On February 21, 2007, the United States Supreme Court heard oral argument in Microsoft Corp. v. AT&T Corp., a patent infringement action in which AT&T had prevailed in both the district court and the Court of Appeals for the Federal Circuit. Judging by some of the questioning at oral argument, AT&T may not enjoy that same success in the Supreme Court.
The centerpiece of the appeal is Section 271(f) of the patent laws, which provides in relevant part that one who "supplies in or from the United States components of a patented invention in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer."
Microsoft exported a "golden master" of its Windows operating system, which included software that, in combination with a computer, infringed a patent held by AT&T. Microsoft licensed foreign manufacturers to copy overseas software from the golden master and install it in computers manufactured overseas for sale outside of the United States. Microsoft had unsuccessfully argued below that it did not infringe 271(f) for two reasons. First, according to Microsoft, software is intangible information such that it could not be a "component" of a patented invention within the meaning of 271(f). Second, even if the Windows software were a component, according to Microsoft, no actual components had been "supplied" in the United States, as required for liability under 271(f), because the copies of Windows installed on the foreign assembled computers had all been made abroad.
The Federal Circuit decision had been a 2 to 1 split. See AT&T Corp. v. Microsoft Corp., 414 F.3d 1366 (Fed. Cir. 2005). Judges Lourie and Mayer found against Microsoft on both points, concluding that "[g]iven the nature of the technology, the 'supplying' of software commonly involves generating a copy." Judge Rader, in dissent, urged that the meaning of "supplies" did not include copying, noting that "[a]s a matter of logic, one cannot supply one hundred components of a patented invention without first making one hundred copies of the component, regardless of whether the components supplied are physical parts or intangible software." All three judges on the panel, relying on the Federal Circuit's earlier decision in Eolas Techs. Inc. v. Microsoft Corp., 399 Fed. 3d 1325 (Fed. Cir. 2005), agreed that software could be a component of a patented invention for the purposes of 271(f).
At oral argument in the Supreme Court, Microsoft and AT&T were joined by the United States, which appeared as amicus curiae in support of Microsoft. The Government attorney characterized 271(f) as a "limited extension of normal territoriality principles" and urged that it should not be extended to "take the further and extraordinary step of applying United States law to the conduct of copying parts abroad for assembly and sale abroad, conduct [that] is properly the subject of foreign law." Counsel for the U.S. observed that the difference between copying in the United States and a foreign country had "two critical dimensions":
The first is that it protects the foreign government's sovereign prerogative to establish the rules of competition that will govern companies that wish to compete in that foreign country's markets by copying their products abroad, assembling them there and selling them there. The second, which is the flip side of that point, is that it enables United States companies to compete on an even playing field abroad against their foreign competitors by manufacturing, assembling, and selling parts abroad
A not insubstantial portion of the oral argument was devoted to the Justices' apparent uncertainty about what was or was not patentable and what was patented in this particular instance. The two litigants also presented their differing views as to what the term "component" was intended to cover. Microsoft's counsel urged that the physical manifestation of the software (e.g. a disk) was the component. In contrast, AT&T argued that the intangible code itself was the component.
While there is always some risk in assuming that questions asked at oral argument reflect how the questioning Justice will decide the case, the questions asked by various of the Justices suggest that they were finding Microsoft's position to be more persuasive than AT&T's. The recurring themes were that "component" implied more than merely an intangible and that adopting AT&T's view could lead to anomalous results in other technologies or an unwarranted meddling in the affairs of other sovereign states.
Justice Breyer was the first and perhaps the most vocal interrogator of AT&T's counsel. He posited a hypothetical in which someone with remarkable memory goes to the U.S. Patent Office, memorizes a patent, and then phones an accomplice in Germany with that information, which enables the machine to be built in Germany. In an alternative version, the first person returns to Germany and there has the machine built. This example, according to Justice Breyer, demonstrated the overbreadth of AT&T's position:
Because I don't see how to decide for you without at the same time permitting a person to walk over to the Patent Office, to read that application and the description, which after all at least can be a very highly detailed set of instructions of how to make a machine, getting on the phone, explaining that to somebody in Europe. They then make it. And that on your reading would violate the statute. It can't be right that that would and you don't even think it would.
Justice Breyer variously described his trepidation about adopting AT&T's broad approach.
But I then would be quite frightened of deciding for you and discovering that all over the world there are vast numbers of inventions that really can be thought of in the same way that you're thinking of this one, and suddenly all kinds of transmissions of information themselves and alone become components.
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[T]he concern that I'm worried about is if you suddenly say that the transmission purely of information is the transmission of a component I can easily see in biology or medicine where a patent has an instruction and indeed, that instruction is an instruction to create other detailed procedures and we transmit that detailed information abroad. Then suddenly it's our patent law and not the foreign patent law that would govern.
Near the end of oral argument, Justice Breyer observed: "We are making an extension of the statute to keep up to date with the technology. That is not for courts to do." This hardly would seem to be comforting to AT&T.
Justice Kennedy took a somewhat different tack, using a different analogy which likewise seemed at odds with AT&T's position:
[S]uppose you had a machine that makes another machine, and if you ship that machine to Europe - and there's a patent for the machine that makes it. If you ship it to Europe and it starts making another machine, the statute is not violated; and isn't that just what's happening here?
Justice Stevens similarly used an example to describe seeming skepticism regarding AT&T's view of "component."
My question is if that when one copy is converted into 500 [overseas] how can those 500 all be components rather than copies of the single component?
Justice Souter, in turn, repeatedly proposed a "blueprint" analogy, noting that "the manifestation of the object code on the golden disk and the manifestation of the object code on the resulting disk are separable, just as the blueprint is separable from what is constructed."
Justice Ginsburg, exploring the outer limits of AT&T's approach, asked if even the golden disk were made abroad, but had been developed from object code supplied from the U.S., would 271(f) be implicated, to which AT&T's counsel answered "yes". There was no follow-up question, but one can imagine that Justice Ginsburg, the same as seemingly some of her other brethren, viewed this as an overbroad reading of 271(f).
Trying to read the tea leaves of oral argument is not always easy or productive. Nevertheless, the oral argument in Microsoft v. AT&T suggests that AT&T may end up one victory short in this battle with Microsoft.
Importantly, it is a battle that would appear to have ramifications beyond this immediate case. AT&T's expansive view would bring Microsoft-type practices within the purview of U.S. patent laws, including subjecting companies in Microsoft's position to damages based on sales that took place entirely outside the U.S. There also could be a reaction to a victory by AT&T. One form of reaction could be retaliatory legislation by foreign countries upset over what they might view as an intrusion on their sovereign rights. Another reaction might be by the Microsofts of the world, who might start to shift research and development activities outside the U.S. and thereby eliminate the predicate to liability of developing the software in the U.S. Yet another reaction might be legislation by Congress to strike some new balance on the issue.
Conversely, and notwithstanding comments by certain Justices at oral argument, if Microsoft were to prevail, a legislative solution might be sought with the avowed objective of updating patent law to take into account the current and likely future state of technology.
John E. Daniel is a Partner at the New York office of Kramer Levin Naftalis & Frankel, where his practice focuses on patent, trademark and other intellectual property litigation. He can be reached at (212) 715-9195.