How Far Is Too Far? the United States Supreme Court Restrains the Extraterritorial Reach of 35 U.s.c. §271(f) Over Software Exports in Microsoft Corp. v. at and T Corp., 127 S. Ct. 1746 (2007)

• Publication year: 2021

87 Nebraska L. Rev. 301. How Far is Too Far? The United States Supreme Court Restrains the Extraterritorial Reach of 35 U.S.C. §271(f) Over Software Exports in Microsoft Corp. v. AT and T Corp., 127 S. Ct. 1746 (2007)

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Note(fn*)

How Far is Too Far? The United States Supreme Court Restrains the Extraterritorial Reach of 35 U.S.C. §271 (f) Over Software Exports in Microsoft Corp. v. AT and T Corp., 127 S. Ct. 1746 (2007)

TABLE OF CONTENTS

I. Introduction ...................................................... 302

II. Background ....................................................... 304 A. The Role of the Presumption Against Extraterritoriality in Statutory Interpretation ............... 304 1. The Presumption Against Extraterritoriality Applied to Congressional Legislation ....................... 304 2. The Presumption Against Extraterritoriality Applied to U.S. Patent Law ................................. 305 B. Congress Responds to Deepsouth Packing Co. v. Laitram Corp. .......................................... 309 1. Section 271(f)............................................. 309 2. Patent Infringement Liability Under Section 271(f)..................................................... 310 C. The Federal Circuit Extends Section 271(f) to Software Exports .............................................. 311 1. Eolas Technologies Inc. v. Microsoft Corp.: Software Is a Component Under Section 271(f)............... 312 2. AT and T Corp. v. Microsoft Corp.: Software Exporter Liable for Patent Infringement .................... 313 D. Microsoft Corp. v. AT and T Corp.: The Supreme Court Reverses the Federal Circuit ............................ 314

Copyright held by the NEBRASKA LAW REVIEW.

* Stephanie N. Mahlin, B.S., 2004, University of Nebraska-Lincoln, with highest distinction; J.D. expected 2010, University of Nebraska College of Law (NEBRASKA LAW REVIEW, Managing Editor, 2008); M.B.A. expected 2010, University of Nebraska-Lincoln. I would like to thank my parents, Richard and Cynthia Mahlin, for their encouragement and support.

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III. Analysis ........................................................ 318 A. Congress Should Not Impose Patent Infringement Liability for Software Exported on Golden Master Disks .............................................. 318 1. The Presumption Against Extraterritoriality Counsels Against Imposing Patent Infringement Liability ................................................. 318 2. Patent Infringement Liability Would Be Excessive ................................................. 320 3. U.S. Patent Holders Should Seek Protection Under Foreign Patent Law Systems .......................... 323 B. Section 271(f) Should be Maintained .......................... 325

IV. Conclusion ....................................................... 327

I. INTRODUCTION

Total software exports from the U.S. averaged approximately $3 billion per year from 1998 to 2002, making foreign software sales big business.(fn1) Companies commonly export their software using golden master disks, which foreign purchasers use to generate the number of software copies they need.(fn2) U.S. companies, however, had been operating under uncertain conditions regarding their potential liability for patent infringement arising from the exportation of software on golden master disks. Generally, liability for patent infringement is limited to activities that occur within the territorial jurisdiction of the U.S., but section 271(f) of the Patent Act is an exception.(fn3) Section 271(f) makes any exporter liable for patent infringement for "suppl[ying] . . . from the United States . . . components of a patented invention."(fn4) For software distributed to foreign buyers using golden master disks, it was not clear, until a recent Supreme Court decision, whether section 271(f) imposed liability when the exported software was used to create an invention protected by a U.S. patent in a foreign country. The issue of patent infringement liability for exported

