Court Opinion

ID: 9891144
Source: CourtListenerOpinion
Date Created: 2023-10-17 17:00:56.213947+00
Date Added: 2024-06-11T13:39:12.076068
License: Public Domain

NOT FOR PUBLICATION                           FILED
                    UNITED STATES COURT OF APPEALS                       OCT 17 2023
                                                                      MOLLY C. DWYER, CLERK
                                                                       U.S. COURT OF APPEALS
                           FOR THE NINTH CIRCUIT

NETLIST INC., a Delaware corporation,           No.    22-55209

                Plaintiff-Appellee,             D.C. No.
                                                8:20-cv-00993-MCS-ADS
 v.

SAMSUNG ELECTRONICS CO., LTD., a                MEMORANDUM*
Korean corporation,

                Defendant-Appellant.

NETLIST INC., a Delaware corporation,           No.    22-55247

                Plaintiff-Appellant,            D.C. No.
                                                8:20-cv-00993-MCS-ADS
 v.

SAMSUNG ELECTRONICS CO., LTD., a
Korean corporation,

                Defendant-Appellee.

                   Appeal from the United States District Court
                      for the Central District of California
                    Mark C. Scarsi, District Judge, Presiding

                        Argued and Submitted June 8, 2023
                              Pasadena, California

      *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
Before: M. SMITH and DESAI, Circuit Judges, and AMON,** District Judge.
Partial Dissent by Judge DESAI.

      This appeal arises from a contract dispute between Samsung Electronics Co.,

Ltd. and Netlist Inc. Samsung appeals the district court’s (1) grant of partial

summary judgment in favor of Netlist on Netlist’s breach of contract claims, (2)

award of nominal damages, (3) grant of a declaratory judgment that Netlist properly

terminated the contract, and (4) preclusion of Samsung’s affirmative defenses at

trial. Netlist cross appeals the district court’s preclusion of certain fees pursuant to

the contract’s consequential-damages bar. We assume the parties’ familiarity with

the briefing and record. We have jurisdiction pursuant to 28 U.S.C. § 1291, and we

affirm in part and reverse and remand in part.

      1.     The district court erred in granting Netlist summary judgment on its

claim that Samsung violated § 6.2 of the Joint Development and License Agreement

(“JDLA”), because the provision is ambiguous as to whether Samsung’s supply

obligation is limited to the now-failed joint development project (the “JDP”) or

applies more broadly to the parties’ overall business relationship. See L.F. v. Lake

Wash. Sch. Dist. #414, 947 F.3d 621, 625 (9th Cir. 2020) (grant of summary

judgment reviewed de novo). Section 6.2 requires Samsung to “supply NAND and

      **
             The Honorable Carol Bagley Amon, United States District Judge for
the Eastern District of New York, sitting by designation.

                                           2
DRAM products to Netlist on Netlist’s request at a competitive price.”            The

substantive law of New York governs this dispute. To assess contract ambiguity,

we consider “the intention of the parties . . . [as] gathered from the four corners of

the instrument.” Beal Sav. Bank v. Sommer, 865 N.E.2d 1210, 1213 (N.Y. 2007).

And in determining the parties’ intent as to a particular provision, New York courts

read “the entirety of the agreement in the context of the parties’ relationship and

circumstances,” rather than isolating distinct provisions of the agreement. In re

Riconda, 688 N.E.2d 248, 252 (N.Y. 1997).

      Standing alone, the plain language of § 6.2 favors Netlist’s interpretation: that

Samsung must fulfill all NAND and DRAM orders by Netlist for whatever purpose.

See Vt. Teddy Bear Co. v. 538 Madison Realty Co., 807 N.E.2d 876, 879 (N.Y. 2004)

(“[C]ourts should be extremely reluctant to interpret an agreement as impliedly

stating something which the parties have neglected to specifically include.” (citation

omitted)). Read as an integrated whole, however, the contract’s apparent purpose as

derived from its title, structure, and related provisions make § 6.2 “reasonably

susceptible of more than one interpretation.” See Chimart Assocs. v. Paul, 489

N.E.2d 231, 233 (N.Y. 1986).

