INTELLECTUAL PROPERTY UPDATE

Transcription

1 INTELLECTUAL PROPERTY UPDATE May Hogan & Hartson LLP INTELLECTUAL PROPERTY UPDATE Supreme Court Holds That 35 U.S.C. 271(f) Does Not Apply To Golden Master Disks In a decision handed down April 30, 2007, the Supreme Court clarified the meaning of Section 271(f) of the Patent Act, which extends patent infringement liability to the export of components of patented inventions assembled in a foreign country. Microsoft Corp. v. AT&T Corp., No , Slip Op. (U.S. Apr. 30, 2007). In a 7-1 decision (Chief Justice Roberts did not participate), the Court held that a golden master disk containing software does not qualify as a component within the meaning of Section 271(f), and, hence, foreign sales of copies created abroad from the golden master do not infringe a U.S. patent. Microsoft is unlikely to have the impact of KSR International Co. v. Teleflex Inc., No , Slip Op. (U.S. Apr. 30, 2007), handed down the same day; however, the decision arguably resolves the first of many unsettled questions regarding the patenting of software. The Microsoft Decision AT&T sued Microsoft for infringement of its U.S. reissue patent No. 32,580. AT&T claimed that Microsoft s Windows operating system infringed AT&T s patent directed to speech codecs 1 with respect to U.S. sales of Windows. However, AT&T also requested damages for foreign sales of Windows under Title 35 of the United States Code, Section 271(f). Section 271(f) includes in the definition of patent infringement the export of components for a patented invention for assembly abroad. Microsoft exports Windows by first creating a golden master disk. The golden master is used abroad to make CD-ROM copies of Windows, which are then installed on personal computer systems. Both the District Court for the Southern District of New York and the Court of Appeals for 1 Codec is short for coder/decoder. Codecs are used to compress a media stream at one computer and then decompress the media stream at another computer in order to reduce the number of bits (0s and 1s) that must be transmitted. Different types of media streams have different idiosyncrasies, and different techniques of compression are used, for example, for audio and video. A speech codec allows compression and decompression of a media stream containing human speech, as in Internet phone calls (Voice over IP).

2 INTELLECTUAL PROPERTY UPDATE May the Federal Circuit held that the export of a golden master was covered by Section 271(f), and thus Microsoft was liable for all copies of Windows sold abroad that infringed AT&T s patent, in addition to liability for U.S. sales. The U.S. Supreme Court disagreed, and held that export of a golden master disk (or transmission of the same information) that was used in a foreign country to replicate copies of infringing software is not included in Section 271(f). Microsoft has stipulated that Windows does infringe AT&T s patent. However, as a result of the Supreme Court s decision, Microsoft is only liable for infringing sales in the United States, and not for sales of Windows abroad. Section 271(f) of the Patent Act and Software Patents Section 271(f) is an exception to the general rule that a product made and sold outside the United States cannot infringe a U.S. patent. Section 271(f) was enacted in 1984 in response to the decision in Deepsouth Packing Co. v. Laitram Corp. 2 Laitram held a patent for a shrimp deveining machine. Deepsouth manufactured a deveining machine that infringed Laitram s patent, but, in order to avoid liability, Deepsouth sold the machine abroad by shipping the components of a machine in three separate boxes, from which a machine could be assembled in less than an hour. The Supreme Court held in Deepsouth that this was not infringement of the U.S. patent, because the whole machine was never actually put together or used in the United States. Congress enacted Section 271(f) to close this potential loophole. Section 271(f) includes as an infringer one who supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention in order to either induce infringement or contribute to infringement of a U.S. patent through the combination of components outside the United States. The patentability of software has engendered a great deal of debate in the United States and around the world. The European Patent Convention, for example, expressly excludes computer programs from its definition of patentable subject matter. In the United States, the Patent Act is silent with respect to the patentability of software, and the Supreme Court has not addressed the issue. Although current Federal Circuit precedent supports the patentability of software, there are several cases pending that could change the definition of what is patentable. As a practical matter, software is patented, both in the United States and abroad, through creative techniques of patent claim drafting. For example, AT&T s patent did not claim software itself, but rather claimed a method for processing a speech pattern, an apparatus for encoding a speech pattern, a speech processor, and a method for producing a speech message. Because software sitting in a box does not perform a method and is not by itself an apparatus that can perform any function, a CD-ROM containing Windows could not, by itself, infringe AT&T s patent. 3 AT&T s patent is only infringed when Windows is installed onto a personal computer, creating an infringing apparatus U.S. 518 (1972). 3 As explained below, there are patent claiming strategies that might have avoided AT&T s problem. This case highlights the importance of careful planning in drafting patents for software.

