Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_06-cv-04173/USCOURTS-cand-3_06-cv-04173-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BAP)

---

United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

In re Read-Rite Corporation,

Debtor.

HITACHI GLOBAL STORAGE TECHNOLOGIES

NETHERLANDS B.V. AND HITACHI, LTD.,

Appellants,

 v.

READ-RITE CORPORATION, a Delaware

corporation,

Appellee. 

)

)

)

)

)

)

)

)

)

)

)

)

)

)

)

)

)

)

No. CV-06-04173 SC

ORDER AFFIRMING THE

BANKRUPTCY COURT

DECISION

I. INTRODUCTION

Hitachi Global Storage Technologies Netherlands B.V. and

Hitachi, Ltd. (collectively, "Hitachi") appeal the Bankruptcy

Court's June 19, 2006 ruling in the case of debtor Read-Rite

Corporation ("Read-Rite"). Appellees Western Digital Corporation

and Western Digital (Fremont), Inc. (collectively "Western

Digital") oppose Hitachi's motion.

II. BACKGROUND

In 1997, Read-Rite and International Business Machines

Corporation ("IBM") entered into a license agreement for a set of

patents and patent applications. See Docket No. 7, Appendix to

Case 3:06-cv-04173-SC Document 43 Filed 08/13/07 Page 1 of 11
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 2

Appellants' Brief ("AA"), Ex. A. Section 2.10 of the agreement

provides that in the event one party transfers a product line to

another company, the new company has the right to request a

license agreement and the party to the original license agreement

will enter into the new agreement forthwith. See id. On December

31, 2002, IBM transferred its hard disk drive product line to

Hitachi. The parties have stipulated that the deal between IBM

and Hitachi satisfied the conditions of Section 2.10, such that

Read-Rite and Hitachi needed to execute a licensing agreement. 

See id., Ex. C. After selling its disk drive business to Hitachi,

IBM made three requests to Read-Rite for Read-Rite's approval of a

license for Hitachi. Upon receiving IBM's February 28, 2003

request and the attached draft agreement, Read-Rite's General

Counsel Colin Campbell responded with a letter suggesting changes

to the draft. By letter dated April 28, 2003, IBM rejected Mr.

Campbell's proposed changes and requested that Read-Rite sign the

agreement as is. On May 12, 2003, Mr. Campbell called IBM's

senior counsel Robert Tassinari, and left a message stating that

he was comfortable with the proposed license agreement, except

that the license should be executed with Hitachi Ltd. rather than

Hitachi Global Storage Technologies Netherlands B.V. After some

internal discussions at IBM and Hitachi, Mr. Tassinari sent a

modified draft to Read-Rite on June 16, 2003 and emailed a copy of

the documents on June 17, 2003. Read-Rite filed its chapter 7

bankruptcy petition later that same day. Though Mr. Campbell

asked Read-Rite CFO Andrew Holcomb to sign the agreement, Mr.

Holcomb refused, stating that it was best left for the bankruptcy

Case 3:06-cv-04173-SC Document 43 Filed 08/13/07 Page 2 of 11
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 3

Trustee. See id., Ex. E, H 194-280 (trial transcript providing

the time line of events). On June 18, Mr. Campbell informed IBM

that because Read-Rite had filed for bankruptcy, no one could or

should sign the license agreement at that time. After the filing

of the bankruptcy petition, IBM repeatedly asked the Trustee to

sign the agreement, but the Trustee refused. 

On July 25, 2003, following an auction, the Bankruptcy Court

entered an order authorizing the Trustee to sell substantially all

of the estate's assets to Western Digital for $87 million. See

Appendix to Appellees' Brief ("AB"), Ex. 6. The sale was to be

"free and clear" of all liens and claims, except for rights of a

non-debtor in Read-Rite's intellectual property under Section

365(n) of the Bankruptcy Code. Id. Hitachi participated in the

auction for Read-Rite's assets and was aware of the free and clear

provisions of the sale. See id., Ex. 3. On November 14, 2003,

the Trustee filed a motion seeking to reject certain contracts,

including the IBM license agreement. The Bankruptcy Court

approved the motion on January 12, 2004 and set a bar date of

February 1, 2004 for parties to assert rights under Section

365(n). See id., Ex. CC. Both the Trustee's motion and the

Bankruptcy Court's rejection order were noticed to approximately

seventeen separate Hitachi addresses, as well as two offices of

Hitachi's counsel. See id., Ex. 15.

