Advanced Micro Devices, Inc. v. Intel Corp.

Decision Date30 December 1994
Docket NumberNo. S033874,S033874
CourtCalifornia Supreme Court
Parties, 885 P.2d 994 ADVANCED MICRO DEVICES, INC., Plaintiff and Respondent, v. INTEL CORPORATION, Defendant and Appellant.

Keker, Brockett & Van Nest, Robert A. Van Nest, Karin Kramer, Laird J. Lucas, San Francisco, Brown & Bain, Terry E. Fenzl and Michael F. Bailey, Palo Alto, for defendant and appellant.

Jackson, Tufts, Cole & Black, Terrence P. McMahon, David T. Alexander, George M J. Lani Bader, San Francisco, as amicus curiae on behalf of plaintiff and respondent.

[885 P.2d 996] Schisler, Sean A. Lincoln, San Francisco, Marer, Marer & Schuck, Gerald Z. Marer, Alan G. Marer, John F. Schuck III, Palo Alto, O'Melveny & Meyers, Thomas M. McCoy, Carl R. Schenker, Jr., Daniel H. Bookin, George A. Riley and Patrick Lynch, Los Angeles, for plaintiff and respondent.

Farella, Braun & Martel, Douglas R. Young and Tamar Pachter, San Francisco, as amici curiae.

WERDEGAR, Justice.

California law allows a court to correct or vacate a contractual arbitration award if the arbitrators "exceeded their powers." (Code Civ.Proc., §§ 1286.2, subd. (d), 1286.6, subd. (b).) In Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 28, 10 Cal.Rptr.2d 183, 832 P.2d 899, we held arbitrators do not exceed their powers merely by erroneously deciding a contested issue of law or fact; we did not, however, have occasion there to further delineate the standard for measuring the scope of arbitrators' authority. This case requires us to decide the standard by which courts are to determine whether a contractual arbitrator has exceeded his or her powers in awarding relief for a breach of contract.

An arbitrator determined the Intel Corporation (Intel) had breached portions of its 1982 technology exchange agreement with Advanced Micro Devices, Inc. (AMD), including the implied covenant of good faith and fair dealing. The superior court confirmed the award, but the Court of Appeal, holding the arbitrator had exceeded his authority in awarding AMD the right to use certain Intel intellectual property, ordered the award corrected by eliminating the disputed relief.

We conclude that, in the absence of more specific restrictions in the arbitration agreement, the submission or the rules of arbitration, the remedy an arbitrator fashions does not exceed his or her powers if it bears a rational relationship to the underlying contract as interpreted, expressly or impliedly, by the arbitrator and to the breach of contract found, expressly or impliedly, by the arbitrator. The remedy fashioned by the arbitrator here was within the scope of his authority as measured by that standard. We therefore reverse the contrary judgment of the Court of Appeal.

FACTS AND PROCEEDINGS 1

AMD and Intel are both engaged in the creation, design, production and marketing of complex integrated circuits, also known as computer chips. In the period 1978-1981 both AMD and Intel were pursuing strategies for producing and marketing 16-bit microprocessors and the 32-bit microprocessors that were expected to follow. AMD was attempting to secure entry into this market through an agreement with a third chip maker, Zilog, while Intel had developed its own 16-bit microprocessor, the 8086. Intel, needing another producer to "second source" 2 the 8086, approached AMD.

Intel hoped to establish the 8086's basic architecture, known as iAPX, as the market standard, guaranteeing future sales of the 8086's expected progeny as well. AMD, having had what it saw as a bad experience in a previous second-source agreement with Intel, wanted to be sure it would not be cut off from second sourcing future generations of the 8086 family. In addition, reaching an agreement with Intel would mean abandoning The parties entered into the contract at issue in February 1982. According to its preamble the agreement was intended "to establish a mechanism for exchanging technical information so that each party acquires the capability to develop products suitable for sale as an alternate source for products developed by the other party." During the ten-year term of the contract (cancelable after five years on one year's notice by either party), either company could elect to be a second source for products offered it by the other. The nondeveloping company would receive technical information and licenses needed for it to make and sell the part. The developing company would receive a royalty. In addition, the developing company would earn the right to be a second source for products developed by the other party. The terms of exchange--the respective value of the products--were to be calculated by a specified equation from the complexity and size of the parts.

