Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_05-cv-03522/USCOURTS-cand-4_05-cv-03522-8/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Breach of Contract

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

MONOLITHIC POWER SYSTEMS, INC., a

Delaware corporation,

Plaintiff,

v.

TAIWAN SUMIDA ELECTRONICS, INC., a

Taiwan corporation,

Defendant.

 /

TAIWAN SUMIDA ELECTRONICS, INC., a

Taiwan corporation,

Counterclaimant,

v.

MONOLITHIC POWER SYSTEMS, INC., a

Delaware corporation,

Counterclaim Defendant.

 /

No. C 05-3522 CW

ORDER GRANTING IN

PART TAIWAN

SUMIDA'S MOTION

FOR SUMMARY

JUDGMENT AND

GRANTING IN PART

MPS'S MOTION FOR

SUMMARY

ADJUDICATION AND

DENYING MPS'S

MOTION TO STAY

PROCEEDINGS

Defendant and Counterclaimant Taiwan Sumida Electronics, Inc.

(Sumida) moves for summary judgment on all claims asserted against

it and on all of its counterclaims. Plaintiff and Counterclaim

Defendant Monolithic Power Systems, Inc. (MPS) opposes the motion

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and cross-moves for summary adjudication that Sumida is barred, as

a matter of law, from recovering its lost profits and the

attorneys' fees it incurs in this case. The matter was heard on

April 20, 2007. Having considered all of the papers filed by the

parties, the evidence cited therein and oral argument, the Court

grants in part both motions.

BACKGROUND

MPS and O2 Micro International are competitors in the market

for inverter controller chips. Sumida purchases inverter

controller chips from MPS and O2 Micro. In late 2002, O2 Micro

warned Sumida that it was infringing O2 Micro's patents by using

MPS's inverter controller chips as components in Sumida's inverter

modules. Sumida asked MPS to protect it from any possible

infringement claims brought by O2 Micro against it. MPS sent

Sumida a proposed indemnification agreement, which MPS had drafted

and which its representative had already signed. There were no

negotiations over the proposed agreement and, on December 25, 2002,

MPS and Sumida entered into a written indemnification agreement. 

The agreement is governed by California law and provides:

2. MPS and SUMIDA agree that MPS has the right to defend or

at its option to settle, and MPS agrees, at its own

expense, to defend or at its option to settle any claim,

suit or proceeding brought against SUMIDA alleging

infringement of any patent owned by O2 Micro

International Limited or O2 Micro, Inc. (collectively,

"Action") for the sale of any Product or any combination

including a Product wherein such infringement would not

occur but for such Product being a part of such

combination, subject to the limitations hereinafter set

forth. MPS shall have sole control of any such Action or

settlement negotiations, and MPS agrees to pay any and

all expenses, losses, damages, demands, liabilities and

expenses (including attorneys' fees and court costs), and

final judgment entered against SUMIDA, or settlement

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amount agreed to by MPS, in any such Action, subject to

the limitations hereinafter set forth.

3. SUMIDA agrees to notify MPS promptly in writing of such

Action, gives MPS authority to proceed as contemplated

above, and gives MPS proper and full information and

assistance to defend and/or settle any such Action.

On January 6, 2003, O2 Micro filed a complaint in the United

States District Court for the Eastern District of Texas, alleging

that Sumida and its parent company infringed O2 Micro's '615 and

'722 patents. A few days later, MPS also sued Sumida and its

parent company in the Eastern District of Texas, alleging that they 

infringed MPS's '814 and '881 patents.

In December, 2003, pursuant to the indemnification agreement,

MPS agreed to defend Sumida in the Texas action brought by O2

Micro. But, because of the conflict created by MPS's suit against

Sumida, MPS's counsel could not represent Sumida in the O2 Micro

action. MPS selected the law firm of Kenyon & Kenyon to represent

Sumida, replacing Sumida's chosen counsel, the law firm of Squire,

Sanders & Dempsey. Although Squire, Sanders & Dempsey remained of

record, Kenyon would be "responsible for and control the litigation

in accordance with MPS's rights under the indemnity agreement." 