It was not until February 22, 2005, over a year after the bar

date, that IBM submitted a declaration electing to retain

intellectual property rights under its license with Read-Rite. 

See AA, Ex. LL. Western Digital filed its objection on June 6,

Case 3:06-cv-04173-SC Document 43 Filed 08/13/07 Page 3 of 11
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 4

2005, and on October 21, 2005 Hitachi filed a response to Western

Digital's objection. See AA, Ex. MM; Ex. NN. The Bankruptcy

Court held a trial to determine the issues presented by Hitachi

and issued its findings on June 19, 2006. See AA, Ex. D. The

Bankruptcy Court ruled against Hitachi. See id. This appeal

followed.

III. LEGAL STANDARD

The District Court reviews the Bankruptcy Court's findings of

fact for clear error and its conclusions of law de novo. See In

re Lazar, 83 F.3d 306, 308 (9th Cir. 1996); see also Fed. R.

Bankr. P. 8013 ("Findings of fact . . . shall not be set aside

unless clearly erroneous, and due regard shall be given to the

opportunity of the bankruptcy court to judge the credibility of

the witnesses."). "A finding of fact is clearly erroneous when

after reviewing the evidence we are left with the definite and

firm conviction that a mistake has been committed." In re Arnold

and Baker Farms, 177 B.R. 648, 653 (9th Cir. BAP 1994). 

Furthermore, "[t]he bankruptcy court's determination of the

existence of excusable neglect is reviewed for an abuse of

discretion." In re Cahn, 188 B.R. 627, 629 (9th Cir. BAP 1995).

IV. DISCUSSION

1. Did Hitachi and Read-Rite enter into a binding license

agreement?

In its Order ("Bankruptcy Order"), the Bankruptcy Court found

that Hitachi and Read-Rite had not entered into a binding license

Case 3:06-cv-04173-SC Document 43 Filed 08/13/07 Page 4 of 11
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 5

agreement prior to Read-Rite's June 17, 2003 bankruptcy petition. 

See AA, Ex. D, 134. The Bankruptcy Court provided four reasons

for its ruling that the license agreement was not effective

because it had never been signed.

The first question before this Court is whether the

Bankruptcy Court erred in ruling that there was no binding license

agreement between Hitachi and Read-Rite pursuant to Section 2.10

of the contract between IBM and Read-Rite. See AA, Ex. A. The

parties agree that New York law applies to this case because the

underlying contracts are based on New York law. The Bankruptcy

Court applied New York law in its findings and this Court agrees

with the assessment of the Bankruptcy Court and the parties. 

"Under New York law, if parties do not intend to be bound by

an agreement until it is in writing and signed, then there is no

contract until that event occurs." R.G. Group, Inc. v. Horn &

Hardart Co., 751 F.3d 69, 74 (2d Cir. 1984). As such, "if either

party communicates an intent not to be bound until he achieves a

fully executed document, no amount of negotiation or oral

agreement to specific terms will result in the formation of a

binding contract." Winston v. Mediafare Entm't Corp., 777 F.2d

78, 80 (2d Cir. 1986). In analyzing the evidence presented, the

Bankruptcy Court found that the parties did not intend to be bound

until the agreement was signed. Bankruptcy Order at 135. In

making its determination, the Bankruptcy Court examined the four

factors described in Winston and found that the evidence showed no

intent to be bound absent a signed agreement. 

The District Court will review the Bankruptcy Court's factual

Case 3:06-cv-04173-SC Document 43 Filed 08/13/07 Page 5 of 11
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 6

findings on intent under the clearly erroneous standard. See

Ciarmella v. Reader's Digest Ass'n, Inc., 131 F.3d 320, 322 (2d

Cir. 1997) ("The intention of the parties on this issue is a

question of fact, to be determined by examination of the totality

of the circumstances."); Fed. R. Bankr. P. 8013 ("Findings of fact

. . . shall not be set aside unless clearly erroneous"). 

