Altera Corp. v. Clear Logic, Inc.

• Decision Date: 15 September 2005
• Docket Number: No. 03-17334.,No. 03-17323.,03-17323.,03-17334.
• Citation: 424 F.3d 1079
• Parties: ALTERA CORPORATION, Plaintiff-counterclaimant-defendant-Appellee, v. CLEAR LOGIC, INCORPORATED, Defendant-counterclaimant-plaintiff-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

424 F.3d 1079

ALTERA CORPORATION, Plaintiff-counterclaimant-defendant-Appellee, v. CLEAR LOGIC, INCORPORATED, Defendant-counterclaimant-plaintiff-Appellant.

No. 03-17323.

No. 03-17334.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 12, 2005.

Filed September 15, 2005.

COPYRIGHT MATERIAL OMITTED

David M. Heilbron and C. William Craycroft, Bingham McCutchen LLP, East Palo Alto, CA, for the appellant.

Karl J. Kramer, Morrison & Foerster LLP, Palo Alto, CA, for the appellee.

Sandeep Jaggi, Milpitas, CA, for amicus curiae LSI Logic Corporation.

Appeal from the United States District Court for the Northern District of California; James Ware, District Judge, Presiding. D.C. No. CV-99-21134-JW/PVT.

Before: HUG, FERGUSON, and RYMER, Circuit Judges.

Opinion by Judge HUG; Concurrence by Judge RYMER.

HUG, Circuit Judge.

This case involves an infringement action by Altera Corporation ("Altera") against Clear Logic Incorporated ("Clear Logic") under the Semiconductor Chip Protection Act of 1984, 17 U.S.C. §§ 901-14 ("SCPA"). Altera also brought state law claims against Clear Logic for intentionally inducing Altera's customers to breach their software license agreements with Altera and also for intentional interference with those contractual relations. A jury found for Altera on all claims and a judgment was entered for $30.6 million in damages, $5.4 million in prejudgment interest and $394,791.68 in costs. The district court judge also entered an injunction preventing Clear Logic from engaging in those activities against Altera. We affirm the judgment and the injunction.

I. Overview

Filling the gap between copyright law and patent law, the SCPA aims to protect the substantial investment of innovative firms in creating the semiconductor chips that are "at the vortex" of the modern information age. H.R.Rep. No. 98-781, at 2 (1984), U.S.Code Cong. & Admin.News 1984 pp. 5750, 5751; S.Rep. No. 98-425 at 7-9. These chips operate microwave ovens, televisions, computers, robots, Xray machines, and countless other now indispensable apparatuses. S.Rep. No. 98-425 at 7-9. Each chip carries its own blueprint. Pirate firms can strip the layers of a semiconductor chip and replicate the design at a cost substantially lower than the original firm's investment. Id.

Altera and Clear Logic are competitors in the semiconductor industry. Altera manufactures programmable logic devices ("PLDs"), which are chips that can be programmed to perform various logic functions. A customer uses Altera's MAX+PLUS II software to program the PLD to perform the desired function.¹ The software helps to route the functions through the thousands of transistors that make up the PLD, ideally achieving the maximum functionality for the particular function desired. Because the PLD can be programmed and reprogrammed, the customer, working with Altera, can continue to work with the PLD and the software until the PLD meets the customer's exact needs. This process can take months.

Clear Logic manufactures a different type of chip: Application-Specific Integrated Circuits ("ASICs"). These chips are designed to perform one specific function and cannot be programmed by the customer. They use less power, are smaller and, for a customer with a large order, are often cheaper. Customers will sometimes start with PLDs and switch to ASICs once they have determined exactly what they need the chips to do. Traditionally, a company that converts from PLDs to ASICs must again start from a high level of description and work toward the end product, the ASIC. This can take a few months and there is a substantial risk that even after the initial attempt, the first chip will not work and more time and money will have to be invested in perfecting the product.

Clear Logic works from a different business model. When customers program Altera devices, using the Altera software, a file called a bitstream is generated. Clear Logic asks customers to send the bitstream to Clear Logic, and Clear Logic uses the bitstream to create an ASIC for the customer. Clear Logic only produces ASICs that are compatible with Altera chips. The laser process Clear Logic uses to create chips with the bitstream allows for a turnaround time of just a few weeks, and rarely produces an incompatible chip.

