Microsoft patent case stirs software export fears

But a high-stakes patent case, set to be argued before the U.S. Supreme Court on Wednesday morning, has attracted a slew of briefs supporting the Windows maker's stance in a complex battle with AT&T over rules governing software code exported to foreign locales.

The question boils down to whether American software makers are required to pay up for infringing on U.S. patents based not only on the number of software copies they supply on their home turf, but also on copies that foreign manufacturers make abroad.

An obscure section of federal patent law prohibits American companies from shipping boxes of parts to foreign manufacturers that could combine them to make a machine that infringes on U.S. patents. It does not, however, restrict sending blueprints that could theoretically prompt a foreign company to concoct an identical product. Those siding with Microsoft argue that the "golden master" disks shipped abroad, containing software to be copied and installed on computers there, are mere blueprints, immune from patent liability.

There's widespread fear that a loss for Microsoft could deal a multibillion-dollar blow to the American software industry. Critics of lower court rulings favoring AT&T say they defy Congress' intentions, forcing American companies to pay damages based both on infringing activity in the United States and abroad, whereas a foreign company found to have infringed on a U.S. patent would only have to pay damages based on its U.S. sales.

"At its best, it amounts to a tax or surcharge on American-made software, which potentially puts U.S. software houses at a disadvantage with respect to their foreign competitors," said Dick Turner, a patent law partner at the firm Sughrue Mion in Washington, D.C.

Taken to its extreme, some argue such a legal climate could spur companies to shift their research operations offshore.

"It's go to Canada, go to wherever you're going to go, so that your conduct--shipping software around the world in a global economy--is not being subjected to this United States rule," said Joseph Miller, a law professor at Lewis and Clark College who filed a brief in support of Microsoft at an earlier stage of the litigation.

Microsoft petitioned the Supreme Court to weigh the issue after a federal district court and the U.S. Court of Appeals for the Federal Circuit both found the company liable not only for violating AT&T's patent in U.S.-assembled computers but also in those abroad. The software giant has conceded that Windows software object code, after being supplied to manufacturers and installed on computers, gave users the ability to record, store and play back speech in a way that violated AT&T's patent.

But Redmond--allied with companies such as Amazon.com, Intel and Yahoo, the free and open-source software movement, the American Intellectual Property Law Association, and the Bush administration--argues that Congress never intended to hold American companies liable for such violations committed outside the country.

If AT&T wants relief for patent infringement on foreign soil, its solution "lies in obtaining and enforcing foreign patents, not in attempting to extend United States patent law to overseas activities," the U.S. Department of Justice's Office of the Solicitor General wrote in its brief.

That's not the way AT&T sees it. Attorneys for the corporation argue Congress adopted that portion of patent law precisely to provide extra international protection.

"It understood that foreign patent protections are sometimes weaker than their U.S. counterparts, and...it wished to spare U.S. patent holders from the considerable expense of obtaining patent protections in dozens of foreign jurisdictions," they wrote in a brief filed with the high court. (PDF)

Backers of free and open-source software hope the case will not only shield software makers from liability abroad, but will also open the door for the justices to make a more sweeping pronouncement: that Congress never intended for patent law to cover software in the first place.

"It could indeed be a landmark decision because the Supreme Court has never answered the question of whether software per se is patent eligible subject matter," said Daniel Ravicher, legal director for the Software Freedom Law Center, which provides legal services to developers of free and open-source software.

Patent season in D.C.
The case marks the latest in a series of patent disputes the high court has accepted during the past year. The seemingly high interest is likely a nod to growing dissatisfaction with the U.S. patent system voiced in recent years by members of Congress and technology companies alike.

The feud that goes before the justices Wednesday may involve two of the nation's most prominent corporations, but its outcome is expected to affect software companies more squarely than other industries.

That's because arguments focus on questions specifically about software related to Section 271(f) of federal patent law, which was added in 1984. That provision decrees Americans can be held liable for supplying any "components" from the United States to foreign manufacturers if their intent is to create a product that would have infringed a U.S. patent had it been physically assembled in the United States.

The rules stemmed from an incident in which Deepsouth, a maker of shrimp-deveining machines, attempted to avoid infringing a competitor's patent by building parts in the United States, shipping them abroad, and assembling them there. After a divided U.S. Supreme Court ruled that the company was not liable for infringement because there was no law prohibiting the production or use of a U.S.-patented product outside of the country, Congress enacted 271(f) in hopes of plugging that perceived loophole.

