Sweden. Brief for Petitioner at 31 n. 8.

Microsoft, as part of its famous Windows software, included programs like Sound Recorder and NetMeeting, which used embedded code that was covered by AT&T’s patent when that code was combined with a computer; Microsoft agrees that its product infringed the patent. Brief for Petitioner at 4; Brief for Respondent at 2, 9.

To distribute Windows, Microsoft sends a “golden master disk” of the software or electronically transmits it to computer manufacturers, including foreign manufacturers. AT&T Corp. v. Microsoft Corp., 414 F.3d 1366, 1368 (Fed.Cir. 2005). These manufacturers make copies of the Windows software and install them onto computers which they have built. Id. Microsoft develops, tests, and debugs its software in the United States, but the computers which use Windows are not all built and used in the United States. Brief for Respondent at 8. Microsoft licenses its software to foreign computer manufacturers and charges them a licensing fee for each of the tens of millions of copies installed onto computers. Brief for Respondent at 2, 34.

When Microsoft refused repeated requests to buy a license for AT&T’s patent, AT&T sued Microsoft in the United States District Court for the Southern District of New York for infringement and the inducement of infringement of AT&T’s patent through the distribution of Windows software to computer manufacturers. Brief for Respondent at 9. Microsoft stipulated that it infringed with regard to domestically produced computers but contested liability under 35 U.S.C. § 271(f) with regard to foreign produced computers that did not enter the U.S. market. Brief for Petitioner at 4, 5. The District Court decided against Microsoft. AT&T, 414 F.3d at 1368. Microsoft and AT&T then entered into a settlement agreement which preserved Microsoft’s right to appeal but also set how much money Microsoft has to pay, depending on the outcome of the appeals. Brief for Respondent at 11. Microsoft appealed to the United States Court of Appeals for the Federal Circuit, which affirmed the District Court’s decision. AT&T, 414 F.3d at 1372.

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Discussion

Looking at an old TV screen from 2 inches away, one can see thousands of blue, red, and green flashing specks of light. Looking at that same TV from 3 feet away, one can see a late night talk show host nailing the punch line about a political candidate. Both are real and true, but it is all a matter of perspective.

In Microsoft v. AT&T, the Supreme Court will have decide which perspective courts should take when deciding cases involving the mass foreign production of software that would infringe United States patents if it was produced and installed in the United States. Should the software developer, here Microsoft, be held responsible for every single copy produced and installed, even if they only sent one master disk overseas to be copied. Zooming in, it is clear that the physical components that Microsoft sent overseas never became part of an infringing product. Zooming out, it is clear that Microsoft created and distributed a program for the purpose of making infringing products.

The Court will have to decide if the relevant statute, Section 271(f), covers Microsoft’s conduct, based on the interpretation of undefined language in the statute. In doing so, the Court will decide to what extent the statute covers conduct outside the United States and whether the statute should cover such conduct, given the general rule that patent protections are limited to a country’s territory. Brief for Petitioner at 30.

Microsoft is arguing that it should not be responsible to pay royalties on every foreign copy produced because Section 271(f) can only cover conduct in the United States, and the copies at issue were not produced domestically. AT&T retorts that this is hair- splitting word play since the relevant software was developed and finalized in the United States and any copies were a direct result of Microsoft’s actions and intentions.

One thing is for sure about the outcome: big money is at stake. Under Microsoft and AT&T’s settlement agreement, the amounts (which depend on the outcome) are already set. Some experts estimate that if Microsoft loses, it could cost over $1 billion. See On the Docket: Microsoft v. AT&T, Medill Journalism, Oct. 27, 2006. Microsoft would be paying royalties on every relevant, foreign copy of Windows sold until 2001.

An Outcome for AT&T

If the Court rules for AT&T, AT&T will likely receive a very large sum of money; but, in addition, United States patent holders, particularly software-related ones, will have a new mechanism to combat the production and sale of patented software-related systems abroad. While AT&T did have foreign patents for the system at issue here, it is unclear whether AT&T could have claimed infringement and what type of cost and difficulty would be involved in doing so. Brief for Petitioner at 31. A ruling in AT&T’s favor could relieve some of the cost involved in gaining foreign patents and trying to enforce them. This protection could encourage inventors with smaller resources to innovate because they know their inventions will receive wider and more easily enforced protection.

