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Is Software a Section 271(f) 'Component' of a Patented Invention?

By Sean Chao
November 30, 2006

On Oct. 27, 2006, the Supreme Court granted certiorari in Microsoft Corp. v. AT&T Corp. (No. 05-1056), preparing to elucidate the contours of patent infringement under 35 U.S.C. '271(f) as applied to the exportation of software code. This case marks the first time in the 22 years since Congress enacted the provision that the Court will venture into this area. The outcome may have significant ramifications for the software industry because '271(f) was widely assumed to apply only to the tangible components of a physical machine. If '271(f) applies equally to software, then software companies will need to rethink their exposure to liability when exporting software abroad. Liability under '271(f) may extend beyond the initial act of exporting and further include downstream activities, such as copying and installing that are done entirely outside of the United States.

Congress enacted '271(f) in 1984 in response to the Supreme Court's ruling in Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518 (1972), which exposed a loophole in '271 that allowed potential infringers to escape liability by manufacturing the components of a patented invention in the United States and then shipping them abroad for assembly. In Deepsouth, the manufacturer attempted to avoid an injunction by manufacturing the parts of a patented machine in the United States and then shipping the parts in three separate boxes to its overseas customers for easy assembly. Because only the components were 'made' in the United States, there was no direct infringement under '271(a), which prohibits only the making, using, offering to sell, selling, or importing of a patented invention within the United States. Furthermore, as there was no direct infringer in the United States, indirect infringement under ”271(b) or (c) did not apply.

Case History

Microsoft designs, authors, and tests its Windows operating system at its headquarters in Redmond, WA, in the United States. When final testing is completed and software is ready for public sale, it is referred to as 'golden.' As such, 'golden master' disks are often created and sent to manufacturers. These manufacturers can then in turn use these 'golden masters' as either the master copies from which to duplicate additional copies for sale to retail customers (such as the retail CD copy a consumer would purchase), or as the master installation copy which computer hardware manufacturers use to 'install' the software (such as when newly purchased computers come 'pre-installed' with software). Either way, Microsoft ships manufacturers a single 'golden master' and grants a license to manufacturers to make additional copies, either onto additional disks or onto a computer's hard drive via 'installation.' Microsoft does not make the further copies itself. Alternatively, instead of mailing a disk containing a copy of the software, Microsoft can also transmit a copy via an encrypted electronic transmission.

AT&T sued Microsoft alleging that computers running the Windows operating system infringe a patent it owned, which comprises a computer programmed with a 'speech codec.' A codec is a computer program capable of taking digitally recorded sound, compressing it so it takes less space when stored in the computer, and then decompressing it into a version that sounds like the original when needed. When the sounds being processed are human speech, the program is called a speech codec.

Whether software alone may be patentable subject matter remains unsettled. According to the Patent and Trademark Office, 'a claim for a computer program, without the computer-readable medium needed to realize the computer program's functionality,' is unpatentable because computer programs are neither 'physical things' nor 'acts being performed.' MPEP '2106.IV.B.1(a). Regardless, AT&T's claim is not to the software program itself, but rather to a computer system programmed with a speech codec, a microphone, and a speaker. AT&T alleged that computers with the Windows operating system installed infringe its patent by enabling the user, through Windows' own speech codecs, to record, store, and play back speech in a manner covered by its patent. It is only the computer system as a whole, the computer hardware with the computer software installed, which is alleged to be covered by the patent, not the software by itself.

Microsoft stipulated that, by selling copies of its Windows software to manufacturers of computers that are ultimately manufactured, used, or sold in the United States, it induced those computer manufacturers to infringe in violation of '271(b). The issue on appeal concerns AT&T's contention that it is entitled to damages for all foreign sales of Windows-based computers.

Under ' 271(f):

(1) Whoever without authority supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention, where such components are uncombined in whole or in part, in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.

(2) Whoever without authority supplies or causes to be supplied in or from the United States any component of a patented invention that is especially made or especially adapted for use in the invention and not a staple article or commodity of commerce suitable for substantial noninfringing use, where such component is uncombined in whole or in part, knowing that such component is so made or adapted and intending that such component will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.

Software As a Component

AT&T alleges that the Windows operating system constitutes a 'component' of the patented Digital Speech Coder system and that the foreign-made copies were 'supplied' by Microsoft 'from the United States.' In the district court action, Microsoft moved for partial summary judgment, arguing that its object code is intangible information and thus not a 'component of a patented invention' because information cannot be 'combined' with other objects in the manner required by '271(f).

