In a decision handed down April 30, 2007, the Supreme Court clarified the meaning of Section 271(f) of the Patent Act, which extends patent infringement liability to the export of components of patented inventions assembled in a foreign country. Microsoft Corp. v. AT&T Corp., No. 05-1056, Slip Op. (U.S. Apr. 30, 2007). In a 7-1 decision (Chief Justice Roberts did not participate), the Court held that a golden master disk containing software does not qualify as a “component” within the meaning of Section 271(f), and, hence, foreign sales of copies created abroad from the golden master do not infringe a U.S. patent. Microsoft is unlikely to have the impact of KSR International Co. v. Teleflex Inc., No. 04-1350, Slip Op. (U.S. Apr. 30, 2007), handed down the same day; however, the decision arguably resolves the first of many unsettled questions regarding the patenting of software.

The Microsoft Decision

AT&T sued Microsoft for infringement of its U.S. reissue patent No. 32,580. AT&T claimed that Microsoft’s Windows operating system infringed AT&T’s patent directed to speech codecs1 with respect to U.S. sales of Windows. However, AT&T also requested damages for foreign sales of Windows under Title 35 of the United States Code, Section 271(f). Section 271(f) includes in the definition of patent infringement the export of components for a patented invention for assembly abroad. Microsoft exports Windows by first creating a “golden master” disk. The golden master is used abroad to make CD-ROM copies of Windows, which are then installed on personal computer systems. Both the District Court for the Southern District of New York and the Court of Appeals for the Federal Circuit held that the export of a golden master was covered by Section 271(f), and thus Microsoft was liable for all copies of Windows sold abroad that infringed AT&T’s patent, in addition to liability for U.S. sales.

The U.S. Supreme Court disagreed, and held that export of a golden master disk (or transmission of the same information) that was used in a foreign country to replicate copies of infringing software is not included in Section 271(f). Microsoft has stipulated that Windows does infringe AT&T’s patent. However, as a result of the Supreme Court’s decision, Microsoft is only liable for infringing sales in the United States, and not for sales of Windows abroad.

Section 271(f) of the Patent Act and Software Patents

Section 271(f) is an exception to the general rule that a product made and sold outside the United States cannot infringe a U.S. patent. Section 271(f) was enacted in 1984 in response to the decision in Deepsouth Packing Co. v. Laitram Corp.2 Laitram held a patent for a shrimp deveining machine. Deepsouth manufactured a deveining machine that infringed Laitram’s patent, but, in order to avoid liability, Deepsouth sold the machine abroad by shipping the components of a machine in three separate boxes, from which a machine could be assembled in less than an hour. The Supreme Court held in Deepsouth that this was not infringement of the U.S. patent, because the whole machine was never actually put together or used in the United States.

Congress enacted Section 271(f) to close this potential loophole. Section 271(f) includes as an infringer one who “supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention” in order to either induce infringement or contribute to infringement of a U.S. patent through the combination of components outside the United States.

The patentability of software has engendered a great deal of debate in the United States and around the world. The European Patent Convention, for example, expressly excludes “computer programs” from its definition of patentable subject matter. In the United States, the Patent Act is silent with respect to the patentability of software, and the Supreme Court has not addressed the issue. Although current Federal Circuit precedent supports the patentability of software, there are several cases pending that could change the definition of what is patentable.

As a practical matter, software is patented, both in the United States and abroad, through creative techniques of patent claim drafting. For example, AT&T’s patent did not claim software itself, but rather claimed a “method for processing a speech pattern,” an “apparatus for encoding a speech pattern,” a “speech processor,” and a “method for producing a speech message.” Because software sitting in a box does not perform a method and is not by itself an “apparatus” that can perform any function, a CD-ROM containing Windows could not, by itself, infringe AT&T’s patent.3 AT&T’s patent is only infringed when Windows is installed onto a personal computer, creating an infringing “apparatus.”

Even if a CD-ROM containing Windows could be considered a “component” under Section 271(f), a golden master for producing CD-ROMs is one step further removed. The Federal Circuit held in Eolas Technologies Inc. v. Microsoft Corp.4 that a golden master for Windows is a component under Section 271(f), but did not reach the question of whether its shipment abroad constituted “suppl[ying] or caus[ing] to be supplied” a component under Section 271(f).5

Factual and Procedural Background

An International Telecommunications Union (ITU) standard, G.723.1, for a speech codec was issued in 1996 to support standardization of speech transmission over computer networks. A number of electronic meeting and communication products, including Microsoft NetMeeting 2.0, complied with the G.723.1 standard.