Meckes Dec., Ex. A at 61:9-12. Nonetheless, the engagement letter

made clear that Kenyon's client was Sumida and, therefore, although

MPS paid the invoices, Kenyon represented only the interest of

Sumida and its "duty of loyalty is to them only." Minton Dec.,

Ex. 44. 

While MPS was defending Sumida in the Texas action, MPS was

also engaged in litigation with O2 Micro before this Court. The

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1Although the Northern California action consisted of two

cases, because those cases were consolidated for trial, the Court

refers to the litigation as the Northern California action. See C

00-4071 CW and C 01-3995 CW. 

4

Northern California action1 concerned MPS's '814 and '881 patents

and O2 Micro's '615 patent. Also at issue was whether MPS

misappropriated O2 Micro's trade secrets. 

In April, 2004, Sumida and MPS entered into a Joint Defense

Agreement, which stated that MPS's and Sumida's interests were

aligned against the "O2 Claims" asserted in the Texas and Northern

California actions. Minton Dec., Ex. 4. The agreement defined "O2

Claims" as "the allegations asserted by O2 in the Suits that (1) O2

owns the O2 Asserted Patents; (2) the O2 Asserted Patents are

valid; and (3) the Parties have infringed, contributed to

infringement of, and/or actively induced others to infringe the O2

Asserted Patents." Id. The agreement did not address the trade

secret causes of action in the Northern California action or

mention the indemnity agreement. Further, it expressly provided

that, although the parties may exchange information necessary to

their defenses, nothing in the agreement "shall impose any

affirmative obligation on the part of any Party to share or

disclose any information"; nor did the agreement impose any

obligation "in any way to participate in or assist the other

Party." Id.

On July 22, 2004, MPS's attorney Michael Barclay sent an email

to Nathan Lane, one of Sumida's attorneys at Squire, Sanders,

informing him that, in the Northern California action, O2 Micro was

claiming as part of its trade secret a certain transformer sold by

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Sumida. Mr. Barclay noted that this issue was "independent of the

indemnity for the Texas suit, but is still one for which MPS would

appreciate Sumida's assistance." Meckes Dec., Ex. 13. He asked if

Sumida would "graciously provide" documentation showing the first

sales of the relevant transformers. Id. Mr. Barclay states that,

at that time, he had no interest in triggering a legal fight about

what was "legally required" by the "full information and

assistance" clause of the indemnity agreement by attempting to

coerce Sumida into providing the information. He further states

that he clearly communicated to Sumida's counsel that the alleged

transformer trade secret claim could have serious implications for

Sumida. Indeed, according to Mr. Barclay, before the trials in the

Northern California and Texas actions began, it had become apparent

that the alleged transformer trade secret was relevant to both

actions. 

After the July 22, 2004 email, Mr. Barclay discussed the trade

secret claim over the telephone with Mr. Lane, who informed Mr.

Barclay that, while Sumida might be able to assist MPS informally,

it did not want to appear to be taking sides between its two

suppliers. When Mr. Lane asked if Sumida was "technically legally

required" to assist MPS, Mr. Barclay again responded that, although

Sumida was not "legally required to" assist MPS, it was in its best

interest to do so. Meckes Dec., Ex. A 94:23—95:5.

Sumida obtained a copy of a catalog of one of its sister

companies, which it gave to MPS and which was later admitted as

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2

The catalog was relevant to the trade secret claims, not the

patent claims. 

3

This information was also relevant to the trade secret

claims, not the patent claims.

6

evidence in the Northern California trial.2 In order to get more

documents, however, MPS sought information related to Sumida's

transformers through formal legal channels in Taiwan, by use of

letters rogatory.3 Mr. Barclay sent drafts of the letters rogatory

to Sumida's counsel in the Texas action several weeks before they

were formally issued by the court. No one either at Squire,

Sanders or at Kenyon told MPS that there were any problems or

deficiencies with the letters rogatory. But, when the Taiwanese

district court asked Sumida to provide documents or testimony in

connection with the letters rogatory, Sumida stated that the

letters rogatory did not comply with Taiwanese law and argued that

it should not be required to provide any information or documents. 

The Taiwanese district court did not order Sumida to produce the

requested information. 