At the same time, a ruling for AT&T could be seen as a major blow to the United States software industry. If United States developers are forced to pay royalties for software they reproduce and sell abroad, they will be at a disadvantage relative to foreign software developers who sell abroad. Brief for Petitioner at 20. Without a subsequent change to the statute by Congress, this could spur the movement of software development jobs and money out of the United States to avoid these costs. At a conceptual level, a ruling for AT&T could signal a potentially unfair application of patent law to software systems in a way no other product is treated by preventing it from ever being exported without the payment of royalties.

An Outcome for Microsoft

In addition to saving an estimated $1 billion dollars, Microsoft would have confirmation that its distribution and development structure could remain in place for some time. This outcome would also likely please other nations by signaling the intent of the United States not to step on the toes of foreign patent regulations and systems which might prioritize intellectual property protection and development differently. See Dennis Crouch, “Microsoft v. AT&T: Trasnational Patent Law at the Supreme Court.” Patently-O: Patent Law Blog, http://www.patentlyo.com (Dec. 19, 2006). A ruling this way could also encourage nascent biotechnology industries which involve intellectual property dynamics similar to software by allowing the distribution of materials abroad without royalty payments. Id. The pharmaceutical industry could also benefit by allowing the exportation of generics overseas before the United States patents expire. Id.

At the same time, ATT argues that a ruling for Microsoft would continue to encourage the circumvention of United States patent law by foreign production. Brief for Respondent at 49. Jobs and industry in the United States would be better served, they claim, if Microsoft loses and the Court’s protection of patents abroad levels the global playing field for patent holders. Id.

With nearly twenty Amicus Briefs filed in this case, it is clear that a variety of industries and communities are watching this case closely, and that the implications from a decision here could be far-reaching.

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Analysis

The United States government’s ability to grant patents is based on the U.S. Constitution Art. I § 8 Cl. 8 with the purpose of promoting technological for the benefit of the people. When a sovereign, like the U.S., grants a patent, the general rule of international law has been that the patent only applies within the territorial jurisdiction of the sovereign that granted it. EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 248 (1991)(“Arabian”); Brief for Petitioner at 30. By following this rule, nations respect the sovereignty of other nations and their choices as to what types of inventions to protect. However, a country can draft a law which will cover conduct outside its boundaries, but not every law covers conduct abroad. Id. If a law is ambiguous about whether it will cover conduct outside of the United States, judges will invoke the presumption against extraterritoriality and hold that in the absence of clear intent, a law will not cover conduct outside the nation’s borders. Id.

HISTORY OF SECTION 271(f)

The Deepsouth Case

This presumption against extraterritoriality was invoked by the Supreme Court in Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518 (1972). In Deepsouth, a company was manufacturing all of the component parts for a shrimp de-veining device in the U.S. and then shipping those components to foreign nations where the parts were assembled. Brief for Petitioner at 13. They did so to sidestep the U.S. patent on the shrimp de-veining device which they did not hold. Id. When the patent holder sued the company for patent infringement, the Court held that there was no infringement, that U.S. patent law did not cover the activity because the assembly occurred outside the U.S., and the only conduct on U.S. soil was the manufacture of unpatented components. Id. The Court held that since Congress had not clearly indicated that the patent protection was to extend to conduct abroad, the statute had to be construed to only apply to domestic conduct based on the presumption against extraterritoriality. Id. The Court stated that Congress would have change the law to cover the conduct in Deepsouth. Id.

