Case Title: Qualcomm Incorporated v. Texas Instruments

Citation: 

Docket Number: 474, 2004

State: delaware

Court: Delaware Supreme Court

Date: 2005-06-08T00:00:00Z

Document:
IN THE SUPREME COURT OF THE STATE OF DELAWARE
QUALCOMM INCORPORATED,
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No. 474, 2004
Defendant Below,
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Appellant,
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v.
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Court Below:  
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Court of Chancery
TEXAS INSTRUMENTS
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of the State of Delaware
INCORPORATED,
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in and for New Castle County
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C.A. No. 20569
Plaintiff Below,
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Appellee.
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Submitted: April 20, 2005
Decided: May 25, 2005
Revised:  June 8, 2005
Before STEELE, Chief Justice, HOLLAND, BERGER, JACOBS and RIDGELY,
Justices, constituting the Court en Banc.
Upon appeal from the Court of Chancery.  AFFIRMED.
Thomas C. Grimm, Esquire, Jon E. Abramczyk, Esquire (argued), Rodger D. Smith,
II, Esquire, Susan Wood Waesco, Esquire and James W. Parrett, Jr., Esquire, of
Morris, Nichols, Arsht & Tunnell, Wilmington, Delaware, for Appellant.
Jesse A. Finkelstein, Esquire, and Jeffrey L. Moyer, Esquire, of Richards, Layton &
Finger, Wilmington, Delaware; Terence M. Murphy, Esquire (argued), Joseph L.
McEntee, Esquire and Thomas R. Jackson, Esquire, of Jones, Day, Dallas, Texas and
Christian G. Vergonis, Esquire, of Jones, Day, Washington, D.C., for Appellee.
BERGER, Justice:
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In this appeal, we consider: (i) whether the confidentiality provision in a Patent
Portfolio Agreement (PPA) between QUALCOMM Incorporated and Texas
Instruments Incorporated (TI) is a material term of that agreement; and (ii) whether
TI breached the PPA’s covenant not to sue.  The Court of Chancery held that, as a
matter of New York law, the confidentiality provision is not material because the
“root” of the PPA is patent peace, not confidentiality.  Thus, although TI violated the
confidentiality provision, QUALCOMM could not terminate the PPA.  The Court of
Chancery also held that TI did not breach the covenant not to sue because its lawsuit
was not based on a preexisting agreement between QUALCOMM and a third party.
We agree and affirm.
Factual and Procedural Background
QUALCOMM designs and manufactures communication products based on a
form of digital wireless technology called Code Division Multiple Access (CDMA).
The company holds numerous patents related to CDMA technology and licenses its
technology to cell phone companies and others in the wireless industry.
QUALCOMM’s licensing program generates royalties from both the manufacturers
of CDMA integrated circuits and the manufacturers of hand sets that use CDMA
integrated circuits.  To protect its stream of royalties from the hand set manufacturers,
QUALCOMM’s licenses with integrated circuit manufacturers deny the licensees any
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so-called “pass-through rights” that would otherwise relieve the hand set
manufacturers of their obligation to pay CDMA royalties to QUALCOMM. 
 TI manufactures application-specific integrated circuits for hand sets using
CDMA and a competing wireless technology called GSM.  TI, like QUALCOMM,
holds numerous patents relating to digital wireless technology.  TI was interested in
entering into an agreement with QUALCOMM that would allow both companies to
use each others’ patent portfolios.  The resulting PPA, executed in December 2000,
recites
[REDACTED]
The PPA also provides, among other things, that: i) TI is entitled to “most
favored nation”(MFN) status, 
[REDACTED]
 ii) except in circumstances not relevant here, TI may not sue
QUALCOMM over a pass-through rights agreement between QUALCOMM and a
third party if that agreement was in existence at the time the PPA was executed; iii)
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the parties are required to keep the terms of their agreement confidential; and iv) if
either party materially breaches the PPA, the other party may terminate the agreement,
and still retain the use of the breaching party’s patents.
In May 2003, TI disclosed the PPA’s royalty terms to investment analysts at a
TI conference.  In July 2003, QUALCOMM filed suit in the Superior Court, alleging
that TI’s disclosure to the analysts breached the PPA, and seeking a determination that
the breach was material.  TI responded by filing suit against QUALCOMM in the
Court of Chancery, alleging that QUALCOMM breached the MFN provision.  The
two lawsuits were effectively combined when QUALCOMM dismissed its Superior
Court action and filed a counterclaim in the Court of Chancery action.
After discovery, the parties moved for summary judgment as to various aspects
