Intel Corp. v. Advanced Micro Devices, Inc.

• Decision Date: 28 December 1993
• Docket Number: No. 92-16899,92-16899
• Citation: 12 F.3d 908
• Parties: 1994 Copr.L.Dec. P 27,189, 29 U.S.P.Q.2d 1363 INTEL CORPORATION, Plaintiff-Appellant, v. ADVANCED MICRO DEVICES, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 908

12 F.3d 908

1994 Copr.L.Dec. P 27,189, 29 U.S.P.Q.2d 1363

INTEL CORPORATION, Plaintiff-Appellant, v. ADVANCED MICRO DEVICES, INC., Defendant-Appellee.

No. 92-16899.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Oct. 13, 1993.

Decided Dec. 28, 1993.

Michael F. Bailey, Brown & Bain, Phoenix, AZ, for plaintiff-appellant.

Robert B. Morrill, Skjerven, Morrill, MacPherson, Franklin & Friel, San Jose, CA, for defendant-appellee.

Appeal from the United States District Court for the Northern District of California.

Before: REINHARDT and LEAVY, Circuit Judges, and MERHIGE, ^* District Judge.

REINHARDT, Circuit Judge:

Intel Corporation (Intel) appeals the district court's order staying its copyright action against Advanced Micro Devices, Inc. (AMD). The stay was granted pending final state court appellate review of an arbitration award of license that, if upheld, would provide AMD with a defense to Intel's claims of copyright infringement. Because we do not find that exceptional circumstances exist justifying a "wise judicial administration" stay under Colorado River Water Conservation District v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976), and because the stay cannot be upheld on the alternative grounds suggested by AMD, we reverse the stay order and remand to the district court for further proceedings.

BACKGROUND

Intel and AMD are semi-conductor companies which design, produce and market microprocessors. A common practice within the microprocessor industry is the "second sourcing" arrangement, by which the creator of a newly developed product will license rights to manufacture the product to another company, receiving a royalty in return. Although both companies then market the same product in competition with one another, the existence of a second source for the new product reassures customers and, in theory, leads to a greater market share for both companies.

In 1981, Intel approached AMD regarding a second sourcing arrangement for the Intel 8086 microprocessor. After protracted negotiations, the parties signed a contract in February 1982, later amended in 1984, which stated the terms by which each party could earn the rights to manufacture the other's product. It was, in effect, a reciprocal second sourcing agreement: if one party wanted to market parts the other party had developed, it could offer parts that it had developed in exchange. The exchanged parts were rated using a system of complexity factor (CF) points, which created a form of currency for the transactions.

Intel gave AMD immediate rights to second source its 8086 microprocessor, but AMD's right to acquire later Intel products was dependent upon AMD acquiring the CF points necessary to "purchase" them. However, by the time that Intel's 80386 microprocessor (the 386) entered the market, Intel had largely failed to accept AMD products, leaving AMD without the CF points needed to acquire rights to the 386.

By 1986, AMD realized that Intel was not going to permit it to second source the 386, which had become the industry standard in microprocessors. Pursuant to an arbitration provision in the contract, AMD filed a petition in state court to compel arbitration, alleging AMD's position in the arbitration was that Intel had deliberately frustrated the contract. AMD asserted that Intel had wrongly prevented AMD from getting rights to the 386 by refusing to accept AMD parts in exchange. According to AMD, the contract had created a partnership or joint venture between AMD and Intel that obligated Intel to license AMD products. Alternatively, AMD claimed that Intel had wrongly reneged on its bargain to take certain AMD parts. Either way, AMD claimed to be entitled to the Intel 386.

breach of contract. The petition was granted in August 1987 and arbitration hearings before a retired judge began. ¹

The arbitrator disagreed with AMD's interpretation of the contract. He found that AMD had no rights to the 386 microprocessor under the contract, because the contract "simply created a modus vivendi for the exchange of product between the two companies," creating no obligation for either company to take the other's products. He nonetheless agreed with AMD that Intel had breached the contract. Even though Intel had the right not to accept AMD products, the covenant of good faith and fair dealing required that this decision be taken openly. According to the arbitrator, Intel had breached this covenant by trying to deceive AMD into believing that product exchanges would continue, with the motive of "keeping AMD in the Intel 'camp,' of keeping AMD away from some sort of partnership with another company--say NEC or Fujitsu--where AMD's talents might be used in effective competition against Intel."

