AT&T v. Microsoft And The Extraterritorial Reach Of U.S. Patent Law

The Supreme Court on October 27, 2006 agreed to review a case that may greatly extend the extraterritorial reach of U.S. patent law. The dispute between AT&T and Microsoft centers on products made outside the U.S. in part with technology patented in the U.S. The broader question presented by this case, however, is whether U.S. patent law can be used to impose liability for the manufacture and sale of products outside of the United States where a portion of the product is provided from the U.S.

In this case, Microsoft exported a "golden master" of its Windows software that included software that infringed a patent held by AT&T. Microsoft licensed foreign manufacturers to copy the software from the golden master and install it in computers manufactured overseas for sale outside of the United States. AT&T claims that even though the foreign manufacturers copied and installed the software, Microsoft should be deemed to have "supplied" the software in the foreign-manufactured computers. Microsoft’s position is that it did not "supply" the software on the computers because it did not physically export the copies of the software that were contained in the computers. If the Supreme Court supports AT&T’s position, Microsoft could be liable for hundreds of millions of dollars in infringement damages in respect of the computers sold outside of the U.S.

As a general matter, a patent is specific to the country where the patent is granted. In other words, a patent granted in the United States only prevents parties from selling, manufacturing or using the patented technology in the United States or importing it into the United States. Actions that take place in a different country are typically not covered—if a patent holder wants protection in a second country, the holder must apply for a patent in that country as well.

Title 35 § 271(f) of the U.S. patent code is an exception to this general rule. Under § 271(f)(1), a party that "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 such manner as to actively induce the combination of such components outside 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." The effect of § 271(f)(1) is to prevent U.S. manufacturers from evading liability for patent infringement by splitting a product into multiple pieces, none of which by itself violates any U.S. patent, and combining the pieces overseas to create a product which would, if manufactured in the U.S., violate a patent.

Section 271(f) is a narrowly crafted statute that was enacted in response to a 1972 case, Deepsouth Packing Co. v. Laitram Corp. (406 U.S. 518). In that case, a manufacturer produced a number of components, none of which by themselves violated the relevant patent. The manufacturer then shipped the components overseas, where they were combined into a single product that did infringe. The Supreme Court found that patent law as it existed at that time did not prevent such action, and Congress responded by enacting § 271(f) to close what was perceived as a loophole.

AT&T has contended that by exporting the golden master containing infringing material, Microsoft supplied a component of a patented invention from the United States within the meaning of § 271(f). The copying of the golden master, therefore, should give rise to infringement liability. Microsoft’s position is that the relevant action is the copying of the master, not the provision of the master from the U.S. Microsoft argues that because the copying took place overseas Microsoft did not "supply" the copies. Alternatively, Microsoft argues that software should not be considered a "component" because it is not a physical item that can be combined with other items, another requirement for liability under § 271(f).

Courts have traditionally limited the extraterritorial application of U.S. patent law. Patent law has protected U.S. patent holders from domestic competition, but it has not been used to protect patent holders from foreign competition. Instead, U.S. patent holders who seek to exploit their inventions outside of the U.S. have been required to obtain and enforce patents in those foreign markets. Microsoft argues that extending § 271(f) liability to cover actions by foreign manufacturers that take place in foreign countries would greatly extend the reach of the U.S. patent laws, and in particular would put U.S. software manufacturers and others at a disadvantage to their foreign competitors. Foreign software companies would be free to create and sell their software in non-U.S. markets without having to worry about infringing U.S. patents (whether inadvertently or intentionally), but U.S. companies would face the threat of damages under U.S. patent law for overseas sales under the theory that they "supplied" their software from the U.S. This logic would apply to companies in any industry where a product is produced by copying a master, including, for instance, stem cells, semiconductor designs, and even tire manufacturers who prepare a master mold of a tread design. The end result, according to Microsoft, could be to push software development, chip design, stem cell research and other types of research activity to offshore locations in order to avoid infringement claims under U.S. patents when those technologies are exploited in overseas markets.

AT&T v. Microsoft is likely to be the most significant patent case heard by the Supreme Court during the current term. It will turn on challenging questions of statutory interpretation, congressional intent and the impact of the case on foreign policy. This case has the potential of having a very serious impact on companies outside of the U.S. who collaborate with U.S. companies to manufacture and sell products in markets outside of the U.S. We will provide updates on this action as it progresses.

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