JEFFREY S. WHITE

ORDER REGARDING CROSS-MOTIONS FOR SUMMARY JUDGMENT

Now before the Court are the cross-motions for summary judgment filed by Plaintiff and Counterclaim Defendant Lotes Company, Ltd. ("Lotes") and by Defendants and Counter-claimants Hon Hai Precision Industry Co.. Ltd. ("Hon Hai") and Foxconn Electronics, Inc. ("Foxconn") (collectively, "Defendants"), or in the alternative, for judgment on partial findings. The Court finds that these matters are appropriate for disposition without oral argument and, thus, are deemed submitted. See N.D. Civ. L.R. 7-1(b). Accordingly, the hearing set for July 20, 2012 is HEREBY VACATED. Having carefully reviewed the parties' papers and considering their arguments and the relevant authority, and good cause appearing, the Court hereby grants in part and denies in part each of the parties' cross-motions for summary judgment.

BACKGROUND

Lotes and Defendants previously engaged in litigation regarding Defendants' patents. The parties settled that prior litigation. As part of the settlement, the parties executed a Settlement Agreement and a Patent License Agreement ("PLA"). Now the parties dispute whether those agreements have been followed and/or whether Lotes is infringing on several of Defendants' patents, including two Taiwanese patents and one Chinese patent (collectively, the "foreign patents"). The parties have filed cross-claim motions for summary judgment on the following three threshold issues concerning their dispute: (1) enforceability of the covenant not to challenge in the Settlement Agreement; (2) scope of the licensed products subject to the PLA; and (3) burden of proof of infringement.

The Court shall address specific additional facts in the remainder of this Order.

ANALYSIS

A. Applicable Legal Standards.

A principal purpose of the summary judgment procedure is to identify and dispose of factually unsupported claims. Celotex Corp. v. Cattrett, 477 U.S. 317, 323-24 (1986). Summary judgment is proper when the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). "In considering a motion for summary judgment, the court may not weigh the evidence or make credibility determinations, and is required to draw all inferences in a light most favorable to the non-moving party." Freeman v. Arpaio, 125 F.3d 732, 735 (9th Cir. 1997).

The party moving for summary judgment bears the initial burden of identifying those portions of the pleadings, discovery, and affidavits that demonstrate the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323. An issue of fact is "genuine" only if there is sufficient evidence for a reasonable fact finder to find for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49 (1986). A fact is "material" if it may affect the outcome of the case. Id. at 248. If the party moving for summary judgment does not have the ultimate burden of persuasion at trial, that party must produce evidence which either negates an essential element of the non-moving party's claims or that party must show that the non-moving party does not have enough evidence of an essential element to carry its ultimate burden of persuasion at trial. Nissan Fire & Marine Ins. Co. v. Fritz Cos., 210 F.3d 1099, 1102 (9th Cir. 2000). Once the moving party meets its initial burden, the non-moving party must go beyond the pleadings and, by its own evidence, "set forth specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e).

In order to make this showing, the non-moving party must "identify with reasonable particularity the evidence that precludes summary judgment." Keenan v. Allan, 91 F.3d 1275, 1279 (9th Cir. 1996). In addition, the party seeking to establish a genuine issue of material fact must take care adequately to point a court to the evidence precluding summary judgment because a court is "'not required to comb the record to find some reason to deny a motion for summary judgment.'" Carmen v. San Francisco Unified School Dist., 237 F.3d 1026, 1029 (9th Cir. 2001) (quoting Forsberg v. Pacific Northwest Bell Telephone Co., 840 F.2d 1409, 1418 (9th Cir. 1988)). If the non-moving party fails to point to evidence precluding summary judgment, the moving party is entitled to judgment as a matter of law. Celotex, 477 U.S. at 323.

In the event the Court determines that there are genuine issues of material fact that preclude the Court from granting summary judgment in either party's favor, the parties have agreed that the Court shall resolve any disputed issues of fact as the trier of fact pursuant to Federal Rule of Civil Procedure 42(b) based upon the parties' submissions in support of their motions for summary judgment. (Docket No. 117.)

B. The Parties' Cross-Motions.

1. Enforceability of Covenant not to Challenge Defendants' Patents.

The parties' Settlement Agreement includes the following provision:

Agreement Not to Challenge. In return for the benefits under this Agreement and the License Agreement, Lotes agrees that it will not directly or indirectly challenge, now or in a future proceeding regarding the Licensed Products, Hon Hai [sic] ownership or the validity or enforceability of the Licensed Patents that are the subject of this Agreement.