Congress’s Response

After Deepsouth, Congress changed the Patent Law, adding a number of provisions including 35 U.S.C. § 271(f). Brief for Petitioner at 14. Section 271(f) was directed against U.S. component manufacturers who attempted to avoid liability by shipping the parts abroad for foreign assembly, as in Deepsouth. Id. Section 271(f)(1) prohibits the supply of all or a substantial portion of a patent’s components from the United States in a way that actively induces the combination of such components in a way that would infringe the patent if done in the United States. Section 271(f)(2) prohibits the supply from the United States of a component especially made for a patented invention and intending that the component be combined in way that would infringe the patent if done in the United States.

STATUTORY INTERPRETATION

In this case, the dispute centers around the interpretation of two words within Section 271(f): “Component” and “Supply” both of which are undefined within the statute. An “analysis of claims under Section 271(f) requires identifying the relevant components of the patented invention and determining whether the accused infringer supplied those components from the United States.” Brief for Petitioner at 12. In the lower courts, Microsoft argued that it did not supply components from the United States because the only copies of Windows installed were created outside of the United States, and Microsoft only sent over master disks which were not installed in any computers. AT&T, 414 F.3d at 1368, 1372. Microsoft also argued that software could not constitute a component of a patented invention under 271(f). Id. The District Court and the Federal Circuit rejected both of these claims. AT&T, 414 F.3d at 1368, 1372. The Federal Circuit quickly gave its conclusion that software can be a component by citing its recent decision in Eolas Technologies Inc. v. Microsoft Corp., 399 F.3d 1325 (Fed. Cir. 2005). AT&T, 414 F.3d at 1369. As to supply, the Federal Circuit held that Microsoft did supply the components from the United States, since copying is subsumed within supply for the purposes of the software industry since it relies on the “replicatable” nature of software to distribute its products. Id at 1369–70.

Microsoft’s Argument

Supply

Microsoft argues that because supply is not defined in the statute, it should be read in its ordinary meaning. Supply in its ordinary meaning does not include copy, reproduce, or replicate. Brief for Petitioner at 16. As such, the foreign-made copies cannot be supplied from the U.S. under the statute. Brief for Petitioner at 15. Microsoft criticizes the Federal Circuit for ignoring Congress’s plain language since the Circuit’s opinion uses equivocating language which does not directly state that Microsoft actually supplied, instead stating that “essentially” supplied or shall be “deemed” to have supplied. Brief for Petitioner at 16. Given that Federal Circuit justifies its interpretation as necessary to ensure the effectiveness of Section 271(f) as to software, Microsoft dismisses that interpretation as improper because it contravenes the Supreme Court’s holdings that judges should not “re-write” patent law to cover new technologies, which Congress instead should do. Brief for Petitioner at 29.

In Microsoft’s view, the Federal Circuit’s interpretation of supply is also in conflict with Congress’s intent behind Section 271(f). Based on Congressional statements, and because Section 271(f) was intended to close the loophole of Deepsouth, Microsoft reads Section 271(f) as only concerned with the manufacture of parts in the U.S. which will be assembled into patented devices overseas. Brief for Petitioner at 27. Specifically, Section 217(f) only prohibits components and does not prohibit the supply of templates or molds, which would function like Microsoft’s master disks, as means to make identical copies of parts that could be assembled into patented devices. Id.

For Microsoft, the true issue is where the copying took place, and since it occurred outside of the U.S., Microsoft argues it is not liable under U.S. law. Especially in the patent context, the presumption against extraterritoriality prohibits the courts from applying law to foreign conduct unless Congress clearly expressed its intention to do so. Arabian , 499 U.S. at 248. Microsoft argues that Section 217(f) contains no express intention and is specifically focused on domestic conduct, like in Deepsouth, and that holding Microsoft responsible for copying done outside of the U.S. is necessarily the application of U.S. law to foreign conduct. Brief for Petitioner at 30–31, 32. Even where it seems more natural to have a law apply extraterritorially, a court should interpret a law as not doing so if reasonable so as not to interfere with other nations’ sovereignty, which here could relate to the patents which AT&T held in other countries. Brief for Petitioner at 30.

