By R. Todd Wilson

The U.S. Court of Appeals for the Federal Circuit held on July 13, 2005 that the export of software from the United States to foreign computer manufacturers which copy and install the software and then sell computers loaded with the software abroad constitutes an infringing supply of a patented component in violation of Section 271(f) of the United States Patent Act. The case is AT&T Corp. v. Microsoft Corp., 2005 WL 1631112 (Fed. Cir. July 13, 2005). This case, considered together with Eolas Technologies Inc. v. Microsoft Corp., 399 F.3d 1325 (Fed. Cir. 2005), lays out the Federal Circuit’s current interpretation of Section 271(f) regarding the exportation of software code.

AT&T sued Microsoft for infringement of its U.S. Reissue Patent No. 32,580 related to speech codecs. A codec is a software program that converts speech into a compact computer code and then re-converts the code back into a signal that sounds like the original voice signal. Microsoft included the codecs in master versions of its Windows�� operating system supplied to foreign computer manufacturers and foreign “replicators,” who replicated the master versions by generating multiple copies for installation on foreign-assembled computers, pursuant to contracts with Microsoft. The parties agreed that Microsoft infringed AT&T’s patent by distributing the Windows�� operating system to be loaded onto computers assembled in the United States. Microsoft argued on appeal that it did not infringe the patent under Section 271(f) by exporting master disks because it did not “supply” from the United States any “component” of the patented invention.

Section 271(f) of the Patent Act imposes liability for patent infringement upon anyone who supplies or causes to be supplied from the United States a patented invention or components of a patented invention when such components are to be assembled outside the United States if such a combination in the United States would infringe the patent. Subsection (f)(1) defines the infringing act as the supplying in or from the United States of all or a substantial portion of the components of a patented invention and active inducement of an infringing combination of such components outside the United States. Subsection (f)(2) defines an act of infringement as supply in or from the United States of any component of a patented invention that is knowingly and specially made or adapted for use in the invention and intent that such component will be combined into an infringing combination outside of the United States.

Microsoft argued that Section 271(f) does not apply to software. First, it insisted that the word “component” should not apply to software since software is inherently intangible. Second, Microsoft argued that it could not be held to have “supplied” the foreign replicated copies of the software since the copies were made and installed onto computer hardware outside the United States.

Microsoft’s first argument was that Section 271(f) does not apply to the exportation of master disks because the supply of the master disk does not constitute the supply of a component of an infringing product. The disk, according to Microsoft’s argument, was not itself a physical part of any product but simply the media which contained the Windows�� operating system to be loaded onto computer hardware by original equipment manufacturers overseas.

The Federal Circuit dismissed Microsoft’s “component” argument finding that the issue had been fully determined in Eolas during the pendency of the AT&T appeal. The court in Eolas held that the code contained on the master disks was itself a “component of a patented invention” within the purview of Section 271(f)(1). The court construed “patented invention” in this context to encompass any invention patentable under the Patent Act and dismissed the suggestion that the application of Section 271(f) should be limited to physical components of machines and other structural components. In finding that Microsoft had infringed the Eolas patent, the court said that the Windows�� code that can be copied from a master disk onto a hard drive “is not only a component, it is probably the key part of this patented invention.”

Microsoft’s second argument in AT&T was one not considered in Eolas. In AT&T, the Federal Circuit turned its attention to whether the word “supplied” in the statute should be construed to include the dispatch of a single disk which is used to make multiple copies abroad. Although the court had already held that Microsoft’s Windows�� software could be a “component” of a patented invention under Section 271(f), Microsoft argued that even if Windows�� was a component under the statute, no such components were “supplied in or from the United States” because the actual replication and installation on computer hardware occurred outside of the Untied States by licensees.

In dismissing Microsoft’s second argument, the Federal Circuit in its AT&T holding looked to the meaning of the word “supplied” in the context of software distribution. Since software is typically distributed by providing a single copy, either electronically or on some medium such as a master disk, which is used to make multiple copies on computer hardware, the court held that, “for software ‘components,’ the act of copying is subsumed in the act of ‘supplying,’ such that sending a singe copy abroad with the intent that it be replicated invokes �� 271(f) liability for those foreign-made copies.” Therefore, software is “supplied” under this section of the Patent Act whether each individual copy is dispatched for installation and sale abroad or a single copy is dispatched abroad for replication on computer hardware for sale in foreign markets.

Judge Rader’s dissent in the AT&T case complained of the majority’s “extraterritorial expansion” of U.S. patent protection. Judge Rader argued that the court “should accord proper respect to the clear language of the statute and to foreign patent regimes by limiting the application of �� 271(f) to components literally “shipped from the United States.'” Such a literal interpretation is supported by the holding in Pelligrini v. Analog Devices, Inc., 375 F.3d 1113 (Fed. Cir. 2004). The Pelligrini case involved chips that were manufactured exclusively outside of the United States entirely for foreign distribution and use. The components were never shipped to or from the Untied States. The Federal Circuit in Pelligrini held that Section 271(f) “applies only where components of a patent invention are physically present in the United States.” The fact that the allegedly infringing components were manufactured by a U.S. based company did not affect the outcome. The bottom line is that Section 271(f) focuses on the location of the accused components, not the accused infringer.

Judge Rader argued in his dissent to the AT&T holding that “one cannot supply one hundred components of a patented invention without first making one hundred copies of the component, regardless of whether the components supplied are physical parts or intangible software.” Judge Rader would have found that the infringing components had been “supplied” in the AT&T case only if the copies had been made in the United States for export with the intent to assemble an infringing devise abroad. In Judge Rader’s view, “Section 271(f) protects foreign markets from domestic competitors” and was not intended by Congress to protect foreign markets from foreign competitors.

The Pelligrini case does, however, allow a distinction to be made between the supply of a “component” and the supply of instructions. Under the Peligrini holding, mere instructions given from the Untied States for the making of components outside the Untied States do not infringe. The statute’s use of the term “supplied” refers to physical supply of components rather than the supply of instructions or corporate oversight.

The recent holdings in the Microsoft cases decided under Section 271(f) of the Patent Act are certain to have an impact on the foreign distribution of software products protected by United States issued patents. The reach of the holdings, however, may also extend to other areas of technology distribution. The ultimate effect is that the export of any technology which may be considered more than mere instructions and which is transmitted for manufacturing use overseas may be subject to U.S. patent protection under Section 271(f). Possible areas to which such protection would apply include transmission of product plans and integrated circuit design to offshore manufacturing locations. Technology companies should consider the implication of these recent cases on the dispatch of software and other technical information to overseas locations even for the manufacture of products not intended for the U.S. market.