      First, the JDLA has two stated purposes: (1) developing a new NVDIMM-P

product (i.e., the JDP), and (2) patent cross-licensing. The title and preamble of the

agreement exclusively reference these two topics, and each substantive section

                                          3
corresponds entirely to one of the two goals. In this context, it is reasonable to

interpret § 6.2 as tethered to one of those projects rather than as a separate,

freestanding obligation. See Hooper Assocs., Ltd. v. AGS Comps., Inc., 548 N.E.2d

903, 905 (N.Y. 1989) (“Words in a contract are to be construed to achieve the

apparent purpose of the parties.”).

      Second, the title and structure of § 6 support a finding of ambiguity. Section

6, “Supply of Components,” requires both parties to supply certain products to the

other upon request.     Section 6.1 requires Netlist to “provide Samsung any

NVDIMM-P controller,” while § 6.2 requires Samsung to “supply NAND and

DRAM products.” Netlist’s view is that because § 6.1 explicitly links Netlist’s

supply obligation to the JDP, while § 6.2 does not, that omission must be viewed as

intentional. That is one plausible reading. It would also be reasonable to read §§ 6.1

and 6.2 as complementary mirror provisions that describe the parties’ obligations to

provide components of the NVDIMM-P product. See N.L.R.B. v. SW Gen., Inc., 137

S. Ct. 929, 940 (2017) (“The expressio unius canon applies only when circumstances

support a sensible inference that the term left out must have been meant to be

excluded.” (internal quotation marks and alteration omitted)).

      Third, if Netlist’s interpretation of § 6.2 is correct, then the provision would

be a significant outlier in the overall agreement. As noted, all other substantive

provisions of the JDLA concern either the JDP or cross-licensing and describe the

                                          4
parties’ rights and obligations related to those elements in detail. But if § 6.2 is

properly understood as an unbounded supply obligation, it would represent a

separate, third element of the JDLA. In addition, it would be unusual for this

purportedly important, discrete obligation to be referenced only once in a single

sentence in the entire agreement.        Accordingly, we conclude that § 6.2 could

reasonably be understood as restricted to the NVDIMM-P project.1 See Hooper, 548

N.E.2d at 905 (“Although the words might seem to admit of a larger sense, yet they

should be restrained to the particular occasion and to the particular object which the

parties had in view.” (internal quotation marks and citation omitted)).

       Because we conclude that § 6.2 is ambiguous as a matter of law, we remand

to the district court to consider in the first instance whether the extrinsic evidence

“creates a genuine issue of material fact” as to the provision’s meaning. See

MacIntyre v. Carroll Coll., 48 F.4th 950, 956 (9th Cir. 2022) (“[T]he remaining

issues are not purely legal and require us to determine whether the evidence creates

a genuine issue of material fact. The district court is thus better suited to consider

these issues in the first instance.”).

       2.     The district court erred in granting Netlist judgment on its claim that

1
  To the extent Samsung contends that the district court independently erred by
awarding nominal damages following the jury’s finding that Netlist had not suffered
actual damages from the breach of § 6.2, we disagree. See Kronos, Inc. v. AVX
Corp., 612 N.E.2d 289, 292 (N.Y. 1993).

                                           5
Samsung breached § 3 of the JDLA by erroneously withholding $1.32 million of its

$8 million payment to Netlist and paying that sum to the Korean tax authority.