In January, 2005, Mr. Barclay sent Sumida's counsel, Ron Prass

at Kenyon, an email, requesting "Sumida's assistance, for both

Sumida's and MPS's benefit, to defend against the O2 Micro

patents." Meckes Dec., Ex. 22. At issue was whether earlier

versions of O2 Micro products had functioning "open lamp" or "overvoltage" protection. O2 Micro claimed that it had solved this

protection problem earlier than MPS; MPS believed that it had

solved it first. Sumida states that, after reviewing this request,

it immediately began collecting documents that might be responsive

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to MPS's request. But, according to an email that Sumida's General

Office Manager sent to other two Sumida employees, "Naturally, if

such evidence does exist, it is obvious that the evidence will not

be favorable to O2. Therefore as for whether or not it should be

put forth, or how it should be put forth, we still need to ask

General Manager Wu to make a final decision before it can be

determined." Minton Dec., Ex. 14. Sumida gave to Mr. Prass

documents it believed were relevant to MPS's request. MPS claims

that it never received these documents and that, although they were

relevant, Kenyon did not use the documents in Sumida's defense. 

According to Mr. Barclay, the documents would have been helpful

both in defending against the trade secret claims in California and

also in strengthening a key invalidity defense in the Texas action.

That same month, MPS's general counsel sent an email to Sumida

noting that "MPS needs to see Sumida demonstrating its commitment

to the Joint Defense Agreement between the parties by cooperating,

collecting and sharing the evidentiary information in both 

parties' common interest. We are concerned about the pace and

responsiveness to our recent requests." Minton Dec., Ex. 46. The

email did not mention the indemnity agreement. 

In April, 2005, O2 Micro, MPS and Sumida participated in a

joint mediation in Texas to try to settle all of the pending

actions. No settlement was reached. Around this time, MPS's

general counsel permitted a Sumida officer to discuss with O2 Micro

a possible settlement. That permission, however, was based on four

conditions, including that Sumida had to tell O2 Micro that MPS had

to approve the terms of any settlement and that there was to be "no

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admission of anything by any party." Minton Dec., Ex. 32. The

Sumida officer sent an email to Joe Lin at O2 Micro, informing him

that "many Sumida employees have been, and will be, contributing a

significant amount of relevant info and data to MPS for the

upcoming trial and retrials anticipated after appeals." Minton

Dec., Ex. 33. But, according to the Sumida officer, he could stop

that effort, exit the MPS Joint Defense Agreement and "return to

the neutral corner (or even align with your side)." Id. Again,

however, no settlement was reached. 

A few months later, the Northern California action went to

trial. The issues in that trial were whether MPS had stolen O2

Micro's trade secrets, whether O2 Micro infringed MPS's patents and

whether MPS's patents were invalid. O2 Micro's '615 patent was no

longer at issue; the Court had granted summary judgment of noninfringement in MPS's favor. After an eleven-day trial, the jury

decided against MPS, finding that MPS had stolen various O2 Micro

trade secrets, including the trade secret concerning Sumida's

transformer.

After the trial, MPS became concerned that Kenyon was not "up

to the task" of defending Sumida in the Texas action. Meckes Dec.,

Ex. B at 233:3-6. It never, however, expressed its concerns to

Kenyon or Sumida. Mr. Barclay, however, did advise Kenyon that

Sumida should assert a best mode defense to O2 Micro's patent

infringement claims. Sumida did not. Nor did Sumida, despite

MPS's urging, present a defense in the Texas action based upon

MPS's '814 patent, which MPS believed was prior art to the O2 Micro

patents. According to MPS, not only did Sumida not listen to its

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strategic advice, but Sumida failed to keep MPS "in the loop" and

failed to allow MPS to control the litigation. Minton Dec., Ex.

45, 228-230. Nonetheless, according to Mr. Prass at Kenyon, Sumida

"did its best to defend against O2 Micro's claims in the Texas

Action." Prass Dec., ¶ 4.

