Gauging reach of patent law

Two corporate titans, one in the software world, the other in the world of telecommunications, will do battle in the U.S. Supreme Court this month over the reach of domestic patent law beyond the borders of the United States.

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WASHINGTON-Two corporate titans, one in the software world, the other in the world of telecommunications, will do battle in the U.S. Supreme Court this month over the reach of domestic patent law beyond the borders of the United States. The financial stakes for Microsoft Corp. and AT&T Inc., in particular, and for the software industry in general, are huge, but the ramifications of a Supreme Court ruling most likely will be felt far beyond the software industry, according to patent litigators and others. Microsoft v. AT&T, No. 05-1056. Reflecting those high stakes, Microsoft and AT&T have hired big-name Supreme Court litigators, both former U.S. solicitors general: Theodore B. Olson of Gibson, Dunn & Crutcher for Microsoft, and Seth Waxman of Wilmer Cutler Pickering Hale and Dorr for AT&T. An array of high-tech, biotech and other business interests, the Bush administration, as well as patent scholars and members of the patent bar have joined in the legal battle with amicus briefs emphasizing what a wrong decision could mean for the future of research and development in this country. At the heart of the high court case is a section of the federal patent infringement statute that generally applies to the export, from the United States, of components of patented inventions. Microsoft and its allies challenge the U.S. Court of Appeals for the Federal Circuit’s interpretation of that statute, arguing that it puts U.S. businesses at a disadvantage vis-�-vis their foreign competitors and provides an incentive to move research and development activities offshore. But AT&T and its supporters counter that a reversal in favor of Microsoft would deny patent holders the licensing revenues needed to recoup their investments and would undermine the ability of biotech and other entrepreneurs to attract venture capital and other funding critical to innovative research. “I can see both sides,” said intellectual property law scholar Cynthia Ho of Loyola University Chicago School of Law. “The law reads a certain way but if applied in the way it reads, that seems to emasculate its effectiveness. So what are we to do? This is something that could really use greater debate and policy consideration from Congress.” Machines to software The historical understanding of patent infringement, both at common law and under the federal patent infringement statute, was that it did not include infringement occurring outside of the United States. Patents are territorial. The U.S. Supreme Court reaffirmed that understanding in a 1972 decision involving the export of parts of a shrimp deveining machine. The court held that the statute could not be applied when unassembled components of a patented combination were exported for final assembly in foreign countries. “In order to get around the patent, the defendant shipped in crates all the parts of the machine and told customers how to assemble them,” said patent litigator Erik Puknys of Washington-based Finnegan, Henderson, Farabow, Garrett & Dunner’s Palo Alto, Calif., office. Reacting to the ruling, Congress amended the statute to include the provision now at issue in the Microsoft-AT&T case: Section 271(f). That section prohibits the “suppl[y] . . . from the United States . . . [of] all or a substantial portion of the components of a patented invention . . . in such manner as to actively induce the combination of such components outside of the United States.” It also applies to the “suppl[y] . . . from the United States [of] any component of a patented invention that is especially made or especially adapted for use in the invention.” The two key requirements under the section are “components” of a patented invention and “supply” from the United States. When he signed the legislation, President Reagan said that it “closes a loophole in existing law which permitted copiers to export jobs and avoid liability by arranging for final assembly of patented machines to occur offshore.” For almost two decades, courts read the provision narrowly, said Puknys and others, in accord with the general presumption that patents are not extraterritorial. “As someone who has done patent litigation his entire career, I can say that up until four to five years ago, nobody used 271(f) because we thought it was very narrow,” said Puknys. “But with the advent of software, most of the prominent cases have involved software.” And it’s not just the advent of software that has brought 271(f) more into play, others explained. The advent of the “global economy” and multinational companies that develop and manufacture products in many countries has driven U.S. patent holders to assert their rights more aggressively against extraterritorial activities. “One of the big issues here is how do you apply this provision, written in an era long before the Internet and software became big-a bricks-and-mortar framework-to what is now so important to society-information crossing borders,” said Ho. Exporting intangibles In the Microsoft case, the Federal Circuit held that the statutory provision applied to software copied abroad from a “golden master” disk supplied from the United States. The decision upheld the trial court’s ruling that Microsoft was liable for infringing an AT&T patent for converting speech into computer code in copies of its Windows operating system sold overseas. In the high court, Gibson Dunn’s Olson argues that the software code is “abstract information, floating in the ether” that can’t be combined with anything. “Although computer programs recorded on machine readable media may be statutory components, the abstract instructions comprising such programs-a ‘binary sequence of numbers that lacks physical existence,’ in AT&T’s formulation-cannot be a component of a patented invention within the meaning of Section 271(f),” he contends in his brief. And because copies of the code were used to create the infringing combination, he added, nothing that Microsoft actually exported became part of the ultimate product. Abstract information cannot be exported or “supplied.” WilmerHale’s Waxman counters that Microsoft is trying to read into 271(f) a requirement that a component be physical in nature. The code here, he contends in his brief, is “the key component of the foreign-made devices in terms of their ability to practice AT&T’s invention . . . just as a unique collection of intangible words is a component of any book bearing the title ‘Moby-Dick,’ even though those words, too, must be combined with ink and paper before the book can be read.” And Microsoft “supplied” the code to foreign computer manufacturers “with the intent that those companies would pay Microsoft a royalty each time they combined that code with other components to form devices that would infringe AT&T’s patent if made or used in the United States,” added Waxman. The Bush administration agrees with AT&T that the code may be a “component” here, but disagrees that the creation of copies of software overseas based on a master disk provided by Microsoft constitutes “supply” from the United States. AT&T’s remedy, writes the U.S. solicitor general, “lies in obtaining and enforcing foreign patents, not in attempting to extend United States patent law to overseas activities.” In a lot of countries, software is not “patentable” subject matter, noted Loyola’s Ho. And an amicus brief filed by the Software Freedom Legal Center urges the justices to find that software is not patentable under the U.S. Patent Act’s provision on “patentable inventions.” “There are many interesting, over-lapping issues,” said Ho. “If the Supreme Court were to look at what is patentable subject matter, some of these other issues may disappear. Of course, the court takes cases as they come up, not in the most logical order.”

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