of their claims.  The trial court held that: (i) TI breached the PPA by disclosing the
royalty terms; (ii) as a matter of New York law, that breach was not material; and (iii)
QUALCOMM did not breach the MFN provision.  The Court of Chancery conducted
a trial on QUALCOMM’s remaining claim – that, by suing QUALCOMM over the
MFN provision, TI breached the litigation rights provision of the PPA.  After the trial,
that Court concluded that TI did not breach that provision because the suit did not
relate to an agreement between QUALCOMM and a third party.  This appeal
followed.
Frank Felix Assoc., Ltd. V. Austin Drugs, Inc., 111 F.3d 284, 289 (2d Cir. 1997). 
1
 Id. (Citations and internal quotations omitted.)
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Restatement (Second) of Contracts, § 241; Frank Felix, 111 F.3d at 289.
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Discussion 
I.  Materiality of the Confidentiality Provision
Under New York law, which governs the PPA, a breach is material if it is “so
substantial that it defeats the object of the parties in making the contract.”  Stated
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differently, the breach must “go to the root of the agreement between the parties.”  In
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deciding whether a breach is material, New York courts consider the following factors
identified in the Restatement (Second) of Contracts:
(a) the extent to which the injured party will be deprived of the benefit
which he reasonably expected; (b) the extent to which the injured party
can be adequately compensated for the part of that benefit of which he
will be deprived; c) the extent to which the party failing to perform or to
offer to perform will suffer forfeiture; (d) the likelihood that the party
failing to perform or to offer to perform will cure his failure, taking
account of all the circumstances including any reasonable assurances; (e)
the extent to which the behavior of the party failing to perform or to offer
to perform comports with standards of good faith and fair dealing.3
We are satisfied that the Court of Chancery correctly concluded that the
confidentiality provision was not material to the PPA.  As the trial court noted, “[t]he
‘root of the agreement’ or the ‘essence of the contract’ was patent peace between
Qualcomm and TI.  The agreement itself makes this abundantly clear.”  Moreover, if
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the Court of Chancery had evaluated all of the Restatement factors expressly, the
result would have been the same:
(a) QUALCOMM conceded that, despite TI’s breach: (i) QUALCOMM
continues to sell, distribute and license its products without being subjected to patent
infringement litigation from TI; and (ii) QUALCOMM continues to receive royalties
from hand set manufacturers with no pass-through.  Thus, the breach did not deprive
QUALCOMM of the benefit it expected from the PPA.
(b) QUALCOMM claims that it suffered a $30 million loss because another
company withdrew from negotiations over a licensing agreement after learning the
royalty terms of the PPA.  Assuming that TI’s May 2003 disclosure was the reason for
the breakdown in negotiations, QUALCOMM would have been able to recover
damages from TI caused by the disclosure.  QUALCOMM decided to forego its
damage remedy, however, because (it says) a trial court discovery ruling would have
forced it to reveal the confidential terms of all of its licensing agreements – a result
that would be even more damaging than TI’s wrongful conduct.  But QUALCOMM
never sought review of the trial court’s discovery ruling.  Instead, it simply dismissed
its damages claim shortly before the scheduled trial.  Thus, on this record, it appears
that QUALCOMM could have been adequately compensated for the one transaction
that TI’s breach allegedly derailed.
Restatement (Second) of Contracts, § 241, Comment d.
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(c)  The third Restatement factor is the extent to which the breaching party
would suffer a forfeiture.  QUALCOMM acknowledges that TI would suffer a
forfeiture because, if the breach were material, QUALCOMM could continue to use
TI’s patents, but TI would lose its right to use QUALCOMM’s patents.  Although it
criticizes the trial court for failing to use the Restatement’s factors to determine
materiality, QUALCOMM asks this Court to ignore this factor, because the forfeiture
was part of the parties’ bargain. That argument misconceives the issue, however,
which is not whether the termination provision is enforceable, but whether a breach
of the confidentiality provision is material.  Where, as here, a finding of materiality
would result in a forfeiture, the Restatement counsels that the breach is “less likely to
be regarded as material.”  
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(d) The fourth factor is TI’s ability to cure its breach.  The confidential
information was disclosed, and that disclosure cannot be undone.  TI has attempted
