AT&T-Microsoft patent spat: Court weighs in

The US Supreme Court has agreed to wade into a patent case involving AT&T and Microsoft. The outcome could alter the scope of damages software companies must hand over for infringing activity occurring outside the US.

The case dates back to 2001, when AT&T sued Microsoft in federal court. The telephone company alleged the speech codec software included in Windows loaded on computers infringed on one of its patents, which covered a "digital speech coder".

The parties ultimately reached a confidential settlement in 2004, and the facts of infringement quickly became less important than how damages would be awarded. A federal judge in New York decided Microsoft was liable for infringement of the patents in two areas: on systems sold in the US, and for copies of the software made by foreign manufacturers from a "golden master" disk created in the US. Last July, a majority on a three-judge panel for the US Court of Appeals for the Federal Circuit, which presides over many patent cases, upheld that ruling.

Microsoft balked at those decisions, and in January, it filed a petition seeking the high court's review.

At issue before the Supreme Court is whether those decisions are consistent with a complex portion of patent law that deals with US companies' liability outside their home turf. It says one can be liable for patent infringement for supplying "substantial components" of a US patented invention to someone outside the US with the knowledge that, when combined with other components, that device will infringe on a US patent.

The questions the court has been asked to tackle are: does software object code count as one of those components? And if so, can a US company be considered a supplier of that component to thousands of computers, if it provides only one master disk to a foreign manufacturer, which then replicates it?

Andy Cuthbert, a Microsoft associate general counsel, applauded the high court's acceptance of the appeal. The earlier appeal ruling caused concern because it "imposes liability on any company that does research and development in the US but doesn't impose the same liability on companies that have their R&D based overseas", Cuthbert said in a statement.

He added: "This creates a disincentive for companies to base their R&D operations in the United States and potential new liabilities for making, using and selling products overseas."

AT&T declined to comment on the case, except to say in a statement: "We anticipate the Supreme Court will handle this in their normal course of business, and we look forward to their decision."

That decision is sure to influence far more than just Microsoft's operations, said Victor de Gyarfas, a partner and registered patent attorney with the law firm Foley & Larder in Los Angeles.

He said in a telephone interview: "If Microsoft were to prevail, then this would be a boon for all software companies that are afraid of infringement claims due to transferring their software offshore. On the other hand, if AT&T prevails, then patent holders would benefit, because they would be able to collect damages for all the software that's created in the United States and that infringes."

Anne Broache writes for CNET News.com