The US Supreme Court has overturned a lower court's ruling that held Microsoft liable for patent infringement on copies of its software sold outside the US.

The lower court had ruled in a patent dispute between Microsoft and telecoms provider AT& T over a audio compression technology bundled with Windows.

Patent law states that overseas sales are subject to US patents when the infringement concerns a US supplied component.

A Chinese car, for example, could be subject to US patents on brake pads if it uses pads supplied and manufactured by a US company.

The lower court had ruled that the audio codec technology fell under Microsoft's rules, but the Supreme Court reversed the decision, claiming that it "improperly extends US patent law to foreign markets".

Extending the ruling would put US software companies at a competitive disadvantage, the Supreme Court ruled.

The decision hinged on the definition of a component. Microsoft supplies computer makers with a gold disk from which they create installation disks.

Redmond successfully argued that the gold disk cannot be considered a component because customers cannot use it to install the software.

AT&T countered that turning the gold disk into a readable and installable software CD is so easy that it too qualifies as a component.

The eight-judge panel voted 7-1 in favour of Microsoft.