By late 1990, AMD had begun marketing a 386 microprocessor called the Am386. In October 1991, just prior to the close of the remedies phase of the arbitration, Intel commenced this federal court action against AMD for copyright infringement. Intel charged AMD with reverse-engineering Intel's 386 microprocessors and copying the computer programs contained in them. As a remedy for this alleged copyright infringement, Intel asked for an injunction prohibiting AMD from further use of the disputed computer programs, the impounding of existing copies of the programs, and damages.

In February 1992, after almost five years of hearings, the arbitrator handed down his award. In addition to awarding AMD damages under the contract, he granted AMD the equitable remedy of "a permanent, royalty-free, non-exclusive, non-transferable, worldwide right (but not the right to assign, license or sublicense such right to any other party) under any and all Intel copyrights, patents, trade secrets and maskwork rights contained in the current versions of AMD's reverse engineered 80386 family of microprocessors." He explained that his purpose in awarding this right was:

to provide a complete and dispositive defense to AMD as to the Intel claims against AMD regarding the technology and intellectual property used in AMD's current versions of the 80386 in such lawsuits as Intel Corp. v. Advanced Micro Devices, Inc. (A 91 CA 800) in the United States District Court for the Norther[n] District of California, and Intel Corp. v. Advanced Micro Devices, Inc. (C 90 20571 WAI) in the United States District Court for the Northern District of California, and to preclude and defeat other potential Intel intellectual property infringement claims with respect to the technology used in AMD's aforedescribed past and current versions, and future revisions and modifications, of the 80386.

The arbitrator elaborated further on the reasons supporting what he conceded was an unconventional approach to relief in his Memorandum of Decisions re Issues in Award. Complaining of the parties' abuse of the court system, he said that the award was meant to "abort the incessant [legal] warfare In March 1992, AMD filed a petition in the Superior Court of California to confirm the arbitration award, and Intel filed a petition to correct the award. After a hearing, the state court confirmed the arbitration award in its entirety. AMD then filed a motion in the present federal action for summary judgment, or, in the alternative, a stay of proceedings. The magistrate judge granted AMD's motion for a stay of district court proceedings, relying on the "wise judicial administration" doctrine first enunciated in Colorado River Conservation Dist. v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976).

which has gone on between these two companies for the past five years." ²

Contending that the stay was improperly granted, Intel now appeals to this court. ³ The stay order is appealable as a final order. Moses H. Cone Memorial Hospital v. Mercury Const. Corp., 460 U.S. 1, 13, 103 S.Ct. 927, 936, 74 L.Ed.2d 765 (1983); Travelers Indem. Co. v. Madonna, 914 F.2d 1364, 1367 (9th Cir.1990).

DISCUSSION

I. The Merits.

Intel's action for copyright infringement is based on 17 U.S.C. Sec. 106, which states that the owner of a copyright "has the exclusive rights to do and to authorize any of the following: (1) to reproduce the copyrighted work.... (2) to prepare derivative works based upon the copyrighted work." Intel meets AMD's affirmative defense of license by asserting that the arbitrator violated Sec. 106 by simply awarding rights to the 386 microprocessor to AMD as an equitable remedy.

II. Standard of Review.

A district court's stay order is reviewed for abuse of discretion. Nakash v. Marciano, 882 F.2d 1411, 1413 (9th Cir.1989). However, courts have repeatedly emphasized that this abuse of discretion standard is stricter than the flexible abuse of discretion standard used in other areas of law. When a stay for reasons of "wise judicial administration" is contemplated, "discretion must be exercised within the narrow and specific limits prescribed by the particular abstention doctrine involved.... [T]here is little or no discretion to abstain in a case which does not meet traditional abstention requirements." Mobil Oil Corp. v. City of Long Beach, 772 F.2d 534, 540 (9th Cir.1985) (quoting C-Y Development Co. v. City of Redlands, 703 F.2d 375, 377 (9th Cir.1983)).

III. The Colorado River Doctrine.

Considerations of "wise judicial administration, giving regard to conservation of judicial resources and comprehensive disposition of litigation" may counsel granting a stay when there are concurrent state proceedings involving the same matter as in the federal district court. Colorado River, 424 U.S. at 817, 96 S.Ct. at 1246. The Supreme Court has stressed, however, that the Colorado River exception to "the virtually unflagging obligation of the federal courts to exercise the jurisdiction given them" is a narrow one. Id.; see also Moses H. Cone, 460 U.S. at 17, 103 S.Ct. at 937. Only exceptional circumstances justify such a stay, and whether these circumstances exist is...