The US Supreme Court has ruled that Microsoft is not liable for using patented AT&T technology in copies of Windows running on computers outside the US.
The seven to one verdict means the software giant will not have to pay what could have been enormous damages. It will also change how the software industry looks at patent rights.
Microsoft has previously admitted to violating an AT&T patent for converting speech to computer code, which it incorporated into tens of millions of copies of its Windows operating system. It settled with AT&T in the US for an undisclosed amount, but disputed that Windows software running on machines located overseas were covered by the patent.
AT&T said it was disappointed with the ruling, "All US-based sources of innovation - including the software development community - could benefit from patent laws that enable fair, appropriate protection and valuation of new technologies and inventions domestically and overseas."
At issue was part of a 1984 patent law, which prevents companies from shipping parts overseas to be assembled in a fashion that would infringe on a US patent.
In front of the court in February, Microsoft argued that the master copies of Windows it ships overseas to other manufacturers are blueprints that do not violate patent laws.
AT&T, which filed the original case in 2001, countered that Microsoft used the code in combination with other components in order to reap royalties from every copy of Windows sold. AT&T had also argued that the 1984 patent law created a loophole for software makers to avoid patent infringement by allowing installation copies to be mass-copied overseas.
In delivering the court's opinion, Justice Ruth Bader Ginsburg wrote that the "master disk" or "electronic transmission" Microsoft gives to foreign manufacturers does not violate the patent on its own since that specific copy is not used on foreign-made computers.
"Instead, copies made abroad are used for installation," Ginsburg wrote. Because those copies are not supplied by Microsoft, the company does not supply the "components", she wrote.
A decision in favour of AT&T could have put the US Patent and Trademark Office into a role of an arbiter of intellectual property worldwide and pushed software prices higher.
The Supreme Court was the last stop for Microsoft, which had lost a previous court battle. In July 2005, the US Court of Appeals for the Federal Circuit upheld a lower-court ruling that Microsoft was liable to pay fines for foreign sales of patent-infringing software even if it was originally created in the US.
But Microsoft had gained broad support in its defence efforts, including the Bush administration and tech giants Amazon.com, Intel and Yahoo, and industry groups such as the Business Software Alliance and the American Intellectual Property Law Association.
AT&T was unavailable for comment.