[885 P.2d 997] AMD's relationship with Zilog; AMD therefore sought a long-term arrangement.

The parties had fundamentally different views of the contract. AMD believed the agreement created a partnership or joint venture under which the two companies would agree in advance on products to be developed by each of them, avoiding duplicative research expenditures and guaranteeing each a more complete product line. Intel, on the other hand, saw the agreement as "little more than an armed truce," in which each proposed second-source agreement was to be the subject of combative bargaining with no continuing obligations from episode to episode. The arbitrator rejected both extremes, finding that, "while a party was not obligated to act substantially against its self interest in deciding to transfer or accept a part, there was an implied covenant to make the relationship work which obligated a party to consider in good faith ... the purposes of the contractual relationship ... and to negotiate reasonably to accomplish this purpose. If it could not do this it should terminate the arrangement--as Intel finally did." 3 The purposes of the agreement, according to the arbitrator, were expansion of product line and savings on research and development.

The contract provided for arbitration of "disagreements aris[ing] under this Agreement...." Arbitration was to be by a single arbitrator, whose decision would be considered "a final and binding resolution of the disagreement." Disagreements over product exchanges led AMD to petition the superior court to compel arbitration in April 1987. The parties agreed on an arbitrator and to the rules he would follow, including section 42, entitled "Scope of the Award," which provided: "The Arbitrator may grant any remedy or relief which the Arbitrator deems just and equitable and within the scope of the agreement of the parties, including, but not limited to, specific performance of a contract." Section 41 further instructed the arbitrator to "interpret and apply these Rules insofar as they relate to his powers and duties." After hearings in superior court, a temporary judge (who was also the chosen arbitrator) made an order of reference stating the issues for arbitration and providing, as to each issue, that "the Arbitrator is authorized to fashion such remedy as he may in his discretion determine to be fair and reasonable but not in excess of his jurisdiction."

The arbitration lasted four and one-half years and included three hundred and fifty-five days of hearings. As the current dispute focuses narrowly on two items of relief awarded, only a small portion of the arbitrator's extensive findings need be summarized here.

Under the contract AMD could initially obtain second-source rights to Intel's 8086 chip and other specified products for cash. After 1985, AMD would have open access to Intel's product line if Intel accepted AMD products of sufficient value, as determined from the complexity-size formula. In 1984 the parties negotiated an amendment to the contract, under which AMD was to second source the successors of the 8086--the 80186 and 80286--in exchange for substantial royalties to Intel. Intel also agreed at that time to accept certain AMD products then in development, conditional in some instances on final specifications. The arbitrator found The arbitrator found Intel extensively breached its obligations to act in good faith and deal fairly. Beginning in mid-1984 Intel, anxious to be the sole source for the 80386 (its 32-bit chip, which was to prove vastly successful) and convinced the contract was to its disadvantage, decided to frustrate the operation of the contract by taking no more products from AMD. Intel also resolved to keep this decision from AMD and the public, leaving AMD and others in the industry with the belief AMD would be a second source for the 80386. This "ke[pt] AMD in the Intel competitive camp" and avoided public knowledge of Intel's sole-source strategy for the 80386, a strategy Intel feared could limit its market if known. 4 The plan succeeded: AMD continued for about two years to believe, incorrectly, its agreement with Intel "had a future."

[885 P.2d 998] that "[i]f Intel took all these products, or even some of them, AMD would have access to the Intel line of products without restriction--and no royalties."

One concrete example of Intel's failure to negotiate in good faith was its treatment of AMD's Quad Pixel Display Manager (QPDM), a graphics chip. Although Intel promised in 1984 to accept the QPDM from AMD provided the parties agreed on its specifications, the arbitrator found Intel made no actual attempt to negotiate the remaining differences as to specifications. Instead, partly in order to avoid having both to give AMD the 80386 and to eliminate royalties on other products, Intel summarily rejected the QPDM. In doing so, the arbitrator found, Intel breached the implied covenant of good faith and fair dealing as well as "its implied covenant to negotiate reasonably to further the goals of the relationship between the parties...."

The arbitrator also found, however, Intel was not obliged under the contract to accept the QPDM or other products that would have earned AMD the...

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