High Court Rules Software Not a ‘Component’ for Patent Damages Abroad

The court called itself reluctant to interpret Sec. 271(f) of the patent law -- which penalizes domestic manufacture of patented “components” that are shipped abroad and assembled into products - more broadly than the plain language of Congress. But the ruling seemed to suggest that Congress reconsider its history of legislating in response to perceived patent “loopholes.” Justice John Stevens filed a dissent. Chief Justice John Roberts didn’t participate.

The court Mon. also strengthened the obviousness standard for patents in KSR v. Teleflex, raising the possibility of far stricter scrutiny of applications for patents that seem “obvious” to a person with “ordinary skill.” The decisions are the latest Supreme Court rejections of U.S. Appeals Court, Federal Circuit, rulings on patent issues that began with 2006’s eBay decision reversing the automatic granting of injunctions for patent infringement (WID May 16/06 p1).

At issue was whether Microsoft was liable for foreign copies of Windows made from a “master disk” shipped from the U.S., or by electronic transmission from the U.S. (WID Feb 22 p1). Interpretation of the statute hinged on whether software code fits the definition of “components,” and what counts as “shipped” from the U.S. Microsoft argued that only “object code” -- software in “machine-readable” binary, which is what’s on the master disk -- counts as a component, and not the human-written “source code” that becomes readable only when converted to object code.

The court said “any software detached from an activating medium remains uncombinable,” making it “an idea without a physical embodiment.” That includes software on CD or downloaded from the Internet. Microsoft and software companies have argued that software code is analogous to a blueprint: Nothing but simple instructions, which aren’t patentable. AT&T said software continually interacts with hardware, making it functionally different from a blueprint, whose instructions are “exhausted” once the product whose design it prescribes is completed. But blueprints “can be independently developed, bought and sold” as well, the court said. Before software and hardware can interact, “an actual, physical copy of the software must be delivered by CD-ROM or some other means of interfacing with the computer.” Congress easily could have put in its Sec. 271 “components” definition “information, instructions or tools from which those components readily may be generated” --but it didn’t, the court said.

Neither can Sec. 271 be understood to threaten to punish software makers for having “supplied” infringing components from the U.S., the court said, adding that “ease of copying” has no special relevance under the law making software, functionally speaking, a component. “While copying software abroad is indeed easy and inexpensive, the same can be said of other items, such as keys copied from a master,” the court said. It told AT&T to get patents outside the U.S., and then file infringement claims.

The court admitted its ruling sounds like a “loophole” for software, but said the situation made “dynamic judicial interpretation” of Sec. 271 inappropriate. The Federal Circuit said the statute must be interpreted “in a manner that is appropriate to the nature of the technology at issue” to be effective, making the Supreme Court wary. Congress created 271(f) to penalize combining abroad components in the U.S. because it considered the law at the time to include a loophole for infringement, and it could do so again for software, the court said. “Congress is doubtless aware of the ease with which electronic media such as software can be copied, and has not left the matter untouched,” the court said, citing the DMCA. But the courts shouldn’t be in the habit of “forecasting Congress’ likely disposition.”

Justice Samuel Alito went further than the majority in favor of Microsoft in a concurrence signed by Justices Stephen Breyer and Clarence Thomas. The majority chose not to resolve Microsoft’s contention that installing Windows on a foreign computer directly from the master desk, as opposed to a copy, wouldn’t infringe. But the concurrence said it’s irrelevant whether the master disk itself or a copy was installed. “[I]f these computers could not run Windows without inserting and keeping the CD-ROM in the appropriate drive, then the CR-ROMs might be components of the computer,” it said: “But that is not the case here.”

Justice John Stevens called the master disk “the functional equivalent of a warehouse of components… that Microsoft fully expects to be incorporated into foreign- manufactured computers.” The majority would hold Microsoft liable only for sending copies of software abroad to each be installed on a “separate infringing computer,” Stevens said in his dissent. Software “plainly satisfies the dictionary definition” of “component,” he said, which includes “element” or “ingredient,” and is essential to infringement. Software is better described as the roller on a player piano, not the “sheet music that tells a pianist what to do,” he said, tweaking the majority’s metaphor.