Faced with the loss of millions of dollars in business, Altera has challenged Clear Logic's business model. In the district court, Altera argued that Clear Logic infringed its rights under the SCPA by copying the layout design of its registered mask works for three families of chip products. Clear Logic denied the infringement and asserted an affirmative defense of reverse engineering. The jury returned a verdict in favor of Altera on the infringement claim.

In addition, Altera alleged state law claims based on a permitted use provision in its software licensing agreement. Customers can access two versions of the Altera software: one is a free version available on the internet, the other requires a subscription fee but includes additional benefits. In either case, the user must agree to the terms of a license before using the software. The license agreement has taken several forms, but Altera's Vice President of Software and Tools Marketing, Timothy Southgate, testified that it was unlikely any customers were still using older versions of the software because it is not compatible with some of the newer products. Each time the software is updated, the customer must agree to the latest version of the licensing provision. A provision was added to the software license agreement in the early 1990's to prevent competitors from taking advantage of the software. The current version of the use provision, added to the agreement in 1999, provides that customers may "use the Licensed Programs for the sole purpose of programming logic devices manufactured by ALTERA and sold by ALTERA or its authorized distributors (the "Permitted Use")." The earlier version did not include the word "sole," but was otherwise similar.

Based on that provision, Altera asserted state law claims for inducing Altera's customers to intentionally breach their license agreements with Altera and also for intentionally interfering with those contractual relations. Clear Logic argued that those claims were preempted by federal copyright law and additionally alleged that the licensing agreements constitute copyright misuse. The district court found as a matter of law that the claims were not preempted and also denied as a matter of law the copyright misuse defense because there was no allegation of copyright infringement. The jury found for Altera on these claims as well.

After the jury trial, pursuant to a stipulation of the parties, the district court determined damages, awarding Altera $30.6 million in damages, $5.4 million in prejudgment interest, and $394,791.68 in costs. In addition, the court issued a permanent injunction preventing Clear Logic's activities that were found to violate Altera's rights under the SCPA and to induce the breach of Altera's software licenses with its customers.

On appeal Clear Logic does not contest the amount of the damage award, only its liability for those damages. It also does not contest the specific terms of the injunction. It contends that the district judge misinterpreted the application of the SCPA, and improperly instructed the jury concerning the defense of reverse engineering. Clear Logic also contests liability under the state law claims.

II. The Semiconductor Chip Design Process and the Semiconductor Chip Protection Act

Clear Logic and Altera define the stages and terms relating to the chip design process differently.² According to Altera, the layout is "the physical arrangement of the components on the chip." The architecture is comprised of "the components and the structures that are physically arranged within the chip." Clear Logic argues that the architecture is essentially a block diagram showing the basic arrangement of the chip. From this conceptual plan, the designer creates floor plans that show the arrangement of functional modules, focusing on how the designer will group major components. The floor plan and the architecture are both at high levels of abstraction. The designer next creates an electrical schematic, which is a two-dimensional abstract drawing. After this, a layout designer creates a three-dimensional layout design which includes the specific placement of all of the elements of the chip and is used to make the glass masks that are printed onto the chip.

Despite their disagreement over the specific definitions of industry terms and the specific steps in the process of chip design, Altera and Clear Logic agree that chip design starts with a high level idea and moves toward the placement of individual transistors on a chip in several layers. Ultimately, the schematics and floor plans are used to develop the specific placement of every transistor that will eventually go on the chip. Glass disks are etched with the pattern for each layer of the chip, and these glass disks, called masks, are printed onto the semiconductor chip, one layer at a time, by photolithography.³ S.Rep. No. 98-425 at 2-3. Generally, there are eight to twelve layers to the chip, each of which requires a separate mask. Id. The series of all of the masks is the mask work.

Reverse engineering has long been an accepted practice in the semiconductor chip industry. By photographing and chemically dissolving each layer of the chip, a second company can recreate the entire mask work for any chip. The process allows legitimate analysis of chips to spur innovation and improvement on existing designs, but also makes direct copying of chips feasible. S.Rep. No. 98-425 at 4. At the behest of the semiconductor industry, Congress sought to protect this important facet of the American economy, and indeed of modern American society, while preserving the validity of reverse engineering as...