Activities that Occur Outside the U.S. May Result in Liability for Infringement of a U.S. Patent: AT&T Corp. v. Microsoft Corporation, 414 F.3d 1366 (Fed. Cir. 2005)

I. Introduction

The requirements for establishing liabilty for infringement of a U.S. patent are stated in § 271 of the U.S. Patent Statute. Section 271(a) establishes liability for unauthorized making, using, offering or selling a patented invention inside the U.S. In contrast, § 271(f) establishes liability for making component parts of a patented invention in the U.S. and then assembling the invention outside the U.S. Section 271(f)(1) states:

"Whoever without authority supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention, where such components are uncombined in whole or in part, 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."¹

Section 271(f) was enacted by Congress in 1984 to correct a problem in the patent laws. The U.S. Supreme Court had uncovered this problem in the case of Deepsouth Packing Co. v. Laitram Corp.² In Deepsouth the Supreme Court held that an infringer could avoid li­ability for U.S. patent infringement by exporting otherwise infringing products in component parts for assembly outside the U.S. To prevent such activity, Congress enacted § 271(f), which expanded the definition of infringement to include exporting components of patented inventions with the intent or knowledge that such components would be used in a manner that would otherwise infringe if the activity occurred in the U.S.

Although § 271(f) contains general language, the courts have encountered many questions concerning how the general language of § 271(f) should be applied to specific facts. For example, what constitutes a "component" of a patented invention? What actions by an alleged infringer constitute "supplying" or "causing to be supplied" a component of an invention, such that an alleged infringer will be found liable for infringment? If an alleged infringer is found liable for infringement under § 271(f), how many sales outside the U.S. may be included in the calculation of damages? Do the answers to these questions depend upon the technological nature of the patented invention? Are there some inventions that are more susceptible to attack under § 271(f)?

In the recent case of AT&T Corp. v. Microsoft Corporation,³ the CAFC⁴had the opportunity to consider these and other questions. The detailed analysis of the AT&T v. Microsoft decision which follows provides some useful insight into the U.S. law of liability for patent infringement under 35 U.S.C. § 271(f).

To facilitate international distribution of its Windows® software product, the alleged infringer, Microsoft, supplied a limited number of master versions of the software to non-U.S. computer makers. The master versions were created in the U.S. and sent outside the U.S. on so-called "golden master" disks or via electronic transmission. Under a license agreement with Microsoft, the non-U.S. computer makers replicated the master version to generate multiple copies of software for installation on computers assembled outside the U.S. and sale to non-U.S. customers outside the U.S. The master version included certain software programs which, when installed on a computer, were alleged to infringe a patent⁵ owned by AT&T.

AT&T sued the Microsoft. Microsoft responded that non-U.S. sales of software did not result in liability for infringement of a U.S. patent under 35 U.S.C. § 271(f). Microsoft asserted two arguments: (1) software is intangible information and cannot be a "component" of a patented invention within the meaning of § 271(f), and (2) even if software is considered a "component," no actual "components" had been "supplied" from the U.S. as required by § 271(f) because the copies of software installed on the non-U.S.-assembled computers had all been made abroad.

The district court rejected both of Microsoft’s arguments. With respect to the argument that software could not be a "component" of a patented invention under § 271(f), the district court ruled that the patentability of software was well-established and the patent statute did not limit "components" to tangible structures. With regard to the second argument, the district court ruled that the purpose of § 271(f) is to prohibit the circumvention of infringement through exportation, and copies made outside the U.S. from a master version sent from the U.S. were not shielded from liability under § 271(f). The district court found Microsoft was liable for infringement under 35 U.S.C. § 271(f) for copies of the Windows operating system that had been replicated abroad from a master version sent from the U.S. Microsoft appealed to the CAFC.

On appeal, Microsoft argued that the district court erred in its determination of infringement under § 271(f), arguing that (1) the master versions of the Windows® software exported for copying are not "components" within the meaning of § 271(f), and (2) liability under § 271(f) should not attach because copies made abroad are not "supplied" from the United States. The CAFC rejected both arguments, as explained below.

The CAFC explained that the first question, whether software may be a "component" of a patented invention under § 271(f), was answered in the affirmative by Eolas Technologies Incorporated and the Regents of the University of California v. Microsoft Corporation.⁶ In Eolas, the CAFC stated that "[w]ithout question, software code alone qualifies as an invention eligible for patenting." Because the "statutory language did not limit section 271(f) to patented ‘machines’ or patented ‘physical structures,’" the CAFC in Eolas concluded that software could very well be a "component" of a patented invention for the purposes of § 271(f). Id. at 1339.

The CAFC, citing Eolas, held that software replicated abroad from a master version exported from the United States -- with the intent that it be replicated -- may be deemed "supplied" from the United States for the purposes of § 271(f).⁷ The court’s reasoning is provided below:

The CAFC began its interpretation of the statute with the statutory language itself, giving the words their ordinary, contemporary, common meaning, absent an indication Congress intended them to bear some different import.⁸ Because the statute sets forth no specific definition of the word "supplied," the CAFC in AT&T Corp. stated that its meaning must be "context-dependent." In particular, that means that § 271(f) must be construed in the context of software distribution.

The CAFC argued that because copying is "part and parcel" of software distribution, the act of copying is subsumed in the act of "supplying."⁹ In fact, the court explained that it is "inherent in the nature of software" that one can supply only a single disk that may be replicated instead of supplying a separate disk for each copy of the software to be sold abroad. Id. at 1370. Accordingly, the CAFC concluded that for software "components," sending a single copy abroad with the intent that it be replicated triggers § 271(f) liability for those foreign-made copies. Id.

