Microsoft Corporation v. Neodron Ltd

Opinion

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UNITED STATES DISTRICT COURT g WESTERN DISTRICT OF WASHINGTON AT SEATTLE 9 10 MICROSOFT CORPORATION, CASE NO. C20-1216JLR 11 Plaintiff, ORDER GRANTING IN PART v. AND DENYING IN PART 12 ATMEL’S MOTION TO DISMISS 3 ATMEL CORPORATION, et al., PROVISIONALLY FILED Defendants. eee ee 14 15 I INTRODUCTION 16 Before the court is Defendants Atmel Corporation and Atmel Global Sales Ltd.’s 17 || (collectively, “Atmel”) motion to dismiss Plaintiff Microsoft Corporation’s (“Microsoft”) 18 ||complaint. (MTD (Dkt. # 29); see also Reply (Dkt. ## 57 (sealed), 64 (redacted)).) 19 || Microsoft opposes Atmel’s motion. (Resp. (Dkt. ## 52 (sealed), 62 (redacted)).) Having 20 || considered the motion, the parties’ submissions regarding the motion, the relevant 21 22

1 || portions of the record, and the applicable law, ! the court GRANTS in part and DENIES 2 ||in part Atmel’s motion to dismiss. 3 Il. BACKGROUND Factual Background? 5 This breach of contract case stems from a component purchase agreement (the 6 ||““CPA”) executed between Microsoft and Atmel on August 12, 2011. (Compl. (Dkt. ## 1 7 (sealed), 22 (redacted)) ¥ 10.) The CPA governs the sale of certain Atmel components 8 || for incorporation into Microsoft hardware products. (/d. 10-12; 9/28/20 Ohlert Decl. 9 || (Dkt. # 45) 9 3, Ex. 1 (Dkt. ## 43 (redacted), 46 (sealed)) (““CPA”).) Exhibit A of the 10 || CPA is used to list which components are governed by the agreement, and the parties 11 || have amended Exhibit A to include more components as Microsoft has purchased them to 12 || be incorporated into new devices. (Compl. J 12.) 13 The CPA includes a covenant not to sue (the “CNS”), which states that a

6 | A 2.513: COA ot 6) rs 17 || Xs 18 19 aa ' Microsoft and Atmel both request oral argument. (See MTD at 1; Resp. at 1.) But the 209 || court finds oral argument would not be helpful to the disposition of this motion and therefore declines to hold oral argument. See Local Rules W.D. Wash. LCR 7(b)(4). 1 ? For the purposes of a motion to dismiss, the court accepts all well-pleaded allegations in the complaint as true and draws all reasonable inferences in favor of the plaintiff. Wyler Summit P’ship v. Turner Broad. Sys., Inc., 135 F.3d 658, 661 (9th Cir. 1998).

| | ee 12.) In 2014, Atmel and Microsoft agreed 2 || that the CPA would extend until August 12, 2016, and would be automatically extended 3 ||on a yearly basis after that, unless either party terminated the agreement. (Compl. 4 16.) 4 || Under the CPA, Atmel also agreed to defend and indemnify Microsoft against S| INN

| | es (1.5 19.) 8 In 2016, Atmel was acquired by Microchip Technology Incorporated 9 || (“Microchip”), which maintains Atmel as a wholly owned subsidiary. (/d. 9/5.) In 10 || December of 2018, Neodron Ltd.’ (“Neodron”), Atmel, and Microchip entered into a 11 || patent sale and assignment agreement (“PSA”). (/d. § 17.) Through the PSA, Neodron 12 || acquired the right to a number of Atmel’s patents. U/d.) As of August 10, 2020, Neodron 13 || had sued Microsoft nine times in four jurisdictions for infringing patents that previously 14 || belonged to Atmel. Ud. 418.) All nine of these suits involved alleged infringement 15 || arising from Microsoft’s sale and import of devices that incorporate Atmel components 16 || purchased under the CPA. (/d.) 17 || B. Procedural Background 18 On August 10, 2020, Microsoft filed its complaint against Atmel and Neodron. 19 ||(See Compl.) Microsoft brings claims against Atmel for breaching the covenant not to 20 ||sue, (id. J] 29-31); the covenant of good faith and fair dealing, (id. J] 32-36); the duty to 21 3 While Microsoft initially named Neodron asa Defendant, it has since dismissed all claims against Neodron with prejudice. (Not. of Dismissal (Dkt. # 67).)

