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Salesforce Commerce Solution Guide

Microsoft v. AT&T: Breaking New Legal Ground

By Erika Morphy
Feb 27, 2007 4:00 AM PT

As the Microsoft v. AT&T case wound its way through the U.S. court system, warnings abounded that an adverse ruling could seriously complicate software companies' global manufacturing and sales strategies.

Microsoft v. AT&T: Breaking New Legal Ground

This theory was reinforced by a federal court jury decision, which ordered Microsoft to pay US$1.52 billion to Alcatel-Lucent for infringing on two patents that convert audio into the digital MP3 format. That award, the largest ever for a patent infringement judgment, could be impacted by the U.S. Supreme Court's ruling on Microsoft v. AT&T.

The Case

To recap, Microsoft v. AT&T is rooted in claims that Microsoft Windows infringed on patents held by AT&T and a law that forbids U.S. companies from manufacturing or assembling products overseas in order to avoid U.S. patent laws.

In 2001, AT&T filed a suit against Microsoft in federal court in New York alleging that Microsoft's Windows operating system infringes upon one of AT&T's patents for digitally coding and decoding speech. Subsequent court decisions supported AT&T's claims, and the company was awarded a judgment that was based on the copies of Windows distributed in the United States.

At issue in Microsoft v. AT&T is Microsoft's claims that copies of Windows produced and distributed outside of the United States do not infringe on AT&T patents.

The law in question -- 35 U.S.C. 271(f) -- was passed several years ago to keep companies from shipping components abroad for assembly in order to avoid patent claims.

Microsoft argues because it only shipped one master disk that foreign manufacturers subsequently copied it did not violate this law because the actual installation occurred overseas. Another line of argument is that software is not a component.

Breaking New Ground

Microsoft v. AT&T isn't as sexy as the eBay v. Mercantile or NTP v. Research In Motion cases, both of which introduced significant changes into patent strategies, and also dealt with easy-to-understand technology.

However, Microsoft v. AT&T is breaking new legal ground as well. Perhaps more importantly, the decision will undoubtedly affect how software companies manage their global operations. One worst-case scenario would be a wholesale shifting of manufacturing and assembly operations overseas to avoid patent suits. Another scenario would -- as Microsoft says -- leave U.S. companies at a competitive disadvantage overseas.

"Our legal position in this case is supported not only by companies and organizations including Yahoo, Amazon.com, the Software [&] Information Industry Association and the Business Software Alliance, but by the U.S. government as well," Microsoft General Counsel Brad Smith stated.

"U.S. Solicitor General Paul Clement urged the court to hear the case because if AT&T is successful, U.S. software companies will find themselves at a substantial competitive disadvantage in foreign markets," he added.

Either way, the case has introduced another element of uncertainty into how companies manage their global patent portfolios, Barry Cohen, a partner at Thorp Reed & Armstrong, told the E-Commerce Times.

"Anyone who conducts R&D (research and development) overseas has to worry about jurisdictional issues like this," he added.

Reading the Tea Leaves

Based on the questions posed by the justices during oral arguments, attorney Jeffrey Brown of Merchant & Gould told the E-Commerce Times, "You can see that the Court is struggling with trying to come up with a decision that doesn't have a far-reaching or rather unpredictable consequences in future cases."

For multiple reasons, the Court is likely to take as narrow an interpretation as possible, Brown said.

"It has illustrated that it doesn't like to graft its own thinking on plainly worded statutes. In many cases, it has said it must defer to Congress. Also, the court is becoming more reluctant to expand the scope of U.S. laws overseas," he noted.

A Platform for Concerns

On the other hand, the justices also appeared to be wary of the chilling impact the ruling could have on the software industry.

"The decision on this case will most likely have significance beyond the dispute between the parties because comments made by some justices at the oral argument seem to indicate a significant antipathy toward software patents in general," Robert Greene Sterne, a director with Sterne, Kessler, Goldstein and Fox, told the E-Commerce Times.

"Several justices appear to be concerned about the patentability of software-related inventions, and this case could provide a platform for them to articulate these concerns," he stated.

Any restriction on the scope of the patentability of software-related inventions would be detrimental, "because patents on these inventions are so important to innovation and to the U.S. software industry in light of global competition," Greene Sterne added.

A Component Is a Component

In its brief, Microsoft concentrated more on the supply chain issues in the case, George Best, a partner with Foley & Lardner in the firm's IP litigation and appellate practices division, told the E-Commerce Times.

Many of the justices, however, appeared to be more focused on the issue of whether software is a component.

"It wouldn't surprise me if that is where the case turns," Best stated, adding that the most difficult questions were posed to AT&T's attorney. AT&T, not surprisingly, had proffered a very broad definition of a component.

The AT&T counsel had a difficult argument to make, he continued.

"The position he was taking was a fairly abstract one. In order to argue it you had to get into arcane technical details about how computers work. He worked hard to explain the tech issues to court -- and considering limitations of time he did a good job of it. But I am not sure how convincing he was," Best concluded.

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