3 INTELLECTUAL PROPERTY UPDATE May Even if a CD-ROM containing Windows could be considered a component under Section 271(f), a golden master for producing CD-ROMs is one step further removed. The Federal Circuit held in Eolas Technologies Inc. v. Microsoft Corp. 4 that a golden master for Windows is a component under Section 271(f), but did not reach the question of whether its shipment abroad constituted suppl[ying] or caus[ing] to be supplied a component under Section 271(f). 5 Factual and Procedural Background An International Telecommunications Union (ITU) standard, G.723.1, for a speech codec was issued in 1996 to support standardization of speech transmission over computer networks. A number of electronic meeting and communication products, including Microsoft NetMeeting 2.0, complied with the G standard. AT&T notified Microsoft in 1999 that NetMeeting 2.0 violated U.S. reissue patent No. 32,580 owned by AT&T, because any product that complied with G necessarily infringed its patent. 6 In 2001, AT&T filed suit against Microsoft for patent infringement. AT&T and Microsoft eventually settled the patent infringement suit with a stipulation that Microsoft could appeal the trial court s ruling on the Section 271(f) issue. The parties further agreed that the amount of Microsoft s payment to AT&T was dependent on the eventual result of the resolution of the Section 271(f) issues. 7 The Supreme Court s Legal Analysis Justice Ginsberg, joined by Justices Scalia, Kennedy, Souter, Thomas, Breyer, and Alito, found that a golden master is not a component and shipping a golden master abroad for the purpose of replicating copies of software is not suppl[ying] a component under Section 271(f). 8 First, the Court examined whether a golden master is a component under Section 271(f). The Court reasoned first that software must be encoded on some medium in order to be a component. AT&T had urged that software in the abstract 9 be considered a component, but the Court rejected this interpretation. The statute uses the word combination, and the Court held that the use of this word requires that a component must be combinable with other components. It is only when object code is written on some medium, such as a CD-ROM, that is capable of being combined with a computer that object code can be a component. Further, because it is individual copies of software that are sold to consumers not abstract object code the Court reasoned that a golden master, which is never used to directly copy object code onto a computer, is not a component. The Court F.3d 1366 (Fed. Cir. 2005). 5 Interestingly, Judge Rader authored the majority opinion in Eolas as well as the dissent in the Federal Circuit decision in Microsoft, where he reasoned that even though a golden master was a component under Section 271(f), shipping the golden master abroad was not suppl[ying] a component. 6 AT&T s patent expired in Justice Scalia noted this agreement at oral argument, questioning whether such an agreement made the case moot. 8 Justices Thomas, Breyer, and Alito declined to join footnote 14 of the majority opinion, which states that the court did not reach the issue of whether a disk shipped from the United States, and used to install Windows directly on a foreign computer, would [] give rise to liability under 271(f) if the disk were removed after installation. 9 Software in the abstract is the term used by the Court to refer to object code, i.e., the sequence of 0s and 1s encoding software, regardless of whether the object code is recorded on a medium. Under AT&T s interpretation, shipping or transmitting the object code in any form is supplying a component under Section 271(f).