On August 3, 2005, Mr. Barclay sent an email to Sumida's

counsel at Squire, Sanders and at Kenyon, requesting declarations

from Sumida to use in MPS's opposition to O2 Micro's motion for an

injunction in the Northern California action. After advising

Sumida that it had a business interest in working with MPS to

defeat the entry of an injunction, Mr. Barclay stated for the first

time that Sumida had a legal obligation to assist MPS pursuant to

paragraph 3 of the indemnity agreement, even though the

declarations related to O2 Micro's trade secret claims, not its

patent claims. In an email sent less than a week later, MPS's

attorney Jamie DiBoise informed Sumida that the requested

declarations were "really the bare minimum necessary to assist MPS

in defending the Sumida Texas action." Meckes Dec., Ex. 31. 

Further, if Sumida refused to provide the declarations requested,

MPS would "consider it a breach of the Indemnification Agreement,

and terminate that agreement, as we cannot be in a position of

being subject to indemnity obligations while at the same time

having Sumida fail to provide assistance and compromise its

position in the Texas action." Id. Three days after MPS's imposed

deadline, Sumida sent a declaration to MPS.

On August 30, 2005, three weeks before trial in Texas was

scheduled to begin, MPS terminated its indemnification agreement

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with Sumida. According to MPS, Sumida's failure to provide

information and assistance prevented MPS from exercising "control,"

as provided by section 2 of the agreement; Sumida's failure to

provide the requested "proper and full information and assistance"

to defend the Texas action, as section 3 of the agreement required,

was another serious breach and, thus, MPS had "no choice" but to

terminate the indemnity agreement. Meckes Dec., Ex. 33. Mr. Prass

states that he does not recall that, prior to the termination,

anyone either from or representing MPS ever informed him that

Sumida or Kenyon had acted in a way that might compromise Sumida's

obligations under the Indemnification Agreement between MPS and

Sumida. 

The day after terminating the indemnification agreement, MPS

filed the present law suit against Sumida for breach of contract

and breach of the covenant of good faith and fair dealing. 

On November 14, 2005, the trial in Texas began. On

November 17, 2005, the jury returned a verdict that Sumida had

induced and/or contributed to the infringement of O2 Micro's '722

patent, that the infringement was willful and that the asserted

claims were not invalid. Sumida and O2 Micro had stipulated

immediately before the trial that, if O2 Micro prevailed, actual

damages would be set at two million dollars, with enhanced damages,

if any, capped at two million dollars and attorneys' fees capped at

three million dollars. In April, 2006, the court in Texas entered

judgment against Sumida in the amount of four million dollars and

granted a permanent injunction. It later awarded O2 Micro 

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attorneys' fees in the amount of $2,725,689.46 and costs of

$93,931.53.

Sumida then countersued MPS in this Court, seeking to recover

the money it owed O2 Micro, attorneys' fees and lost profits. 

Sumida argues that, under the indemnification agreement, its duty

to provide MPS with "full information and assistance to defend

and/or settle" did not extend to information relevant only to the

Northern California litigation between MPS and O2 Micro; it

contends that it was MPS that breached the indemnity agreement and

the covenant of good faith and fair dealing.

LEGAL STANDARD

Summary judgment is properly granted when no genuine and

disputed issues of material fact remain, and when, viewing the

evidence most favorably to the non-moving party, the movant is

clearly entitled to prevail as a matter of law. Fed. R. Civ.

P. 56; Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986);

Eisenberg v. Ins. Co. of N. Am., 815 F.2d 1285, 1288-89 (9th Cir.

1987).

The moving party bears the burden of showing that there is no

material factual dispute. Therefore, the court must regard as true

the opposing party's evidence, if supported by affidavits or other

evidentiary material. Celotex, 477 U.S. at 324; Eisenberg, 815

F.2d at 1289. The court must draw all reasonable inferences in

favor of the party against whom summary judgment is sought. 

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,

587 (1986); Intel Corp. v. Hartford Accident & Indem. Co., 952 F.2d

1551, 1558 (9th Cir. 1991). 

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Material facts which would preclude entry of summary judgment

are those which, under applicable substantive law, may affect the

outcome of the case. The substantive law will identify which facts

are material. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248

(1986).

