The high court granted Microsoft’s petition to review an appeals court ruling that held AT&T could seek royalties based on the foreign manufacture and sale of infringing software products.

The Microsoft-AT&T dispute is one of the most important patent cases that will come before the court this year and could determine the reach of U.S. patents overseas, experts said.

The case raises “the question of how far downstream you can go in capturing damages in the chain of commerce,” said Stephen Maebius, a patent lawyer with the firm Foley & Lardner LLP.

At issue is a ruling last year that upheld a lower court decision that Microsoft was liable for infringing an AT&T patent for converting speech into computer code in copies of Windows sold overseas.

The U.S. Court of Appeals for the Federal Circuit said the world’s largest software maker was liable for the unauthorized distribution of codec technology, used to compress speech signals into data, in copies of Windows overseas.

A year earlier, Microsoft settled most of the telephone company’s outstanding claims, and both agreed to appeal the unresolved issue over the distribution of the technology overseas, for which Microsoft said it was not liable.

U.S. Solicitor General Paul Clement of the Justice Department urged the high court to review the case. In a brief filed earlier with the court, he agreed with much of Microsoft’s argument and said the appeals court ruling “improperly extends United States patent law to foreign markets” and puts U.S. software companies at a competitive disadvantage.

“That disadvantage will harm the software sector of the American economy and could ultimately compel some software companies to relocate their research and development operations abroad,” the government said in documents filed with the court.

Maebius said patent holders “are trying to stretch the distance of a U.S. patent to perhaps compensate for lack of patent protection in foreign countries.”

Microsoft had argued unsuccessfully before the appeals court that liability should not extend to products sold overseas because software is not a product “component” under U.S. patent law, and because copies of the software were made overseas, rather than in the United States.

Microsoft issued a statement on Friday saying the case was “not only important to Microsoft, but to the entire U.S. (information technology) industry.”

An AT&T spokesman said the company expects the high court will handle the case “in the normal course of business. We look forward to their decision.”

The Supreme Court did not comment further on its decision to grant the review, except to say that Chief Justice John Roberts did not participate in the decision.

[1] copyright © 2006 [2] Reuters. All rights reserved.