The CAFC also spent considerable effort explaining the legislative history of § 271(f). In 1984, Congress enacted § 271(f) in response to the Supreme Court’s ruling in Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518 (1972), that exposed a loophole in § 271 that allowed potential infringers to avoid liability by manufacturing the components of patented products in the United States and then shipping them abroad for assembly. According to the Congressional Record, § 271(f) "will prevent copiers from avoiding U.S. patents by supplying components of a patented product in this country so that the assembly of the components may be completed abroad." Id. at 1371. Based on this passage and others, the CAFC concluded that Congress "obviously intended the statute to have an extraterritorial effect to the extent that the exportation was facilitated by acts in the United States, and the acts at issue here originating from the United States can be understood to be similarly within the meaning of the statute." The CAFC stressed that § 271(f), if it is to remain effective, must be interpreted in a manner that is "appropriate to the nature of the technology at issue." Id.

2. Holding Consistent with Pellegrini

In reaching its decision, the CAFC distinguished the present case from Pellegrini v. Analog Devices, Inc.¹⁰ In Pellegrini, the CAFC held that liability under § 271(f) may exist only where a component itself, as opposed to instructions for manufacturing the component or management oversight, has been "supplie[d] or cause[d] to be supplied in or from the United States."¹¹ According to the CAFC, the alleged infringer supplied an "actual component, i.e., the Windows® operating system," not instructions to foreign software engineers for designing and coding Windows®.¹²

The CAFC in the present case rejected the alleged infringer’s suggestion that software sent by electronic transmission must be treated differently for purposes of § 271(f) liability from software shipped on disks. According to the Court, liability under § 271(f) does not depend on the medium used for exportation: "a disk is merely a container that facilitates physical handling of software, much like bottles for liquids or pressurized cylinders for gases." AT&T Corp. at 1370-1371.

The CAFC also rejected the alleged infringer’s argument that if a broad interpretation of § 271(f) were adopted, a "parade of horribles" would befall the domestic software industry. However, the CAFC explained that the possible loss of jobs in this country is not justification for misinterpreting a statute to permit patent infringement. In addition, according to the majority, "[t]he remedy for any dissatisfaction with the results in particular cases lies with Congress" and not with this court.¹³

Judge Rader argued that the majority’s judgment disregards the existing international scheme of patent law. While Judge Rader leaves open the possibility that software may be a component of a patented invention under § 271(f) and that electronic transmissions of software from the United States must receive the same treatment as software shipped from the United States on disks, he disagreed with the proposition that foreign manufacture of a mere component of a patented product creates liability in the United States under § 271(f).¹⁴

Essentially, Judge Rader supported his position with three lines of reasoning: (1) the term "supplies" does not include copying, replicating, or reproducing, (2) the majority’s holding departs from Pellegrini, and (3) acts wholly done in a foreign country cannot constitute infringement of a United States Patent.

Judge Rader’s primary argument was that the holding turned on an incorrect interpretation of the word "supplies," as it appears in § 271(f). That is, that the ordinary meaning of the word "supplies" does not include copying, replicating, or reproducing, which he equates to "manufacturing." According to Judge Rader, the court distinguished intangible software components from tangible components on the grounds that "the ‘supplying’ of software commonly involves generating a copy." However, Judge Rader argued that copying and supplying are separate acts with different consequences, noting that "one act of ‘supplying’ cannot give rise to liability for multiple acts of copying." Id. at 1373. Judge Rader continued by arguing that the "only true difference between making and supplying software components and physical components is that copies of software components are easier to make and transport … [and the] ease of copying a patented component is not the proper basis for making distinctions under § 271(f)." Id. at 1374.

2. Majority Holding Departs from Pellegrini

Furthermore, Judge Rader claims that the ruling departs from the holding of Pellegrini. The court dismissed Pellegrini because the alleged infringer supplied an actual component of the patented invention and not merely instructions. However, Pellegrini holds that "the language of § 271(f) clearly contemplates that there must be an intervening sale or exportation; there can be no liability under § 271(f) unless components are shipped from the United States for assembly."¹⁵ In this case foreign distributors copy the components supplied from the United States and then install the copies into the infringing products. Essentially, Judge Rader argued that foreign manufacturers do not install actual components "supplied" from the U.S.; they install copies of the component, which are made abroad.

Moreover, Judge Rader argued that patent infringement "cannot be predicated on acts wholly done in a foreign country."¹⁶ However, according to Judge Rader, the majority holding does exactly that: "[i]t holds the alleged infringer liable for the activities of foreign manufacturers making copies of the patented component abroad."¹⁷ Judge Rader’s argument is that had Congress intended to give extraterritorial effect to U.S. patent laws, it would have expressly stated so, but did not. To the contrary, Judge Rader points to the limiting statutory language "supplied in and from the United States," which would have been unnecessary had the law been intended to regulate activities occurring wholly abroad.

Those who are attempting to enforce a U.S. patent against activities that occur outside the U.S., as well as those who have been accused of infringing a U.S. patent due to activities outside the U.S., are well advised to carefully consider the AT&T v. Microsoft case. The CAFC’s decision in this case significantly broadens the effect of U.S. patent law outside the U.S. Under a narrow interpretation, the decision means that liability under § 271(f) is possible when a software component of a patented invention is shipped from the U.S. and copied outside the U.S. Under a broader interpretation, the decision means that liability under § 271(f) is possible when any component of a patented invention (software or non-software) is shipped from the U.S. and copied outside the U.S. It is not clear whether, and to what extent, the CAFC will limit the AT&T v. Microsoft decision to software inventions only. However, it can be expected that U.S. patent owners will use this decision to assert that many competitive activities occurring outside the U.S. will result in liability for infringement of a U.S. patent.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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