Viasat, Inc. v. Acacia Commc'ns, Inc.

• Decision Date: 23 May 2022
• Docket Number: D077111
• Parties: VIASAT, INC., Plaintiff, Cross-defendant, and Appellant, v. ACACIA COMMUNICATIONS, INC., Defendant, Cross-complainant, and Appellant.
• Court: California Court of Appeals Court of Appeals

VIASAT, INC., Plaintiff, Cross-defendant, and Appellant,
v.
ACACIA COMMUNICATIONS, INC., Defendant, Cross-complainant, and Appellant.

D077111

California Court of Appeals, Fourth District, First Division

May 23, 2022

NOT TO BE PUBLISHED

Appeals from a judgment and orders of the Superior Court of San Diego County, No. 37-2016-00002323-CU-BC-NC Timothy M. Casserly, Judge. Affirmed in part and reversed in part.

Horvitz & Levy, John A. Taylor, Eric S. Boorstin and Scott P. Dixler; Fitzgerald Knaier and Kenneth M. Fitzgerald; Colin L. Ward of Viasat, Inc., for Plaintiff, Cross-defendant, and Appellant.

Procopio, Cory, Hargreaves & Savitch and Kendra J. Hall; Wilmer Cutler Pickering Hale and Dorr, William F. Lee, Lauren B. Fletcher, Rauvin A. Johl, Thomas G. Sprankling and Joseph M. Levy for Defendant, Cross-complainant, and Appellant.

IRION, J.

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This dispute arises from a development and license agreement between Viasat, Inc. and Acacia Communications, Inc. that initially led to a productive business relationship, but ultimately led to litigation and these appeals. Viasat agreed to provide one intellectual property (IP) component for Acacia's communication products, and to license another, in exchange for a fixed fee and royalties on the licensed component (the Agreement). The parties also agreed to protect each other's confidential information, and to cap Agreement-related damages of either party to the aggregate amount paid by Acacia under the Agreement (except for confidentiality breaches). Acacia developed, sold, and paid royalties on two products, Everest and K2, ultimately paying Viasat a total of $12.8 million. Acacia then developed and sold three later-generation products that were backwards compatible with Everest, but did not pay royalties on them.

Viasat sued for breach of contract, breach of the implied covenant of good faith and fair dealing, and trade secret misappropriation, asserting, in substance, that it would be impossible to achieve backwards compatibility with the Everest product without its licensed IP. ^[1] Acacia maintained it independently and permissibly developed its later-generation products. The case proceeded to a jury trial, at which the trial court declined to give certain instructions requested by Acacia. The jury found Acacia liable for breach of contract, breach of the implied covenant, and misappropriation, awarding $49 million in contract damages (and the same amount, in the alternative, for breach of the implied covenant) and $1 in misappropriation damages.

The parties filed several posttrial motions, the trial court denied most of them and entered judgment, and both parties appealed. Acacia contends

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the judgment on breach of contract must be reversed because there was no substantial evidence the Agreement required Acacia to pay royalties on its later-generation, backwards-compatible products, given the meaning of certain Agreement terms, and the court erred by rejecting its proposed jury instructions and declining to apply the damages cap. Acacia also argues the implied covenant claim fails as a matter of law, because the Agreement covers the matters at issue, and there was no misappropriation, because the Agreement authorized Acacia's use of Viasat's trade secrets. On cross-appeal, Viasat argues the jury's $1 misappropriation damages award was improper, and the court erred in denying its motion for costs of proof.

We conclude Acacia establishes the judgment must be reversed as to breach of the implied covenant and trade secret misappropriation. However, Acacia does not establish the judgment should be reversed as to breach of contract, and Viasat does not establish any reversible error. We reverse the judgment as to the implied covenant and misappropriation claims, and the judgment and orders are otherwise affirmed.

FACTUAL AND PROCEDURAL BACKGROUND

I. Underlying Events^[2]

At its core, this case is a dispute over how Acacia could use Viasat's technology under their Agreement. We begin by introducing the parties and technology at issue; then describe the terms of their business relationship, and initial products; and, finally, explain how Acacia's development and sale of its later-generation products without paying royalties led to litigation, trial, and, eventually, these appeals.

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A. Overview of Parties and Technology

In 2009, Acacia was a start-up company aiming to develop a fiberoptic communication product that could transmit data at 100 gigabits per second-10 times faster than most communications at the time. The product, which is an "application specific integrated circuit" (ASIC) or chip, or the module containing the chip, also had to address the errors that occur in fiberoptic transmission.