Although state law ordinarily governs issues relating to contract interpretation, where, as here, the issues are "intimately related with the substance of enforcement of a patent right," Federal Circuit precedent governs. Flex-Foot, Inc. v. CRP, Inc., 238 F.3d 1362, 1365 (Fed. Circ. 2001) (applying Federal Circuit precedent to determination of whether covenant not to contest the validity of patents was enforceable). The Federal Circuit has clearly held that where there is a clear and unambiguous waiver of future challenges to the validity of patent in a settlement agreement, an accused infringer is contractually estopped from challenging the validity of the patent in any subsequent proceeding. Id. at 1370.

The court in Flex-Foot distinguished the holding in Lear, Inc. v. Adkins, 395 U.S. 653, 670-71 (1969), whereby the Supreme Court eliminated the doctrine of "licensee estoppel," citing the "important public interest in permitting full and free competition in the use of ideas." "Under Lear, a licensee of a patent is not estopped from challenging the validity of the licensed patent by virtue of the licence agreement." Baseload Energy, Inc. v. Roberts, 619 F.3d 1357, 1361 (Fed. Cir. 2010). The Federal Circuit noted that the license agreement in Lear was not created as part of a litigation settlement and, significantly, the license at issue in Lear "did not contain, and was not accompanied by, any promise by the licensee not to challenge the validity of the patent." Flex-Foot, 238 F.3d at 1368. The Federal Circuit found this distinguishing fact meaningful "because it implicates the important policy of enforcing settlement agreements and res judicata." Id.

Here, it is undisputed that Lotes signed this explicit promise not to challenge Defendants' patents at issue pursuant to a settlement agreement which resolved their then pending litigation. While Lotes disagrees with the Federal Circuit's interpretation of the Supreme Court's holding in Lear, in the absence of any intervening authority, the Federal Circuit's ruling is binding on this Court. U.S. v. Mandel, 914 F.2d 1215, 1220-21 (9th Cir. 1990) (holding that circuit precedent is binding unless there is an intervening Supreme Court decision that undermines the existing precedent); see also Foster v. Hallco Mfg. Co., Inc., 947 F.2d 469, 475 (Fed. Cir. 1991) (holding that the Federal Circuit's precedent interpreting Lear is binding on district courts).

Lotes also attempts to distinguish Flex-Foot by arguing that the waiver at issue is not "clear and unambiguous." According to Lotes, the waiver in the Settlement Agreement is not clear and unambiguous because the PLA contains another provision that contemplates that a neutral, third party may opine that one of the patents is invalid. (Chadwick Decl., Plaintiff's Ex. 2, § 8.1(D).) The Court finds Lotes' argument unpersuasive. The fact that a separate agreement provides that a neutral, third party may opine that one of the patents is invalid does nothing to undermine or render ambiguous the clear language barring Lotes from challenging the validity of the patents at issue.

Finally, even if such waivers may be generally enforceable, Lotes argues that the Court should refrain from enforcing the waiver here pursuant to the doctrine of economic duress. "To render a contract unenforceable for duress, a party must establish (1) that it involuntarily accepted the other party's terms, (2) that circumstances permitted no other alternative, and (3) that such circumstances were the result of the other party's coercive acts." North Star Steel Co. v. United States, 477 F.3d 1324, 1334 (Fed. Cir. 2007). To constitute coercion under the third prong, there must be a showing that Defendants' conduct "was wrongful, i.e., (1) illegal, (2) a breach of an express provision of the contract without a good-faith belief that the action was permissible under the contract, or (3) a breach of the implied covenant of good faith and fair dealing." Id. (internal quotation marks and citation omitted). Lotes fails to submit any evidence demonstrating that Defendants' conduct was coercive or wrongful under this standard. Although Lotes emphatically argues that standard for economic duress is broader under Federal Circuit law, Lotes does not cite to any authority in support of this proposition. Accordingly, the Court finds that the covenant not to contest the validity of the patents is enforceable.

2. Construction of Exhibit to Patent License Agreement.

The parties dispute the scope of the licensed products, or accused products, subject to the PLA. They agree that the Exhibit ? attached to the PLA sets forth the scope of the licensed. The parties further agree that California law governs the interpretation of the PLA concerning this dispute. However, they dispute whether the licensed products, or accused products, are defined by the product category or by the product number.

Under California law, the PLA must be interpreted to give effect to the mutual intention of the parties at the time the contract was formed. If possible, this intent is to be inferred solely from the written provisions of the contract. See Ameron Intern. Corp. v. Insurance Co. of State of Pennsylvania, 50 Cal. 4th 1370, 1378 (2010). Nevertheless, extrinsic evidence may be offered when a contract term is ambiguous on its face and to expose a latent ambiguity. Southern Pac. Transp. v. Santa Fe Pac. Pipelines, Inc., 74 Cal. App. 4th 1232, 1241 (1999). "The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible." Pacific Gas & E. Co. v. G. W. Thomas Drayage & Rigging Co., Inc., 69 Cal. 2d 33, 37 (1968).

