TCS Daily

Recent Case Demonstrates the Importance of Definition in the Patent Age

By James Benham - June 18, 2007 12:00 AM

The recent Supreme Court decision in AT&T vs. Microsoft will have lasting impact on the international enforceability of intellectual property rights for small and large businesses alike. Though the Supreme Court left the decision on the larger issue of patent enforcement up to Congress, which is planning some potentially major changes in the law, they did let Microsoft off of a very large hook, much to AT&T's chagrin.

The lawsuit originated from a patent that AT&T holds regarding the use of a device to digitally process recorded speech through encoding and compression. AT&T filed the infringement suit against Microsoft claiming the Windows operating system had the potential to perform the encoding of speech in the method described by AT&T's patent in all of the foreign installations of Windows. The domestic installations were not in question because Microsoft previously admitted fault in regard to the domestic operating system sales. The Supreme Court, when ruling in favor of Microsoft, said "It is the general rule under United States patent law that no infringement occurs when a patented product is made and sold in another country." AT&T argued that this

rule was not applicable because of an exception granted that allows for enforcement of foreign patents if a patented invention's components are used and combined abroad. The Court ruled in favor of Microsoft because of the definition of Windows itself as the component, not the AT&T process.

The message sent by the Court ruling is that software companies in the United States who file patents for technology processes cannot expect enforcement against U.S. companies who distribute software in the same manner as Microsoft. The loophole exploited by Microsoft in this case relates to the way in which they distribute the software that they manufacture. In this case, as cited in the Court ruling, Microsoft sends master copies of their software to international distributors who then duplicate the software abroad. This distributed duplication process, combined with the ruling that the Windows Operations System itself is the component, and not the AT&T technology, is what has allowed them to, by their own admission, bypass any royalty payments for foreign sales.

The effect on the software industry could be far reaching, sending the message to U.S. software companies that they can utilize patented components from another company as long as they distribute their software through a network of foreign manufacturers who take master copies of their software and produce it for resale. The impact on the Software as a Service (SaaS) industry is potentially different, however, in that SaaS providers typically sell the use of their software directly to the end client in other countries, bypassing the traditional foreign resale and manufacturing channel that proved so useful to Microsoft in their legal defense. The changing face of software delivery will not make this any easier. As companies continue to push towards an all digital delivery process, one wonders how the courts will define "components" when there is never a physical disc or device manufactured.

In yet another example of how broken and ineffective the United States patent system is, especially in regards to protecting and promoting innovation in the field of technology, the Supreme Court dodged the broader issue and laid the mantle of responsibility upon Congress' shoulders, whom we can only hope will pass the reform that is currently being discussed in Washington. The Supreme Court further stepped away from the issue stating that "Foreign law alone, not United States law, currently governs the manufacture and sale of components of patented inventions in foreign countries. If AT&T desires to prevent copying abroad, its remedy lies in obtaining and enforcing foreign patents."

James Benham is the President of JB Knowledge Technologies, Inc., a fully integrated professional service firm specializing in Web & Graphic Design, Software & Database Development, 3D Animation, and Business Process Outsourcing.



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