Where the moving party does not bear the burden of proof on an

issue at trial, the moving party may discharge its burden of

production by either of two methods. Nissan Fire & Marine Ins.

Co., Ltd., v. Fritz Cos., Inc., 210 F.3d 1099, 1106 (9th Cir.

2000). 

The moving party may produce evidence negating an

essential element of the nonmoving party’s case, or,

after suitable discovery, the moving party may show that

the nonmoving party does not have enough evidence of an

essential element of its claim or defense to carry its 

ultimate burden of persuasion at trial. 

Id. 

If the moving party discharges its burden by showing an

absence of evidence to support an essential element of a claim or

defense, it is not required to produce evidence showing the absence

of a material fact on such issues, or to support its motion with

evidence negating the non-moving party's claim. Id.; see also

Lujan v. Nat’l Wildlife Fed’n, 497 U.S. 871, 885 (1990); Bhan v.

NME Hosps., Inc., 929 F.2d 1404, 1409 (9th Cir. 1991). If the

moving party shows an absence of evidence to support the non-moving

party's case, the burden then shifts to the non-moving party to

produce "specific evidence, through affidavits or admissible

discovery material, to show that the dispute exists." Bhan, 929

F.2d at 1409. 

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If the moving party discharges its burden by negating an

essential element of the non-moving party’s claim or defense, it

must produce affirmative evidence of such negation. Nissan, 210

F.3d at 1105. If the moving party produces such evidence, the

burden then shifts to the non-moving party to produce specific

evidence to show that a dispute of material fact exists. Id.

If the moving party does not meet its initial burden of

production by either method, the non-moving party is under no

obligation to offer any evidence in support of its opposition. Id.

This is true even though the non-moving party bears the ultimate

burden of persuasion at trial. Id. at 1107.

Where the moving party bears the burden of proof on an issue

at trial, it must, in order to discharge its burden of showing that

no genuine issue of material fact remains, make a prima facie

showing in support of its position on that issue. UA Local 343 v.

Nor-Cal Plumbing, Inc., 48 F.3d 1465, 1471 (9th Cir. 1994). That

is, the moving party must present evidence that, if uncontroverted

at trial, would entitle it to prevail on that issue. Id.; see also

Int’l Shortstop, Inc. v. Rally's, Inc., 939 F.2d 1257, 1264-65 (5th

Cir. 1991). Once it has done so, the non-moving party must set

forth specific facts controverting the moving party's prima facie

case. UA Local 343, 48 F.3d at 1471. The non-moving party's

"burden of contradicting [the moving party's] evidence is not

negligible." Id. This standard does not change merely because

resolution of the relevant issue is "highly fact specific." Id. 

DISCUSSION

Each party alleges that the other breached the indemnification

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agreement and the covenant of good faith and fair dealing. As

noted above, Sumida moves for summary judgment in its favor on

MPS's claims and its counterclaims. MPS moves for summary

adjudication that Sumida cannot recover lost profits or the

attorneys' fees it incurs in this case.

I. Sumida's Motion for Summary Judgement

A. MPS's Breach of Contract Claim

To prevail on a breach of contract claim, a plaintiff must

establish four elements: "(1) the existence of a valid contract;

(2) the plaintiff's performance or excuse for nonperformance;

(3) the defendant's unjustified or unexcused failure to perform;

and (4) damage to the plaintiff." Lincoln Nat. Corp. v. TakeCare,

Inc., 1998 WL 281290, *3 (N.D. Cal.) (quoting 4 Witkin, California

Procedure, § 476 (4th ed.)); see also First Commercial Mortgage Co

v. Reece, 89 Cal. App. 4th 731, 745 (2001). There is no dispute

that the indemnity agreement is a valid, enforceable contract. 

Sumida contends that MPS also bears the burden of proving that

any breach of the cooperation clause resulted in "substantial

prejudice" to MPS. Sumida need not rely on its "substantial

prejudice" argument for the Court to award summary judgment in its

favor on MPS's claims, nor need the Court address it. 

