Microsoft Courts the Supreme Court

Lawyers for AT&T and Microsoft presented oral arguments this morning.

The core case is quite simple, while the legal nuances are enormously complex. In 2001, AT&T sued Microsoft for patent infringement over speech decoding technology shipping in Windows. Microsoft lost the case and subsequent appeals. The question before the Supreme Court: Can AT&T collect on the infringement outside the United States?

Gary Abelev, a partner with Dorsey & Whitney in New York, said the case "could have serious ramifications" for Microsoft. He observed that Microsoft's financial liability could be "enormous" should it lose the case.

AT&T and Microsoft settled the patent dispute, on undisclosed terms, in early 2004. Microsoft reserved the right to appeal, with respect to patent infringement liabilities outside the United States.

The case is really about "whether you could get product damages outside the United States for a product issued in the United States," Abelev said.

About 55 percent of Microsoft revenue comes from sales outside the United States. The Supreme Court ruling would determine whether Microsoft would be liable for patent infringement on 45 percent or 100 percent of sales.

The issue of financial liability nearly tripped up Microsoft's lawyer, Theodore Olson, before he could make his presentation before the Supreme Court this morning. Justices Anthony Kennedy and Antonin Scalia interrupted Olson's opening statement and pressed him on liability for infringement, which would change based on the Supreme Court's ruling.

"Is there a lot of money involved depending on whether you win or lose?" Scalia asked.

"Yes," Olson responded.

Rhetoric or Reality?
Microsoft's position—and rhetoric—is similar to its U.S. antitrust case. Throughout the case, Microsoft positioned itself as a crusader defending the software industry against government regulation. But in the end, there was no precedent-sweeping ruling or major change to the industry—other than Microsoft oversight by the U.S. Justice Department and a handful of states.

"The fundamental question before the Court is whether the United States should be able to apply its patent laws unilaterally beyond its borders," Brad Smith, Microsoft's general counsel, said in a statement issued today. "If it does, U.S. high-tech companies such as Microsoft will be disadvantaged compared with overseas competitors."

Smith's statement continues, "This issue is important for the whole IT industry, and for other innovative sectors of the U.S. economy."

Once again, Microsoft takes the position of crusader, but the broader issue is the bottom line if AT&T should be in position to collect on every copy of Windows sold globally.

Microsoft's position as crusading against a potentially industry-sweeping precedent is hollow also in part because precedent has already been set. There have been similar cases, like the Eolas patent-infringement case against Microsoft. Microsoft lost on appeal with a similar argument as put forth in the AT&T case. Interestingly, the Supreme Court refused to hear Microsoft's Eolas appeal.

A Case in History
AT&T filed its suit in early June 2001 with the U.S. District Court for the Southern District of New York. The lawsuit alleged that TrueSpeech technology violated patents issued to AT&T in 1984 and reissued in 1998. Microsoft licensed TrueSpeech from DSP Group and incorporated it into NetMeeting and all versions of Windows then shipping, including 95 and NT.

The original complaint alleged that Microsoft had violated AT&T's "580 Patent by making, using, offering to sell, and/or selling within the United States products that include the TrueSpeech codec and/or the certain NetMeeting codec, including the Microsoft Operating System Products."

AT&T claimed that it had notified Microsoft of the infringement in 1999.

The case went to trial, with AT&T and Microsoft reaching settlement before the jury reached a verdict.

Microsoft appealed the case to United States Court of Appeals for the Federal Circuit, where the company lost in 2005. The Patent Act, or Title 35 of the United States Code, governs U.S. patents. The ruling potentially expands 35 U.S.C. 271, with respect to collecting on patent infringement.

Microsoft had argued that liability essentially ended with the gold master of the software produced in the United States because secondary parties overseas made copies sold there.

The court disagreed. In its ruling:

"Given the nature of the technology, the 'supplying' of software commonly involves generating a copy. For example, when a user downloads software from a server on the Internet, the server 'supplies' the software to the user's computer by transmitting an exact copy. Uploading a single copy to the server is sufficient to allow any number of exact copies to be downloaded, and hence 'supplied.' Copying, therefore, is part and parcel of software distribution. Accordingly, for software 'components,' the act of copying is subsumed in the act of 'supplying,' such that sending a single copy abroad with the intent that it be replicated invokes [U.S.C.] 271(f) liability for those foreign-made copies."

Based on the ruling, by distributing software outside the United States, Microsoft infringes on AT&T patents and is so liable for damages.

In a supporting Supreme Court brief on behalf of AT&T, WARF (Wisconsin Alumni Research Foundation), Research Corporation Technologies and the Regents of the University of California argued that previous Microsoft legal proceedings brought into question the gold master argument.

"When it suits its interests, even Microsoft acknowledges that the number of units it supplies is not limited by the number of golden masters it sends abroad," the brief reads. "In Microsoft Corp. v. Comm'r of Internal Revenue, Microsoft argued that it was entitled to tax deductions ... for all foreign sales of software replicated from Microsoft's golden master abroad, claiming that such copies were 'export property.'

"The Ninth Circuit [court] ... agreed with Microsoft that all copies created from the golden master were export property, thereby providing Microsoft with another $31 million in claimed deductions for 1990 and 1991," according to the legal brief. "Thus, just as golden-master copies of software are 'exported' from the United States, they are likewise 'supplied' from the United States."

Last autumn, the Supreme Court agreed to hear Microsoft's appeal. Today, Microsoft got its day in court.

"I think the Supreme Court took on this case because of the potential damage and because [it perceived] some ambiguity in the law," Abelev said.

[Editor's Note: Some of the background research for the post is based on two posts (here and here) from the Patently O Patent Weblog. The blog is written by Dennis Crouch, who is a lawyer with Chicago-based McDonnell Boehnen Hulbert & Berghoff.]