Amicus Curiae Brief — Microsoft Corp. v. AT & T CORP.

Supreme Court brief2007

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No. 05-1056 iA Ny Z 22007

OFFICE OF THE cre; ,

IN THE | SUPREME couaT ae

—

Supreme Court of the United States

MICROSOFT CORPORATION,

Petitioner.

AT&T CORP.,

Respondent.

On Writ oF CERTIORARI

TO THE UNireD States CourRT OF APPEALS

FOR THE FEDERAL CIRCUIT

BRIEF OF U.S. PHILIPS CORPORATION AND

PHILIPS ELECTRONICS NORTH AMERICA

CORPORATION AS AMICI CURIAE

IN SUPPORT OF RESPONDENT

SSS a

Jack E. HAKEN Joun M. DiMatteo

EDWARD BLOCKER Counsel of Record

Priuips INTELLECTUAL PROPERTY EUGENE CHANG

& STANDARDS WILLKIE FARR & GALLAGHER LLP

345 Scarborough Road 787 Seventh Avenue

Briarcliff Manor, NY 10510 New York, NY 10019

(914) 945-6000 (212) 728-8000

Counsel for Amici Curiae

U.S. Philips Corporation and Philips Electronics

North America Corporation

January 23, 2007

QUESTIONS PRESENTED

(1) Whether digital software code—an intangible

sequence of “l’s” and “0Q’s’—may be considered a

“component[ ] of a patented invention” within the meaning

of Section 271(f)(1); and, if so,

(2) Whether copies of such a “component{ |” made in

a foreign country are “supplie[d] . . . from the United States.”

TABLE OF CONTENTS

QUES TIORNS PRESENTED. .......:.cccccovesseccseccsscacsesse i

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INTERES! OF AMICI CURIAE..............cccccscsesscosess l

SUMMARY OF ARGUMENT ...............02ceceeeeeeeeeeees 3

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1. If This Court Exempts Executable Software Code

From Section 271(f), It Would Improperly Favor

Software Companies Over Electronics Companies

In The Emerging Technology Landscape............ 7

Il. Executable Software Code, A Key Component

Of Most Electronic Devices, Is Supplied When

It Is Furnished To A User In An Intended And

NE MEIN cccicndedcdniadienepheestuecanataes 10

[1]. Liability For A Single Act In The United States

Properly Encompasses All Consequential

Damages, Including Foreign Sales.................. 18

IV. Software Companies Advocate Weak Protection

Overseas Because Software Piracy In Developing

Countries May Be Beneficial In The New

iii

TABLE OF AUTHORITIES

CASES

In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994)............0.0005 12

AT&T Corp. v. Microsoft Corp., 414 F.3d 1366 (Fed. Cir.

PIED nistscctcebaphadiedugdbimaiscbecienpinnaaehaniperde 17

AT&T Corp. v. Microsoft Corp., No. 01 Civ. 4872 (WHP),

2004 WL 406640 (S.D.N.Y. Mar. 5, 2004)............ 18

Datascope Corp. v. SMEC, Inc., 879 F.2d 820 (Fed. Cir.

eee cccinscoccndivsbdoddiieiaidadinedbibadinhedtendebeamis 20

Eolas Techs. Inc. v. Microsoft Corp., 399 F.3d 1325

NE Ts Sa ciblavidpnksarivadsndidéseadubuseivckindue 8

MGM Studios, Inc. v. Grokster, Lid., 125 S. Ct. 2764

Si cc tsivndsieiksbeitbauddababaidhiebunaindateddeapeubisin 12

Schneider AG v. SciMed Life Sys. Inc., No. 94-1317, 1995

U.S. App. Lexis 9754 (Fed. Cir. Apr. 26, 1995)...... 20

Sheldon v. Metro-Goldwyn Pictures Corp., 106 F.2d 45

CRE RO sivcksnckddauividaddekdusdetctdosendatesunatl 20

Update Art, Inc. v. Modiin Publ'g, Ltd., 843 F.2d 67

Sapa: SE adedh dadaibuisidanssndvnonseiscopseanenniin 20

STATUTES

FD Sein BET E GAOT Piccticantonspessnescecscencsceqetscosecssen 15

MISCELLANEOUS

Jane C. Ginsburg, Extraterritoriality and Multiterritoriality

in Copyright Infringement, 37 Va. J. Int'l L. 587

William M. Landes & Richard A. Posner, The Economic

Structure of Intellectual Property Law (2003)