As Sumida points out, there is no evidence that it failed to

cooperate fully in the defense of the Texas action or that it

failed to provide information that was requested for use in the

Texas action. To the contrary, there is evidence that Sumida spent

hundreds, if not thousands, of hours retrieving information

requested by Kenyon; it produced over one million pages of

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documents and brought multiple witnesses to the United States for

depositions and trials. Sumida points to Mr. Prass's declaration,

stating that Sumida was cooperative in providing information and

assistance in defense of the Texas action; indeed, as noted above,

it "did its best to defend against O2 Micro's claims in the Texas

action." Prass Dec., ¶ 3. It emphasizes that MPS never informed

it that keeping MPS's representative "in the loop" was a condition

of indemnification. Nor did MPS inform Sumida that it had a legal

obligation to give MPS any requested information or that its

failure to do so would be a breach of the agreement, until after

MPS lost in the Northern California action which was shortly before

it terminated the agreement. Up until the month that MPS

terminated the agreement, it expressly stated to the contrary. 

MPS attempts to create triable issues of fact. It contends

that Sumida did not give it information it requested concerning

over-voltage protection, information allegedly relevant to both the

Texas and Northern California actions. The evidence shows that

Sumida gave the over-voltage protection materials to Kenyon,

Sumida's counsel appointed by MPS. That Mr. Prass then chose not

to use those materials at trial, informed MPS that the documents

were not useful and never gave them to MPS does not show that

Sumida failed to provide full information and assistance to defend

and/or settle the Texas action. 

Mr. Prass's failure to provide the over-voltage protection

documents to MPS for use in the Northern California action could

establish a triable issue of fact only if Sumida's obligation to

give MPS "full information and assistance" is interpreted to

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require Sumida to provide any information and assistance requested

by MPS if doing so might give MPS some possible advantage in

settling the Texas action, even if that information is only useful

in the Northern California action.

The term "full information and assistance to defend and/or

settle any such Action" is not clearly defined. As the Court

previously noted, it is a broad obligation, the scope of which is

not specifically constrained and is disputed by the parties. 

Nonetheless, the cooperation clause, as a matter of law, is not as

broad as MPS claims it to be. 

In interpreting a contract, the Court may consider the

subsequent acts and conduct of the parties in the execution of the

contract in order to determine the intent of those parties. Cal.

Code Civ. P. § 1856(c). The Ninth Circuit instructs, “The

construction given the contract by the acts and conduct of the

parties with knowledge of its terms, before any controversy has

arisen as to its meaning, is entitled to great weight and will,

when reasonable, be adopted and enforced by the court.” U.S.

Cellular Inv. Co. v. GTE Mobilnet, Inc., 281 F.3d 929, 937 (9th

Cir. 2002) (quoting Warner Constr. Corp. v. City of Los Angeles, 2

Cal. 3d 285, 296-97 (1970)). MPS's assurances to Sumida that it

was not legally required to give MPS information relating to the

trade secret claims show that the parties did not intend for the

cooperation clause to be read so broadly. Another example of the

parties' conduct belying MPS's interpretation of the cooperation

clause is the Joint Defense Agreement, which did not list the trade

secret claims as a "common interest." The only common interests

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identified were those that involved O2 Micro's allegations of

infringement against Sumida and MPS.

MPS provides no extrinsic evidence to support its broad

reading of the contract. That the parties believed the Texas and

Northern California actions to be "interrelated" does not establish

a material dispute of fact. Rather, this supports Sumida's

interpretation of the contract. Even though Mr. Barclay thought

that the cases were "related," he told Mr. Lane that Sumida had no

legal obligation to provide any materials concerning the trade

secret claims. Nor does the fact that O2 Micro wanted a global

settlement create a material dispute of fact or support MPS's

interpretation of the cooperation clause. Again, although MPS was

aware of this, it never told Sumida that it was required to provide

information regarding the trade secret claims that arguably could

help MPS reach a global settlement, until shortly before MPS

terminated the agreement. 

MPS' broad reading of Sumida's obligations under the indemnity

agreement is not supported by the law or the facts. Thus, whether

Sumida failed to assist MPS with trade secret information, useful

only in the Northern California action, and provide MPS with overvoltage protection information, useful only in the Northern

California action, does not constitute a dispute concerning whether

Sumida fulfilled its obligations under the indemnity agreement. 