Component

Microsoft argues that it did not supply “components” of the patented invention for two main reasons. First, the language of Section 271(f)(1) prohibits of the combination of “such components”, referring to the components supplied from the United States. Microsoft argues that since the components it supplied from the U.S. are only master disks that were never installed on computers, Microsoft never supplied any relevant components. Brief for Petitioner at 35. Second, Microsoft argues that software is merely a set of instructions and, as such, cannot be combined with the end product, in the same way that blueprints cannot be combined with a building. Brief for Petitioner at 38.

Argument of the United States as Amicus Curiae

The Solicitor General agrees that Microsoft did not supply under Section 271(f) but disagrees with Microsoft’s position that software is not a component. Brief for the United States as Amicus Curiae Supporting Petitioner at 7. As to supply, the United States tracks Microsoft’s argument, emphasizing the disfavored treatment of software developers under the Federal Circuit’s interpretation. Id at 7–8.

AT&T’s Argument

As to whether software can be a component, AT&T’s best technique is the citation to a number of Microsoft produced materials which use “component” in the context of software. Brief for Respondent at 19, 20 n.11. AT&T also reiterates the rationale behind Eolas that software code is the key part of computer and must be regarded as a component. 399 F.3d at 1339; Brief for Respondent at 22.

As to whether Microsoft supplied components, AT&T argument focuses on a bird’s eye perspective that emphasizes that Microsoft’s Windows ends up in every one of the foreign produced computers, regardless of how it got there. If Microsoft Windows was installed within the United States using any method, it would infringe AT&T’s patent, and therefore AT&T dismisses Microsoft’s attempts to break the supply chain as “sophistry” which engages in “angels-on-a-pin metaphysics” that denies the plain reality that Microsoft Windows still ends up on every one of the computers at issue, as a direct result of Microsoft’s actions. Brief for Respondent at 38, 40.

AT&T points out that Microsoft views itself as connected to each one of the foreign computers at issue since Microsoft collects royalties every time a foreign manufacturer installs Windows, and Microsoft also regarded every royalty collection as an export product which entitled Microsoft to $31 million in tax deductions. Brief for Respondent at 32. As to extraterritoriality, AT&T views Section 271(f) as covering only domestic conduct, in this case the development and manufacture of Windows as an entity, and the intention to send it abroad for assembly. Brief for Respondent at 41. Also, AT&T argues it was Congress’s intent with Section 271(f) to counteract the presumption against extraterritoriality used in Deepsouth. Brief for Respondent at 42.

Battle of Analogies

Perhaps the best way to understand the respective arguments in this case is to examine the analogies that each side uses. Microsoft’s most powerful analogy is that sending the master disk and copying it is the same as sending a machined part which is then used in a duplicating lathe to produce a exact copy, which in Microsoft’s view would not infringe. Brief for Petitioner at 15–16; see, e.g., Shopsmith Lathe Duplicator. AT&T’s analogizes to a book publisher who sends basic text of Moby Dick to a foreign publisher who then sets type and reproduces many books; for AT&T, even though the container changes, in the end it’s still Moby Dick -- in the end regardless of disks and copying each computer still has Microsoft Windows installed. Brief for Respondent at 31. Microsoft continually tries to make the production process detailed and concrete, making its existence as software inconsequential to the result. Brief for Petitioner at 35–40. This concretization allows Microsoft to compartmentalize the supply process, so that it can only be said to supply the master disks. AT&T, in contrast, delves into a more conceptual view of how we should understand software and computing aside from the 1’s and 0’s of its basic mechanics, so that on the whole Microsoft can be seen as controlling this process, reaping rewards, and doing so based on its initial and one time manufacture of Windows in the United States.

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Conclusion

The outcome of this case could greatly impact not only the parties involved but the entire software development industry worldwide. With possible $1 billion on the line, a Battle Royale of statutory interpretation is likely to take place at an oral argument that will feature three solicitor generals, two former and one current. Given the consensus by many amici that Microsoft will lose the first question presented, the discussion will likely focus on the question of “supply,” as well as issues related to the possible extraterritorial application of the law.

Authors

Prepared by: Dylan Letrich

Additional Sources

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