Microsoft’s Foreign Mass-Copying Does Not Infringe AT&T’s U.S. Patent

Supreme Court Interprets the Bayh-Dole Act

Robyn R. Smith

In a case that research institutions predict will change the course of U.S. technology, the U.S. Supreme Court delivered its opinion in Microsoft Corp. v. AT&T Corp.  The 7-1 decision in Microsoft’s favor was handed down on April 30, 2007.
The decision marks the end of a landmark patent battle between two industry superpowers.  As Microsoft emerged the victor, innovation capitalists called for Congress to revise the Patent Act to include reproducible software code as a protectable invention component.

The Infringement Action

In 2001, AT&T filed a patent infringement suit against the software giant in the Southern District of New York.  AT&T holds a patent for a speech codec, a software program that encodes speech signals into a compact form.  AT&T alleged that Microsoft’s Windows software, once installed, commands computers to process speech in a manner that infringes its U.S. patent.  After extensive trial preparation by both companies, Microsoft asked the trial court to exclude evidence of foreign sales of the software.
Like many software companies, Microsoft engineers its programs in the U.S. and sends “golden master” disks abroad for copying.  Microsoft argued that the code on the golden masters is “intangible information,” not a component of the final good.  Since the Patent Act deals only with components of final goods, the legal designation of software code was critical to this case’s outcome.
In February of 2007, research universities and an independent technology management company joined AT&T in its Supreme Court battle, submitting arguments as amici curiae.  The research institutions spent an estimated $42 billion on research and development in 2004.  They argued that Microsoft’s victory would establish a dangerous legal precedent allowing infringers to “circumvent U.S. patent rights worldwide.”

“Export Property” In the Ninth Circuit

In 2002, Microsoft convinced the Ninth Circuit to allow deductions in excess of $30 million for “export property” it realized as a result of copying golden masters abroad.  Had the Ninth Circuit instead determined that foreign copies of the golden master were copyright property, the deductions would have been disqualified.  The Supreme Court did not review the circuit court opinion.
With Microsoft’s victory in the U.S.’s highest court, it enjoys the strength of two seemingly contradictory precedents.  Foreign copies will be exported goods for tax purposes, but they will be products created wholly outside the U.S. for patent law purposes.