AT&T v. Microsoft

A patent battle between two titans, AT&T and Microsoft, currently before the Supreme Court awaiting oral argument, raises the increasingly important question of the ability to U.S. federal courts to award damages for infringing activity that occurs overseas. The case is one principally of statutory interpretation, but the Solicitor General's brief on Microsoft's side is couched in policy terms. Those policy considerations may apply to copyright as well. This is a case well worth watching.

AT&T sued Microsoft in the SDNY for patent infringement of speech codecs, software that was embedded in the Windows operating system. Simplifying, Judge William Pauley found the codecs to infringe an AT&T patent and the question turned to damages, where the relevant dispute turned on whether AT&T could collect for overseas infringement facilitated by Miicrosoft's having sent master copies of the infringing disks (and in some cases electronically transmitting them) overseas, where they were then further disseminated. This issue turned on how to intepret 35 USC Section 271(f):

(1) Whoever without authority supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention, where such components are uncombined in whole or in part, in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.
(2) Whoever without authority supplies or causes to be supplied in or from the United States any component of a patented invention that is especially made or especially adapted for use in the invention and not a staple article or commodity of commerce suitable for substantial noninfringing use, where such component is uncombined in whole or in part, knowing that such component is so made or adapted and intending that such component will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.

Both Judge Pualey and the Federal Circuit (414 F.3d 1366) thought Microsoft's activity fit within the statute as a component. As I read the statute, though, it requires that there be things that aren't put together here, which are then shipped overseas, and put together there. I don;t think those are the facts. As I understand it - which may well be way off base), there was a single work created here and sent in its entirety overseas. if this is correct, then I don;t see how Section 271(f) applies.

There is no analog to Section 271(f) in the Copyright Act, but that hasn't stopped some courts from awarding damages for overseas conduct. Judge Learned Hand’s opinion in Sheldon v. MGM Pictures Corp., which involved the making of an infringing motion picture negative in the United States from which unauthorized foreign theatrical performances occurred is a foundational opinion. In developing a "constructive trust" theory in order to capture foreign proceeds, Judge Hand wrote:

The negatives were "records" from which the work could be "reproduced," and it was a tort to make them in this country. The plaintiffs acquired an equitable interest in them as soon as they were made, which attached to any profits from their exploitation, whether in the form of money remitted to the United States, or of increase in value of shares of foreign companies held by the defendants. We need not decide whether the law of those countries where the negatives were exploited recognized the plaintiff’s equitable interest; we can assume arguendo that it did not, for, as soon as any of the profits so realized took the form of property who situs was in the United States, our law seized upon them and impressed them with a constructive trust.

This passage is farfetched, to say the least. Judge Hand assumes that a foreign country would not recognize plaintiff’s claim to damages, but doesn’t matter because notwithstanding the non-extraterritoriality of the U.S. Copyright Act and a conflict with a foreign statute, U.S. law reached across the Atlantic Ocean, grabbed foreign proceeds, and brought them back to the United States, the alleged situs of the property. The "property," of course, is a claim to damages arising from conduct occurring overseas, governed entirely by a foreign law that Judge Hand assumes does not recognize the claim, and therefore denies the existence of the "property." Under these circumstances, calling an award of legal damages an equitable trust is sophistry: it is not only legal causes of action that are not extraterritorial under the Copyright Act, all elements of those cases of action, including equitable remedies, are non-extraterritorial.
The next important opinion is the Second Circuit’s opinion Update Art, Inc. v. Modi’in Publishing, Ltd. After correctly finding that damages are not available for foreign violations of the performance right, the Update Art court incorrectly held damages are available for certain foreign violations of the reproduction right:

It is well established that copyright laws generally do not have extraterritorial application. There is an exception – when the type of infringement permits further reproduction abroad – such as the unauthorized manufacture of copyrighted material in the United States . . ..
. . . As the applicability of American copyright laws over the Israeli newspapers depends on the occurrence of a predicate act in the United States, the geographic location of the illegal reproduction is crucial. If the illegal reproduction of the poster occurred in the United States and then was exported to Israel, the magistrate properly could include damages accruing from the Israeli newspapers. If, as appellants assert, this predicate act occurred in Israel, American copyright laws would have no application to the Israeli newspapers.

There is no basis in the statute for the court’s predicate act exception to extraterritoriality, an exception that is essentially an unarticulated application of contributory infringement: If the predicate act is itself non-infringing, as by definition it must be, how can it form the basis for subject matter jurisdiction in U.S. federal courts whose jurisdiction is limited by statute to adjudicating acts of infringement of title 17? Application of U.S. copyright damages to foreign conduct will very likely give rise to "unintended clashes between our laws and those of other nations which could result in international discord."

One might ask what harm there is of a U.S. court asserting jurisdiction over and awarding damages for foreign activity if that activity also violates the copyright law of that foreign country. The answer is that the harm is done to international relations by divesting foreign courts and legislatures over the right to determine the appropriate amount and type of damages, and harm is done to defendants, who may be required to pay greater damages than would be assessed had the case been brought under the laws of the proper jurisdiction. The U.S. Copyright Act does not make conduct overseas, or authorization here of conduct overseas, a violation of our statute. Thus, whatever may be the case in other fields of law, there is a statutory mandate to think local even if defendants act globally. Nor is this a quaint or parochial anachronism that can be safely disregarded by those who have a grander sense of justice than Congress: copyright is not extraterritorial precisely because it embodies important national views about how political and culture goals should be furthered. Until an international consensus develops on global jurisdiction – as the European Union regionally came to with the 1968 Brussels Convention on enforcing judgments – U.S. courts should decline the role of world enforcer of Copyright Americana.

But even if one wishes a court to ignore the statute under which it is deciding a case, there are likely to be cases where a defendant can assert at least a legitimate claim that its activity does not violate the laws of the foreign country. United States courts would then be required to evaluate the claim under foreign law: not an impossible task, to be sure, but an unnecessary one given the availability of adjudicating the foreign infringement in that foreign country. Even if the substantive law is the same, the remedies are not likely to be. It is certainly against principles of comity to willy-nilly award a plaintiff remedies against a foreign defendant that would not be imposed in the defendant’s country of origin. Should, for example, a foreign defendant be subject to the very generous and unique U.S. statutory damage provisions for engaging only in contributory infringement here, when the foreign country where the direct infringement occurred does not award such damages?

And there is another factor to consider for those who think only of litigation brought in the United States: why, under comity, should not foreign countries exercise similar power? In a case where the predicate act occurred in England but the direct infringement was in the United States, an English court, applying Update Art’s rationale, would be forced to deny a U.S. defendant his or her constitutional right to a jury to award the statutory damage amounts resulting from the U.S. infringements since English law does not recognize those damages or the right to a jury for their assessment. Before U.S. copyright owners rush to advocate a rule permitting the courts of the forum to award world-wide damages, they should consider the consequences of other countries applying their remedial provisions to conduct that occurs in the United States.