Microsoft Exploits Loophole in Patent Law - And what you can learn from this!

May 4, 2007

On the same day that the Supreme Court seemed to rely on common sense in its approach in KSR decision, it handed down its holding in Microsoft Corp. v. AT&T Corp, No. 05.1056, 550 US ___ (April 30, 2007) which defies common sense.  The lesson learned from this decision is to either file for foreign patents or work to change the law.

The case concerned the exportation of  machine-readable "golden masters" by Microsoft outside the United States for copying and installation onto computers.  The question was whether these actions triggered the extra-territorial reach of 35 USC §271(f)(1) which attaches patent infringement liability to the supply abroad of the components of a patented invention, where such components are uncombined in whole or in part, in such manner as to actively induce the combination of such components.  AT&T holds a patent on a computer used to digitally encode and compress recorded speech.

The Court granted Microsoft a small oasis in the desert of their recent legal turmoils by deciding that Microsoft's actions did not fall within the scope of 35 USC §271(f)(1). 

Microsoft shipped the golden masters abroad, where the code was copied onto other disks that were then placed into foreign-made computers for purposes of installing the Windows program.  The key to the Court's holding was that "no physical aspect of a Windows CD-ROM original disk … is ever incorporated into the computer itself. …  It bears emphasis …that uninstalled Windows software does not infringe AT&T's patent any more than a computer standing alone does; instead, the patent is infringed only when a computer is loaded with Windows and is thereby rendered capable of performing as the patented speech processor."  It is interesting to note that, at times, the Supreme Court appeared to be confused as to whether they were discussing the issue of source code exportation or machine-readable object code on the golden disks.  There is some discussion as to why source code would not be considered a component as it exists in the abstract.  This seems entirely irrelevant to the actual facts of the case since it was stipulated that object code was on the master disks … Microsoft dispatched from the United States.  It is possible that the Court was trying to distinguish between the executable code comprising the installer package (which includes the compressed version of the ultimate operating system as well as the executable code to uncompress it) and the actual executable code of the installed operating system.  That would, at least, have rendered those sections of the opinion, somewhat more cogent.

The Court held, because the actual "component" is a copy and not an original, liability does not attach.  The Supreme Court agreed with Judge Rader, who dissented from the Federal Circuit decision holding Microsoft liable.  Judge Rader had noted that "supplying is ordinarily understood to mean an activity separate and distinct from any subsequent copying, replicating, or reproducing … in effect, manufacturing."  Justice Stevens dissented:  "On the Court's view, Microsoft could be liable under §271(f) only if it sends individual copies of its software directly from the United States with the intent that each copy would be incorporated into a separate infringing computer."  Justice Stevens reasonably points out that Microsoft's actions have only been saved by a step which simply makes the computer production process cheaper and more efficient.  Indeed, the only reason that the golden disk master is not used as the component is simply to preserve it as a backup in case anything happens to the copies being used in the actual installation process (e.g., a disk is scratched).   But a computer manufacturer could have just as easily used the golden disk as a component. 

The Court acknowledged the loophole this creates.  Even more than computer software, the decision appears to allow any manufacturer to escape liability under 271(f) by creating a component, sending it abroad, having it copied, and then having the foreign party use the copied component to create an end product which is actually sold. The court admitted the bigger loophole in the context of copies of knives stored in a warehouse for ultimate sale by stating "a copy made entirely abroad does not fit the description supplie[d] . . . from the United States."  The decision specifically stated that they leave to "Congress' informed judgment any adjustment of §271(f) it deems necessary or proper."  They further stated that "Section 271(f) contains no instruction to gauge when duplication is easy and cheap enough to deem a copy in fact made abroad nevertheless supplie[d] . . . from the United States."

The upshot of the decision is that the key to protecting your innovations, if you are like AT&T, is to either get and enforce foreign patents or lobby your Congressional representative to expand the scope of 35 USC 271(f).[1]

For further information, please contact Ria Farrell Schalnat at rschalnat@fbtlaw.com.     


[1] By the way, the current version of the HR 1908 - The Patent Reform Act of 2007, does not contain a provision to expand the scope of 271(f), and, interestingly enough, the previous version of this bill HR 2795 actually contained a repeal of 271(f) for software.

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