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software generally arose as follows: (1) a U.S-based company exported software to a foreign buyer on a golden master disk, (2) the foreign buyer copied the software code onto computer-readable disks using the golden master disk, (3) the foreign buyer used the foreign-made copies to install the software code onto computers for sale outside the U.S., (4) the resulting computer and software combination potentially infringed on a U.S. patent, and (5) the U.S. patent holder brought suit against the U.S.-based company for patent infringement under section 271(f).(fn5) With over 230,000 software-related U.S. patents,(fn6) software exporters could potentially be held liable for actions of foreign buyers outside the U.S. In its 2007 decision in Microsoft Corp. v. AT and T Corp., the Supreme Court held that section 271(f) did not impose patent infringement liability on U.S. suppliers that export software from the U.S. on golden master disks.(fn7)

Section 271(f) is an exception to the presumption against extraterritoriality prevalent in patent law. The presumption provides that liability for patent infringement is limited to activities that occur within the U.S.(fn8) Congress enacted the section in response to a loophole exposed by Deepsouth Packing Co. v. Laitram Corp.(fn9)Deepsouth involved a U.S.-based exporter that had escaped patent infringement liability by exporting all the parts of a patented mechanical invention in separate boxes for assembly and sale exclusively outside of the U.S.(fn10) If the exporter had first fully assembled the patented invention within the U.S. before export, the exporter would have been liable for patent infringement. Similarly, U.S. companies that create a patented invention involving software within the U.S. and then export that invention would also be liable for patent infringement.(fn11)

Courts routinely applied section 271(f) to exported parts of patented mechanical inventions,(fn12) but did not generally apply the section to exported software that could be used to create a patented invention.(fn13) This changed in 2005 with AT and T Corp. v. Microsoft Corp. in which the Federal Circuit Court of Appeals found a company that exported software on golden master disks liable for patent infringement under section 271(f).(fn14) That decision exposed software exporters to

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unexpected potential liability. However, the decision did not stand long. The Federal Circuit's decision was reversed by the Supreme Court two years later in Microsoft Corp. v. AT and T Corp.(fn15) The Court based its decision primarily on its interpretation of section 271(f), but it also emphasized that the presumption against extraterritoriality in U.S. patent law encouraged reversal.(fn16) This decision clarified that section 271(f), in its current form, had limited applicability to software exports and left it to Congress to determine whether to create patent infringement liability for software exported on golden master disks.(fn17) Although such legislation would provide additional protection for U.S. patent holders, Congress should not enact legislation imposing patent infringement liability because the presumption against extraterritoriality counsels against it, U.S. software exporters could face excessive liability, and U.S. patent holders can pursue protection in the foreign countries where their patented inventions are likely to be sold.

This Note addresses whether Congress should impose patent infringement liability on U.S. companies that export software on golden master disks when the software is used to make and sell a U.S. patented invention in foreign countries. Part II of this Note focuses on the significant role of the presumption against extraterritoriality in statutory interpretation, the history of section 271(f) along with a discussion of the application of the section to software exports by the Federal Circuit, and the Supreme Court's opinion in Microsoft Corp. v. AT and T Corp. Part III discusses why Congress should maintain section 271(f) in its current form and not expand it to impose liability for software exported on golden master disks. Finally, Part IV of this Note concludes that Congress should not respond to Microsoft Corp. v. AT and T Corp. as it did to Deepsouth.

II. BACKGROUND

A. The Role of the Presumption Against Extraterritoriality in Statutory Interpretation

1. The Presumption Against Extraterritoriality Applied to Congressional Legislation

When interpreting Congressional legislation, courts generally apply a presumption against extraterritoriality.(fn18) The presumption is that the legislation applies only within the territorial jurisdiction of the U.S.; however, Congress can overcome this presumption by plainly indicating a contrary intent.(fn19) Courts apply the presumption for a couple of key reasons. First, it is a way to avoid the "international discord" that could result from "unintended clashes between our laws and those of other nations."(fn20) Second, under the doctrine of comity, it is a recognition of the interests of other nations.(fn21) The Supreme Court has defined comity in the following manner:

`Comity,' in the legal sense, is neither a matter of absolute obligation, on the one hand, nor of mere courtesy and good will, upon the other. But it is the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens, or of other persons who are under the protection of its laws.(fn22)

Courts, therefore, generally apply the presumption against extraterritoriality to avoid an unintended statutory interpretation that could conflict with other nations' laws or disregard the interests of other nations.

2. The Presumption Against...