to minimize the impact of its disclosure, however.  Its employees were instructed not
to make such disclosures in the future, and TI removed the information from its
website.  Moreover, and as the Comment to the Restatement explains, the “likelihood
of cure” factor relates to the parties’ expectation of performance under the contract.
McGuire v. Rudy’s Rail, Inc., 73 N.Y.S.2d 72, 75 (N.Y. Sup. Ct. 1947)(Quotations
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omitted.).
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The record establishes that the parties are continuing to perform under their cross-
license agreement.  Thus, this factor does not support a finding of materiality.
(e) QUALCOMM focuses attention on the final factor, arguing that the
willfulness of TI’s conduct lowers the standard for materiality and thereby undermines
the trial court’s conclusion.  QUALCOMM describes TI’s conduct as “malicious” and
“a calculated attempt to gain an economic advantage at QUALCOMM’s expense.”
The fact that TI’s disclosure was intentional and motivated by self-interest does not
make it material, however.  At most, “the severity of [the] rule [requiring that the
breach destroy the object of the contract] is somewhat relaxed where the default is
deliberate.”   Since the record establishes that both parties are continuing to perform
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under the PPA and to reap the benefits of their cross-licensing agreement, the
disclosure does not meet even a “somewhat relaxed” standard of materiality.
Finally, we note QUALCOMM’s argument that summary judgment was not
appropriate because there are disputed issues of fact relating to the materiality claim.
In denying TI’s motion to dismiss, the trial court did recognize the possibility that,
notwithstanding the apparent purpose of the PPA, QUALCOMM might present
In Re Ivan Boesky Sec. Litig., 825 F. Supp. 623, 636 (S.D.N.Y. 1993), aff’d, 36 F.3d 255
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(2d Cir. 1994).
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evidence to show that TI’s breach of confidentiality was material.  But, after full
discovery, the trial court concluded:
I granted Qualcomm the opportunity to muster evidence to support its
claim that TI’s breach was material.  Qualcomm has failed in this
effort....
The PPA was the mechanism by which the parties intended to
share their respective patent portfolios        [REDACTED]           without
fear of litigation,                                         [REDACTED]                     
                                                  In other words, the PPA was an
agreement               [REDACTED]              respective intellectual
property rights              [REDACTED]               The PPA is not a
confidentiality agreement.  Nor was confidentiality identified by the
parties as a critical term or goal of the PPA.
*       *       *
... I have no doubt that Qualcomm believes the PPA’s confidentiality
provision was important, but as ‘[i]mportant as the preservation of
confidentiality might have been ..., there is no doubt that it was ancillary
to the principal objective’  of the PPA, namely, patent peace.
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Based on our review of the record, we agree that there are no material issues of fact
in dispute and that TI was properly found entitled to judgment as a matter of law.
II.  Covenant Not to Sue.
Article 8.3(b) of the PPA, the “litigation rights provision,” states in relevant
part:
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[REDACTED]
In its Amended Complaint, TI sought declaratory and injunctive relief, alleging that
QUALCOMM was violating the MFN provision of the PPA.  Specifically, the
complaint alleged that QUALCOMM had granted more favorable pass-through rights
to its own integrated circuit business than to TI by allowing hand set manufacturers
who purchased their circuits from QUALCOMM to pay a reduced royalty on their
hand sets.  QUALCOMM successfully defended against this claim.  QUALCOMM
also filed a counterclaim, alleging that TI’s lawsuit violated Article 8.3(b) of the PPA.
After a trial on the counterclaim, the Court of Chancery held that TI had not violated
the litigation rights provision, because TI “did not sue on a preexisting agreement
between QUALCOMM and a third party.”
QUALCOMM argues that the trial court misinterpreted the litigation rights
provision.  It argues that, whether or not TI actually was suing on a preexisting
agreement with a third party, the critical question was whether TI claimed to be suing
on such an agreement.  We disagree.  The litigation rights provision, by its terms,
applies only to preexisting agreements between QUALCOMM and third parties.  The
trial court held that QUALCOMM’s integrated circuit business was not a third party.
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That holding, which neither side disputes, makes the litigation rights provision
inapplicable.
Conclusion
Based on the foregoing, the judgments of the Court of Chancery are affirmed.