WASHINGTON - A lawyer for AT&T argued before a skeptical Supreme Court on Wednesday that Microsoft Corp. is violating one of its patents when it sends its Windows software overseas to be copied and placed on personal computers.
The case has implications beyond the technology sector and, depending on the outcome, could encourage U.S. manufacturers to establish more research and development facilities abroad.
Microsoft acknowledged that it violated AT&T's patent on speech encoding technology when it sold Windows in the United States, but disputes that it should be held responsible for infringement when the software is copied by foreign computer manufacturers.
Justice Stephen Breyer expressed sympathy for Microsoft Corp.'s argument, suggesting AT&T Inc. should pursue its infringement complaint in overseas markets where the copies are made.
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"The whole question here is whether (the company) has to get a patent" abroad, Breyer said.
At issue in the dispute is a section of patent law that bars companies from shipping components of a patented invention overseas for assembly. The intent of the provision, which became law in 1984, was to prevent companies from circumventing patents by sending parts offshore to assemble them in a way that would infringe the patent in the United States.
Two lower federal courts ruled in favor of AT&T. The Supreme Court is expected to decide the case by July.
AT&T's lawyer, Seth P. Waxman, argued that the patent law "does not reach what anybody does overseas." Instead, Waxman said, Microsoft violated the law when it sent its software from the United States to other countries to be "installed and stored in foreign computers."
Microsoft's lawyer, Theodore B. Olson, countered that the company's software is not a component until it is placed on a computer's hard drive or optical disc and can actually be used by a computer.
"It is our position that the only components in this case are the physical manifestations" of the software, Olson said. It is the foreign manufacturer that produces those components, he added, not Microsoft, which only sends a master version of its software overseas.
The Court of Appeals for the Federal Circuit, which was set up to consider patent cases, ruled for AT&T in 2005.
Olson said if that ruling was allowed to stand, any company that designed products in the United States and sent them abroad to be manufactured could be held liable for the copies made overseas.
Such an interpretation would affect a broad range of industries, he said.
"It might be a pill, it might be a mousetrap, it might be a Buick," Olson said.
In addition, if U.S. patent law is applied internationally to products developed in the United States but manufactured overseas, Microsoft said, then many corporations will have an incentive to move their research and development functions offshore as well.
High-tech companies and trade associations, such as Yahoo! Inc. and the Business Software Alliance - as well as the U.S. government - expressed similar concerns in friend of the court briefs.
U.S. Solicitor General Paul Clement, the government's top Supreme Court lawyer, largely sided with Microsoft in a brief that urged justices to take the case.
The section of patent law in question, Clement said, "permits the manufacture and assembly of identical components overseas - conduct that is properly the domain of other nations' patent laws."
Justice Antonin Scalia, meanwhile, noted that the companies have reached a financial settlement in the case and wondered if that made the arguments before the court moot.
The court generally does not consider cases if the parties have settled their dispute.
Olson said the case still presents the court with a "very significant legal question" and added that significant financial sums are at stake.
Chief Justice John Roberts did not participate in the oral argument. Roberts owns shares of Microsoft, according to the court's financial disclosure forms.
The case is Microsoft Corp. v. AT&T Inc., 05-1056.
Shares of Microsoft rose 52 cents to close at $29.35 in afternoon trading on the Nasdaq Stock Market, while shares of AT&T dropped 15 cents to $37.21 on the New York Stock Exchange.