Viasat was an established company with a division that specialized in modem work, including error correction for communications products (ECC, also known as Viasat Cleveland). Acacia approached Viasat to develop IP cores for Acacia's chip. An IP core is "a collection of intellectual property that allows its recipient to exercise a certain function," and each chip can have a "variety of different types of circuitry."

Under the parties' Agreement, the terms of which we discuss below, Viasat provided Acacia with a DSP Core and an SDFEC Core. The DSP Core conducts "digital signal processing," by creating a data signal for transmission and processing received signals to remove distortions and errors. The SDFEC Core handles "soft decision forward error correction," meaning redundant data is included in the signal to help process data that was corrupted in transit ("forward error correction"), along with a reliability value that further reduces errors (the "soft decision" aspect). The SDFEC Core has both an "encoder" and a "decoder."

In providing these components, Viasat supplied documents for the IP Core design process, not physical items. The process includes "high-level specifications," or the general design; "low-level specifications," the specific design and "most important" part of the process; and "source code," which is used to create software instructions for the manufacturer that physically

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fabricates the chip. Viasat also provided manuals and programs "to run performance simulations," among other materials.

B. Parties' Joint Business Relationship

We now explain the contractual terms and resulting products of the parties' joint business relationship, which appeared to go well for a time.

In June 2009, Acacia and Viasat signed a nondisclosure agreement (NDA). The NDA's stated purpose was to permit the parties to exchange confidential information to explore or support a "joint business relationship." The NDA required the parties to make confidential information "available only to those . . . employees . . . having a need to know and solely for the Purpose of this Agreement. . . ."

Later that month, Viasat prepared a white paper for Acacia titled "100G Soft-Decision FEC Selection Analysis," which recommended a particular forward error correction approach for Acacia's desired usage.

In November 2009, the parties signed an IP Core Development and License Agreement (the Agreement) which was to be interpreted under Delaware law. Acacia's payments to Viasat under the Agreement were based on the parties' ownership rights to the technology to be developed by Viasat.

The DSP Core was "Foreground Information," or IP rights owned by Acacia. (Agreement Section 1(j), 3(a).) Acacia paid a $3.2 million fixed fee for development services, which it viewed as payment for ownership of the DSP Core. (Section 2(b).)

The SDFEC Core was "Background Information," which was defined as IP rights owned by Viasat and included all related "technical data, manuals and other documentation and data." (Section 1(b).) The SDFEC Core was also the basis for "Licensed Materials," which was defined as:

"[T]he SDFEC Core provided to ACACIA ... in whatever form provided ... or however designated . . . and including all changes, additions,

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revisions, replacements, manuals and documentation thereto which VIASAT may provide under this Agreement." (Section 1(k).)^[3]

"[I]ncorporat[ion]" of "any part" of the Licensed Materials was what made an Acacia chip a "Licensed Product" under the Agreement-meaning the product was subject to royalty payments, but was also within Acacia's license to develop and sell. (Sections 1(1)-(m) [definitions of "Licensed Products," and "Royalty Bearing Products"]; 4(a) ["License"]; 4(b) ["Recurring License Fee"].) There was a limited royalty-free license for use of Background Information in certain circumstances. (Section 3(b).)

The Agreement also imposed confidentiality obligations on the parties, including by incorporating the NDA (Section 9), and limited damages to the amount paid by Acacia under the Agreement, subject to a confidentiality breach exception (Section 13).

Acacia developed and sold its first two products, Everest and K2, which the parties agree incorporated the SDFEC Core, and paid over $9.5 million in royalties to Viasat.^[4] Added to the $3.2 million fixed fee, Acacia paid Viasat a total of $12, 821, 000 under the Agreement.

C. Acacia's Later-Generation Products

The parties' joint business relationship did not last. Acacia later developed the three products at issue here, Sky, Denali, and Meru. Each product had a mode that was backwards-compatible with Everest, and other

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modes that were not. Acacia did not pay royalties on these later-generation products.

Internal communications reflected Acacia's executives had considered various options for forward error correction for its later-generation products. During one email discussion about developing a new FEC, cofounder and former president Christian Rasmussen said, in part, that he did not think "royalty savings alone justifie[d] such a big undertaking." Vice President of Engineering Bhupendra Shah...