Microsoft/AT&T head to Supreme Court. What does it mean?

Microsoft and AT&T headed to U.S. Supreme Court Wednesday to argue their sides in a complex transnational patent case that could send shockwaves through the software industry.

The two giants have been locked in a battle over patent infringement that centers on exporting software code to foreign countries. The two already have settled for an undisclosed amount in the United States where Microsoft acknowledged it infringed on an AT&T patent covering speech decoding technology. AT&T, however, has taken the case global, arguing that copies of Windows distributed overseas to computer hardware manufacturers also infringes on AT&T’s intellectual property.

Experts say the outcome of the case could change the face of the software industry and cost software vendors billions of dollars.

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Microsoft and AT&T headed to U.S. Supreme Court Wednesday to argue their sides in a complex transnational patent case that could send shockwaves through the software industry.

The two giants have been locked in a battle over patent infringement that centers on exporting software code to foreign countries. The two already have settled for an undisclosed amount in the United States where Microsoft acknowledged it infringed on an AT&T patent covering speech decoding technology. AT&T, however, has taken the case global, arguing that copies of Windows distributed overseas to computer hardware manufacturers also infringes on AT&T’s intellectual property.

Experts say the outcome of the case could change the face of the software industry and cost software vendors billions of dollars.

Here is how the case, which has already seen rulings in favor of AT&T in both district court and the U.S. Court of Appeals shapes up.

What is the case about?

Microsoft acknowledges that it violated an AT&T patent for converting speech to computer code, but Microsoft disputes that it is guilty of infringement when its software is shipped overseas. AT&T says Microsoft is guilty of violating a provision – section 271(f) – of a 1984 patent law, which prevents companies from shipping parts overseas to be assembled in a fashion that would infringe on a U.S. patent. Experts told the San Jose Mercury News that the case hinges on interpretation of the word “component” and “supplier” and that the Supreme Court must decide that software is a component of AT&T’s patent and that Microsoft is a supplier to foreign computer manufacturers in order for Microsoft to be found in violation of the patent. AT&T has already won judgments in both district and appeals courts.

What is Microsoft arguing?

Microsoft says the “gold master” disks of the Windows operating system that it ships overseas to computer hardware manufacturers to copy and install on machines is a blueprint and therefore not a patent infringement under 271(f), which does not prevent blueprints from being shipped overseas. The company says computer hardware companies in foreign countries are the suppliers. Amazon.com, Intel and Yahoo, the Business Software Alliance, the American Intellectual Property Law Association and the Bush Administration are among those in Microsoft’s corner.

What is AT&T arguing?

AT&T dismisses the blueprint argument and says 271(f) was added to patent law to spare U.S. patent holders from the considerable expense of obtaining patent protections in dozens of foreign jurisdictions. The company said in court filings that Microsoft supplied its software code ”to foreign computer manufacturers, with the intent that those companies would pay Microsoft a royalty each time they combined that code with other components to form devices that would infringe AT&T’s patent.”

What are the implications if Microsoft wins?

Software companies big and small that do business overseas could not be held liable for code shipped overseas and would not be exposed to financial hardships based on infringement penalties sought by hardware and electronics companies, software developers or those seeking to cash in on their patents. Experts say the law could save the software industry from potentially billions of dollars in litigation and having to establish research and development centers outside the U.S. to avoid paying U.S. patent royalties on products they sell overseas.