Bad times for tech startups - great times for Patent trolls

It rests on just two words in an obscure federal law, but billions of dollars may hang in the balance.

U.S. software makers and Web site operators will find themselves in an unusual position this week: rooting for Microsoft Corp.

Today, the U.S. Supreme Court will hear arguments in Microsoft vs. AT&T, a complex transnational patent infringement case that the software industry says, if upheld, could threaten its business and drive thousands of jobs overseas.

Here are the bare bones. Windows has long included some sound recording and playback technology on which AT&T held a U.S. patent that was active until 2001. The companies reached a settlement on Microsoft's liability for all U.S. sales of Windows, but AT&T says Microsoft should also shell out for all the infringing copies of Windows sold overseas, and so far the courts have backed it up. Critics say Congress never intended U.S. companies to be held liable both here and abroad while foreign companies violating a U.S. patent would face damages based only on U.S. sales.

Companies that normally focus on thwarting the world's largest software company stand to benefit if it defeats AT&T Inc. in a U.S. Supreme Court case that may give software makers new protections from patent lawsuits on exported products.

AT&T won in the district court and the U.S. Court of Appeals, so Microsoft appealed to the Supreme Court.

The key to the decision will come down to an interpretation of section 271(f) of the U.S. patent statutes: if software is a ”component'' of AT&T's patented invention, and if Microsoft is a ”supplier'' to the foreign computer manufacturers. If Microsoft convinces the court that either one of those statements is false, then Windows software sold in computers overseas is not legally infringing on AT&T's patent.

Small companies whose patents are being infringed upon by gorillas like Microsoft could gain from a pro-AT&T ruling, although innovative start-ups might be litigated out of existence if sued for both their American and foreign operations.

If Microsoft does win the case, some say it's unlikely it will do so on its ``component'' argument, which essentially asserts that the 1s and 0s of software code are unpatentable, a controversial statement even in an industry frustrated by the headaches of decades of IP litigation.

``For small companies depending on venture capital funding based on software patents, if software all of a sudden was considered unpatentable, it might have a negative impact on VC funding,'' said Victor de Gyarfas, a partner and patent attorney in Foley & Lardner's Los Angeles office. ``A lot of big companies would be fine with that, though, as they worry about lawsuits from patent trolls.''