Feb. 20, 2007 – This case addresses a very specific but important issue. The Court’s decision could have a major impact on the U.S. software industry, including Microsoft Corp. and other high-tech companies. The Supreme Court will decide whether Microsoft can be held liable under U.S. patent law for alleged acts of foreign infringement involving copies of its Windows® operating system software produced overseas for installation in foreign-built computers.

Microsoft designs its software programs, including its flagship Windows operating system, at its headquarters in Redmond, Wash. It distributes its programs in foreign markets by transmitting master versions of the software on “golden master disks” to foreign computer manufacturers. These foreign manufacturers then replicate the software and install the foreign-made copies on foreign-assembled computers for sale to foreign consumers.

In 2001, AT&T filed suit against Microsoft in federal court in New York alleging that the Microsoft® Windows operating system infringes on one of its patents for digitally coding and decoding speech. AT&T sought to recover damages from Microsoft based upon copies of the Windows software program manufactured in the United States and, invoking a relatively obscure provision of the U.S. patent laws that makes it an act of infringement to “suppl[y] . . . from the United States all or a substantial portion of the components of a patented invention” for assembly abroad, also sought damages based upon foreign-manufactured copies of the program.

Microsoft argued that, when it came to the tens of millions of alleged acts of foreign infringement, it could not be held liable because it only sent a single master version of the Windows software program that was then used by the foreign manufacturers to make computers overseas. None of those computers contains any physical parts supplied by Microsoft. Both the trial court and the U.S. Court of Appeals for the Federal Circuit, however, agreed with AT&T’s position. Reasoning that software can be cheaply and quickly duplicated, these courts concluded that supplying a single master version of a software program is essentially the same thing as supplying the tens of millions of copies ultimately produced from that original, and they held Microsoft liable for each foreign-duplicated copy of the Windows software program that had been produced from the U.S.-supplied original.

Microsoft then asked the U.S. Supreme Court to review the case. To assist in its decision-making, the Supreme Court requested the views of the U.S. Government. The U.S. Government agreed with Microsoft that it could not be held liable for foreign-manufactured copies of the Windows program because those copies are not supplied from the United States, and urged the Court to accept the case and to reverse the judgment against Microsoft. The Court agreed to review the case and will hear arguments from the parties on Feb. 21, 2007. A decision is expected by the end of June.

For the U.S. software industry, there could be billions of dollars riding on the outcome of the case because AT&T’s arguments would expose U.S.-based software companies to potentially exorbitant infringement liability based on overseas manufacturing activities. A number of high-tech companies, including Intel Corporation, Yahoo! Inc., Amazon.com Inc., and Autodesk Inc., have filed briefs urging the Supreme Court to reject AT&T’s far-reaching arguments.