Supreme Court sides with Microsoft in patent spat

Justices say software giant can't be held liable when code copied by foreign manufacturers infringes on U.S. patents.

In what could be a broader victory for American software companies, the U.S. Supreme Court on Monday ruled that Microsoft cannot be forced to pay up for patent infringement that occurs when copies of Windows are made and installed on computers abroad.

Generally, U.S. patent protection does not transcend American borders. At issue in this case is a complex exception in patent law that bars American companies from shipping "components" to foreign manufacturers, which could then combine them to make a machine that infringes on U.S. patents. The law does not, however, restrict sending blueprints that could theoretically prompt a foreign company to build an identical product.

Scarcely two months after they in a patent dispute that pitted the Windows maker against AT&T, the justices ruled 7-1 (PDF) that "abstract software code" shipped by Microsoft to foreign manufacturers in the form of "golden master discs" amounts to such a blueprint, not a "component" of the invention.

"The master disc or electronic transmission Microsoft sends from the United States is never installed on any of the foreign-made computers in question," the justices said in a majority opinion penned by Justice Ruth Bader Ginsburg. "Instead, copies made abroad are used for installation."

That means under existing federal law, the company cannot be held liable for infringement that occurs as a result of those foreign installations, the justices concluded, although they seemed to invite Congress to take another look at what AT&T argued are loopholes in the law.

If AT&T wants to prevent its inventions from being copied abroad, the justices added, its "remedy lies in obtaining and enforcing foreign patents."

Andrew Leibnitz, an intellectual property lawyer for Farella Braun and Martel in San Francisco, said in making the ruling the court determined that U.S. patent law governs only the U.S. and not the world. Leibnitz said that is "recognition of a deference that the U.S. has not previously evinced in world affairs."

It's also, he said, a sign that the high court is leery of expanding patent law.

"I think it shows, if not hostility, a reluctance to see patent law applied more broadly than absolutely necessary," Leibnitz said, adding that the ruling will impact the whole software sector as well as other industries. "The Supreme Court is talking about not just software, but prototypes that are sent abroad...templates or blueprints or any other idea that gets sent abroad that needs to be combined with something physical in order to potentially infringe."

The decision could save Microsoft and other global software companies billions of dollars. When a jury earlier this year ordered Redmond to pay Alcatel-Lucent Technologies $1.5 billion in a patent dispute over MP3 audio technology used in Windows, the company noted that about half of the damages were calculated based on overseas sales of Windows PCs.

Microsoft general counsel Brad Smith called the decision "important for the entire information technology industry, adding clarity and balance to our patent system." He said he believed the damage awards in the Alcatel-Lucent case and an earlier case against the University of California's Eolas spinoff would be revisited, and the company welcomed that result.

"More generally, because Microsoft is such a large, rich company and competes in so many business areas, it's increasingly been the target of patent litigation," said Matt Rosoff, a lead analyst with the firm Directions on Microsoft. "So any ruling that decreases the amount of potential liability is a good thing for Microsoft."

AT&T Knowledge Ventures CEO Scott Frank said the company was disappointed in the court's ruling. "All U.S.-based sources of innovation--including the software development community--could benefit from patent laws that enable fair, appropriate protection and valuation of new technologies and inventions domestically and overseas," he said in a statement.

The ruling marks the latest in a string of patent-focused cases heard in the past year by the high court that have been hailed by technology companies. Separately on Monday, the Supreme Court issued a unanimous ruling designed to make it easier to weed out patents covering obvious combinations of elements.

The Supreme Court agreed to review the Microsoft-AT&T matter after a federal district court and the U.S. Court of Appeals for the Federal Circuit both found Microsoft liable not only for violating an AT&T patent covering a "digital speech coder" in U.S.-assembled computers but also in those abroad. AT&T first sued Microsoft over the patent in 2001.

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