Made in America?

Foreign-copied software escapes U.S. patent law

Microsoft dodged an expensive bullet in a U.S. Supreme Court decision, which reversed two lower court decisions. In a case brought by AT&T, the Court held 7-1 in Microsoft Corp. v. AT&T Corp. that the act of supplying a master copy of infringing software to foreign manufacturers didn't constitute infringement under U.S. patent law, when the copies were made abroad and such copies were installed in computers manufactured overseas.

A twist on free speech

AT&T holds a patent on an apparatus for digitally encoding and compressing recorded speech. Microsoft conceded that its Windows operating system has the potential to infringe that patent because it incorporates software code that, when installed, enables a computer to process speech in the manner claimed by the patent. Windows software doesn't, however, infringe the claim unless it's installed on a computer, rendering the computer capable of performing as a patented speech processor.

In the case considered by the Supreme Court, Microsoft sends a master version of Windows to foreign manufacturers, either on a disk or via encrypted electronic transmission. The manufacturers use the master version to make copies of the software. Only the copies are installed on the foreign-made computers, not the master version itself.

Long arm of the law

Generally, U.S. patent infringement doesn't occur when a patented product is made and sold in another country. Section 271(f) of the Patent Act created an exception when a company supplies from the United States a patented invention's "components" for "combination" abroad. The question before the Supreme Court was whether Microsoft was supplying "components" to be integrated into a patented invention outside the United States in violation of law.

The provision was enacted in response to the Supreme Court's decision in Deepsouth Packing Co. v. Laitram Corp. In that case, the Court found that, absent a clear, congressional intent, courts couldn't stop the manufacture and sale of parts of patented inventions for assembly and use abroad. With Sec. 271(f), Congress expanded the definition of infringement to include supplying a patented invention's components from the United States.

In Microsoft, Microsoft stipulated that it had infringed AT&T's patent by installing Windows on its own computers during the development process. It also stipulated to inducing infringement by licensing copies of Windows to U.S. computer manufacturers. But it argued that unincorporated software cannot constitute a "component" of an invention under Sec. 271(f) because software is intangible information. Regardless, Microsoft asserted, foreign-generated copies of its Windows operating system installed abroad weren't components supplied from the United States.

The district court rejected these arguments and held Microsoft liable for infringement under Sec. 271(f). The Federal Circuit Court of Appeals affirmed the ruling. Microsoft then took its case to the Supreme Court.

The Court goes abstract

The Supreme Court began by recognizing that software can be conceptualized in at least two ways:

1. In the abstract, as instructions detached from any medium, and
2. As a tangible copy, the instructions encoded on a medium like a CD-ROM.

The Court analogized the former to the notes of a Beethoven symphony and the latter to sheet music for that symphony.

Microsoft contended that only a tangible copy qualifies as a component. And, as the Court acknowledged, if the relevant components were actually the installed copies, AT&T couldn't argue that those components were supplied from the United States. So the Court was left to determine when - or in what form - software qualifies as a "component" under Sec. 271(f).

It's in the components

The Court began by noting that Sec. 271(f) applies only to components as combined to form the patented invention. The Windows software wasn't combinable when it was detached from an activating medium because it couldn't be installed while detached. Abstract software code lacks a physical embodiment and doesn't qualify as "components" amenable to "combination." To illustrate its point, the Court compared software with a blueprint, or anything containing design information, which isn't itself a combinable component.

AT&T countered that software, unlike design information, is "modular," a standalone product developed and marketed for use with many different types of hardware and software. The Court disagreed, noting that blueprints also could be independently developed, bought and sold. What retailers sell, and consumers buy, are copies of software. The extra step of producing a copy of the software's instruction is what renders the software a combinable part of a computer.

The supply line

The Court next addressed whether "components" of the foreign-made computers at issue were supplied by Microsoft from the United States. The Federal Circuit had reasoned that a master version sent abroad didn't differ from the exact copies generated from the master. Sending a master abroad for replication, therefore, invoked Sec. 271(f) liability for the foreign-made copies. The appellate court concluded that, with software components, the act of copying is subsumed in the act of supplying.

The Supreme Court aligned itself with the dissent at the appellate level. Under Sec. 271(f), the components supplied from the United States, not their copies, trigger liability when combined abroad to form the patented invention. Here, it held, the copies installed on foreign computers weren't supplied from the United States. The copies didn't even exist until they were generated by third parties outside the country. The Supreme Court concluded that Microsoft didn't supply from the United States the installed copies at issue.

The Court added that the ease of copying is irrelevant. In its view, Sec. 271(f) includes no instruction to gauge when copying is easy and inexpensive enough "to deem a copy in fact made abroad nonetheless 'supplie[d] ... from the United States.'"

Protecting yourself over there

The Court also found that the presumption against extraterritoriality applies "with particular force in patent law." The Patent Act expressly provides that a patent confers exclusive rights in an invention within the United States. Although Sec. 271(f) was intended to cover certain activity abroad, the mere fact that a law specifically addresses extraterritorial application doesn't defeat the presumption. According to the Court, if an inventor wishes to prevent copy infringement in foreign countries, its remedy lies in obtaining and enforcing foreign patents.

Sidebar: In Congress's court

The Supreme Court also addressed AT&T's assertion that its reading of Section 271(f) creates a loophole for software manufacturers. To avoid patent infringement liability, manufacturers can have installation copies of software made quickly and cheaply overseas, from a master version supplied from the United States.

The Federal Circuit envisioned the same problem. It reasoned that courts would be subverting Sec. 271(f)'s remedial nature, permitting a technical avoidance of the statute by ignoring technological advances - and associated industry practices - that developed after Sec. 271(f)'s enactment.

The Supreme Court deferred to Congress to consider any loopholes and close them if warranted. Sec. 271(f) was a direct response to the gap revealed by Deepsouth, but Congress didn't address other arguable gaps. Given that Congress didn't close the loophole presented by AT&T, precedent required the Court to leave it up to Congress to address the patent-protective determination sought by AT&T.