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Spring 2006Newsletter

Software Export

Intellectual Property Update

In 1984 Congress enacted §271(f) of the patent statute to overrule the Supreme Court's decision in Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518, 173 USPQ 769 (1972), which exposed a loophole in the law. The loophole allowed a defendant to avoid liability for infringement of a U.S. patent by manufacturing the components of a patented product in the United States and then shipping those components out of the country unassembled, for assembly abroad. The U.S. patent in that case covered only the fully assembled product, but the components of the product were not assembled until after they were shipped outside the jurisdiction of this country, where U.S. patent law does not apply, to some country where no counterpart foreign patent existed.

Section 271(f) provides, in part:

Whoever without authority supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention, where such components are uncombined in whole or in part, in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.

In the Deepsouth case the components shipped overseas in unassembled condition were the mechanical parts of a shrimp-deveining machine. In the recent case of AT&T Corp. v. Microsoft Corp., 75 U.S.P.Q.2D 1506 (Fed. Cir. 2005), the issue was whether software could be considered a “component” of a computer in the same sense as mechanical parts are components of a machine.

In that case Microsoft was accused of infringement of an AT&T U.S. patent under §271(f). The patent covered the combination of a computer and certain software incorporated into the Microsoft Windows operating system. The software for copies of Windows had been replicated abroad from a master version sent from the United States, and then loaded onto foreign-manufactured computers in other countries.

Microsoft argued that: (1) software is intangible information, and therefore it could not be a "component" of a patented invention within the meaning of §271(f); and (2) even if the Windows software were a "component," those components had not been "supplied" from the United States as required by §271(f) because the copies of Windows installed on the foreign-assembled computers had all been made abroad.

On the first issue, the court held that software code qualifies as a “component” because the statutory language did not limit §271(f) to “machines” or “physical structures."

As to the second issue, Microsoft maintained that no liability attaches under §271(f) for foreign-replicated copies of Windows because they are not "supplie[d] or cause[d] to be supplied in or from the United States." According to Microsoft, a foreign-replicated copy of software has actually been manufactured abroad, even though it was made from a master version supplied from the United States.

But the court wasn’t buying that argument either. In order to properly construe the words "supplie[d] or cause[d] to be supplied in or from the United States," said the court, one must look at the way software is typically "supplied." Given the nature of the technology, the "supplying" of software commonly involves generating a copy. For example, when a user downloads software from a server on the Internet, the server "supplies" the software to the user's computer by transmitting an exact copy. Uploading a single copy to the server is sufficient to allow any number of exact copies to be downloaded, and hence "supplied."

Therefore, said the court, copying is part and parcel of software distribution. Accordingly, for software "components," the court concluded that the act of copying is subsumed in the act of "supplying," such that sending a single copy abroad with the intent that it be replicated invokes §271(f) liability for those foreign-made copies.

The court also rejected Microsoft's argument that the earlier case of Pellegrini v. Analog Devices, Inc., 375 F.3d 1113, 71 USPQ2d 1630 (Fed. Cir. 2004), required a different result. The Pellegrini case had held that liability under §271(f) applied only to a component itself--as opposed to instructions for manufacturing the component--"supplie[d] or cause[d] to be supplied in or from the United States." In the present case, said the court, what is being supplied abroad is an actual component, i.e., the Windows operating system, that is ready for installation on a computer to form an infringing apparatus--not instructions to foreign software engineers for designing and coding the Windows operating system.

Also rejected was Microsoft's suggestion that software sent by electronic transmission must be treated differently for purposes of §271(f) from software shipped on disks, because only the disk qualified as a physical entity. But the court ruled that liability under §271(f) does not depend on the medium used for exportation. It reasoned that a disk is merely a container that facilitates physical handling of software, much like bottles for liquids or pressurized cylinders for gases.

The court then concluded:

Were we to hold that Microsoft's supply by exportation of the master versions of the Windows software--specifically for the purpose of foreign replication--avoids infringement, we would be subverting the remedial nature of §271(f) ***. Section 271(f), if it is to remain effective, must therefore be interpreted in a manner that is appropriate to the nature of the technology at issue.

One judge dissented from this decision on the ground that supplying a single "component" of a patented invention from the United States should not give rise to “endless liability in the United States under §271(f) for products manufactured entirely abroad.” As copies of the software are installed on computers in Dusseldorf and Tokyo for the German and Japanese markets, said the dissenting judge, those acts create liability only under German or Japanese patent law, and AT&T can protect its foreign markets from foreign competitors by obtaining and enforcing foreign patents. Moreover, he said, “copying” and “supplying” are separate acts with different consequences, particularly when the supplying occurs in the United States and the copying occurs in Dusseldorf or Tokyo.

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