The US Supreme Court has overturned a ruling that Microsoft should pay damages to AT&T, the telecoms group, for infringing outside of the United States a patent granted in America. The ruling could save the world’s largest software developer billions of dollars in future claims.

The court rejected by a 7-1 majority AT&T’s argument that software code is a “component” of a computer, making overseas sales of the dominant Windows operating system an infringement under US law.

Microsoft already had been found to have infringed an AT&T patent granted in the US covering the conversion of speech to computer code.

The US Justice Department had sided with Microsoft in the dispute, arguing that an earlier appeals court ruling in AT&T’s favour “improperly extends United States patent law to foreign markets”, putting US software companies at a competitive disadvantage.

Had Microsoft lost to AT&T, the companies had agreed to an undisclosed settlement figure.

The Supreme Court said that US patent laws generally stop at the nation’s borders. “If AT&T desires to prevent copying abroad, its remedy today lies in obtaining and enforcing foreign patents,” Justice Ruth Bader Ginsburg said. She added that AT&T should turn to Congress to close the “software-specific loophole” in American law.

The Bush Administration supported Microsoft in the case. Microsoft and the US Government said that computer code is not a component until it is copied on to a hard drive or installation disk. Copying parts for sale abroad is properly the subject of foreign law, the Justice Department Solicitor-General’s office told the court.

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