Section 3 requires Samsung to pay Netlist $8 million in non-recurring engineering

fees, less any withholding taxes required by Korean law. The Korean tax authority

ultimately concluded that the fees were not subject to withholding. The district court

determined that “the reasonableness of Samsung’s position [on whether the taxes

were properly withheld] is immaterial to whether it breached its obligation.” We

disagree. Section 3.2 provides that if Samsung deducts withholding taxes, it must

“reasonably cooperate with Netlist in any lawful efforts to claim a credit or refund

or exemption with respect to any such withholding taxes.”             Because § 3.2

contemplates that Samsung may reasonably but erroneously withhold taxes, we do

not interpret § 3.1 as providing for strict liability upon an erroneous withholding.

See Beal Sav. Bank, 865 N.E.2d at 1213–14. A contrary holding that Samsung

breached § 3 by reasonably misinterpreting Korean tax law would also produce

absurd results and be inconsistent with the parties’ reasonable expectations. See

Uribe v. Merchs. Bank of N.Y., 693 N.E.2d 740, 743 (N.Y. 1998) (construing

contract in accordance with the “reasonable expectation and purpose of the ordinary

businessperson” (alteration and citation omitted)). Accordingly, we reverse the

district court’s entry of judgment in Netlist’s favor on the § 3 breach of contract

                                          6
claim and remand with instructions to enter judgment for Samsung.2

       3.     The district court erred in granting a declaratory judgment that Netlist

properly terminated the JDLA because disputed fact issues precluded summary

judgment on the materiality of Samsung’s alleged breach of § 6.2. “Under New York

law, for a breach of a contract to be material, it must ‘go to the root of the agreement

between the parties.’” Frank Felix Assocs., Ltd. v. Austin Drugs, Inc., 111 F.3d 284,

289 (2d Cir. 1997) (citation omitted). New York courts consider several factors in

assessing materiality, including, among others: the extent to which the injured party

will be deprived of the benefit which he reasonably expected, the likelihood that the

party failing to perform or to offer to perform will cure his failure, the quantitative

character of the default, and the breaching party’s good faith or willfulness. See

Hadden v. Consol. Edison Co. of N.Y., Inc., 312 N.E.2d 445, 449 (N.Y. 1974);

Restatement (Second) of Contracts § 241 (Am. L. Inst. 1981). The record reflects

that several of these factors hinge upon disputed facts. For example, the parties

dispute whether—assuming that the district court correctly construed § 6.2—the

exchange of Samsung’s mandatory supply obligation in return for Netlist’s patent

2
  On cross appeal, Netlist challenges the district court’s conclusion that the JDLA’s
provision concerning consequential damages barred recovery of the fees Netlist paid
to its tax consultant, PricewaterhouseCoopers, for assistance in obtaining a refund
of the erroneously withheld taxes. Because we hold that Samsung did not breach
§ 3 of the JDLA, and therefore that Netlist is not owed damages resulting from the
purported breach, we need not address whether the district court properly barred
recovery of the fees.

                                           7
licenses was “the centerpiece” of the agreement.

       We reject Samsung’s contention that Netlist’s declaratory-judgment claim

fails for the independent reason that Netlist waived its right to terminate the contract

by delaying termination proceedings until 2020.           The district court properly

determined that given the JDLA’s no-waiver provision, Netlist’s failure to act upon

notice of the breach does not constitute a clear manifestation of intent to waive its

termination rights. See Gilbert Frank Corp. v. Fed. Ins. Co., 520 N.E.2d 512, 514

(N.Y. 1988) (requiring “clear manifestation of intent by [one party] to relinquish

[contractual] protection”). We reverse the district court’s entry of a declaratory

judgment and remand for further proceedings.