According to Winston, the Court considers four factors:

(1) whether there has been an express reservation of the

right not to be bound in the absence of a writing; 

(2) whether there has been partial performance of the

contract; 

(3) whether all of the terms of the alleged contract have

been agreed upon; and 

(4) whether the agreement at issue is the type of contract

that is usually committed to writing.

777 F.2d at 80. The Bankruptcy Court provided explicit findings

on each of the four factors. First, Section 8.10 explicitly

stated, "This Agreement shall not be binding upon the parties

until it has been signed hereinbelow by or on behalf of each

party." AA, Ex. J; Bankruptcy Order at 134. Second, the

Bankruptcy Court found no evidence of partial performance of the

contract. Bankruptcy Order at 135. Third, the court found that

Read-Rite's bankruptcy "might well have raised a whole new set of

issues that needed to be incorporated into subsequent drafts of

the agreement." Id. Fourth, the court found that license

agreements, like the one at issue, are ordinarily written and

executed for a variety of reasons, including the complexity and

high dollar value of the transaction and because they are

agreements between competitors and customers in the field of

information technology. Id.

Case 3:06-cv-04173-SC Document 43 Filed 08/13/07 Page 6 of 11
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 7

Evidence regarding the first factor clearly indicates an

express reservation not to be bound in the absence of a writing. 

First, the IBM—Read-Rite agreement as well as the Read-Rite—

Hitachi draft agreements all contained Section 8.10, a provision

requiring a signature to bind the parties. Second, to execute the

document, Read-Rite's General Counsel Colin Campbell sought to

have the agreement signed by a Read-Rite executive, who declined

and said to leave the decision to the bankruptcy Trustee. See AA,

Ex. E, 279-80. Third, IBM made several attempts on behalf of

Hitachi to have the agreement executed by both Read-Rite and

Hitachi. See Appellants' Brief, 7. Finally, drafts of the

agreement sent between IBM and Read-Rite contained a header

stating "DRAFT FOR DISCUSSION PURPOSES ONLY" at the top of each

page. See AA, Ex. J. There is substantial evidence in the record

that the parties expressly reserved the right not to be bound

until the agreement was fully executed.

Evidence regarding the second factor also demonstrates a

failure to form a contract. As the Bankruptcy Court correctly

noted, there was no partial performance of the contract. ReadRite did not grant Hitachi a license and never acted as though it

had. "Aside from unilateral contracts, partial performance is an

unmistakable signal that one party believes there is a contract;

and the party who accepts performance signals, by that act, that

it also understands a contract to be in effect." R.G. Group, 751

F.2d at 75-76. In this case, there was no partial performance. 

Thus, there is no evidence that the parties believed there was a

contract absent signatures.

Case 3:06-cv-04173-SC Document 43 Filed 08/13/07 Page 7 of 11
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 8

Evidence regarding the third factor indicates that all the

terms of the contract had not been settled. As the Bankruptcy

Court acknowledged, Read-Rite's bankruptcy filing "might well have

raised a whole new set of issues." Bankruptcy Order at 135. 

Indeed, while Read-Rite was originally willing to compromise its

position on contract language in order to court Hitachi Japan as a

customer, as Read-Rite's finances deteriorated, its priorities

changed. See AA, Ex. E, 280, 292. This Court agrees with the

Bankruptcy Court's analysis and finds that the evidence

demonstrates that all the terms of the contract had not been

settled prior to Read-Rite's bankruptcy petition.

Evidence regarding the fourth factor also indicates a failure

to form a contract. Licensing agreements of this type are

customarily written and executed. "Where, as here, the parties

are adversaries and the purpose of the agreement is to forestall

litigation, prudence strongly suggests that their agreement be

written in order to make it readily enforceable, and to avoid

still further litigation." Winston, 777 F.2d at 83. The

licensing agreement contains reciprocal covenants not to sue in

Sections 2.4 and 2.5 and thus fits the criteria described in

Winston and by the Bankruptcy Court. Furthermore, the Court notes

that the statute of frauds in New York, N.Y. Gen. Oblig. Law § 5-

701(a)(1), requires a signed writing for any agreement that cannot

be performed within one year. The contract at issue in this case

also meets that definition. Because agreements of this type are

customarily written and executed and this agreement was never

executed, a contract was never formed.