The Supreme Court also corrected the Federal Circuit in KSR, saying the appeals court applied a “narrow, rigid” test to determine whether a patent is obvious -- one that virtually guaranteed proliferation of uninspired patents. The case had to do with whether the combination of an adjustable pedal system with an electronic sensor -- both well documented in prior art -- constituted an invention that wouldn’t have been predictable. The Federal Circuit’s “teaching, suggestion, motivation” (TSM) test wrongly assumed that a patent could be obvious only if the prior art addressed the exact problem the patentee was trying to solve, the Supreme Court said in a unanimous ruling. The court granted summary judgment to KSR rather than return the case to the Federal Circuit, which inappropriately found “genuine issues of material fact” unresolved between the parties.

The TSM test offers a “helpful insight” -- that a patent with several elements isn’t obvious simply because each was known on its own in prior art, the Supreme Court said. But unless additional considerations are weighed, TSM can be guilty of “overemphasizing the importance of published articles and the explicit content of issued patents.” The software industry in particular has complained that its researchers don’t publish their findings with the regularity the TSM test envisions. A patent’s primary purpose may not be its only obvious use, “and a person of ordinary skill often will be able to fit the teachings of multiple patents together like pieces of a puzzle,” the court said.

Federal Circuit ‘Recalibrated’ on Patents, BSA Says

The rulings show the Supreme Court wants to elevate “statutory intent” above judicial responses to changing technology, Business Software Alliance counselor Emery Simon told reporters. The balance between patent owners and the “underlying social contract,” or public benefit, is being “recalibrated” toward the public benefit, he said. “The results certainly were expected” after oral arguments, attorney George Best told us.

Experts were divided on what message, if any, the court was sending to Congress in Microsoft. The court’s reminder of the patent dispute that led Congress to add Sec. 271(f) “does nothing to disturb what I believe to be the crux of the decision” -- that the “mere export of information” can’t be considered infringement, Simon said. As a result, though, BSA won’t be pushing Congress to repeal Sec. 271(f) as it did before the ruling, he said. But “the court really almost invites Congress to fix” the so-called extraterritoriality loophole, lawyer Steve Maebius told us. The distinction that the court makes between supplying and copying software may seem “very fine,” but, especially with 2 new justices who are “fairly conservative and somewhat sensitive to past criticisms” over judicial activism, the court is wary of reading more into statutory language than necessary, he added.

With the opposing Microsoft parties having roughly equal influence in Congress, it’s unlikely there’s “enough interest one way or the other to force Congress to do anything about” the extraterritoriality loophole, Best said. “Institutional forces” pushing patent reform -- Microsoft and similar companies -- are probably “happier with today’s decision than not,” even with the judicial hint to Congress, he added. The decision means “big dollars” for Redmond but otherwise is a “pretty narrow issue,” Best said. Patent owners, on the other hand, are likely to agitate for Sec. 271(f)’s repeal, Maebius said. There’s reason to believe they would get a hearing, he said -- the Senate Judiciary Committee is holding a hearing today (Tues.) on process patents, whose scope under 271(g) recently were narrowed by the International Trade Commission.

It’s hard to say where the KSR decision may have an effect earlier -- in litigation or patent examination -- said experts. Courts will take time adjusting to the decisions, Simon said, predicting that KSR will force patent examiners to “filter out the worthy from the unworthy patents.” The Supreme Court was “unhelpful” in giving lower courts guidance on how to test for obviousness, Best said, so it’s hard to predict how courts will rule in response to the rebuke to the TSM standard: “The effects won’t show up in courts for probably 5-10 years.” But companies trying to fight off patents may be emboldened to make the obviousness defense, he added.

The KSR decision didn’t “dismantle the whole basis we have for rebutting obviousness,” Maebius said, voicing doubts of a “sea change” in lower court rulings. Lowering the bar for obviousness may have a side effect, however: Pressure to pull postgrant opposition provisions from the latest patent reform bill (S-1145, HR-1908), on the theory that the Supreme Court ruling will make PTO scrutinize applications closer and weed out weak ones, he said. Patent practitioners will need to rely on secondary considerations -- such as a patent’s commercial success in the absence of advertising and “unexpected results” from combining 2 well-known technologies -- to overcome the obviousness hurdle, Maebius said.