Microsoft Corporation v. Hon Hai Precision Industry Co., Ltd.

Background

Microsoft Corporation and Microsoft Licensing GP sued Hon Hai Precision Industry Co., Ltd. for breach of a Confidential Patent License Agreement, called the PLA. The PLA gave Hon Hai and its subsidiaries a worldwide license covering certain devices that included the Android/Chrome Platform. In return, Hon Hai had to submit complete and accurate royalty reports twice a year, pay royalties based on covered-product sales, maintain records, and cooperate with audits.

The PLA included limited royalty exemptions. These included exemptions for certain products sold through separately licensed entities and for certain products destined for consumers in China. The China exemption required, among other things, a written customer representation that the product would be resold, activated, and used exclusively in mainland China. Hon Hai conceded that it did not have those written representations. Hon Hai also conceded that it did not meet the agreement’s technical requirements for claiming the separate-license exemption.

Microsoft asserted that Hon Hai underreported and underpaid royalties for 2013 and 2014 and stopped submitting royalty reports beginning in 2015. Microsoft later requested an independent audit, but Hon Hai did not provide the requested audit information. The court also described several discovery disputes and orders requiring Hon Hai to produce sales information and other records.

Motions and governing standard

Microsoft moved for summary judgment on its breach-of-contract claim and on Hon Hai’s counterclaims and affirmative defenses. Hon Hai moved for partial summary judgment on its statute-of-limitations defense, arguing that the limitations period barred damages for breaches occurring more than four years before Microsoft filed suit.

Summary judgment is appropriate when the evidence shows there is no genuine dispute about a fact that could affect the outcome and the moving party is entitled to judgment under the law. The court must view disputed evidence in favor of the party opposing the motion and may not decide witness credibility or weigh conflicting evidence at this stage.

Hon Hai’s counterclaims and affirmative defenses

The court denied Microsoft’s motion concerning Hon Hai’s counterclaims and affirmative defenses. The court had separated those matters from the breach-of-contract claim for a later phase, and discovery concerning them was still continuing. Hon Hai identified outstanding depositions and discovery requests and explained facts it expected to obtain that could be important to its opposition.

Because relevant discovery remained, the court found Microsoft’s request premature. For the same reason, the court denied Hon Hai’s motion for partial summary judgment on its statute-of-limitations defense. The order did not resolve the merits of those counterclaims, affirmative defenses, or the limitations defense.

Microsoft’s breach-of-contract claim

The court granted Microsoft summary judgment on its breach-of-contract claim. Under California law, the claim required a contract, Microsoft’s performance or an excuse for nonperformance, Hon Hai’s breach, and resulting damages. The parties agreed that the PLA existed, and the court found no genuine dispute that Microsoft performed its obligations. The court identified the disputed issue as whether Hon Hai breached the PLA.

The court interpreted the PLA to require Hon Hai to report and pay royalties for covered products, subject to the agreement’s defined exemptions. It rejected Hon Hai’s argument that the PLA merely gave Hon Hai the option to pay royalties and otherwise left it exposed to possible patent-infringement claims. The court also considered outside evidence about the parties’ intent and found that Hon Hai witness Justin Huang’s declaration described only an undisclosed personal understanding, which did not make the agreement reasonably open to Hon Hai’s interpretation under California law.

The court also rejected Hon Hai’s argument concerning products sold through entities with Open Invention Network licenses. It found that the Open Invention Network license expressly did not affect other patent-license agreements and therefore did not change Hon Hai’s royalty obligations under the PLA. Separately, Hon Hai admitted that it did not satisfy the PLA’s technical requirements for claiming the exemption. The court rejected Hon Hai’s contention that later compliance with court-ordered discovery amounted to substantial performance of those contractual requirements.

The court reached the same conclusion regarding products destined for consumers in China. The PLA required a specific written representation from the customer to qualify for that exemption, and Hon Hai admitted it had no such written representations. The court found that later discovery production did not constitute substantial performance of the agreement’s requirements. It concluded that no genuine dispute of material fact prevented judgment for Microsoft on the breach claim.

Disposition

The court granted in part and denied in part Microsoft’s motion for summary judgment. It granted the motion as to Microsoft’s breach-of-contract claim and denied it as to Hon Hai’s counterclaims and affirmative defenses. The court denied Hon Hai’s motion for partial summary judgment concerning its statute-of-limitations affirmative defense.