Sumida was not required to provide information to MPS that was

useful only to the Northern California action. Thus, the Court

finds that there are no material disputes of fact and that MPS

cannot prove its claim that Sumida failed to cooperate as required

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under the indemnity agreement or that it prevented MPS from

controlling the Texas action; therefore, the Court grants summary

judgment in Sumida's favor that MPS's claims against it fail. 

B. Sumida's Counterclaims

Sumida states that, if the Court finds that MPS's claims fail,

then, "as a necessary corollary," the Court should rule that MPS's

termination of the indemnification agreement was not justified and

grant Sumida summary judgment on its counterclaims, including its

claim for breach of the covenant of good faith and fair dealing. 

MPS responds that there are factual disputes surrounding Sumida's

failure to provide the information and assistance to which MPS was

entitled. As discussed above, however, the Court did not find any

material disputes of fact. Nonetheless, although the Court finds

that MPS breached the indemnification agreement, it does not find

that, as a matter of law, it breached the implied covenant of good

faith and fair dealing by terminating the indemnity agreement. One

can breach a contract without breaching the implied covenant of

good faith and fair dealing. Although Sumida has presented

evidence that, if uncontroverted at trial, would entitle it to

prevail on its claim for breach of the covenant of good faith and

fair dealing, MPS has set forth facts controverting Sumida's prima

facie case and suggesting that it did not terminate the indemnity

agreement in bad faith. See UA Local 343, 48 F.3d at 1471. 

Therefore, the Court denies Sumida summary judgment on this claim.

II. MPS's Motion for Summary Adjudication

A. Lost Profits

The agreement provides that MPS will "pay any and all

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expenses, losses, damages, demands, liabilities and expenses

(including attorneys' fees and court costs), and final judgment

entered against SUMIDA, or settlement amount agreed to by MPS in

any such Action." Sumida contends that the losses include the

$ 1.61 million it suffered as business losses as a result of the

verdict and injunction against it in the Texas action. See Fern

Dec., Ex. 1. MPS responds that, even if Sumida is able to

demonstrate liability, it is barred as a matter of law from

recovering the profits it claims it lost as a result of losing the

Texas action, arguing that the term "losses" in the indemnification

agreement does not encompass lost profits. 

California Civil Code section 2778(2) provides that, "unless a

contrary intention appears" in the agreement, "under an indemnity

against claims, or demands, or damages, or costs, expressly, or in

other equivalent terms, the person indemnified is not entitled to

recover without payment thereof." MPS contends that, because lost

profits are never actually paid by an indemnitee and because there

is no "contrary intention" in the agreement, section 2778(2)

precludes recovery of Sumida's lost profits. It notes that an

email from a Sumida officer to MPS's general counsel acknowledges

that "the current Indemnification Agreement does not cover any lost

sales nor profit." Minton Dec., Ex. 47.

Sumida responds that MPS's reliance on this section is

misguided and that there is no basis for excluding from the term

"losses" those losses that it actually suffered, but did not "payout-of-pocket." The Court finds that MPS's reliance on section

2278(2) is not misguided. Sumida's business losses are not an

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4

Nor does Sumida cite Jones-Hamilton Co., a case which remains

good law and which is binding on this Court.

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actual loss that Sumida paid or for which it is liable to O2 Micro. 

As MPS notes, Sumida does not argue that its business losses are a

"liability." 

The Court grants summary adjudication in MPS's favor that

Sumida is barred, as a matter of law, from recovering its alleged

business losses. 

B. Attorneys' Fees

MPS further contends that Sumida is barred as a matter of law

from recovering the attorneys' fees it incurs in this case. It

relies on California appellate cases holding that, unlike a standalone attorneys' fees provision in a contract that calls for

recovery of fees on an action to enforce the contract itself, a

provision including attorneys' fees as an item of loss in an

indemnity clause does not qualify as a provision for attorneys'

fees in an action to enforce the contract. See, e.g., Campbell v.

