Crossroads Systems, Inc. v. Dot Hill Systems Corp.

Filing 86

ORDER GRANTING IN PART AND DENYING IN PART 50 Sealed Motion for Partial Summary Judgment; GRANTING IN PART AND DENYING IN PART 67 Motion for Summary Judgment Partial. Signed by Judge Sam Sparks. (jk)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
AUSTIN DIVISION

F
2914

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SEP 19

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CLiR US
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WL$TERtI OS7ICT OF TEX?S

CROSSROADS SYSTEMS, INC.,
Plaintiff,

BY

__________
EPJT V

-vs-

Case No. A-13-CA-800-SS

DOT HILL SYSTEMS CORP.,

Defendant.

ORDER
BE IT REMEMBERED on this day the Court reviewed the file in the above-styled cause, and
specifically Defendant Dot Hill System Corp. (Dot Hill)' s Motion for Partial Summary Judgment [#50],

PlaintiffCrossroads Systems, Inc. (Crossroads)'s Response [#70], PlaintiffCrossroads' Cross Motion for

Partial Summary Judgment [#67], Dot Hill's Response [#77], Dot Hill's Combined Reply [#79], and
PlaintiffCrossroads' Sur-Reply [#85]. Having reviewed the documents, the governing law, and the file as
a whole, the Court now enters the following opinion and orders.

Background
In October 2006, Dot Hill and Crossroads entered into an "Amended Settlement and License
Agreement" (the Dot Hill License). P1.'s Resp. [#70-1], Ex. A (Dot Hill License). This agreement was
a royalty-bearing license covering "any product manufactured by or for Dot Hill, based on designs or
specifications created by Dot Hill, and which is Sold by Dot Hill, that is covered by any claim of any patent

inthe '972 Patent Family." Id., § 1.5. The '972 Patent Family includes U.S. PatentNo. 6,425,035 (the
'035 patent). Id., § 1.1. Dot Hill has made products for Hewlett-Packard (HP) since the fourth quarter

'I

of 2007. Declaration of Sandy Kaiser [#44], ¶ 3. For a time, Dot Hill paid royalties to Crossroads
pursuant to the Dot Hill License on various products sold to HP. Pl.'s Resp. [#70-2], Ex. B (Jonikas
Depo.), at 16:11-25, 18:17-21:18, 23:15-27:15.

In October 2011, Crossroads entered into a separate "Confidential Settlement and License
Agreement" with HP (the HP License). Id. [#70-5], Ex. E (HP License). In this agreement, Crossroads
granted HP a license to "make, have made, use, sell, offer to sell, have sold, lease, import, have imported,

export and otherwise transfer" HP Licensed Products. Id., § 2.1. "HP Licensed Products" are defined
as "any past, current or future product. . . manufactured by or for HP based on designs or specifications

created by or for HP, and which is sold/distributed by or for HP, that is covered by any claim of the
Crossroads Patents." Id., § 1.14. Additionally, the license "extend[s] to HP customers, distributors and
manufacturers, involved in the distribution, manufacture, sale or use of HP Licensed Products." Id, § 2.1.

In exchange, HP made a lump sum payment to Crossroads; the agreement is royalty-free. Id.,

§

4.1.

At some point, Dot Hill ceased making royalty payments to Crossroads on products it made for
HP, which Crossroads believes it is owed. For this reason and others, Crossroads sued Dot Hill, accusing

Dot Hill of: (1) breaching the Dot Hill License by failing to make royalty payments on products covered

by the license, and (2) infringing the '035 patent by making certain products for HP.

See

Compl. [#1], ¶

27; Id., ¶J 31-34.' Dot Hill answered and, as relevant to the instant motions, asserted defenses of license

1According to Crossroads, the '035 patent infringement claims are based on not only the products Dot Hill sells
to HP, but also all products Dot Hill manufactures, uses, offers for sale, sells, or imports into the United States which
infringe a claim of the '035 patent. While the Court is unclear which products exactly fall into the former and latter
categories, Crossroads does list the following as members of the former: AJ752A: HP 2012sa Single Controller Modular
Smart Array; AJ753A: HP 2012sa G2 Dual Controller Modular Smart Array; AJ8O5A: HP 2312a G2 Dual Controller
Modular Smart Array (LFF); and AJ8O7A: HP 2324sa G2 Dual Controller Modular Smart Array (SFF). See P1's Resp.
[#70], ¶ 3. Therefore, as the Court understands the pleadings, Dot Hill's instant motion for partial summary judgment
concerning patent infringement relates only to those products made for HP.