1 || defend Microsoft, (id. {| 37-41); and the duty to indemnify Microsoft, (id. 4] 42-45). 2 || Atmel filed its motion to dismiss on September 29, 2020. (See MTD.) On January 28, 3 2021, Microsoft dismissed all claims against Neodron with prejudice. (Not. of 4 || Dismissal.) 5 Il. ANALYSIS 6 Atmel moves to dismiss all claims brought by Microsoft. (See generally MTD.) It 7 || also argues that Microsoft’s response to its motion includes new allegations and 8 || improperly relies on documents not included with Microsoft’s complaint. (See Reply at 9 ||2-4.) The court first lays out the appropriate legal standard before addressing which 10 || documents it will consider when evaluating Atmel’s motion to dismiss. It then turns to 11 || the merits of Atmel’s motion. 12 Legal Standard 13 Federal Rule of Civil Procedure 12(b)(6) provides for dismissal for “failure to 14 ||state a claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). When 15 || considering a motion to dismiss under Rule 12(b)(6), the court construes the complaint in 16 || the light most favorable to the nonmoving party. Livid Holdings Ltd. v. Salomon Smith 17 || Barney, Inc., 416 F.3d 940, 946 (9th Cir. 2005). The court must accept all well-pleaded 18 || facts as true and draw all reasonable inferences in favor of the plaintiff. Wyler Summit 19 || P’ship v. Turner Broad. Sys., Inc., 135 F.3d 658, 661 (9th Cir. 1998). The court, 20 || however, is not required “to accept as true allegations that are merely conclusory, 21 unwarranted deductions of fact, or unreasonable inferences.” Sprewell v. Golden State 22 || Warriors, 266 F.3d 979, 988 (9th Cir. 2001). “To survive a motion to dismiss, a

1 |}complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to 2 relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting 3 || Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)); see also Telesaurus VPC, LLC v. 4 || Power, 623 F.3d 998, 1003 (9th Cir. 2010). “A claim has facial plausibility when the 5 || plaintiff pleads factual content that allows the court to draw the reasonable inference that 6 || the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 677-78. Dismissal 7 under Rule 12(b)(6) can be based on the lack of a cognizable legal theory or the absence 8 || of sufficient facts alleged under a cognizable legal theory. Balistreri v. Pacifica Police 9 || Dep ’t, 901 F.2d 696, 699 (9th Cir. 1990). 10 || B. Documents and Allegations Considered 1] As a threshold matter, the court must determine what, if any, documents outside 12 || the complaint it will consider in evaluating the motion to dismiss. Atmel contends that 13 || Microsoft improperly raises new arguments and inappropriately relies on 13 attached 14 || documents.” (See Reply at 2-4; see also 10/7/20 Ohlert Decl. (Dkt. # 54 (sealed)) 15 || (authenticating 13 exhibits); Dunn Decl. (Dkt. # 53 (sealed)), Exs. 1-13.) 16 Although the scope of review on a motion to dismiss for failure to state a claim is 17 || generally limited to the complaint, a court may consider evidence on which the complaint 18 || “necessarily relies” if: (1) the complaint refers to the document; (2) the document is 19 || central to the plaintiff's claim; and (3) no party questions the authenticity of the 20 ||document. Daniels-Hall v. Nat’l Educ. Ass’n, 629 F.3d 992, 998 (9th Cir. 2010) (quoting 21 || Marder v. Lopez, 450 F.3d 445, 448 (9th Cir. 2006)). 22