       4.     The district court correctly precluded Samsung from asserting at trial

affirmative defenses of waiver, estoppel, and acquiescence. Samsung pleaded all

three defenses in its answer, but did not raise them in response to Netlist’s motion for

partial summary judgment or in its own motion for summary judgment. Samsung

therefore abandoned the defenses. Where a movant puts liability at issue on summary

judgment, a defendant opposing summary judgment may not decline to raise an

affirmative defense that, if successful, would defeat the movant’s claim, and then

seek to assert that defense at trial. See Fed. R. Civ. P. 56(a).3

3
  The district court also properly precluded Samsung from raising an election of
remedies affirmative defense. Samsung failed to plead the defense in its answer, see
In re Adbox, Inc., 488 F.3d 836, 841 (9th Cir. 2007); Fed. R. Civ. P. 8(c)(1), and the

                                            8
     AFFIRMED IN PART AND REVERSED AND REMANDED IN PART.

     The parties shall bear their own costs.

court did not abuse its discretion in finding that Samsung had not shown “good
cause” to amend its answer at the close of discovery, see Johnson v. Mammoth
Recreations, Inc., 975 F.2d 604, 607–08 (9th Cir. 1992).

                                        9
                                                                         FILED
Netlist Inc. v. Samsung Electronics Co., Ltd., No. 22-55209               OCT 17 2023
                                                                      MOLLY C. DWYER, CLERK
                                                                       U.S. COURT OF APPEALS
DESAI, Circuit Judge, dissenting in part:

      I respectfully dissent from Section 1 of the memorandum disposition. The

majority’s means-to-an-end analysis of § 6.2 is a departure from longstanding rules

of contract interpretation, particularly when interpreting a contract negotiated at an

arm’s length between two sophisticated parties. Worse, my colleagues’ perfunctory

conclusion that § 6.2 is ambiguous makes doing business harder. It forces contracting

parties to anticipate and expressly disclaim every conceivable limiting construction

to avoid an alleged ambiguity. I would not impose that burden.

      Section 6.2 is clear and unambiguous: Samsung agreed to “supply NAND and

DRAM products to Netlist on Netlist’s request at a competitive price.” That

provision means what it says. The majority concedes, as it must, that “the plain

language of § 6.2 favors Netlist’s interpretation.” Mem. Disp. at 3. Yet my colleagues

bend over backwards to invent an ambiguity based on the agreement’s “apparent

purpose as derived from its title, structure, and related provisions.” Mem. Disp. at

3.1 Their arguments are unpersuasive.

1
       The majority’s decision relies on Samsung’s made-for-litigation theory that §
6.2 is ambiguous. But Samsung never even argued the agreement was ambiguous
until after it decided to stop fulfilling its supply obligations. In fact, Samsung raised
its ambiguity argument for the first time only after the district court denied its motion
for judgment on the pleadings.

                                           1
      For starters, my colleagues overreach by concluding without any basis that §

6.2 is “a significant outlier in the overall agreement.” Mem. Disp. at 4. The

majority’s own notions about the fairness of Samsung’s supply obligation go far

beyond interpreting the “four corners of the contract,” Ellington v. EMI Music, Inc.,

21 N.E.3d 1000, 1003 (N.Y. 2014), and instead infer, “under the guise of judicial

construction, . . . additional requirements to relieve a party from asserted

disadvantage flowing from the terms actually used.” Collard v. Inc. Vill. of Flower

Hill, 421 N.E.2d 818, 823 (N.Y. 1981). Those inferences violate New York’s

“established contract law, which focuses on the parties’ chosen language, by

injecting considerations untethered to the words that the parties included in their

agreement.” Donohue v. Cuomo, 184 N.E.3d 860, 870 (N.Y. 2022). When “a contract

‘was negotiated between sophisticated, counseled business people negotiating at

arm’s length,’ courts should be especially ‘reluctant to interpret an agreement as

impliedly stating something which the parties have neglected to specifically

include.’” 2138747 Ontario, Inc. v. Samsung C & T Corp., 103 N.E.3d 774, 780

(N.Y. 2018) (quoting Vt. Teddy Bear Co. v. 538 Madison Realty Co., 807 N.E.2d

876, 879 (N.Y. 2004)). Yet that is what the majority did here.