swindle Gadisbehiee Bababbioneeneae puma maebencailicea 7, 14, 23, 24

Microsoft, Preinstalling Microsoft Windows XP

Professional by Using the OEM Preinstallation

Ek FE hy Sr arin tihed lnc diccrkekebins tocateeys 17

Richard A. Posner, Antitrust in the New Economy, 68

Antitrust L.J. 925 (2001).............cceeee eee e eee 22, 23

Richard A. Posner, The Law & Economics of Intellectual

Property, 131:2 Daedalus 5 (2002).................. 22

Richard A. Posner, Do We Have Too Many Intellectual

Property Rights?, 9 Marq. Intell. Prop. L. Rev. 173

INTEREST OF AMICI CURIAE!

With this appeal, software companies (and similarly

situated “new economy” companies) are seeking to have this

Court create an exception for software in 35 U.S.C. § 271(f).

Such an exception would unfairly favor the software industry

over traditional electronics hardware companies, such as

Philips. Furthermore, the interpretation sought by Microsoft

and its amici ignores the proper measure of damages, which

would include all foreign sales resulting from the infringing

act.

Amici curiae U.S. Philips Corporation and Philips

Electronics North America Corporation are part of the Philips

worldwide family of companies (“Philips”). Like other parts

_ of the Philips family, the amici curiae are wholly owned by

the Dutch parent company, Koninklijke Philips Electronics

N.V.

Philips has been inventing and manufacturing

electronic and electrical products for over 115 years, and is

one of the largest users of the patent systems in the United

States and other industrialized countries. Last year Philips

filed U.S. patent applications for about 3,000 new inventions.

Scientists and engineers at our U.S. laboratories have made

pioneering advances in the fields of high definition

television, optical CD and DVD recording, digital cellular

telephones, medical imaging, and digital rights management.

' Amici curiae submit this brief with the written consent of the parties, as

reflected in letters filed with the Clerk of this Court. No counsel for a

party authored this brief in whole or in part, and no person or entity other

than amici curiae and their counsel has made a monetary contribution to

its preparation or submission.

Section 271(f) allows us to protect our intellectual property

rights when American-based companies export specialized

components and parts kits for assembly in countries that

currently do not have useful patent enforcement systems,

particularly China, Taiwan, Korea, and India.

Section 271(f) was enacted by Congress more than 20

years ago to plug a loophole that had allowed American

companies to avoid liability for patent infringement by

creating the essential components of a patented invention in

the U.S., but assembling the device overseas. In the decision

currently on appeal, the United States Court of Appeals for

the Federal Circuit confirmed that Section 271(f) applies to

software components as well as hardware components. If

this Court reverses that decision and exempts software

components from the protection of Section 271(f), it will

weaken the patent protection for many of our most

innovative products.

For example, Philips invented the optical recording

technology that enabled development of the CD and DVD

industries. When Philips started licensing this patented

technology, the technology was implemented as hardware

circuits in disc drives and recorder sets. Today the .ame

technology is implemented through PC software that is

distributed over the Internet and through firmware’ that is

stored in semiconductor memory chips.

Another example is speech and image coding

technology. Philips invented important speech and image

? Firmware is software that is imbedded into an electronic device. It can

be installed and upgraded like any other software.

coding methods and devices that we license to manufacturers

of cellular telephones, digital cameras, and set-top boxes.

Today, American-based companies are the primary

developers of the application and operating system software

that controls the hardware and implements the coding

methods. These companies often export software code on

master disks or as firmware on semiconductor memory chips,

and they distribute upgrade software over the Internet and

cable television networks.

The list of pioneering hardware inventions now

implemented through software goes on and on. If this Court

reverses the decision currently on appeal, it will create an

exception for software code that will allow infringers to

avoid paying appropriate damages by implementing their

device in software and moving the final assembly step—

installation of the software—overseas. That result is neither

fair nor justifiable.

SUMMARY OF ARGUMENT

On its face, this would appear to be an appeal

centered on the abstract statutory construction of two words:

“component” and “supply.” Appearances are deceiving. In

reality, the interpretation argued by Microsoft and its amici

would create an exception that favors the software industry

over other industries, including traditional electronics

hardware companies.