1 In its opposition, Microsoft contends only that its complaint relies on and refers to 2 || the five exhibits that are letters from Microsoft to Atmel tendering claims for defense and 3 ||indemnification. (See Resp. at 13 (citing Compl. 20, 39; Dunn. Decl., Exs. 7-11).) 4 || Atmel does not dispute the authenticity of these documents (see generally Reply), and so 5 || the court will consider them.* But Microsoft does not submit that its complaint refers to 6 || or relies on the remaining eight exhibits. (See generally Resp.; compare Dunn Decl., 7 || Exs. 1-6, 12-13, with Compl.) Thus, the court will not consider these eight exhibits while 8 || ruling on Atmel’s motion to dismiss. See Daniels-Hall, 639 F.3d at 998. Similarly, the 9 || court will not consider new allegations raised in Microsoft’s response that have no basis 10 the complaint.° See Schneider v. Cal. Dep’t of Corr., 151 F.3d 1194, 1197 n.1 (9th 11 || Cir. 1998) (“In determining the propriety of a Rule 12(b)(6) dismissal, a court may not 12 || look beyond the complaint to a plaintiff's moving papers, such as a memorandum in 13 || opposition to a defendant's motion to dismiss.”). Thus, the court will only consider 14 || Exhibits 7-11 filed with Microsoft’s response. (See Dunn. Decl., Exs. 7-11) 15 16 17 □ 4 Atmel argues that the court may not consider these documents because they were not attached 18 || to the complaint. (Reply at 2-3 (citing Akhtar v. Mesa, 698 F.3d 1202, 1212 (9th Cir. 2012) (“When reviewing a motion to dismiss, we consider only allegations contained in the pleadings, 19 || exhibits attached to the complaint, and matters properly subject to judicial notice.”’)).) But neither Atmel’s quoted portion of Akhtar nor other case law suggests a bright line rule that the 20 document must be attached to the complaint. See Daniels-Hall, 639 F.3d at 998 (considering document referenced by, but not attached to, complaint); Del Vecchio v. Amazon.com, Inc., No. 71 C11-0366RSL, 2012 WL 1997697, at *7 (W.D. Wash. June 1, 2012) (same).

9 > To the extent these new allegations merit further comment from the court, they are discussed in its analysis below.

1 Breach of Covenant Not to Sue 2 Atmel contends that it cannot have breached the CNS because it has not sued 3 || Microsoft. (MTD at 3-4.) Atmel also argues that, as a matter of law, it “could not have 4 || breached a covenant not to sue by simply selling patents because when the patents were 5 they were sold to Neodron with all restrictions and encumbrances, known or 6 ||unknown.” (/d. at 4 (citing Datatreasury Corp. v. Wells Fargo & Co., 522 F.3d 1368, 7 || 1372 (Fed. Cir. 2008) (“[B]ecause the owner of a patent cannot transfer an interest 8 || greater than that which it possesses, an assignee takes a patent subject to the legal 9 || encumbrances thereon.’)).) 10 Microsoft responds that Atmel’s contention that the sale of the patents breached 11 || the CNS is a “strawman” of Atmel’s own construction. (Resp. at 1.) Microsoft argues 12 || that Atmel not only sold a significant portion of its patent portfolio to Neodron but also 3

15 ee. (Id. at 1, 3-4.) In support of its claim, Microsoft cites 16 || cases where courts have found that a party violated a CNS by providing financial support 17 || for a third party to sue in its stead. (/d. at 6 (collecting cases).) 18 But Microsoft’s theory of lawsuit-by-proxy exists only in its response to Atmel’s 19 || motion, and its complaint makes no factual allegations to support such a theory. 20 || (Compare Resp., with Compl.) Microsoft’s complaint does not mention any iii 21 | 22 ee. (See generally Compl.) The only allegation in the

1 complaint resembling this theory is that “Atmel sold its patents to Neodron to enable 2 || Neodron [to assert a claim for patent infringement against Microsoft].” (/d. § 30.) 3 || Microsoft has failed to plead sufficient factual content such that the court may draw a 4 ||reasonable inference that Atmel is liable for violating the CNS. See Igbal, 556 U.S. at 5 ||677-78. Therefore, the court DISMISSES Microsoft’s claim based on breach of a 6 || covenant not to sue without prejudice and with leave to amend. See Lopez v. Smith, 203 7 || F.3d 1122, 1127 (9th Cir. 2000) (where claims are dismissed under Rule 12(b)(6), the 8 || court “should grant leave to amend . . . unless it determines that the pleading could not 9 || possibly be cured by the allegation of other facts”). 10 || D. Breach of Covenant of Good Faith and Fair Dealing 11 Microsoft’s claim based on a breach of a covenant of good faith and fair dealing is 12 || also deficient. Microsoft contends that it is not the sale of the patents that breached the 13 || covenant, but “Atmel’s breach of the CPA’s CNS provision and its attempt to circumvent 14 || the spirit of the contract.” (Resp. at 9.) According to Microsoft, “Atmel’s actions of 15 || actively seeking out, enabling, and financially benefitting from Neodron’s patent 16 || infringement lawsuits” are contrary to its reasonable and justified expectations under 17 || their contract and frustrates the contract’s purpose. (/d. at 10.) Once again, however, 18 of Microsoft’s detailed allegations against Atmel regarding its violation of the 19 || covenant are contained in its complaint. (See generally Compl.) Microsoft’s complaint 20 || alleges that “Atmel orchestrate[d] the sale of its patent to Neodron for the purpose of 21 enabling and encouraging Neodron to sue Microsoft.” (/d. § 34.) It provides no 22 allegations of how Atmel “actively [sought] out, enable[ed], or financially benefit[ed]”