AT&T notified Microsoft in 1999 that NetMeeting 2.0 violated U.S. reissue patent No. 32,580 owned by AT&T, because any product that complied with G.723.1 necessarily infringed its patent.6 In 2001, AT&T filed suit against Microsoft for patent infringement. AT&T and Microsoft eventually settled the patent infringement suit with a stipulation that Microsoft could appeal the trial court’s ruling on the Section 271(f) issue. The parties further agreed that the amount of Microsoft’s payment to AT&T was dependent on the eventual result of the resolution of the Section 271(f) issues.7

The Supreme Court’s Legal Analysis

Justice Ginsberg, joined by Justices Scalia, Kennedy, Souter, Thomas, Breyer, and Alito, found that a golden master is not a “component” and shipping a golden master abroad for the purpose of replicating copies of software is not “suppl[ying]” a component under Section 271(f).8 First, the Court examined whether a golden master is a component under Section 271(f). The Court reasoned first that software must be encoded on some medium in order to be a component. AT&T had urged that “software in the abstract”9 be considered a component, but the Court rejected this interpretation. The statute uses the word “combination,” and the Court held that the use of this word requires that a component must be “combinable” with other components. It is only when object code is written on some medium, such as a CD-ROM, that is capable of being “combined” with a computer that object code can be a component. Further, because it is individual copies of software that are sold to consumers – not abstract object code – the Court reasoned that a golden master, which is never used to directly copy object code onto a computer, is not a “component.” The Court was not persuaded by the fact that it is easy and cheap to make copies from the golden master.

Without the ability to directly combine with a computer through installation, there is no component. Second, the Court considered whether shipping a golden master abroad is supplying a component under Section 271(f). Following its earlier reasoning, the Court found that no components were supplied, because the copies that were actually installed on computers abroad were created abroad. Even though the golden master made it easy to produce those copies, sending a master from which duplicates can be made is not “suppl[ying] or caus[ing] to be supplied” components under Section 271(f).10

Third, the Court observed that there is a general presumption against U.S. laws having extraterritorial effect. This presumption applied, because U.S. patent law expressly covers only conduct in the United States, and Section 271(f) is an exception. As a result, the Court construed terms of the statute narrowly, leaving it to Congress to be clear that a broader meaning was intended. As the Court noted, several statutes bearing on software have been passed since 1984, including the Digital Millennium Copyright Act, so Congress has dealt with software issues. If it wished to be clear that Section 271(f) applied to software, Congress knew how to do so. Congress is free to clarify the law later, but the Court would not read this section expansively.

In a concurring opinion, Justice Alito, joined by Justices Thomas and Breyer, went further with respect to the issue of whether software can be a component under Section 271(f). Justice Alito found that “component” requires physical combination. A disk or CD-ROM containing an installable copy of software is unchanged by installation of the software, and thus is not “combined” in the sense of Section 271(f). Under Justice Alito’s reasoning, even shipping CD-ROMs containing Microsoft Windows would not infringe under Section 271(f).

Import of the Decision

The decision allows software manufacturers to ship masters abroad for replication outside the United States, while avoiding liability for infringement. That is, Section 271(f) may now have little effect on software manufacturers, although the Court did leave the possibility open for liability for shipping installable copies abroad. Had the Court ruled the other way, a software manufacturer could not avoid liability for foreign sales, short of developing the software outside the United States. The decision makes clear that patentees in the software industry must continue to be careful in drafting patent claims. For example, a claim directed to a “computer-readable medium” containing a program (known as a Beauregard or program-product claim) may enable a patentee to sue for infringement for the production of any medium containing infringing software, including a golden master. Assuming such a claim was upheld and found infringed by the production of a golden master, it is an open question whether damages would include the value of copies replicated from the golden master and sold abroad.

From the perspective of software patent owners, there are now additional potential complications for enforcing their rights. Even though AT&T held foreign patents on its speech codec, it chose to bring suit in U.S. court on its U.S. patent, using Section 271(f) to address foreign sales. That approach is no longer possible. In light of a recent Federal Circuit decision, Voda v. Cordis,11 a U.S. patentee may not sue on a foreign patent in U.S. court. Assuming Voda is not overturned, this forces patentees into foreign court to enforce their foreign patent rights. As foreign countries are generally not as sympathetic to patenting software, it may be more difficult for software patentees to protect their rights abroad.

Microsoft is generally viewed as a victory for software manufacturers. It remains to be seen if Congress will step in and reverse the Court’s interpretation of Section 271(f). But barring Congressional reversal, the decision represents a reining in of the scope of software patent rights.