High court wrestles with software patent questions

The conflict centers on part of a U.S. statute that restricts American companies from shipping "components" made in the United States to foreign manufacturers, which could combine them to make a machine that infringes on U.S. patents. The statute does not stop them from sharing design plans that would spawn an identical product.

The U.S. software industry fears that a ruling against Microsoft could expand its vulnerability in patent infringement suits compared to global rivals and make it more attractive to locate its research operations abroad. AT&T, on the other hand, says software companies need only worry if they're committing infringement in the first place.

During hour-long oral arguments, some justices pressed AT&T attorney Seth Waxman, a former Solicitor General of the U.S. Department of Justice, to explain why Microsoft is supplying anything more than a blueprint when it ships software object code on "golden master discs" to foreign manufacturers for duplication and installation on individual machines.

"A machine in Europe is following instructions just the way an artisan would follow a blueprint," Justice David Souter said to Waxman. "What's the difference?"

There's "no question" that the master disc is more than a set of instructions, Waxman repeatedly asserted. He argued that it is a critical component that "interacts continuously with the hard drive" of any computer system that infringes on an AT&T patent covering a digital speech-coding technology.

Microsoft has conceded in earlier stages of litigation that its Windows object code, when copied and installed onto computers, leads to infringement of AT&T's patent. It has said it is willing to pay undisclosed damages based on sales of U.S. computers that commit such a violation.

But the software company, backed by the U.S. government, among others, disagrees with lower federal-court rulings that found it liable for foreign computers that infringe on the patent. Microsoft contends that all it provided to foreign manufacturers was a master disc that never became a physical "component" of any machine. Rather, the master disc acted as a sort of blueprint, copied and installed by manufacturers on foreign turf, argue Microsoft and its allies in the case, which also include Intel, Amazon.com, Yahoo, and free- and open-source developers.

If the high court sides with AT&T, "U.S. companies will be held liable for patent infringement whenever their products are copied abroad," and that's not what Congress intended, argued Theodore Olson, who served as solicitor general after Waxman and currently represents Microsoft.

Justice Stephen Breyer said he feared that a ruling in favor of AT&T would open the doors to patent infringement allegations so expansive that "transmission purely of information" could be considered a violation.

"I would be quite frightened of deciding for you and discovering vast numbers of inventions that can be thought of in the way you describe this one," he told Waxman.

Breyer suggested that if the court accepted AT&T's logic, it would be unlawful for an American to read the text of a patent claim over the phone to someone in a foreign country, who then decided to make the same product. Such a reading of the law "can't be right," he said.

Some justices, however, seemed to question Microsoft's distinction between the master discs it ships and the copies of code actually installed on computers by other companies.

"Microsoft doesn't say, please buy our discs because they're the prettiest discs in the business," Justice Anthony Kennedy said.

"Isn't this an artificial distinction?" Justice Samuel Alito asked Olson. He said he had gotten the impression that the previous courts ruled that Microsoft owed damages on its foreign sales because "it is so easy and inexpensive and fast to copy (software code) that simply sending information abroad is tantamount to making copies overseas."

Olson cautioned Alito against relying on such reasoning. "Patent laws can't be determined (based on) whether it's easy or fast or efficient to copy something," he said. "Where would that take us?"

The justices devoted only passing attention to another question raised by Microsoft in its appeal--the extent to which software should be patentable. Free- and open-software advocates had hoped that the case might provide a forum for the Supreme Court to take a stand on the issue and declare outright that software cannot be patented.

"We're operating under the assumption that software is patentable...but we've never held that in this court, ever," Breyer said, addressing attorney Daryl Joseffer, assistant to the solicitor general. "What should we do here?"

Joseffer insisted that the issue of software patentability is irrelevant to the case at hand. More important, he said, is clarifying that American companies cannot be held liable for copies of software or other machine parts made in another country, or they'll be at a serious disadvantage to their global rivals. "We haven't found a single country that would apply its laws in the same way," he told the justices.

Chief Justice John Roberts did not participate in the hearing, reportedly because he has disclosed in financial statements that he owns Microsoft stock. Because Microsoft lost at the lower-court level, it would need five justices on its side to prevail. A tie would result in a win for AT&T. A decision is expected by July 2007.