This case involves economic and technical issues at

the heart of the new economy, particularly the convergence

* Philips holds patents on codecs that are similar to the patents involved

in the case currently on appeal.

of hardware and software devices. Over the past decade,

software has become increasingly interchangeable with

hardware, particularly in the fieid of consumer electronics.

Traditional electronics hardware companies have

relied on Section 271(f) to protect their intellectual property

for over 20 years. Software companies typically have also

been proponents of strong patent protection—at least for

software and business methods. Now that they compete

directly with electronics hardware companies, however, these

same software companies seek to avoid paying proper

damages by creating an exception for software code from the

protection of Section 271(f). If this Court rules in their favor,

it will favor software companies over hardware companies in

this emerging competitive landscape.

Microsoft and its amici raise two main arguments to

try to convince this Court to exclude software code from the

scope of Section 271(f). First, they argue that executable

software code can never be a “component” of a patented

invention, even though the software is an essential part of

most electronic devices. Second, they argue that the software

is not “supplied” from the United States, even though the

executable code is created here in its final form, and then sent

overseas with the intent that it be installed without

modification onto the infringing products. Neither of these

arguments has merit.

To argue that software is not a component under

Section 271(f), Microsoft and its amici present this Court

with a series of far-fetched hypothetical situations and bizarre

“molecule” tests. These arguments blithely ignore how

software is developed, used, and distributed in the real world.

At minimum, when software substitutes directly for, and has

the same technical effect as, a piece of specialized hardware,

it must be a component just as is the specialized hardware.

Like other software companies, Microsoft intended to

supply the executable software code at issue in a standard,

customary manner. Everyone with a “Windows” certificate

of authenticity knows that the executable software code on

that computer was supplied by Microsoft, regardless of how

many secondary copies were made during installation and

assembly.

Lost in the pages of arguments made by Microsoft

and its amici is the real issue in this case: the proper measure

of damages. Once a company supplies a software component

to foreign installers in the same way that it supplies that

component to U.S. installers, the proper measure of damages

includes all the consequent foreign sales. It is irrelevant

whether the company supplies the component on a golden

master disk or over the Internet. When a software company

supplies the executable code that is used to create multiple

infringing devices, it should be held liable for all attendant

damages flowing from that act. Thus, it should pay damages

for each of the infringing devices sold abroad.

Contrary to the arguments of Microsoft and its amici,

software companies do not face endless liability for

infringing devices that are created abroad. Their liability is

bounded by their own intent-—when they send software

abroad with the intent that it be installed on multiple

infringing devices, they owe damages for all of those

devices, no more, no less. Both patent law and copyright law

already allow damages for foreign sales involving

multiterritorial acts of infringement. There is no reason to

create an exception for Section 271(f).

Microsoft and its amici also argue that the entire U.S.

software industry will move its research and development

overseas if they have to pay damages for infringing foreign

sales under Section 271(f). This scenario—positing a

wholesale exodus based on liability under a single section of

the infringement statute—is implausible at best. In fact, new

economy software companies benefit from strong intellectual

property protection and are not likely to move to countries

with weaker intellectual property systems. The patentability

of software has been a contentious issue in Europe, and it is

hard to believe that U.S. software companies will move to

countries where they might not be able patent their software

at all, just to sell a product abroad that they cannot sell ‘n the

U.S. It is « ven less likely that they will move to countries

with less-developed intellectual property regimes, such as

China.

ARGUMENT

I. If This Court Exempts Executable Software Code

From Section 271(f), It Would Improperly Favor

Software Companies Over Electronics Companies

In The Emerging Technology Landscape

The worlds of electronic hardware and software are

colliding. Traditional electronics hardware companies, like

Philips, have relied on Section 271(f) for over 20 years to

provide proper protection of their intellectual property from

other hardware companies. Over the past decade, however,

competition in the electronics industry has shifted to include

“new economy” companies, whose primary outputs are

intangible, such as computer code, rather than physical

goods. See William M. Landes & Richard A. Posner, The

Economic Structure of Intellectual Property Law 390 (2003).

The new economy includes companies like Microsoft, Intel,

AOL, and Amazon.com. /d.

Now that new economy software companies compete

directly with traditional electronics companies, they want this

Court to carve out an exception from Section 271(f) for

executable software code. If this Court does so, it will

improperly favor software companies over hardware

companies in the emerging technology landscape.

