Editor’s Note: José Cortina is a member of the Research Triangle Park law firm of Daniels Daniels & Verdonik, P.A.

RESEARCH TRIANGLE PARK, N.C. – The upcoming calendar for the U.S. Supreme Court includes the case of Microsoft Corp. v. AT&T Corp., which will address an issue that could have significant impact on technology research and development activities in the United States.

The case involves interpretation of a somewhat controversial section of U.S. law related to liability for patent infringement as a result of providing components of infringing products for use in manufacture outside the United States. AT&T is seeking damages for infringement from sales of Windows software abroad which would be infringing if sold in the U.S. – but the version in question is not sold in the U.S.

More specifically, the question to be decided by the Supreme Court is whether infringement occurs as a result of the exportation of a golden master containing software code, which code is subsequently copied outside the United States and the copies are then incorporated into a software product that infringes a United States patent (although not a patent in the countries where the software product is being used).

The Federal Circuit, in the case being appealed, ruled in favor of AT&T, holding Microsoft liable for infringement as a result of supplying software that is assembled into a final Windows software product sold abroad. Many amicus or “friend of the court” briefs have been filed supporting Microsoft’s position.

Why Is Case Being Heard?

On first impression one must question why this case is even being heard. After all, aren’t U.S. laws supposed to apply to activities only if the alleged infringing activity occurs in the United States? Why should a U.S. patent owner be able to enforce its patent as to activities outside the United States? Does it make sense that conduct undertaken within the U.S. which is not infringing in the United States, can result in liability for a U.S. patent? Why should activities related to non-infringing exported products have any relationship to U.S. patent infringement?

The easy answer is that for most of the history of patent law there would be no infringement liability as the result of such a scenario. In 1972, however, Congress took legislative action in response to the decision in the case of Deepsouth Packing Co. v. Laitram Corp. In that case the Supreme Court held manufacturing components of a patented invention in the United States, which components were exported and assembled into the patented invention abroad, was not “making” that would constitute infringement under the U.S. laws: 35 U.S.C. §271(a).

In response, Congress enacted a new §271(f). The new statute sought to prevent alleged infringers from escaping infringement liability by manufacturing or supplying a component of a patented invention from the United States and then exporting it for combination into an end product overseas. One problem with such a provision was that components supplied from foreign countries and incorporated into foreign-assembled products do not fall under the provision. This had the unfortunate result of driving some manufacturing operations in the U.S. to other countries to avoid infringement under Section 271(f).

While most of the arguments advanced in amicus briefs filed in support of Microsoft discuss whether software is a component and thus should be exempt from interpretation of the statue, the Business Software Alliance (“BSA”) clearly points a more important issue: the copies made abroad are not components supplied from the United States; the components or copies of the code are actually being made outside the U.S.

More Off-shoring Ahead?

The BSA further argues that the interpretation of the lower court “exposes American producers to potential global liability and upsets investments and plans made in reasonable reliance on previously settled law that limited the extraterritorial reach of U.S. patent law.” A group of professors also argues that a decision in favor of AT&T will prompt the off-shoring of research and development.

Further, the Federation of Intellectual Property Attorneys based in Switzerland filed a brief objecting to the violations of the principle of non–extraterritoriality represented by the lower Federal Circuit’s decision in favor of AT&T because it could prompt other countries to enact similar legislation. Such legislation could potentially negatively impact the activities of global U.S. companies operating in such countries.

In short, what does all of this mean? The U.S. Congress, in response to special interest groups lobbying after court decisions, has often adopted practices designed to appease such groups. The Congress’ actions include, in part, enacting legislation reaching beyond U.S. borders, ostensibly to protect such groups, without much thought to the broader impact of such legislation.

Consider another example. What happens with the export of an intermediate compound used to synthesize a patented new pharmaceutical when the intermediate compound is shipped outside the United States, not patented in the United States and used to synthesize the pharmaceutical that would infringe a United States patent, but for which there is no patent in the country where the drug is sold. Is the U.S. manufacturer of the intermediate compound liable for infringement on a parallel basis? Is such an intermediate a component, even though it loses its identity as a result of the synthesis reaction?

Unfortunately, in many cases legislation enacted as a result of a “knee jerk” reaction to efforts by special interest groups has the potential to affect more groups in unforeseen ways than merely those lobbying for the legislation. Then, court decisions interpreting the new laws affect how broadly such laws are applied, and in some cases result in negative effects on U.S. economic competitiveness in a global market.

If the Supreme Court rules for AT&T and upholds the Federal Circuit decision, I fear the amicus brief writers in support of Microsoft may turn out to be correct in their various positions. If so, we may eventually see a further negative economic impact on U.S. manufacturing, research and development which is designed to sell products in a global market outside the U.S.

A. José Cortina is a registered patent attorney with the law firm of Daniels, Daniels & Verdonik, P.A. He focuses his practice on the intellectual property needs of small to large technology companies, including providing patent, trademark, copyright, counseling, licensing, conflict resolution and transactional services. He is experienced in a broad range of technologies, including electronics, communications, computer hardware and software, biomedical, materials, and selected chemical and chemical engineering technologies.