Supreme Court to Hear Microsoft Appeal

This afternoon, the Associated Press reports, the U.S. Supreme Court has agreed to hear the appeal of defendant Microsoft, in a case where it was found by the Court of Appeals for the Federal Circuit (CAFC) to have infringed upon patents currently held by AT&T.

The case surrounds a company's right to sell abroad a product that includes what the law calls a "component of a patented invention" of another company, and then enable the buyer to resell that product and pocket the proceeds. Specifically, algorithms developed by AT&T used for speech recognition and reproduction, are packaged and sold with Microsoft Windows.

The AT&T suit challenged Microsoft's rights to enable companies abroad to reproduce "golden master" Windows disks, with the intention of reselling those disks abroad, if that software contains what AT&T claimed was its intellectual property.

In July 2005, the CAFC ruled in favor of the plaintiff, and in so doing, referred back to another pinnacle case in Microsoft's history. In Eolas v. Microsoft, filed back in 1999, developers and regents from the University of California argued that Microsoft had no right to include their patented methodology for invoking executable code from a Web page, within Internet Explorer.

A critical side argument made then was that Microsoft also had no right to sell what the regents and Eolas argued to be components of their invention -- the executable code trigger mechanism -- to foreign customers, and keep the profits.

In its defense against Eolas, Microsoft argued -- in stark and surprising irony compared to its defense in its U.S. antitrust proceedings -- that a derivative discovery realized in the form of software was not a component of an invention, to be protected by law. More specifically, Microsoft put forth that a component had to be a "thing," a tangible mechanism that one could touch, hold, or break by means other than a Web browser exploit.

In their Eolas decision last year, the CAFC judges wrote, "On a functioning computer, software morphs into hardware and vice versa at the touch of a button. In other words, software converts its functioning code into hardware and vice versa. Thus in the context of this patented invention, the computer transforms the code on the golden disk into a machine component in operation. Thus, sound policy again counsels against varying the definition of 'component of a patented invention' according to the particular form of the part under consideration, particularly when those parts change form during operation of the invention as occurs with software code."

While Eolas Technologies and UC were technically the victors in this case, technicalities have forestalled the courts' ability to assign damages, which some believe could total as much as half a billion dollars.

For its own argument, AT&T relied heavily on the Eolas decision, which effectively stated that a U.S. company could be held liable in U.S. court for patent infringements against another U.S. company for a U.S.-held patent, that take place in foreign countries. Since AT&T was arguing this case before the same court that rendered the Eolas decision, all it needed to offer was a gentle reminder.

Microsoft's defense in the AT&T case relied on judges' innate ability to be mystified by the context shift to manufacturing in the digital realm. Microsoft was not doing the replicating of AT&T's technology for sale with Windows, it argued; rather, it's the foreign replicators, authorized by Microsoft, who are doing so.

But since the entire replication process was protected by encryption, the company attempted to put forth, it was protected under "lock and key," which would be inherently different than offering up a physical model of something for others to duplicate. In the latter, the duplication process requires examination of the original model; in the former, none of the engineering details are exposed. Thus, said Microsoft, it should only be held liable for having infringed AT&T's rights with regard to the transfer of custody of the "golden master" disks for duplication, the total penalties for which might come up to about $4.95.

The CAFC didn't buy that argument, either. "We reject this theory of liability as it fails to account for the realities of software distribution," the judges wrote. "It is inherent in the nature of software that one can supply only a single disk that may be replicated - saving material, shipping, and storage costs - instead of supplying a separate disk for each copy of the software to be sold abroad. All of such resulting copies have essentially been supplied from the United States." Thus liabilities, the court ruled, should attach to all the copies, even though they were made elsewhere.

"We cannot accept Microsoft's suggestion that software sent by electronic transmission must be treated differently for purposes of liability from software shipped on disks," the CAFC added, "as it would amount to an exaltation of form over substance."

But if there is any single company in the history of human endeavor that has been unflappably capable of snatching victory from the jaws of defeat, it is Microsoft. Although AT&T won its case on Microsoft's appeal, the two companies actually reached a settlement in 2004. Though the majority of the terms were not disclosed, the terms evidently permitted Microsoft to pursue its appeal; if it had won, the settlement would likely have been thrown out. The murkiness of those original terms might be partly responsible for awakening justices' interest in hearing Microsoft's final appeal.

But in the end, reports the AP, it was a plea from the United States' own Solicitor General, Paul Clement, which seems to have turned the tide. In his plea, he argued that AT&T should be seeking remedies in courts within the jurisdictions where its patents were infringed, "not in attempting to extend United States patent law to overseas activities."

The efficacy of US patents in foreign jurisdictions has been a matter of some contention, especially among proponents of patent reform. As a result, the Microsoft appeal could produce a landmark ruling from the high court, establishing the U.S. position on the territorial reach of its own patent protection.

This news may be greeted positively by European patent law reformers, who have argued lately that U.S. patent jurisdiction should stop at its own borders, and who may be surprised to learn Microsoft is in agreement with them.

Supreme Court Chief Justice John Roberts declined to hear today's petition for appeal, perhaps on the grounds that he is himself a Microsoft stockholder. Quite possibly, the Chief Justice could recuse himself from hearing the appeal on those grounds.

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