There are two major changes that have affected the

electronics industry during the past decade and that make

Section 271(f) so important to hardware companies. The first

change is a well-recognized shift of high-volume electronics

manufacturing from the United States to overseas contract

facilities. Although the United States is no longer a

competitive site for manufacturing this equipment, the U.S.

remains a primary locale for the development of technology

and essential components that are exported overseas for

assembly. Royalties on exports of patented technology are a

significant reason why U.S. innovation continues to flourish

and why the U.S. domestic research establishment remains

competitive in the global marketplace.

The second change is perhaps not as visible as the

first. In 1990, almost all consumer electronic devices were

implemented in separate specialized sets as combinations of

hardware circuit elements. For example, televisions, VCRs

and telephone answering machines were produced and

marketed in separate boxes and often via different selling

channels. Today those same technical functions are usually

implemented in software that is installed on a small number

of common multiuse hardware platforms. Personal

computers and PDAs use software to provide audio and

video recorder functionality. Cellular telephones contain

software functionality for cameras, music players and, soon,

television players.

In this context, the boundary between hardware and

software becomes fuzzy. Software and firmware code

effectively reconfigures generic hardware circuits to perform

technical functions that were formerly achieved in fixed

circuitry. Hardware and software now “are practically

interchangeable in the field of computer technology. On a

functioning computer, software morphs into hardware and

vice versa at the touch of a button. In other words, software

converts its functioning code into hardware and vice versa.”

Eolas Techs. Inc. v. Microsoft Corp., 399 F.3d 1325, 1339

(Fed. Cir. 2005) (internal citation omitted).

Failing to apply Section 271(f) to executable software

or firmware code will allow infringers of patents on

electronic devices to escape liability simply by implementing

their design in executable software or firmware code and

installing the code overseas.

In the past, if an electronics company manufactured

specialized hardware components in the United States and

shipped them overseas for combination with other

components to create an infringing device, that company was

clearly liable under Section 271(f). Today, a software

company could take the same functionality and implement it

through software or firmware code, put the executable code

onto a golden master disk, and ship the code overseas to be

installed onto hardware.

The end result is the same—overseas assembly of an

infringing product from components made in the United

States. Accordingly, the U.S. creator of an essential part of

an invention, whether it is implemented in hardware or

software, should be liable under Section 271(f) in both

circumstances. If this Court decides otherwise, then Section

271(f) effectively will not apply to any industry where the

line between hardware and software has blurred. There is no

reason to create such an exception for software in Section

271(f).

Il. Executable Software Code, A Key Component Of

Most Electronic Devices, Is Supplied When It Is

Furnished To A User In An Intended And

Customary Manner

A. Executable Software Code Is As Much A

Component of Electronic Devices As

Hardware

Given the convergence of electronic hardware and

software in the new economy, it would be ironic for the

Court to artificially redraw a line that advances in technology

have already erased. Section 271(f) does not limit

“components” to machines or physical _ structures.

Executable software or firmware code can be a component of

a patented invention for purposes of Section 271(f). In fact,

executable software code is such an essential part of modern |

electronic devices that it is the primary component of many

products today.

This does not mean that every computer program is a

component of a patented invention. But a program that has

the same technical effect as an electronic hardware

component surely is. In particular, there are two factors that

illustrate that executable software or firmware code is in fact

a component of a patented invention.

First, executable code is distributed in its final form

such that it cannot be changed. The software developer

designs the software in the form of source code, and then

fixes it in an executable form by compiling it. The act of

compiling manufactures the executable code. In order to

modify the executable code, it must be decompiled,

modified, then recompiled—a process similar to using a

sample to manufacture new copies of a gear. Although the

software developer may allow the installer to customize

certain parameters, the installer is not allowed to modify the

executable code. For example, Microsoft requires original

equipment manufacturers (“OEMs”) to attach a Certificate of

Authenticity to each fully assembled computer system.* This

certificate assures customers that they have acquired

“genuine Microsoft Windows software.”° Thus, each

consumer receives the same executable Windows software

code that was compiled in the United States, regardless of

where the computer hardware was manufactured or how

many secondary copies were created along the way.