Computer programmers develop software by first authoring 'source code,' the human readable commands to the computer. That source code is then run through a compiler program that translates the human-readable source code into 'object code,' the 0s and 1s the computer understands. According to Microsoft, object code is nothing more than a complex set of commands that instruct a computer to perform a certain task, much like the patterns on a player piano's music roll, with each unique pattern of perforations generating, when run on a player piano, a unique composition of mu-sic. Citing In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994) in its petition for certiorari, Microsoft claims that only when software code (like the pattern of perforations in a piano roll) is embodied on a physical medium (the actual piano roll) may it be a patentable invention. In contrast, according to Microsoft, software code alone, like the arrangement of holes in the music roll, is neither a 'process, machine, manufacture, or composition of matter' as required under 35 U.S.C. '101 and while copyrightable, is not itself patentable. Thus, argues Microsoft, due to the nature of object code (as a set of instructions), it cannot be 'combined' as required by '271.

The Solicitor General explained in its Brief for the United States as Amicus Curiae, with which AT&T agrees, that Microsoft's analogy to 'design information' and 'blueprints' is flawed. Software in a computer's memory 'has a detectable physical existence' in the form of electrons in the memory chips, and software in a computer's hard drive is 'physically embodied in the varied orientation of particles' on the magnetic platters. According to the Solicitor General, 'it is only because the object code has physical existence that the computer's central processing unit is able to detect and implement the software' and '271(f) is not limited to components that are ”tangible' in the sense of being detectable by the sense of touch.'

Even if object code could be a 'component of a patented invention,' Microsoft argues that it has not 'supplied' the foreign-manufacturers with copies. Under this theory, Microsoft claims it only sends the golden master disk or the encrypted transmission embodying the master version of the Windows object code to the manufacturer, neither of which was ever 'combined' in a foreign-manufactured computer. It was the foreign-manufacturer who ultimately makes the second-generation copy from these golden masters onto the computer overseas, and it is only the second-generation copy that is combined with the computer. According to Microsoft, it is vitally important that the copy it sends remain intact and never leaves the hands of the manufacturer.

Ultimately, the Federal Circuit found against Microsoft, with Judge Alan David Lourie writing for the majority and Judge Randall Ray Rader dissenting. The panel relied on an earlier Federal Circuit holding in Eolas Techs. v. Microsoft, 399 F.3d 1325 (Fed. Cir. 2005), decided while Microsoft's appeal was pending, which held that object code could be a 'component' of a patented invention because according to the Eolas panel '271(f) is not limited to 'machine' or 'structural or physical' components. Additionally, the panel majority found Microsoft liable for the foreign copies as well, because they have 'essentially been supplied from the United States[,]' copying is 'part and parcel of software distribution' and therefore, '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 '271(f) liability for those foreign-made copies.' The court noted that it was interpreting '271(f) to account for 'the realities of software distribution' and that any contrary holding would 'emasculate '271(f) for software inventions.'

In Judge Rader's dissent, although he agreed that software code could be a 'component' of a patented invention, he disagreed with the majority's conclusion that the foreign-made copies were 'supplied' from the United States. According to Judge Rader, that software must be copied to be distributed 'does not actually distinguish software components from physical components of other patented inventions. The only true difference between making and supplying software components and physical components is that copies of software are easier to make and transport.' Any contrary holding, he reasoned, would ignore the Federal Circuit's own 'case law that refuses to discriminate based on the field of technology' and that the proper course of action for AT&T to 'protect its foreign markets from foreign competitors' was to obtain and enforce 'foreign patents,' instead of giving extraterritorial effect to U.S. patent law.

Comments

Microsoft's position has some support from the U.S. Department of Justice's Office of Solicitor General. Although the Supreme Court denied Microsoft's appeal in the Eolas case, it may have been the Solicitor's Gener-al's request for reconsideration in the AT&T case that caused the Court to grant certiorari. Supreme Court Chief Justice John Roberts declined to take part in the decision to grant certiorari and will likely also recuse himself from the Court's consideration of the case, possibly because he holds stock in Microsoft.

Regarding the first of the two issues before the Court to decide, whether software can be a component of a patented invention, all indications seem to point toward affirmance. This would be consistent with the earlier Eolas decision, Judge Rader's dissent, and the Solicitor General's position. Regarding the second issue, whether the copies made by foreign manufacturers from a master copy originating from the United States are themselves 'supplied' from the United States, there appears to be some pressure for the Supreme Court to reverse. The Solicitor General's brief argues that the Federal Circuit's ruling on this second issue 'is contrary to the text and history of Section 271(f), improperly extends United States patent law to foreign markets and puts United States software companies at a competitive disadvantage vis-'-vis their foreign competitors in foreign markets.' Microsoft itself has said that it may be forced to relocate a 'hundred miles north to Vancouver' to 'reduce by two-thirds our exposure in all of these patent cases' relating to '271(f) liability for worldwide sales. There appears to be a strong likelihood that the Supreme Court may either wholly reverse or narrow the liability as to this second point.


Sean Chao is an associate in the New York office of Kenyon & Kenyon LLP. He can be reached at 212-908-6340.

