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Tuesday, February 20, 2007 - Page updated at 12:00 AM

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Microsoft's rivals hope it prevails in limiting scope of law

Bloomberg News

U.S. software makers and Web-site operators will find themselves in an unusual position this week: rooting for Microsoft.

Companies that normally focus on thwarting the world's largest software company stand to benefit if it defeats AT&T in a U.S. Supreme Court case that may give software makers new protections from patent lawsuits on exported products.

The case may provide an opportunity for the court to elaborate on its emerging view under Chief Justice John Roberts that patent holders have too much power to bar use of their inventions and extract damages from infringers. A lower court specializing in patent cases sided with AT&T, the largest U.S. phone company; Microsoft's appeal will be argued Wednesday.

"For the software industry, it's a hugely important case because it effectively doubles or triples the liability of developers who write software in the United States, like Microsoft," says John Duffy, a patent-law professor at George Washington University.

Microsoft is seeking to limit what it must pay to use AT&T's patented technology in the Windows computer-operating system. The key issue is whether U.S. patent law, which covers Windows on domestic computers, extends to copies of the software made abroad and installed on computers there.

Oracle, Red Hat and Sun Microsystems are among a group of 60 companies, including Microsoft, lobbying Congress for a patent-law overhaul that would include new limits on potential damages for overseas sales of infringing products. Meanwhile, Yahoo!, Intel and Amazon.com have joined Microsoft in asking the Supreme Court to overturn the decision by the U.S. Court of Appeals for the Federal Circuit.

The companies argue that the appellate ruling encourages companies to insulate themselves from liability by shifting their software-writing teams overseas. Yahoo!, owner of the most visited U.S. Web site, warns that the lower-court ruling might prompt foreign countries to retaliate by extending the scope of their own patent laws to cover U.S. activity.

AT&T, backed by patent-holders including Royal Philips Electronics and the University of California system, says Microsoft's position would shield software makers to a far greater extent than Congress intended.

Court's new direction

The Roberts court has previously expressed skepticism about patent rights in a series of cases that cut across ideological lines. In a November argument in a case involving adjustable gas pedals, the justices repeatedly slammed a test used by the Federal Circuit to limit patent challenges.

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Justice Antonin Scalia called the test "gobbledygook," while Roberts said it was "worse than meaningless."

Then last month, the court ruled 8-1 in a case involving Genentech and MedImmune that rivals can challenge a patent even if they are paying royalties to sell their version of the invention.

"The way they've been trending the last few years is removing the power from the patents," says patent lawyer Erik Puknys of Finnegan Henderson in Palo Alto, Calif.

A decision issued in June hinted at divisions among the justices on how far to restrict patent rights. Ruling in a case involving eBay, the court said companies found to have infringed a rival's patent don't necessarily have to change their products.

Although the core of that ruling was unanimous, Roberts and two other justices said in a concurring opinion that judges historically have barred use of a disputed invention "in the vast majority of cases."

Four other justices, led by Anthony Kennedy, took a different tack, writing separately to say that often a product ban isn't necessary and damages are sufficient. Kennedy also wrote that an increasing number of companies are seeking patents as a means of extracting "exorbitant" licensing fees rather than to sell products.

AT&T- Microsoft case

In the current case, AT&T at one point sought as much as $300 million from Microsoft for worldwide infringement of a patent covering Internet voice transmissions.

The two companies reached a partial settlement in 2004, leaving open the issue now before the high court.

Roberts won't participate when the court hears arguments because he owns Microsoft stock.

The rest of the justices will scrutinize a 1984 law aimed at preventing companies from circumventing U.S. patent rights by shipping components overseas to be assembled into an infringing product. The export law says supplying those components constitutes patent infringement.

Microsoft says that provision doesn't apply because the versions of Windows it sends to foreign computer makers — either on "golden master" disks or as encrypted digital files — don't end up on computers. Microsoft says computer makers instead create copies of Windows for installation.

AT&T says Microsoft's position would leave the export provision with "vanishingly narrow application to the software industry." AT&T argues that Microsoft's ultimate goal is a repeal of the export law, something the software maker and its allies are lobbying Congress to approve.

The Bush administration is largely backing Microsoft, saying the lower-court ruling puts U.S. software companies at a competitive disadvantage.

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