The US Supreme Court said on Friday it will review a lawsuit testing the limits of international patent claims in a case that could have a wide-ranging effect on the US software industry.

The case, pitting tech giants AT&T and Microsoft against each other, will examine whether Microsoft is liable for patent infringement costs after distributing a speech-coding technology patented by AT&T on overseas copies of the Windows OS (operating system).

In July 2005 the US Court of Appeals for the Federal Circuit ruled against Microsoft, saying software copies made from a master version sent from the US are not shielded from patent law, which prohibits circumvention of infringement through the exporting of products.

The case has huge implications for both patent holders and software vendors, with software vendors potentially off the hook for huge patent awards if the Supreme Court sides with Microsoft, said Victor de Gyarfas, a patent lawyer with Foley & Lardner, based in Los Angeles. "There is a lot of money at stake," he said. "Probably hundreds of millions of dollars – or more."


Microsoft argued that it had sent one master copy of Windows overseas on a so-called 'golden disk' to be copied onto PCs sold outside the US. Microsoft shouldn't be liable for patent infringement for the hundreds of thousands of copies of Windows made from that master disk, its lawyers argued.

Microsoft, which agreed to an undisclosed settlement with AT&T in March 2004, also argued that software object code isn't a component of a patented invention. The agreement allowed the software vendor to appeal the case.

The appeals court, in its 2005 ruling, disagreed with Microsoft's arguments. Calling copying "part and parcel of software distribution", it rejected Microsoft's contention that liability should apply only to each disk that is shipped and incorporated into computers assembled outside of the US on the grounds that the argument "fails to account for the realities of software distribution".

Brief cheers

Microsoft cheered the Supreme Court's decision to look at the case. The appeals court decision holds companies that do their research and development activities in the US to a higher standard by penalising them for products sold overseas, when patent claims in other countries typically apply only to products sold in the country where the patent claim was filed, Microsoft said on Friday.

"The ruling by the US Court of Appeals... 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," Microsoft associate general counsel Andy Culbert said in a statement.

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

The US solicitor general and Patent and Trademark Office filed a brief in support of Microsoft's position, the company noted.

The appeals court had rejected Microsoft's R&D arguments. It found an "insufficient basis" for the company's "impassioned recitation of a 'parade of horribles' that may befall the domestic software industry – such as the relocation of manufacturing facilities".

An AT&T spokesman wasn't immediately available for comment.