Is software a tangible part of a computer, or just an intangible string of digital data?
It’s an arcane question that the Supreme Court is being asked to answer by two business giants, with U.S. software jobs potentially at stake.
The case, heard Wednesday, could carve out new ground rules for international patent disputes and double the damages owed by software makers who violate them.
The outcome also could determine whether companies shift software work overseas to avoid additional legal liability.
On one side is AT&T; Inc., which sued Microsoft Corp. in 2001 after Microsoft used the communication company’s patented digital speech compression technology in its Windows software without a license.
Microsoft agreed to settle in 2004 but only for domestic software sales. AT&T; had been seeking as much as $300 million, but settlement terms weren’t revealed.
At issue is a 1984 federal law aimed at preventing companies from circumventing U.S. patents by assembling products overseas using components that someone else invented.
The case is especially important for software companies, which sell about half their products abroad. Microsoft, supported by such companies as Yahoo Inc. and Intel Corp., contends that the law is aimed at traditional manufacturing, not the flow of information technology in a global economy.
Under AT&T;'s interpretation, “there’s a disincentive to doing research and development inside the U.S.,” said Emery Simon, counselor to the Business Software Alliance, which is backing Microsoft.
Microsoft’s attorney, Theodore B. Olson, told the justices that the law shouldn’t apply because the Windows software code sent to foreign computer makers wasn’t a physical component: It was just a series of digital data until placed on a disk or installed on a personal computer.
Even if it were a component, Olson argued, nothing shipped from the United States actually appeared in foreign computers. The Windows software for each machine was only a copy made from “golden master disks” or electronic versions sent from the United States.
But AT&T;'s attorney, Seth P. Waxman, argued that Microsoft was looking for an artful way to avoid paying damages for its foreign Windows sales. Even though the Windows software code is digital data, it still is an actual product, he said.
But several justices aggressively questioned AT&T;'s position, wondering whether calling copies of software computer components would extend the law to blueprints, DNA code and other information.
“The master disk functions like a blueprint,” Justice David H. Souter said. Three justices wondered whether software should even continue to be eligible for patents, but the court isn’t expected to decide that in this case.
The Bush administration sided with Microsoft. Although the government believes that software is a computer component, it bought Microsoft’s second argument that the copies of Windows installed on foreign computers were not shipped directly from the United States.
“You have to allow companies to send the design abroad so they can manufacture abroad,” Assistant Solicitor General Daryl Joseffer said.
At times, the justices appeared to struggle with technological terms such as CPU, RAM, electrons and photons that lawyers used to explain how computer software works.
Chief Justice John G. Roberts Jr. did not participate. The court gave no reason, but his most recent financial disclosure showed that he owned $100,001 to $250,000 in Microsoft stock.
The justices are expected to rule by the end of June.