On Oct. 27, 2006, the Supreme Court granted certiorari in Microsoft Corp. v. AT&T Corp. (No. 05-1056), preparing to elucidate the contours of patent infringement under 35 U.S.C. '271(f) as applied to the exportation of software code. This case marks the first time in the 22 years since Congress enacted the provision that the Court will venture into this area. The outcome may have significant ramifications for the software industry because '271(f) was widely assumed to apply only to the tangible components of a physical machine. If '271(f) applies equally to software, then software companies will need to rethink their exposure to liability when exporting software abroad. Liability under '271(f) may extend beyond the initial act of exporting and further include downstream activities, such as copying and installing that are done entirely outside of the United States.

Congress enacted '271(f) in 1984 in response to the Supreme Court's ruling in Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518 (1972), which exposed a loophole in '271 that allowed potential infringers to escape liability by manufacturing the components of a patented invention in the United States and then shipping them abroad for assembly. In Deepsouth, the manufacturer attempted to avoid an injunction by manufacturing the parts of a patented machine in the United States and then shipping the parts in three separate boxes to its overseas customers for easy assembly. Because only the components were 'made' in the United States, there was no direct infringement under '271(a), which prohibits only the making, using, offering to sell, selling, or importing of a patented invention within the United States. Furthermore, as there was no direct infringer in the United States, indirect infringement under ”271(b) or (c) did not apply.

Case History

Microsoft designs, authors, and tests its Windows operating system at its headquarters in Redmond, WA, in the United States. When final testing is completed and software is ready for public sale, it is referred to as 'golden.' As such, 'golden master' disks are often created and sent to manufacturers. These manufacturers can then in turn use these 'golden masters' as either the master copies from which to duplicate additional copies for sale to retail customers (such as the retail CD copy a consumer would purchase), or as the master installation copy which computer hardware manufacturers use to 'install' the software (such as when newly purchased computers come 'pre-installed' with software). Either way, Microsoft ships manufacturers a single 'golden master' and grants a license to manufacturers to make additional copies, either onto additional disks or onto a computer's hard drive via 'installation.' Microsoft does not make the further copies itself. Alternatively, instead of mailing a disk containing a copy of the software, Microsoft can also transmit a copy via an encrypted electronic transmission.

AT&T sued Microsoft alleging that computers running the Windows operating system infringe a patent it owned, which comprises a computer programmed with a 'speech codec.' A codec is a computer program capable of taking digitally recorded sound, compressing it so it takes less space when stored in the computer, and then decompressing it into a version that sounds like the original when needed. When the sounds being processed are human speech, the program is called a speech codec.

Whether software alone may be patentable subject matter remains unsettled. According to the Patent and Trademark Office, 'a claim for a computer program, without the computer-readable medium needed to realize the computer program's functionality,' is unpatentable because computer programs are neither 'physical things' nor 'acts being performed.' MPEP '2106.IV.B.1(a). Regardless, AT&T's claim is not to the software program itself, but rather to a computer system programmed with a speech codec, a microphone, and a speaker. AT&T alleged that computers with the Windows operating system installed infringe its patent by enabling the user, through Windows' own speech codecs, to record, store, and play back speech in a manner covered by its patent. It is only the computer system as a whole, the computer hardware with the computer software installed, which is alleged to be covered by the patent, not the software by itself.

Microsoft stipulated that, by selling copies of its Windows software to manufacturers of computers that are ultimately manufactured, used, or sold in the United States, it induced those computer manufacturers to infringe in violation of '271(b). The issue on appeal concerns AT&T's contention that it is entitled to damages for all foreign sales of Windows-based computers.

Under ' 271(f):

(1) Whoever without authority supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention, where such components are uncombined in whole or in part, in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.

(2) Whoever without authority supplies or causes to be supplied in or from the United States any component of a patented invention that is especially made or especially adapted for use in the invention and not a staple article or commodity of commerce suitable for substantial noninfringing use, where such component is uncombined in whole or in part, knowing that such component is so made or adapted and intending that such component will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.

Software As a Component

AT&T alleges that the Windows operating system constitutes a 'component' of the patented Digital Speech Coder system and that the foreign-made copies were 'supplied' by Microsoft 'from the United States.' In the district court action, Microsoft moved for partial summary judgment, arguing that its object code is intangible information and thus not a 'component of a patented invention' because information cannot be 'combined' with other objects in the manner required by '271(f).