Case 3:06-cv-04173-SC Document 43 Filed 08/13/07 Page 8 of 11
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 9

Having analyzed the evidence in light of the four Winston

factors, the District Court agrees with the Bankruptcy Court and

finds that Hitachi and Read-Rite never entered into a binding

licensing agreement.

2. Did Hitachi comply with 11 U.S.C. § 365(n)?

The Bankruptcy Court ruled that even if the agreement between

Hitachi and Read-Rite had become binding on the parties, Hitachi

failed to exercise its rights under 11 U.S.C. § 365(n) in a timely

fashion. See Bankruptcy Order at 135. The Bankruptcy Court found

that even though Hitachi was "fully apprised of its rights and of

the Trustee's motions affecting its rights," Hitachi failed to

take appropriate action prior to the bar date for asserting rights

under § 365(n). Id. at 135-36. Indeed, Hitachi should not have

been surprised to find that the Trustee did not list the

unexecuted license agreement on the list of contracts accepted or

rejected because Read-Rite, the Trustee, and Western Digital

consistently asserted that there was no contract. Having reviewed

the record, the Court agrees with the Bankruptcy Court: Hitachi

had actual notice of the proceedings, yet failed to act to protect

its asserted rights. See AA, Ex. C (stipulation stating that all

pleadings were served on Hitachi or its subsidiaries). Moreover,

Hitachi failed to present evidence of excusable neglect sufficient

to overcome the Bankruptcy Court's ruling. There is no indication

as to why Hitachi sat on its rights for so long before deciding to

act.

3. Hitachi's remaining arguments also fail.

In its brief, Hitachi makes several other arguments as to why

Case 3:06-cv-04173-SC Document 43 Filed 08/13/07 Page 9 of 11
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 10

the Court should rule that the license agreement is effective

notwithstanding the failure of the parties to execute a written

agreement. First, Hitachi argues that it has an implied license

under the doctrine of legal estoppel. To establish an implied

license, Hitachi must show that "a patentee has licensed or

assigned a right, received consideration, and then sought to

derogate from the right granted." Wang Labs., Inc. v. Mitsubishi

Elec. Am., Inc., 103 F.3d 1571, 1581 (Fed. Cir. 1997). Hitachi's

argument fails because neither Read-Rite nor Western Digital

granted Hitachi a license to the patents and neither received any

consideration for doing so. 

Similarly, Hitachi's reliance on Syndia Corp. v. Lemelson

Medical, 165 F. Supp. 2d 728 (D. Ill. 2001) and Institut Pasteur

v. Cambridge Biotech Corp., 186 F.3d 1356 (Fed. Cir. 1999) is

unavailing. In Syndia, the parties had previously executed both a

management agreement and a letter agreement, through which the

court concluded that a legally binding exclusive license had

already been formed. See 165 F. Supp. 2d at 742-43. In Institut

Pasteur, the parties had already entered into a cross-license

agreement which required one party to use its best efforts to

recover the rights to the patents. See 186 F.3d at 1375. The

Court finds both cases distinguishable because Read-Rite and

Hitachi had not entered into an agreement prior to the bankruptcy

filing date and Western Digital and Hitachi never reached an

agreement after Western Digital purchased Read-Rite's assets. The

Court declines to enforce an unsigned agreement which expressly

conditioned effectiveness upon valid signatures from both parties. 

Case 3:06-cv-04173-SC Document 43 Filed 08/13/07 Page 10 of 11
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 11

In addition, Hitachi's argument that Section 2.10 is analogous to

an option agreement fails. The various drafts of the agreement

stated that they were "for discussion purposes only," indicating

that an option contract was not in effect. Furthermore, Read-Rite

had received no consideration from Hitachi to enter into an option

contract. 

Having carefully analyzed this potential transaction, the

District Court agrees with the findings of the Bankruptcy Court. 

No valid license agreement exists between Read-Rite and Hitachi.

V. CONCLUSION

For the reasons discussed herein, the Court AFFIRMS the

decision of the Bankruptcy Court. 

 IT IS SO ORDERED.

Dated: August 13, 2007 

UNITED STATES DISTRICT JUDGE

Case 3:06-cv-04173-SC Document 43 Filed 08/13/07 Page 11 of 11