Client Alert

On April 30, 2007, the Supreme Court, in a 7-1 decision, issued its opinion in Microsoft Corp. v. AT & T Corp., which held that Microsoft was not liable for infringement of AT & T’s patent, to the extent of foreign sales of computers loaded with Windows software. In so doing, the Court acknowledged a "loophole" in a key statute, but indicated that it was a matter for Congress, not the Court, to address. As a result, absent Congressional revision of the statute, software manufacturers selling their works overseas should be able to easily avoid liability for foreign sales under that statute, and software patent holders must place increased reliance on foreign patents.

In the litigation, Microsoft admitted liability for infringement as to computers sold and licensed domestically, but denied that AT & T could recover any infringement damages as to Microsoft’s foreign sales of Windows-loaded computers. Microsoft provided a master version of Windows software to foreign computer manufacturers, who made copies from that master version abroad and who then sold computers, loaded with the installed Windows copies (but not with the master version), to foreign users.
AT & T contended that Microsoft was liable as to foreign sales under 35 U.S.C.
§ 271(f), which is an “exception” to the “general rule . . . that no infringement occurs when a patented product is made and sold in another country.” Generally, under § 271(f), infringement liability attaches to whomever without authority “supplies or causes to be supplied from the United States” either a “substantial portion of the components” of the patented invention, or any component thereof “especially made for use in the invention,” with knowledge that the assembly of such components outside the U.S. would infringe the patent. 35 U.S.C. § 271(f)(1) & (f)(2).

The Supreme Court sided with Microsoft, finding that its master version of Windows sent abroad was not a “component” within the meaning of the statute, and that the act of copying that version abroad did not cause the copies to be “supplied from the United States.”

Key Conclusions of Microsoft

• “Abstract software code is an idea without physical embodiment, and as such, it does not match § 271(f)’s categorization: ‘components’ amenable to ‘combination.’” “In sum, a copy of Windows, not Windows in the abstract, qualifies as a ‘component’ under § 271(f).” 
• “The presumption that United States law governs domestically but does not rule the world applies with particular force in patent law.” AT & T’s recourse as to foreign sales is to obtain and enforce foreign patents against Microsoft. 
• AT & T asserted that adopting Microsoft’s position would create a “loophole” through which a software manufacturer could easily circumvent § 271(f), by supplying a master to foreign manufacturers, rather than making installation copies in the U.S. The Supreme Court, however, observed that the “loophole” described by AT & T was a matter for Congress, not the Court, to consider.

Consequences of Microsoft 

• Software manufacturers selling their works in foreign countries can avoid application of § 271(f) to foreign sales by exploiting the “loophole” described by AT & T, e.g., sending masters, rather than installation copies, overseas. 
• Software patentees will need to place greater reliance on foreign patents to recover damages for sales of infringing software overseas. Consideration of the need for foreign patents should be done as early as possible, since some foreign countries have an “absolute novelty” requirement that bars seeking a patent in those countries, where the patent applicant already engaged in commercial activity involving the invention anywhere. Consultation with a patent attorney or agent would be recommended to address foreign patenting questions.

Mr. Cicero is a Member, at Womble Carlyle Sandridge & Rice, PLLC ("Womble Carlyle"), where he concentrates his practice on intellectual property litigation.