Second, executable code is what gives technical

hardware its functionality. The hardware will not work

without the software and the software will not work without

the hardware. That is what makes each of them a component

of a patented invention. Both components are necessary—

the installation of the software component onto the hardware

component is what creates the infringing device. Moreover,

executable software code can substitute for, and have the

same technical effect as, specialized hardware in an

electronic device. Installing software or firmware onto

hardware “creates a new machine, because a general purpose

computer in effect becomes a special purpose computer once

it is programmed to perform particular functions pursuant to

* See Microsoft OEM System Builder License § 7,

http://oem.microsoft.com/downloads/Public/sblicense/English_SB_

License.pdf (last visited Jan. 22, 2007).

° Certificate of Authenticity,

http://oem.microsoft.com/scriptsites/public/certificate_of_authenticity.

htm (last visited Jan. 22, 2007) (emphasis in original).

instructions from program software.” In re Alappat, 33 F.3d

1526, 1545 (Fed. Cir. 1994). When executable software code

provides the same technical effect as specialized hardware,

the code is just as much a “component” of an infringing

device as the specialized hardware itself was in the past.

This Court’s Grokster decision further supports

treating hardware and software interchangeably. Drawing

extensively from patent law decisions involving hardware

devices, this Court found copyright liability for distribution

of a device “with the object of promoting its use to infringe

2764, 2780 (2005). However, the “device” in Grokster was

software, not hardware. /d. at 2782 (“the inducement theory

of course requires evidence of actual infringement by

recipients of the device, the software in this case”).

In Grokster, this Court did not hesitate to apply

traditional principles of patent law to a new mechanism for

software and not by hardware. If this Court will adopt

principles of patent law and apply them to software in

software in an actual patent case.

Against the background of the convergence of

hardware and software, Microsoft and its amici raise two

main arguments in favor of creating an exclusion for

software in Section 271(f): that executable software code is

actually mere “design information” and that software must be

fixed in a particular physical medium to be a component.

As discussed previously, the primary output of new

economy software companies is intangible intellectual

property. This is what they protect with their own software

patents. It is incorrect for Microsoft and its amici to

continually refer to software code as mere “design

information,” similar to a mold, blueprint, or specification.

The executable code of Windows, for example, is not just an

abstract idea or design information, it is functioning software

that actually operates the computer—that is why it is called

the computer’s operating system.

This is very different from the use of a mold or

prototype of a physical component. Creation of a component

based on a mold or specification requires the use of

additional materials to create a replic. of the component.

The mold itself is nonfunctional—it is only used to guide the

manufacture of actual functional components. In contrast,

the golden master disk contains the actual executable

Microsoft Windows software code, which Microsoft intends

to have installed on each computer. The executable software

code is not design information. It is not a recipe or set of

instructions for assembling a computer, or a blueprint for

building a hard drive, or the CAD/CAM specifications for

building a machine. The executable code is itself a

component that is combined with the hardware to create each

infringing computer. Whether or not the golden master itself,

or a duplicate of the golden master, or a stream of bits sent

over the digital transmission wire is used to install the

software, the executable software code is the same.

Similarly, the executable software code is a

component irrespective of its packaging. Just as gears and

chips are supplied in customary packaging when shipped to

the customer, software is likewise packaged in various

physical media. For example, the installation CD is just such

a package for transporting the executable software code—

once the software code is installed, the disk is removed. A

permanent physical union of an installation disk and a

computer never occurs when installing software. Imagine a

customer buys a copy of Microsoft Word at the local

computer store. When the customer takes the disk home and

installs the software, the disk itself does not become part of

the computer; it is removed when the installation is complete

and the software code has been transferred. No “molecules”

from Méicrosoft’s headquarters merge with the user’s

personal computer. See Amazon Brief at 3. Yet it is clear

that the executable software code on the computer is the code

that was written and compiled by Microsoft.

The same would be true if the user downloaded the

software over the Internet and did not purchase a CD at all.

The intellectual property created by new economy companies

“may be shipped on a disk or other physical product,” but

that is not necessary, and “software is increasingly shipped to

the purchaser over the Internet.” Landes & Posner at 390. If

the code were distributed over the Internet, that would

obviously not turn the Internet into a “component” of the

patented invention either.

B. A Software Component Is Supplied When

It Is Furnished To A User In An

Authorized And Customary Manner

Once it is clear that the executable software code can

be a component of a patented invention, the proper inquiry is

to determine whether the code was supplied to a user “in

such manner as to actively induce the combination” of the

executable software code with other components outside of

the United States “in a manner that would infringe the patent

if such combination occurred within the United States.” 35

U.S.C. § 271(f)(1) (2007).