      Although the majority’s decision purports to rely on the plain text of § 6.2, it

goes further than the plain text; it takes a simple clause—“Samsung will supply

NAND and DRAM products to Netlist”—and inserts the words “in connection with

                                          2
the JDP.” But if the parties meant to limit Samsung’s supply obligation to NAND

and DRAM used only in connection with the JDP, they would have said so. See

Ellington, 21 N.E.3d at 1004 (“If the parties intended to bind future affiliates they

would have included language expressing that intent.”); Riverside S. Plan. Corp. v.

CRP/Extell Riverside, L.P., 920 N.E.2d 359, 365 (N.Y. 2009) (holding that the plain

language of a contract’s sunset clause applied to the entire agreement when “the

parties could have drafted an agreement that restricted the scope of the sunset clause”

but declined to do so). Indeed, the majority acknowledges that the parties did exactly

that in Netlist’s supply obligation in § 6.1. Other parts of the agreement similarly

include limiting language where the parties saw fit to include it. See, e.g., § 4.1

(discussing ownership of inventions “arising out of the JDP”); § 1 (defining a term

used in the agreement to describe technology created “in the course and within the

scope of the JDP”). We must give meaning to the omission of similar language in §

6.2. E.g., Quadrant Structured Prods. Co. v. Vertin, 16 N.E.3d 1165, 1172 (N.Y.

2014) (explaining that the expressio unius maxim precludes courts from reading

language into a contract provision that a “sophisticated drafter” omitted).

Respectfully, my colleagues overstep by rewriting § 6.2 to add language Samsung

failed to include.

      The majority’s analysis next turns to the title and structure of § 6 to justify its

conclusion that § 6.2 is ambiguous. But the title and structure confirm just the

                                           3
opposite. Section 6’s title (“Supply of Components”) is general, and both Samsung

and Netlist develop and manufacture components generally, not just for the JDP. All

but one of the provisions in § 6 discuss the parties’ rights and obligations related to

the supply of components generally. Section 6.3 preserves both parties’ rights to

make “semiconductor components” and sell them to third parties. Section 6.4

provides that neither party must buy “any products” from the other. And Section 6.2

requires Samsung to supply “NAND and DRAM products” to Netlist at competitive

prices. In the only provision tied to a JDP-specific product (§ 6.1), the parties

expressly said so. It runs afoul of basic principles of contract interpretation to imply

a similar limitation into any other provision in § 6.

      Finding no support in the terms of the agreement, the majority’s decision

settles on the recitals as the basis for its finding that § 6.2 is ambiguous. Mem. Disp.

at 3. But nothing in the recitals makes § 6.2 ambiguous. The recitals state that two

main goals of the agreement were developing a new NVDIMM-P product through

the JDP and cross-licensing patents. In their quest to find an ambiguity where none

exists, my colleagues again read too much into the plain text. Parties often have

many reasons for executing contracts, and they need not list every form of

consideration in the recitals. In any event, the supply obligation as written in § 6.2

furthers these goals or, at a minimum, there is nothing inconsistent about the

agreement’s general purposes and the clear supply obligation in § 6.2. Nor can the

                                           4
recitals alter the plain language of a substantive term. See Jones Apparel Grp., Inc.

v. Polo Ralph Lauren Corp., 791 N.Y.S.2d 409, 410 (App. Div. 2005) (“Since the

contract is unambiguous on its face, there is no need to refer to its recitals, which are

not part of the operative agreement.”).

      In short, every purportedly “reasonable” justification the majority’s decision

constructs to conclude that § 6.2 is ambiguous requires inserting words in § 6.2,

implying policy considerations, and looking beyond the four corners of the

agreement. That is not this court’s role. A contract “that is complete, clear and

unambiguous on its face must be enforced according to the plain meaning of its

terms.” Greenfield v. Philles Recs., Inc., 780 N.E.2d 166, 170 (N.Y. 2002).

      I respectfully dissent from the portion of the majority’s decision holding that

§ 6.2 is ambiguous. I would affirm the district court’s summary judgment on Netlist’s

breach of contract claim over § 6.2.

                                           5