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and waiver. Answer [#25], ¶J 43-46. In short, Dot Hill contends the HP License, which gives HP "have

made" rights, makes Dot Hill a third party beneficiary, meaning Dot Hill is protected from Crossroads'
claims concerning products made by Dot Hill for FTP by the doctrine of license. Relatedly, Dot Hill argues

Crossroads, by entering into the HP License, waived its right to enforce the Dot Hill License.
Dot Hill has now filed a motion for partial summaryjudgment on Crossroads' claims for patent
infringement and breach of contract concerning products Dot Hill made exclusively for and sold exclusively

to HP. In Dot Hill's view, it is a third party beneficiary of the HP License and therefore is not subject to

an infringement claim. Furthermore, Dot Hill argues the HP License is fully paid-up and does not require

any additional royalty payments by Dot Hill under the Dot Hill License.

Crossroads disputes Dot Hill's understanding ofthe impact of the HP License on the Dot Hill
License. In Crossroads' view, the two licenses are independent, and Dot Hill owes royalties under the Dot
Hill License separate and apart from whatever the obligations of the HP License maybe. In addition, since

Crossroads believes Dot Hill is in breach of the Dot Hill License, it believes it can now sue Dot Hill for
patent infringement concerning those certain products Dot Hill makes for HP. Crossroads has cross moved

for summary judgment on the defenses of license and waiver.

Analysis
I.

Legal

StandardSummary Judgment

Summary judgment shall be rendered when the pleadings, the discovery and disclosure materials

on file, and any affidavits show that there is no genuine dispute as to any material fact and that the moving
party is entitled to judgment as a matter of law.
U.S. 317, 323-25 (1986); Washburn

v.

FED.

R. Civ. P. 56(a); Celotex Corp. v. Catrett, 477

Harvey, 504 F.3d 505, 508 (5th Cir. 2007). A dispute
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regarding a material fact is "genuine" if the evidence is such that a reasonable jury could return a verdict in

favorofthenonmovingparty. Anderson v. LibertyLobby, Inc., 477 U.S. 242,248(1986). Whenruling
on a motion for summaryjudgment, the court is required to view all inferences drawn from the factual

record in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio,
475 U.S. 574, 587 (1986); Washburn, 504 F.3d at 508. Further, a court "may not make credibility
determinations or weigh the evidence" in ruling on a motion for summaiy judgment. Reeves v. Sanderson

Plumbing Prods., Inc., 530 U.S. 133, 150 (2000);Anderson, 477 U.S. at 254-55.
Once the moving party has made an initial showing that there is no evidence to support the

nonmoving party's case, the party opposing the motion must come forward with competent summary

judgment evidence of the existence of a genuine fact issue. Matsushita, 475 U.S. at 586. Mere
conclusory allegations are not competent summary judgment evidence, and thus are insufficient to defeat

a motion for summaryjudgment. Turner v. Baylor Richardson Med. Ctr.,476 F.3d 337,343 (5th Cir.
2007). Unsubstantiated assertions, improbable inferences, and unsupported speculation are not competent

summary judgment evidence. Id. The party opposing summary judgment is required to identify specific

evidence in the record and to articulate the precise manner in which that evidence supports his claim.
Adams v. Travelers Indem. Co. of Conn., 465 F.3d 156, 164 (5th Cir. 2006).
Rule 56 does not impose a duty on the court to "sift throughthe record in search ofevidence" to support
the nonmovant's opposition to the motion for summaryjudgment. Id. "Only disputes over facts that might

affect the outcome of the suit under the governing laws will properly preclude the entry of summary

judgment." Anderson, 477 U.S. at 248. Disputed fact issues that are "irrelevant and unnecessary" will
not be considered by a court in ruling on a summaryjudgment motion. Id Ifthe nonmoving party fails to

El

make a showing sufficient to establish the existence of an element essential to its case and on which it will

bear the burden of proof at trial, summary judgment must be granted. Celotex, 477 U.S. at 322-23.

II.

Application
The parties' dispute is a matter of contract interpretation, and the FIP License is governed by Texas

law. HP License, ¶ 8.4. When interpreting a contract the Court's primary objective is to "ascertain the

true intentions of the parties as expressed in the instrument." Coker v. Coker, 650 S .W.2d 391,393 (Tex.
1983). In doing this, the Court should review the entire contract and "harmonize and give effect to all of

its provisions so that none will be rendered meaningless." McLane Foodservice, Inc.

v.

Table Rock

Rests., L.L. C., 736 F.3d 375, 377-78 (5th Cir. 2013). Further, contracts should be interpreted to avoid

absurd results. Provostv. Unger, 949 F.2d 161, 165 (5th Cir. 1991); Pavecon, Inc.
159 S.W.3d 219, 222 (Tex.

App.Fort

v.

R-Com, Inc.,

Worth 2005, no pet.) ("When possible, we will avoid a

construction that is unreasonable, inequitable, or oppressive, or would lead to an absurd result.") (citing
Reilly v. Rangers Mgmt., Inc., 727 S.W.2d 527, 530 (Tex. 1987)).
A breach ofcontract is a matter of law appropriate for summary judgment where the contract's

terms are clear, and the contract is not ambiguous. Abarca v. Scott Morgan Residential, Inc., 305
S .W.3 d 110, 120 (Tex.
v. Tex.