Whether a component is “supplied” must be viewed

in context. The properties of a component may dictate how it

is supplied to customers. For example, liquid components

may be supplied in containers, or perhaps through pipelines.

In each case, the most relevant inquiry is to look at the

customary methods by which a seller furnishes a component

to a buyer in that industry.

In the new economy, intangible intellectual property

products, such as executable software code, are often

furnished by providing one physical copy of the product (or

an Internet download) along with a license to install that

product on more than one machine. The number of products

“supplied” is the number of products authorized or licensed

for installation. A software license, not possession of a

physical disk, is what gives a user the right to run a program

or transfer it to others.” For example, a company with five or

more employees can purchase software from Microsoft under

a Volume License Agreement. The general license terms for

Microsoft Windows XP Professional allow the company to

“store one copy of the software” on a network server and

® See How to Buy Overview,

http://www. microsoft.com/licensing/options.mspx (last visited Jan. 22,

2007).

“use that copy to install the software on any other device to

which a license has been assigned.”

If a software company furnishes a business with one

software CD and permission to install that software on five

hundred computers via the network, that software company

has supplied its customer with executable software code for

five hundred computers, not one. In fact, the software has

been supplied in the most efficient, customary way. Neither

party wants the software company to supply the executable

code on five hundred separate CDs. As Microsoft points out,

“authorized copying is inherent in the distribution of

software.” Microsoft Br. at 17. As a copyright holder,

Microsoft has the exclusive right to prevent copying. Jd. at

19 n.4. But when Microsoft furnishes the executable

software code, intends for it to be copied, allows it to be

copied, and gets paid for the copies, then Microsoft supplied

those copies of the executable software code.

Furthermore, the number of physical disks and

secondary copies involved in the installations is irrelevant to

the users of the software. Does anyone who buys a computer

with an official “Microsoft Windows” certificate of

authenticity have any doubt that Microsoft supplied the

executable software code? Microsoft’s instructions to OEMs

on how to install Windows illustrate that a physical disk is

not necessary, or even desired, for the installation of the

Windows operating system. Microsoft describes four

’ Microsoft Desktop Operating Systems, Section A(II\(a),

http://www. microsoftvolumelicensing.com/userights/ProductPage.aspx?

pid=91 (click hyperlink which states “Standard Terms for Windows XP

Professional, when licensed in a Microsoft Desktop Operating Systems

model”) (last visited Jan. 22, 2007) (emphasis added).

different ways OEMs can preinstall Windows onto personal

computers. Microsoft, Preinstalling Microsoft Windows XP

Professional by Using the OEM Preinstallation Kit, Part I,

2003, at 3. The recommended way is to fully install the

software on one computer and then take an “image” of that

first computer and install the image onto all of the other

computers over the network. Jd According to Microsoft,

this method is “faster and less cumbersome than the other

models.” /d. In fact, using the CD to manually install the

software is the lowest-rated option because it is “slow and

inefficient.” Id. at 5 & 7.

Thus, new economy software companies like

Microsoft rely on the fact that software can be supplied in

many different ways, most of which are more efficient than

manually using a separate CD for each computer. As the

panel majority pointed out in the decision currently on

appeal, “Microsoft has taken full advantage of the replicable

nature of software to efficiently distribute Windows™

internationally. At the same time, however, Microsoft posits

that § 271(f) liability should attach only to each disk that is

shipped and incorporated into a foreign-assembled

computer.” AT&T Corp. v. Microsoft Corp., 414 F.3d 1366,

1370 (Fed. Cir. 2005) (emphasis added). But the customary

ways in which software is supplied do not require a separate

disk for each installation—the executable software or

firmware code for many machines can be furnished on one

physical medium, such as a CD, or on none at all.

If Microsoft did provide OEMs with multiple

operating system CDs and the OEMs installed each CD

manually, then there is no doubt that Section 271(f) would

apply. Microsoft conceded that fact in the district court.

