16 May Supreme Court limits foreign reach of U.S. patents
Over the past year, the United States Supreme Court has issued several rulings that have eroded the strength and reach of United States patents. In Microsoft Corp. v. AT&T, the Supreme Court delivered another blow by limiting their reach abroad and making clear that United States patent “law governs domestically but does not rule the world.”
In this case, the Supreme Court addressed Section 271(f) of the patent code, which prohibits a party from making components of a patented invention in the United States and supplying those components abroad for assembly. AT&T owned a patent covering a computer capable of digitally processing recorded speech. Microsoft’s Windows software, when installed in a computer, enables a computer to digitally process speech in a manner claimed in AT&T’s patent.
Notably, neither Windows nor a computer standing alone (i.e., without Windows installed) infringes AT&T’s patent. Instead, Windows can only infringe AT&T’s patent if installed in a computer. Microsoft placed its Window software on a “master disk” and supplied it abroad to customers who made copies of software from the master disk and installed the copies on foreign made computers.
AT&T sued Microsoft for patent infringement. The particular issue before the Supreme Court was: Under Section 271(f), does Microsoft have patent infringement liability for computers made in another country when loaded with Windows software copied abroad from a master disk sent by Microsoft from the United States? The Supreme Court answered “no.”
The Supreme Court based its decision on two conclusions. First, the Court held that software code alone is not a “component” amenable to “combination” under §271(f) because software is an idea without physical embodiment. Only when software code is expressed in a computer readable format, such as on a CD-ROM, does it become a “component” capable of being combined.
Second, the Court reasoned that because the Windows software actually installed on the computers is from a foreign made copy of the master disk, no component for combination was supplied from the United States as required by §271(f). The Court further noted that any doubt about whether Microsoft’s activities constitute infringement should be resolved by the presumption against extraterritorial enforcement of United States patent law. Thus, Microsoft’s activities did not violate United States patent laws.
Significance beyond software
The Supreme Court’s decision may implicate other technology fields where a “master” sample or piece of information can be easily transported abroad, copied, and combined into a product that would otherwise infringe a United States patent.
For example, biotechnology may be such a field. Assume a scenario where Company A owns a United States patent claiming a protein used for treating cancer. Company A’s competitor, Company B, supplies Foreign Company C with a plasmid encoding the patented protein. Upon receiving the plasmid, Foreign Company C transforms a cell line, replicates the cells, and induces the cells to produce the patented protein.
Under the Microsoft decision, Company B arguably does not infringe Company A’s protein patent because the plasmids actually used to make the protein were not supplied from the United States. Rather, they are foreign made copies of the supplied plasmid.
Consequently, even though the most essential element for making the patented protein, the plasmid, was created in and shipped from the United States, Company B may have no liability under United States patent law.
Closing the Microsoft loophole
Any company that competes in a global marketplace and is negatively impacted by the “loophole” exposed in Microsoft should consider strategies for closing it. The Supreme Court stated in its decision that the best way for companies to prevent copying in foreign lands is to obtain and enforce foreign patents.
Indeed, if AT&T had patents in the foreign countries at issue, it may have been able to halt the copying of the Windows software or obtain license royalties for allowing it. Thus, companies should assess their exposure to foreign copying and apply for foreign patents on important technology.
Also, the Supreme Court emphasized that the loophole exposed in Microsoft “is properly left for Congress to consider, and to close if it finds such action warranted.” Thus, companies or their industry groups that want to close the loophole should lobby Congress for a change in the law rather than seek change through the courts.
Exploiting the Microsoft loophole
Companies should also consider how to exploit the Microsoft loophole. Indeed, for every patent holder that opposes the loophole, there is likely another party that favors it. To exploit the loophole, a software or biotechnology company may be able to domestically create “master” information and supply it abroad for copying and combination into a product that would infringe if in the United States. Such a strategy could provide a company with an international revenue stream while allowing it to keep its research and development operations in the United States.
Depending on where they are situated in the marketplace, companies may want to protect themselves from the Supreme Court’s Microsoft ruling or use it to their advantage.
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