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

Background

Microsoft and Hon Hai entered into a Confidential Patent License Agreement under which Microsoft licensed certain patents worldwide to Hon Hai for specified royalties. Microsoft later sued Hon Hai for breach of contract, alleging that Hon Hai failed to submit royalty reports and pay royalties. Hon Hai filed an amended answer asserting three counterclaims and ten affirmative defenses.

Hon Hai’s counterclaims alleged breach of the implied covenant of good faith and fair dealing, fraudulent inducement, and negligent misrepresentation. Hon Hai claimed that Microsoft had represented during negotiations that its Android royalty rates were not flexible, that prior licensees had set the pricing, and that Microsoft would not favor some licensees over others. Hon Hai also alleged that Microsoft should have licensed Hon Hai’s competitors or brand-name customers on comparable terms.

Microsoft moved under Federal Rule of Civil Procedure 12(b)(6) to dismiss the counterclaims and under Rule 12(f) to strike the affirmative defenses. A Rule 12(b)(6) motion tests whether the pleading states a legally sufficient claim; a Rule 12(f) motion asks whether a defense should be removed because it is insufficient, redundant, immaterial, or otherwise improper.

Counterclaims

The court dismissed all three counterclaims with prejudice because Hon Hai’s amended answer did not cure the deficiencies identified in the court’s earlier order.

For the implied-covenant counterclaim, the court held that the patent license agreement did not require Microsoft to license Hon Hai’s competitors or otherwise help Hon Hai meet its royalty obligations. The implied covenant of good faith and fair dealing could not add a substantive obligation that the agreement did not contain. The court therefore granted Microsoft’s motion to dismiss this counterclaim with prejudice.

For the fraudulent-inducement and negligent-misrepresentation counterclaims, the court held that Hon Hai did not adequately plead justifiable reliance on Microsoft’s alleged statements. The court relied on several considerations: Hon Hai acknowledged that some royalty rates decreased between a draft and the final agreement; Microsoft rejected a proposed most-favored-nation provision; the agreement contained an integration clause; and the parties were sophisticated corporations represented by counsel during negotiations. Because Hon Hai had already been given an opportunity to amend and did not cure the same deficiencies, the court granted Microsoft’s motion to dismiss both counterclaims with prejudice. The court did not reach Microsoft’s separate argument that the statements were non-actionable “puffery.”

Affirmative defenses

The court granted with prejudice Microsoft’s motion to strike these affirmative defenses:

- Failure to mitigate damages; - Breach of the implied covenant of good faith and fair dealing; - Failure of consideration; - Fraudulent inducement; - Mistake of fact; - “Setoff”; and - Patent misuse.

The court held that the implied-covenant and fraudulent-inducement defenses duplicated deficient counterclaims. It struck the setoff defense because the counterclaims were dismissed with prejudice, leaving no counterclaim damages to offset. It rejected the failure-to-mitigate defense because Hon Hai was using it to argue that Microsoft had to license competitors, sue them for patent infringement, or collect royalties from them—obligations the agreement did not impose on Microsoft. The court also held that the failure-of-consideration defense failed because the agreement exchanged Microsoft’s patent license and related rights for Hon Hai’s royalty payments.

The court struck the mistake-of-fact defense with prejudice. One alleged mistake duplicated the rejected fraudulent-inducement theory, and the other was not pleaded with the particularity required for allegations of fraud or mistake.

The court struck with prejudice the part of Hon Hai’s ninth defense concerning whether the agreement was ambiguous about which licensed products were covered under the Android/Chrome Platform. The court found that the agreement clearly defined that platform. However, the court denied Microsoft’s motion to strike the part of the ninth defense alleging that the agreement was ambiguous about which patents were included under “Covered Patents.” Taking Hon Hai’s allegations as true at this stage, the court found that Hon Hai adequately alleged that the scope of the covered patents might be indefinite.

The court denied Microsoft’s motion to strike Hon Hai’s fourth affirmative defense for frustration of performance. Microsoft had moved against a defense for “frustration of purpose,” while Hon Hai had actually pleaded frustration of performance.

Disposition

Judge Lucy H. Koh granted with prejudice Microsoft’s motion to dismiss Hon Hai’s counterclaims. She granted with prejudice Microsoft’s motion to strike the listed affirmative defenses, granted with prejudice the motion to strike part of the ambiguity defense concerning covered products, denied the motion to strike the ambiguity defense concerning covered patents, and denied the motion to strike the frustration-of-performance defense.