AT&T Corp. v. Microsoft Corp., No. 01 Civ. 4872 (WHP),

2004 WL 406640, at *7 n.7 (S.D.N.Y. Mar. 5, 2004). The

result should be the same if Microsoft provides the

executable software component on one golden master CD

and authorizes, licenses, and instructs the OEMs to install it

on multiple computers. Whether liability attaches under

Section 271(f) should not depend on which installation

method the OEM chooses.

lil. Liability For A Single Act In The United States

Properly Encompasses All Consequential

Damages, Including Foreign Sales

Lost in the pages of argument over convoluted

interpretations of liability is the real issue: the proper

measure of damages. Once a company supplies software

components to foreign manufacturers in the same way that it

supplies them to U.S. manufacturers, proper damages include

foreign sales.

When a software company supplies executable

software code components—even with a single act of

sending a golden master disk or digital transmission—it

should be held liable for all attendant damages. Software

companies like Microsoft supply golden master disks with

the knowledge and intent that the executable software code

on those disks will be installed onto multiple hardware

devices and sold overseas. Thus, those companies should

pay damages for every infringing device that would not have

been sold abroad but for their acts of supplying.

Microsoft and its amici contend that they will face

endless liability if this Court does not create an exception for

software in Section 271(f). But software companies do nof

face endless liability for the software components they have

supplied—they only face liability for the number of copies

they intend to be installed. This is the same liability they

would face if the installation had occurred within the United

States. For example, if Microsoft is liable for “tens of

millions of foreign-produced” copies of Windows (Microsoft

Br. at 24), that is only because it authorized and licensed the

foreign OEMs to install Windows on tens of millions of

computers, for which Microsoft will receive royalty

payments.*

This outcome reflects the realities of software

distribution in the real world. Even if a software company

only sends one golden master CD abroad, foreign OEMs do

not pay for only one copy of the software, as would a regular

consumer purchasing a single copy of a software product.

The OEMs pay for the executable software code to install on

thousands of infringing devices. Thus, the appropriate

measure of damages is not just for a single sale of one copy

of the software. If a software company like Microsoft gets

paid for each and every infringing computer that is created

from that one golden master disk, it must also pay the

consequential damages that flow from supplying that disk.

* In fact, as discussed infra in Section IV, if a new economy software

company tactically encourages pirated copies of its software to be created

and distributed so that it can establish or maintain a network monopoly, it

can be liable for those copies as well. Even in that case, however, the

company’s liability is still limited by its intent.

Both patent law and copyright law already allow a

plaintiff to collect damages for all of the consequences that

flow from an infringer’s actions, including foreign sales.

Patent law allows a plaintiff to collect damages for foreign

sales when infringing devices are made in the United States

and sold abroad. See Datascope Corp. v. SMEC, Inc., 879

F.2d 820, 827 (Fed. Cir. 1989); Schneider AG v. SciMed Life

Sys. Inc., No. 94-1317, 1995 U.S. App. LEXIS 9754, at *9

(Fed. Cir. Apr. 26, 1995) (nonprecedential opinion).

copies when the master copy was created in the United

States. See Update Art, Inc. v. Modiin Publ’g, Ltd., 843 F.2d

67 (2d Cir. 1988); Sheldon v. Metro-Goldwyn Pictures Corp.,

106 F.2d 45, 52 (2d Cir. 1939).

Microsoft and its amici argue that applying the proper

measure of damages would extend the extraterritorial reach

of U.S. patent laws because the damages must be calculated

by looking at the number of sales made abroad. See, e.g., Br.

of Intellectual Property Professors at 6-7. But “[a] claim is

not ‘extraterritorial’ simply because it involves foreign acts

or parties” and courts “may be too quick to perceive ‘extra’-

territoriality in claims that in fact allege multiterritorial

infringements [that] involve acts or parties located in more

than one country.” Jane C. Ginsburg, Extraterritoriality and

Multiterritoriality in Copyright Infringement, 37 Va. J. Int’!

L. 587, 588 (1997).

The executable software code is developed in the

United States and sent overseas for installation with

authorization from the United States software company.

Requiring the infringer to pay damages for such a

multiterritorial act, which has its origin in the United States,

does not extend the extraterritorial reach of U.S. patent law.

Microsoft and its amici also argue that the entire

software industry will move its research and development

facilities overseas if they have to pay damages on foreign

sales under Section 271(f). This scenario is implausible at

best.

Because their primary output is intellectual property,

new economy software companies benefit from strong

intellectual property protection and are not likely to move to

countries with weaker protection just to avoid application of

Section 271(f). The patentability of software has been a

contentious issue in Europe. It is very hard to believe that a

U.S. software company would move to a country where it

might not be able to patent its products at all, just to avoid

one section of the U.S. patent law. It is even less likely that

software companies will move to countries with less-

developed intellectual property regimes, such as China.

