For Microsoft and the global software industry, the U.S. Court of Appeals for the Federal Circuit has resolved a longstanding open question in the patent laws. After deciding in March of this year the term "component" in 35 U.S.C. § 271(f) includes software (Eolas Technologies, Inc. v. Microsoft Corp.), the Court has now decided the term "supplied" in the same statute includes copies of the software made overseas from a single master disk shipped from the United States. AT&T Corp. v. Microsoft Corp., Case No. 04-1285, 2005 U.S. App. LEXIS 14082 (Fed. Cir. July 13, 2005) (Lourie, J.).
The question before the Court was simple: If software designed, developed, tested, marketed and supported in the United States infringes a U.S. patent when in operation, can the software company escape liability by transferring the last step, installing the software onto a computer, overseas? The AT&T Court answered the question with an unequivocal no.
The facts in AT&T were not in dispute. Microsoft developed the Windows operating system and stored the Windows software on a limited number of "golden master" disks in the United States. Some of these golden masters were shipped abroad, where foreign computer manufacturers replicated the disks. These copies were then installed onto computer hardware that was ultimately sold to consumers.
The relevant statute, 35 U.S.C. § 271(f), creates liability where an infringer "supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention." Congress first enacted this law in 1984 after the Supreme Court in DeepSouth v. Laitram found that potential patent infringers could avoid liability by manufacturing components of a patented product in the United States but assembling it abroad. According to the Congressional Record, § 271(f) was passed to "close a loophole in patent law."
Microsoft believed this loophole was still open for software. First, it argued the word "component" should not apply to software. The Court, however, noted it had already rejected that contention in Eolas, while the AT&T appeal was still pending. Second, Microsoft argued that although it admittedly supplied the "golden master" disk from the United States, it could not be held to have "supplied" the foreign-replicated copies actually installed onto computer hardware abroad. Microsoft drew an analogy to a master key sent abroad to be copied, but the Court found this lock-and-key hypothetical "unpersuasive and irrelevant to this case." In rejecting Microsoft’s arguments about the legal and factual distinctions between "supplying" and "copying," the Federal Circuit considered "the nature of the relevant technology and business practices" and concluded that for software, "the act of copying is subsumed in the act of supplying." The Court refused to permit a "technical avoidance of the statute by ignoring the advances in a field of technology."
Practice Note
The Federal Circuit’s definitive ruling in the AT&T case is sure to have far-reaching effects not just in the multi-billion dollar software industry, but also in many other advanced technology fields such as fabless semiconductor manufacturing.
*Ted Jou is a summer associate at McDermott Will & Emery LLP and is currently attending the University of Virginia School of Law, where he will be receiving his JD in 2006. He attended the California Institute of Technology and holds a bachelor's of science degree with a concentration in Applied & Computational Mathematics.
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