4 INTELLECTUAL PROPERTY UPDATE May was not persuaded by the fact that it is easy and cheap to make copies from the golden master. Without the ability to directly combine with a computer through installation, there is no component. Second, the Court considered whether shipping a golden master abroad is supplying a component under Section 271(f). Following its earlier reasoning, the Court found that no components were supplied, because the copies that were actually installed on computers abroad were created abroad. Even though the golden master made it easy to produce those copies, sending a master from which duplicates can be made is not suppl[ying] or caus[ing] to be supplied components under Section 271(f). 10 Third, the Court observed that there is a general presumption against U.S. laws having extraterritorial effect. This presumption applied, because U.S. patent law expressly covers only conduct in the United States, and Section 271(f) is an exception. As a result, the Court construed terms of the statute narrowly, leaving it to Congress to be clear that a broader meaning was intended. As the Court noted, several statutes bearing on software have been passed since 1984, including the Digital Millennium Copyright Act, so Congress has dealt with software issues. If it wished to be clear that Section 271(f) applied to software, Congress knew how to do so. Congress is free to clarify the law later, but the Court would not read this section expansively. In a concurring opinion, Justice Alito, joined by Justices Thomas and Breyer, went further with respect to the issue of whether software can be a component under Section 271(f). Justice Alito found that component requires physical combination. A disk or CD-ROM containing an installable copy of software is unchanged by installation of the software, and thus is not combined in the sense of Section 271(f). Under Justice Alito s reasoning, even shipping CD-ROMs containing Microsoft Windows would not infringe under Section 271(f). Import of the Decision The decision allows software manufacturers to ship masters abroad for replication outside the United States, while avoiding liability for infringement. That is, Section 271(f) may now have little effect on software manufacturers, although the Court did leave the possibility open for liability for shipping installable copies abroad. Had the Court ruled the other way, a software manufacturer could not avoid liability for foreign sales, short of developing the software outside the United States. The decision makes clear that patentees in the software industry must continue to be careful in drafting patent claims. For example, a claim directed to a computer-readable medium containing a program (known as a Beauregard or program-product claim) may enable a patentee to sue for infringement for the production of any medium containing infringing software, including a golden master. Assuming such a claim was upheld and found infringed by the production of a golden master, it is an open question whether damages would include the value of copies replicated from the golden master and sold abroad. 10 Justice Stevens, in dissent, found that the golden master was like a warehouse for copies. That is, shipping the golden master was equivalent to shipping the actual copies, and thus should be considered infringement under Section 271(f).

5 INTELLECTUAL PROPERTY UPDATE May From the perspective of software patent owners, there are now additional potential complications for enforcing their rights. Even though AT&T held foreign patents on its speech codec, it chose to bring suit in U.S. court on its U.S. patent, using Section 271(f) to address foreign sales. That approach is no longer possible. In light of a recent Federal Circuit decision, Voda v. Cordis, 11 a U.S. patentee may not sue on a foreign patent in U.S. court. Assuming Voda is not overturned, this forces patentees into foreign court to enforce their foreign patent rights. As foreign countries are generally not as sympathetic to patenting software, it may be more difficult for software patentees to protect their rights abroad. Microsoft is generally viewed as a victory for software manufacturers. It remains to be seen if Congress will step in and reverse the Court s interpretation of Section 271(f). But barring Congressional reversal, the decision represents a reining in of the scope of software patent rights. About the Intellectual Property Update For more information about the matters discussed in this Update, please contact the Hogan & Hartson LLP lawyer with whom you work or one of the attorneys listed below. If you are interested in viewing any of our other publications, please go to: Update Author: MATTHEW A. "MATT" LEVY mlevy@hhlaw.com Washington, D.C. Intellectual Property Update Editors: TIMOTHY J. LYDEN tjlyden@hhlaw.com Northern Virginia ARUN CHANDRA achandra@hhlaw.com New York This Update is for informational purposes only and is not intended as basis for decisions in specific situations. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Copyright 2007 Hogan & Hartson LLP. All rights reserved. Hogan & Hartson LLP is a District of Columbia limited liability partnership with offices across the United States and around the world. Some of the offices outside of the United States are operated through affiliated partnerships, all of which are referred to herein collectively as Hogan & Hartson or the firm F.3d 887 (Fed. Cir. 2007).