Computer programmers develop software by first authoring 'source code,' the human readable commands to the computer. That source code is then run through a compiler program that translates the human-readable source code into 'object code,' the 0s and 1s the computer understands. According to Microsoft, object code is nothing more than a complex set of commands that instruct a computer to perform a certain task, much like the patterns on a player piano's music roll, with each unique pattern of perforations generating, when run on a player piano, a unique composition of mu-sic. Citing In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994) in its petition for certiorari, Microsoft claims that only when software code (like the pattern of perforations in a piano roll) is embodied on a physical medium (the actual piano roll) may it be a patentable invention. In contrast, according to Microsoft, software code alone, like the arrangement of holes in the music roll, is neither a 'process, machine, manufacture, or composition of matter' as required under 35 U.S.C. '101 and while copyrightable, is not itself patentable. Thus, argues Microsoft, due to the nature of object code (as a set of instructions), it cannot be 'combined' as required by '271.

The Solicitor General explained in its Brief for the United States as Amicus Curiae, with which AT&T agrees, that Microsoft's analogy to 'design information' and 'blueprints' is flawed. Software in a computer's memory 'has a detectable physical existence' in the form of electrons in the memory chips, and software in a computer's hard drive is 'physically embodied in the varied orientation of particles' on the magnetic platters. According to the Solicitor General, 'it is only because the object code has physical existence that the computer's central processing unit is able to detect and implement the software' and '271(f) is not limited to components that are ”tangible' in the sense of being detectable by the sense of touch.'

Even if object code could be a 'component of a patented invention,' Microsoft argues that it has not 'supplied' the foreign-manufacturers with copies. Under this theory, Microsoft claims it only sends the golden master disk or the encrypted transmission embodying the master version of the Windows object code to the manufacturer, neither of which was ever 'combined' in a foreign-manufactured computer. It was the foreign-manufacturer who ultimately makes the second-generation copy from these golden masters onto the computer overseas, and it is only the second-generation copy that is combined with the computer. According to Microsoft, it is vitally important that the copy it sends remain intact and never leaves the hands of the manufacturer.

Ultimately, the Federal Circuit found against Microsoft, with Judge Alan David Lourie writing for the majority and Judge Randall Ray Rader dissenting. The panel relied on an earlier Federal Circuit holding in Eolas Techs. v. Microsoft , 399 F.3d 1325 (Fed. Cir. 2005), decided while Microsoft's appeal was pending, which held that object code could be a 'component' of a patented invention because according to the Eolas panel '271(f) is not limited to 'machine' or 'structural or physical' components. Additionally, the panel majority found Microsoft liable for the foreign copies as well, because they have 'essentially been supplied from the United States[,]' copying is 'part and parcel of software distribution' and therefore, '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 '271(f) liability for those foreign-made copies.' The court noted that it was interpreting '271(f) to account for 'the realities of software distribution' and that any contrary holding would 'emasculate '271(f) for software inventions.'

In Judge Rader's dissent, although he agreed that software code could be a 'component' of a patented invention, he disagreed with the majority's conclusion that the foreign-made copies were 'supplied' from the United States. According to Judge Rader, that software must be copied to be distributed 'does not actually distinguish software components from physical components of other patented inventions. The only true difference between making and supplying software components and physical components is that copies of software are easier to make and transport.' Any contrary holding, he reasoned, would ignore the Federal Circuit's own 'case law that refuses to discriminate based on the field of technology' and that the proper course of action for AT&T to 'protect its foreign markets from foreign competitors' was to obtain and enforce 'foreign patents,' instead of giving extraterritorial effect to U.S. patent law.

Comments

Microsoft's position has some support from the U.S. Department of Justice's Office of Solicitor General. Although the Supreme Court denied Microsoft's appeal in the Eolas case, it may have been the Solicitor's Gener-al's request for reconsideration in the AT&T case that caused the Court to grant certiorari. Supreme Court Chief Justice John Roberts declined to take part in the decision to grant certiorari and will likely also recuse himself from the Court's consideration of the case, possibly because he holds stock in Microsoft.

Regarding the first of the two issues before the Court to decide, whether software can be a component of a patented invention, all indications seem to point toward affirmance. This would be consistent with the earlier Eolas decision, Judge Rader's dissent, and the Solicitor General's position. Regarding the second issue, whether the copies made by foreign manufacturers from a master copy originating from the United States are themselves 'supplied' from the United States, there appears to be some pressure for the Supreme Court to reverse. The Solicitor General's brief argues that the Federal Circuit's ruling on this second issue 'is contrary to the text and history of Section 271(f), improperly extends United States patent law to foreign markets and puts United States software companies at a competitive disadvantage vis-'-vis their foreign competitors in foreign markets.' Microsoft itself has said that it may be forced to relocate a 'hundred miles north to Vancouver' to 'reduce by two-thirds our exposure in all of these patent cases' relating to '271(f) liability for worldwide sales. There appears to be a strong likelihood that the Supreme Court may either wholly reverse or narrow the liability as to this second point.


Sean Chao is an associate in the New York office of Kenyon & Kenyon LLP. He can be reached at 212-908-6340.

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