Scripps Bank, 78 Cal. App. 4th 1328, 1337 (2000). In making this

argument, MPS ignores relevant authority: it does not address

DeWitt v. W. Pac. R.R. Co, 719 F.2d 1448, 1453 (9th Cir. 1983), the

Ninth Circuit case cited by Sumida in its motion for summary

judgment, nor does it cite Jones-Hamilton Co. v. Beazer Materials &

Services, Inc., 973 F.2d 688 (1992).4

In DeWitt, the Ninth Circuit, acknowledging there was a split

in California authority, interpreted California law to permit an

aggrieved indemnitee to collect its attorneys' fees in an action to

enforce the indemnification agreement. Approximately a decade

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5

 Sumida's Request for Judicial Notice (Docket No. 60) is

GRANTED. Sumida's Supplemental Request for Judicial Notice (Docket

No. 81) is also GRANTED. Further, Sumida's objections to evidence

submitted by MPS are overruled as moot. The Court did not consider

any improper or inadmissible evidence in deciding these motions. 

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later, in Jones-Hamilton Co., the defendant requested that the

Ninth Circuit "reevaluate" its holding in DeWitt based on

California appellate cases decided after Dewitt. The court

refused. It explained that "DeWitt's interpretation of California

law is 'binding in the absence of any subsequent indication from

the California courts that our interpretation was incorrect.'" 973

F.2d at 696 n.4 (quoting Owen v. United States, 713 F.2d 1461, 1464

(9th Cir. 1983)). The additional intermediate appellate court

decisions "on one side of a clear split" cited by the defendants

did not indicate that the Ninth Circuit's past interpretation of

California law was incorrect and, thus, did not provide cause for

the court to revisit its holding in DeWitt. Id. 

Similarly here, the additional intermediate appellate cases

MPS cites do "not provide the kind of indication" that the Ninth

Circuit's "past interpretation of California law was incorrect." 

Id. Absent any ruling from the California Supreme Court or the

Ninth Circuit on this issue, the Court is bound to follow DeWitt

and Jones-Hamilton Co., rather than the intermediate appellate

cases cited by MPS. Therefore, the Court denies MPS's motion for

summary adjudication on this ground.

CONCLUSION

For the foregoing reasons, the Court GRANTS IN PART Sumida's

motion for summary judgment (Docket No. 51) and DENIES it IN PART.5

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6

While these motion were pending, MPS filed a motion to stay

proceedings; Sumida opposed the motion. The matter was submitted

on the papers. The power to stay proceedings is within the sound

discretion of the district court, and is incidental to the power

inherent in every court to control the disposition of the causes on

its docket with economy of time and effort for itself, for counsel

and for litigants. Landis v. N. Am. Co., 299 U.S. 248, 254 (1936). 

Having considered the parties' papers and good cause not appearing,

the Court DENIES MPS' Motion to Stay Proceedings (Docket No. 101).

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The Court grants summary judgment in favor of Sumida on all claims

in MPS's complaint and grants summary judgment in favor of Sumida

on the third claim in its counter-complaint for breach of contract.

In addition, pursuant to Sumida's first claim for declaratory

relief, the Court determines that Sumida did not breach the

indemnification agreement. Pursuant to Sumida's second claim for

declaratory relief, the Court determines that MPS owes Sumida a

continuing obligation under the indemnification agreement "to pay

all expenses, losses, damages, liabilities and expenses" in the

Texas action; thus, MPS is ordered to pay or otherwise satisfy any

final judgment, including interest and costs, entered against

Sumida in the Texas action, as well as the attorneys' fees incurred

in the defense and appeal of the Texas action. The Court, however,

denies Sumida summary judgment in its favor on its fourth

counterclaim for breach of good faith and fair dealing. 

MPS's motion for summary adjudication (Docket No. 69) is

GRANTED IN PART AND DENIED IN PART. Although Sumida is barred, as

a matter of law, from recovering its alleged business losses, it

may recover the attorneys' fees it incurs in this case.6 

The parties shall schedule another private mediation session

with the Honorable Edward A. Infante (ret.). The pretrial

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conference is currently set for August 7, 2007 and a four day jury

trial is scheduled to begin on August 13, 2007. 

IT IS SO ORDERED.

Dated: 6/25/07 

CLAUDIA WILKEN

United States District Judge

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