New economy software companies could achieve cost

savings by moving their development and production

facilities overseas, but they have chosen to remain in the

United States and have flourished here, in no small part

because the copyright, trade secret, and judicial processes in

the United States provide strong and effective protection for

the intellectual property content of software products. There

is no justification for letting such companies enjoy the

benefits of our strong intellectual property system for their

own products while, at the same time, allowing them to avoid

paying damages for infringing other companies’ patents

when those same products are exported.

IV. Software Companies Advocate Weak Protection

Overseas Because Software Piracy In Developing

Countries May Be Beneficial In The New

Economy

Given the important role that patents play in

encouraging innovation, it may seem surprising that software

companies are arguing for /ess patent protection for software.

Why would companies with numerous software patents argue

for an exemption that would also result in less patent

protection in countries with weaker intellectual property

rights? The answer lies in the economic nature of new

economy software markets, particularly the monopolies that

exist in these markets.

Software markets exhibit a unique combination of

economic factors. First, intellectual property is characterized

by high fixed costs relative to marginal costs; for computer

software the marginal cost approaches zero. Richard A.

Posner, Antitrust in the New Economy, 68 Antitrust L.J. 925,

926-27 (2001). In fact, the marginal cost can actually be

negative. Richard A. Posner, The Law & Economics of

Intellectual Property, 131:2 Daedalus 5 (2002) (“Indeed,

widespread use of intellectual property can actually increase

the value of the property; in effect, additional copies have

negative cost, when the value they confer is taken into

account.”).

Second, many computer software products,

particularly operating systems and design products like

AutoCAD, are characterized by network effects. Network

effects occur in markets where the larger the firm’s output,

the more valuable that output is to its customers. Posner,

Antitrust in the New Economy, at 928. Computer software

products become more valuable as more people use them,

because of training, support, and standardization of

equipment and procedures. Jd.

Third, intellectual property is a public good. A public

good is something that one person can use without reducing

the value of the product to other users. Richard A. Posner,

Do We Have Too Many Intellectual Property Rights?, 9

Marg. Intell. Prop. L. Rev. 173, 178-79 (2005). Thus,

“piracy” of intellectual property is not really like theft of

physical property. Jd. If someone makes a pirated copy of

the Windows operating system, for example, the program is

still there for Microsoft to sell to others. Jd at 179. If the

‘software pirate could not have afforded to purchase the

software, then Microsoft has not actually lost any sales. Jd.

In fact, if only a few of the people who copy an operating

system would have bought it, Microsoft benefits from the

piracy because the more people who use the operating

system, the more people who need applications for it. Jd.

The interplay of these economic factors explains why

software companies like Microsoft are willing to tolerate, or

perhaps even encourage, software piracy. As Landes &

Posner point out, “[e]ven pirating of software, about which

the software industry complains so loudly, is not all loss to

software producers.” Landes & Posner, supra, at 46.

In other words, the existence of pirated software

increases demand for complementary products. /d For

example, the proliferation of pirated copies of Windows may

benefit Microsoft and other software companies who write

applications that run on the Windows platform. In addition,

“(bly accelerating the spread of the work” to more users

“piracy may help the creator of the work to obtain a network

monopoly.” Jd Software piracy can actually help the

producer of the pirated software by increasing the network

externalities of the dominant firm. Jd. at 393.

Since Microsoft and its amici do not need the

protection of Section 271(f), they would like this Court to

create an exception for the entire software industry. If this

Court does so, it will improperly favor new economy

software companies over traditional electronics companies

who rely on the protection of Section 271(f) to recoup their

research and development costs.

CONCLUSION

The judgment below should be affirmed.

Respectfully submitted,

Jack E. Haken John M. DiMatteo

Edward Blocker Counsel of Record

PHILIPS INTELLECTUAL Eugene Chang

PROPERTY & STANDARDS WILLKIE FARR &

345 Scarborough Road GALLAGHER LLP

Briarcliff Manor, NY 10510 787 Seventh Avenue

New York, NY 10019

Counsel for Amici Curiae U.S. Philips

Corporation and Philips Electronics North

America Corporation

January 23, 2007

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This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.