1 || from these suits. (See generally id.) The court is not obligated to accept conclusory 2 allegations, bereft of any supporting details, as true. See Sprewell 266 F.3d at 988. Thus, 3 || the court DISMISSES Microsoft’s claim based on breach of a covenant of good faith and 4 || fair dealing without prejudice and with leave to amend. 5 Breach of Duties to Defend and Indemnify 6 Microsoft also brings claims that Atmel breached its duties to defend and 7 ||indemnify Microsoft under the CPA. (Compl. 37-45). Atmel contends that 8 || Microsoft’s allegations for these claims are conclusory and provide insufficient notice of 9 || the alleged conduct that breached the duties. (MTD at 7.) Specifically, Atmel argues that 10 || the complaint fails to identify which Microsoft devices Neodron accused of infringement 11 ||and which Atmel components were used in those devices. (/d.) 12 Microsoft’s complaint, however, goes further than Atmel suggests. It alleges that 13 || Microsoft provided Atmel with reasonable notice and tendered its defense and 14 || indemnification obligations to Atmel for nine patent infringement lawsuits filed by 15 || Neodron. (Compl. 19-20, 38-40, 43-45.) Microsoft also identifies the patents at issue 16 the infringement suits brought by Neodron. (/d. 18.) Even if this were insufficient, 17 || the court has determined that it will consider Microsoft’s communications tendering its 18 || defense and indemnification obligations to Atmel. See supra § II.B; (Dunn Decl., Exs. 19 ||7-11.) These communications put Atmel on notice of the conduct that Microsoft alleges 20 || breached the duties of defense and indemnification. One communication provides the 21 exact list of Atmel components used in Microsoft devices that Atmel argues is necessary 22 || for a valid claim. (See MTD at 8; Dunn Decl. Ex. 8 at 3 (containing list of “Microchip

1 Atmel products currently used in the accused Microsoft products”).) Atmel 2 || contends, with no support, that the components on this list are not accused of 3 ||infringement in the Neodron litigation. But at this stage, the court only determines if 4 || Microsoft’s claim is facially plausible. See Igbal, 556 U.S. at 677-78. Microsoft’s 5 ||claims for breach of duties to defend and indemnify meet this threshold. Thus, for these 6 || claims, Atmel’s motion is DENIED. 7 ||F. Sealing 8 Because this order relies on materials filed under seal, the court DIRECTS the 9 || Clerk to provisionally file this order under seal. The court ORDERS counsel for the 10 || parties meet and confer regarding which, if any, portions of this order they seek to redact. 11 || Counsel must then submit one joint statement or, if they cannot agree on a joint 12 || statement, competing statements indicating the portions of the order they seek to have 13 || redacted and on what basis. See Kamakana v. City & Cty. of Honolulu, 447 F.3d 1172, 14 || 1179-80 (9th Cir. 2006). The statement or statements must attach a proposed redacted 15 || order that incorporates the redactions requested in the corresponding statement. The 16 || parties must file any such statement within 14 days of the date of the filing date of this 17 order. The court will consider the parties’ redaction requests, if any, and then file the 18 || order on the docket with any necessary redactions. 19 IV. CONCLUSION 20 For the foregoing reasons, the court GRANTS in part and DENIES in part Atmel’s 21 ||motion to dismiss (Dkt. # 29). 22

1 1. The court GRANTS Atmel’s motion to dismiss Microsoft’s claim that 2 || Atmel violated the covenant not to sue. This claim is DISMISSED without prejudice and 3 || with leave to amend. 4 2. The court GRANTS Atmel’s motion to dismiss Microsoft’s claim that 5 || Atmel violated the covenant of good faith and fair dealing. This claim is DISMISSED 6 || without prejudice and with leave to amend. 7 3. The court DENIES Atmel’s motion to dismiss Microsoft’s claim that Atmel 8 || breached the duty to defend. 9 4. The court DENIES Atmel’s motion to dismiss Microsoft’s claim that Atmel 10 || breached the duty to indemnify. 11 Microsoft shall file an amended complaint, if any, alleging facts that resolve the 12 issues stated herein, no later than 14 days from the filing date of this order. 13 Dated this 12th day of February, 2021. 14 15 Vo e V9 AX 16 JAMES L. ROBART United States District Judge 17 18 19 20 21 22