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Eolas Technologies, Inc. v. Microsoft, No. 04-1234

Export of “Golden Master” Containing Unpatented Source Code Creates Infringement Liability Under §271(f): $521 Million Royalty Award Upheld

The export of software that is a component of a patented combination creates infringement liability under 35 USC § 271(f) when a single copy of the software (a "golden master") is exported to OEMs who make multiple embodiments of the patented combination. Neither the Supreme Court’s decision in Deepsouth nor §271(f) is limited to physical components, and readily encompass steps of a patented method that employ software extraterritorially.

In Eolas Technologies, Inc. v. Microsoft, No. 04-1234 (Fed. Cir. March 2, 2005), the federal circuit affirmed the district court’s claim construction of certain terms in Eolas’ ‘906 patent and affirmed the district court’s holding that “components” under 271(f)(1) includes software code on golden master discs, but vacated and remanded for a new trial on the anticipation, obviousness and inequitable conduct issues.

Eolas’ ‘906 patent is directed to the use of a web browser in a fully interactive environment, e.g., a “distributed hypermedia environment.” At trial, Eolas sought damages for both foreign and domestic sales of Microsoft Windows with Internet Explorer. Microsoft moved to exclude a damages claim based on foreign sales under §271(f). Microsoft exports a limited number of golden master discs containing the software code for the Windows operating system to OEMs abroad who used the disc to replicate the code onto computer hard drives for sale outside the US. The district court concluded that the code on the golden master discs constituted a “component” of an infringing product for combination outside the US under §271(f), and after a jury trial, entered judgment for Eolas. Specifically, the court found that Microsoft failed to prove invalidity and inequitable conduct, and that Microsoft had literally infringed Claims 1 and 6 (and actively induced infringement of claim 1) of the ‘906 patent, entitling Eolas to a royalty of $521 million.

On appeal, the federal circuit reversed the district court determination that a certain prior art web browser had been abandoned under §102(g) simply because its originator (Wei) had later improved (and therefore changed) it before demonstrating it to third-parties. According to the court, creating an improved version of the invention does not abandon the original invention. The court also reversed the decision under §102(b) and held that disclosure of the prior art web browser to third parties who were not under obligation of secrecy to Wei may constitute a public use bar. The obviousness of the ‘906 patent claims was remanded for consideration in view of the court’s conclusion that the early version of Wei’s web browser had not been abandoned or suppressed. The court remanded the inequitable conduct issue on the same grounds, for reconsideration of Wei’s early version of his web browser as prior art in the analysis.

But the court affirmed the damages award based on extraterritorial use of source code in a product used in the method of the invention. Construing §271(f) as including every invention eligible for patent protection, the court reasoned that the “computer readable program code” of claim 6 is a component of the patented invention for several reasons: (1) the software code on the golden master was the “functional nucleus” of the finished product, and was a “key component” of the invention under the plain language of the statute; (2) sound public policy underlying TRIPS (according the same treatment to all forms of invention), combined with the fact that software and hardware can be interchangeable in software inventions counseled against a requirement that the component be purely "physical"; and (3) neither the legislative history nor the language of §271(f) imposed a “physical” limitation on the components of the invention.