In AT&T's view, Microsoft's software code amounts to "not just a component, but the key component of the foreign-made devices." For that reason, it should be forced to pay damages based on code it supplied both at home and abroad--naturally, a substantially higher award.

"Although that object code must be combined with physical components to form such a device, it is plainly a component of that device, just as a unique collection of intangible words is a component of any book bearing the title Moby-Dick, even though those words, too, must be combined with ink and paper before the book can be read," AT&T's attorneys argue in their brief.

A district court reached a similar conclusion at the earlier stages of litigation, and the Federal Circuit appeals court upheld that ruling.

In its brief (PDF), Microsoft claims its master disks are not technically "components" of the invention. Rather, they're nothing more than a "template," analogous to "a mold or die used to produce copies of one of the parts of a shrimp deveining machine."

Viewed another way, the software code on the master disk is merely a set of instructions telling a computer how to do something, and not a "component" in the sense that Congress intended, Microsoft and its supporters argue.

"Unlike a machine part, disembodied software cannot be simply 'snapped into place,'" attorneys for Yahoo wrote in a supporting brief (PDF).

Microsoft also argues it shouldn't be punished because the "components" in question were made outside the United States. It says all it did was make available a limited number of "golden master disks" whose code was never directly installed on any of the machines ultimately sold overseas. It was the foreign manufacturer that duplicated the code from the disk and installed it on individual machines, thus leading to a violation of AT&T's patent.

The Bush administration agreed with that logic, writing in its brief that "because the master copies supplied from the United States are not installed on any of the computers at issue, petitioner has not supplied a component of those computers from the United States."

The U.S. subsidiary of Dutch-owned Philips Electronics, which filed one of three briefs in support of AT&T, took issue with those assessments.

"These arguments blithely ignore how software is developed, used and distributed in the real world," its attorneys wrote (PDF). "At minimum, when software substitutes directly for, and has the same technical effect as, a piece of specialized hardware, it must be a component just as is the specialized hardware."

Can software be patented?
Developers of free and open-source software would like the spat to prompt the high court to proclaim, once and for all, that software is not patentable.

"It is not conceptually different from a list of steps written down with pencil and paper for execution by a human being," the Software Freedom Law Center wrote in its brief (PDF).

Eben Moglen, the center's executive director, said the Federal Circuit's repeated defense of U.S. software patents defies existing Supreme Court precedent.

The justices have "consistently ruled that algorithms and mathematics cannot be patented," he said in a statement. "Since software is expressed as mathematical algorithms, it should not be patentable."

The controversial issue has received considerably more attention in Europe than in the United States. Whether the high court will take a stance is unclear.

"It is not the central issue in the case, and it does not need to be addressed by the Supreme Court in reviewing whether the Federal Circuit has misconstrued Section 271(f) of the Patent Act," said Mark Bohannon, general counsel to the Software & Information Industry Association, which filed a brief on Microsoft's behalf. The trade association's members include Adobe Systems, McAfee and Cisco Systems.

In their briefs siding with Microsoft, the U.S. government and the American Intellectual Property Law Association said they had no doubt that software is patentable.

"I believe the patentability of software in the United States is well-established, and it is unlikely the Supreme Court will disturb its prior rulings on the issue," said Richard Himelhoch, an intellectual property attorney with the firm Schwartz Cooper in Chicago.

It's notoriously difficult to predict how the court will rule, but the justices have shown a willingness to roll back lower court patent decisions in recent times. In a case involving eBay last year, the justices opted to toss a Federal Circuit-created standard that arguably made it easier for patent holders to obtain injunctions against alleged infringers--a central question in a high-profile case involving the BlackBerry mobile device. The court is expected to issue a ruling soon on the question of what makes an invention too obvious to warrant patenting.

The decision will be left to only eight justices, as Chief Justice John Roberts has recused himself from the case. Justices are not required to disclose their reasons for opting out in such situations, but the choice usually stems from the appearance of conflicts of interest, such as holding stock in companies involved or having previously worked on a case at the lower court level.

Because Microsoft lost at the trial level, it will need at least five justices on its side to prevail. A split among judges would result in automatic victory for AT&T.

The health of the entire information technology sector could rest on a favorable outcome in the case, said Microsoft general counsel Brad Smith.

"We need a global patent system that works," he said, "and that will not happen if each country tries to impose its law on others."