Microsoft Corporation v. AT&T Corp., 550 U.S. ___ (2007)

1. Microsoft Corporation v. AT&T Corp., 550 U.S. ___ (2007) Mark C. Scarsi O’Melveny & Myers LLP

2. Microsoft v. AT&T • On Appeal from the Federal Circuit • Fed Circuit Held 35 USC § 271(f) prohibited Microsoft’s exportation of Windows master because foreign manufacturer installed Windows software on computers resulting in product that practiced a U.S. patent. • Supreme Court Reversed

3. Microsoft v. AT&T • 7-1 Decision • Ginsburg wrote opinion of the Court (except footnote 14) • Scalia, Kennedy and Souter joined full opinion • Alito wrote concurring opinion as to all but footnote 14 • Thomas and Breyer joined Alito’s concurrence • Stevens wrote dissenting opinion • Roberts took no part in decision

4. Microsoft v. AT&T Facts • AT&T holds patent on apparatus for digitally encoding and compressing recorded speech • Parties stipulate that a PC with Windows infringes the patent. • Microsoft ships a Master Windows disk to foreign manufactures who copy it and install Windows on PCs • Fed Cir Held Microsoft violated 35 USC § 271(f)

5. Microsoft v. AT&T 35 USC § 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.

6. Microsoft v. AT&T 35 USC § 271(f) • Adopted in 1984 in reaction to Supreme Court Deepsouth decision, 406 U.S. 518 (1972) • Patentee sued Deepsouth for infringing patent on shrimp deveining machine. • Deepsouth sought to recoup its losses by breaking down the machines and selling the components to foreign companies for reassembly abroad • Supreme Court held conduct did not infringe

7. Microsoft v. AT&T Why Did the Supreme Court Take the Case? • Federal Circuit Decision gave extra-territorial effect to software patents • Software patents generally claim software operating on a computer • If shipping a master disk abroad with software constitutes infringement, then a US software patent holder has patent protection abroad for and US software. • Under the same logic, Federal Circuit decision also implicitly allows for pure software patents.

8. Microsoft v. AT&T Ginsburg Decision of the Court • General Rule: no patent infringement liability for products made and sold in another country • 35 U.S.C. § 271(f) is a limited exception to the general rule • Deepsouth: Absent clear Congressional intent, the Court should not extend reach of US patents

9. Microsoft v. AT&T Ginsburg Decision of the Court • Two questions: • When can software be a component within the meaning of 271(f)? • Were components of foreign computers supplied in this case? • Answer 1: Software mustbe in a computer readable form to be a component (e.g.,CD) • Answer 2: No exportation of components in this case

10. Microsoft v. AT&T Ginsburg Decision of the Court • Strong Focus on Abstract Software vs. Physical Software • Odd distinction • Doesn’t buy Fed Cir holding that distributing master is the same as distributing components • Judicial Conservatism

11. Microsoft v. AT&T Alito Concurrence (Thomas, Breyer) • Software is not a component, even if it is in a computer readable form • A component must be physical • The component must be combined • Implication: Software standing alone is not patentable subject matter

12. Microsoft v. AT&T Stevens Dissent • Software, even in the abstract, can be a component. • Implication: Software is patentable subject matter

13. Microsoft v. AT&T 4 - 3 on Footnote 14 “In a footnote, Microsoft suggests that even a disk shipped from the United States, and used to install Windows directly on a foreign computer, would not give rise to liability under §271(f) if the disk were removed after installation. We need not and do not reach that issue here.”

14. Microsoft v. AT&T For: Ginsburg, Scalia, Kennedy, Souter and Stevens Against: Alito, Thomas, Breyer

15. Microsoft v. AT&T • Net effect of decision? • Reliance on In re Beauregard for the proposition that software on a disk is patentable subject matter is misplaced • Continue to follow In re Alappat • Look for next shoe to drop on software patents

16. Microsoft v. AT&T JUSTICE STEVENS: What is patented? Is the physical object patented or is the software patented? MR. OLSON: The AT&T patent -- JUSTICE STEVENS: Right. MR. OLSON: The '580 patent is a program, as I understand it, that's married to a computer, has to be married to a computer in order to be patented. JUSTICE SCALIA: You can't patent, you know, on-off, on-off code in the abstract, can you? MR. OLSON: That's correct, Justice Scalia. JUSTICE SCALIA: There needs to be a device. MR. OLSON: An idea or a principle, two plus two equals four can't be patented. It has to be put together with a machine and made into a usable device. The bind that AT&T is in here is that the components that make the machines run that are produced abroad are not supplied from the United States. They are made in Belgium or Frankfurt or something.

17. Microsoft v. AT&T JUSTICE BREYER: I take it that we are operating under the assumption that software is patentable? We have never held that in this Court, have we? MR. JOSEFFER: No, but as I was saying before -- JUSTICE BREYER: So what should we do here? Should, if we are writing this, since it's never been held that it's patentable in this Court -- MR. JOSEFFER: I think if -- JUSTICE BREYER: If I were writing something, should I say on the assumption that it's patentable? Since the issue isn't raised?

18. Microsoft v. AT&T JUSTICE STEVENS: Your time is up, but I want to ask you one yes or no question. In your view is software patentable? MR. JOSEFFER: Standing alone in and of itself, no.

19. Microsoft v. AT&T JUSTICE BREYER: Is that -- how is that different from this? How is it different? MR. WAXMAN: That is very different than this case because what -- first of all, we all agree that software code in and of itself, removed from a physical structure, cannot be patentableand when software -- when some -- when an invention that is practiced with software is patented, at the most what you will see is preferred embodiments of the source code which is language that humans understand and which computers do not. A lot of work has to be done in items of debugging and testing and compiling to create what is, by stipulation, at issue in this case, which is the precise, machine readable sequence that commands a computer's CPU millions of times a second. Source code would do nothing. Source code has to be worked on overseas.

20. Microsoft v. AT&T JUSTICE SCALIA: That, that code is not patentable, you've said. MR. WAXMAN: The code is not patentable. The expression is copyrightable.AT&T has not sought to get a patent on the code. AT&T has a patent on a system that can be practiced, among other ways, through the use of software.