updated 4/30/2007 11:40:59 AM ET 2007-04-30T15:40:59

The Supreme Court sided with Microsoft Corp. on Monday in a case that restricts the reach of U.S. patents overseas.

In a 7-1 decision, the court found that Microsoft is not liable in a patent dispute with AT&T.

The decision could impact other lawsuits against Microsoft and save the company billions because of the global scope of its operations.

(Msnbc.com is a Microsoft-NBC Universal joint venture.)

AT&T had sued Microsoft, alleging computers running the Windows operating system infringe on an AT&T technology that compresses speech into computer code.

AT&T said it is entitled to damages for every Windows-based computer manufactured outside the United States which uses the digital speech coder system.

Microsoft acknowledged violations in the United States regarding the AT&T patent, while insisting the infringement should not be extended internationally.

AT&T said Microsoft ran afoul of a 1984 law making it patent infringement for a company to ship components of a patented product to a foreign country for assembly there.

Microsoft ships its Windows-operating system to foreign countries on master disks or via electronic transmissions. That data is copied by foreign companies which install it on the computers they manufacture.

“The presumption that United States law governs domestically but does not rule the world applies with particular force in patent law,” Justice Ruth Bader Ginsburg wrote in the majority opinion.

Neither Windows software nor a computer standing alone without Windows installed infringes AT&T’s patent, Ginsburg added.

U.S. patent law is inapplicable to the export of blueprints and there is no reason to think that Congress intended “to place the information Microsoft dispatched from the United States in a separate category,” Ginsburg wrote.

The Bush administration supported Microsoft in the case.

Microsoft and the Bush administration say computer code is not a component until it is copied onto a hard drive or installation disk.

Copying parts abroad for assembly and sale abroad is properly the subject of foreign law, the Justice Department solicitor general’s office told the court.

In a separate unanimous ruling in this area, the justices said that a federal appeals court had gone too far in embracing a standard that has fueled an era of patent protection.

The court said a federal appeals court applied the standard in a manner that is too narrow and too rigid.

The case addresses one of the most basic issues in patent law: How to determine whether a product is obvious and therefore not worthy of a patent.

“Granting patent protection to advances that would occur in the ordinary course without real innovation retards progress and may ... deprive prior inventions of their value,” wrote Justice Anthony Kennedy.

In the case of KSR International Co. v. Teleflex Inc., the U.S. Court of Appeals for the Federal Circuit in the District of Columbia had upheld a patent for adjustable gas pedals. This court hears all appeals in the field of patents.

The legal test at issue in the Teleflex lawsuit has been criticized by the Bush administration as leading to an unwarranted extension of patent protection to claimed inventions that are obvious. Critics of the test say it results in less competition and stifles innovation. Proponents warned that throwing out the standard would upset decades of settled law.

To invalidate a patent, a challenger must show that all parts of a claimed invention were known previously. In addition, the challenger must show that there is a prior “teaching, suggestion or motivation” to combine these prior technologies to produce the invention.

“Helpful insights” that the standard provides “need not become rigid and mandatory formulas,” Kennedy wrote.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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