Upon review of the Exhibit, the Court finds that the language regarding the scope of the accused products is ambiguous. The Exhibit is entitled "Licensed Patents, Licensed Products and Applicable Royalty Rates." (Chadwick Decl., Plaintiff's Ex. 2 (Exhibit ?).) The Exhibit is divided into two sections. The first is entitled "Licensed Patents" and the second is entitled "Licensed Products and Royalty Rates." (Id.) Under the heading of the second section, the Exhibit provides:

If a licensed product, absent this License Agreement, would infringe only claim 6 or claims 8-12 of United States Patent Number 6,877,990 or the foreign counterpart claim(s) ..., such product shall be considered to be a Licensed Product for all purposes of the [PLA] but shall be royalty free. However, for the avoidance of doubt, if such product, absent this [PLA], would infringe any other claim of any Licensed Patent, such product shall be considered to be a Licensed Product for all purposes of the License Agreement and royalty bearing below.

Each party has submitted evidence in support of their respective positions which, if fully credited, is sufficient to create a genuine issue of material fact precluding the entry of summary judgment in favor of either party. Nevertheless, because the parties have stipulated to have the Court resolve disputed issues as the trier of fact, the Court will continue. Upon review of all of the evidence submitted by the parties, the Court finds that Lotes' argument is better supported. In particular, the Court notes that when the parties discussed the desired content of the Exhibit, Defendants said:

Perhaps best way to resolve is to cut-off list of accused products by "product" name and not "Lotes p/n." Lotes lists eight product numbers for its DDR2 240 Pin product. The settlement will provide more certainty to each side if the license and royalties extend to all DDR2 240 Pin products. If Lotes won't agree to this, we would need its help in listing each product number.

3. Burden of Proving Infringement or Non-Infringement.

Defendants move for summary judgment on the issue of whether the PLA altered the burden of proof and shifted the burden to Lotes to prove non-infringement. Both parties agree that it is legally permissible to alter by contract the normal legal rules regarding the burden of proof. Defendants contend that Federal Circuit law governs this dispute. Pursuant to Federal Circuit authority, parties are free to contract around the legal rules as long as their intent to do so is "clear and unambiguous." See Flex-Foot, 238 F.3d at 1370.

According to Defendants, the plain language of the PLA establishes that Lotes bears the burden to prove non-infringement in all litigation between it and Foxconn. Section 3.2 of the PLA provides:

Licensed Products. In the event that the Licensee establishes in accordance [sic] the provisions of Section 8 that a given Licensed Product, absent this License Agreement, no longer infringes any Valid Claim of any of the Licensed Patent, such given Licensed Product shall be deemed deleted from Exhibit ? and shall thereafter not be considered to be a Licensed Product for all purposes of this Agreement.

Even if the term "establish" means prove, or even ultimately succeed, it merely means that Defendants or a court of competent jurisdiction ultimately agreed with Lotes' position. It does not necessarily mean that Lotes bears the burden of proof. These are sophisticated parties with sophisticated patent attorneys. Presumably, they were aware, when the negotiated and drafted this agreement that, ordinarily, patent holders bear the burden of proof on infringement. If the parties sought to alter this burden of proof, they could have clearly specified as much in their agreement. In the absence of any language that clearly alters the normal legal rule regarding the burden of proof, the Court finds that Defendants have not demonstrated that the PLA shifted the burden of proof to Lotes. The language in the PLA does not clearly and unambiguously alter the normal legal rule that the patent holder bears the burden of proof on infringement. Accordingly, the Court denies Defendants' motion for summary judgment on this ground.

CONCLUSION

For the forgoing reasons, the Court GRANT IN PART and DENIES IN PART the parties' cross-motions for summary judgment or for judgment on partial findings on threshold issues. The Court: (1) GRANTS Defendants' motion and DENIES Lotes' motion for summary judgment regarding the enforceability of the covenant not to challenge in the Settlement Agreement; (2) DENIES both parties' motions for summary judgment regarding the scope of the licensed products subject to the PLA due to the existence of genuine issues of material fact but GRANTS Lotes' motion and DENIES Defendants' motion for judgment on partial findings; and (3) GRANTS Lotes' motion and DENIES Defendants' motion for summary judgment regarding burden of proof of infringement.

IT IS SO ORDERED.

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JEFFREY S. WHITE

UNITED STATES DISTRICT JUDGE