App.Houston [1St Dist.] 2009, pet. denied) (citing MCI Telecomms.

Corp.

Utils. Elec. Co., 995 S.W.2d 647, 650-5 1 (Tex. 1999)). "A contract is not ambiguous if it is

worded so that it can be given a definite or certain legal meaning." Orion IP, LLC v. Mercedes-Benz
USA, LLC, 560 F. Supp. 2d 556,559 (E.D. Tex. 2008) (interpreting contract under Texas law).

Where

a contract is clear on its face, parol evidence is generally inadmissible to "vary, add to or contradict" its

terms. A.G. Edwards & Sons, Inc.

v.

Beyer, 235 S.W.3d 704, 709 (Tex. 2007).
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Under Texas law, courts will find a third-party beneficiary to a contract where the contract reflects

"a clear and unequivocal expression of the contracting paies' intent to directly benefit a third party."
Alvarado v. Lexington Ins. Co., 389 S.W.3d 544,552 (Tex. App.Houston [1St Dist.] 2012,110 pet.).
"[T]he intention of the contracting parties is controlling." Basic Capital Mgmt., Inc.

v.

Dynex

Commercial, Inc., 348 S.W.3d 894, 900 (Tex. 2011).

Dot Hill contends the HP License is unambiguous and reflects HP' s intent to have third parties,
including Dot Hill, manufacture licensed products for HP. Specifically, Dot Hill points to the "have made"

rights granted to HP under the HP License. See, e.g., LaserDynamics, Inc.

v.

Quanta Computer Inc.,

694 F.3d 51, 72-73 (Fed. Cir. 2012) (recognizing "have made" rights); Cyrix Corp.

v. Intel

Corp., 77

F.3 d 1381, 1387 (Fed. Cir. 1996) (same). Since the HP products manufactured by Dot Hill are covered

by the HP License, Dot Hill contends: (1) it does not owe royalties under the Dot Hill License because
Crossroads has already been paid royalties by HP, and (2) it does not infringe the '035 patent because the
HP License extends to manufacturers of HP products.

Crossroads argues the HP License has no impact on the Dot Hill License and bases this position
on § 8.7.1 ofthe HP License. Section 8.7 is essentially a standard merger clause, stating "[t]his Agreement
contains the entire understanding and agreement ofthe Parties... ." HP License, § 8.7. Section 8.7.1,

titled "Limitations," provides in its entirety:
8.7.1 Limitations. The Parties acknowledge that there may be one or more other
agreements between Crossroads, HP, and/or 3PAR related to subjects other than the
Lawsuit and the releases and Licenses granted in this Agreement. This Agreement is not
intended to and does not affect the terms of any such other agreement, including any patent
indemnification obligations that Crossroads may owe HP in the event ofany third-party
patent claim or indemnity demand. This Agreement is also not intended to and does not
affect the terms of the Confidentiality Agreement dated February 12, 2011 between

Crossroads and 3 PAR. This Agreement is not intended to and does not affect or
otherwise alter the terms of any agreement between a Party and a third Party.
Id., § 8.7.1 (emphasis added). Crossroads contends this last sentence unambiguously demonstrates the

HP License does not affect the Dot Hill License.
As an initial matter, the Court concludes the HP License is unambiguous. Specifically, the Court
agrees with Dot Hill that the HP License unambiguously grants "have made" rights to HP, and Dot Hill's
manufacturing of products for HP falls within those "have made" rights. Additionally, the Court agrees with

Crossroads that the HP License "is not intended to and does not affect or otherwise alter the terms of' the

Dot Hill License. The question then becomes how these two conclusions impact Crossroads' patent
infringement and breach of contract claims.
As for patent infringement, the Court agrees with Dot Hill. The HP License extends its license to
manufacturers like Dot Hill, and a license is a valid defense to patent infringement. See Anton/Bauer, Inc.
v.

PAG, Ltd., 329 F.3d 1343, 1350 (Fed. Cir. 2003). In fact, Crossroads' patent infringement claims

are premised on the notion Dot Hill is in breach ofthe Dot Hill License by not paying royalties. Even
assuming Dot Hill is in breach ofthe Dot Hill License by not paying the royalties (and thereby eliminating

a license defense as it pertains to the Dot Hill License), Dot Hill is still protected by the HP License from
any patent infringement claim. Therefore, the Court concludes Dot Hill is entitled to judgment concerning

any patent infringement claims for products made for HP, which infringe the '035 patent.
As for breach of contract, the Court falls to see why the HP License somehow eliminates Dot Hill's

preexisting separate obligation under a separate license to pay a separate royalty to Crossroads, and Dot
Hill never offers the Court an adequate reason why it should so conclude. First, Dot Hill points the Court

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to the "double recovery rule," which provides a party may only gain one recovery for a single wrong. See
Def. 's Mot. Partial Summ. J. [#50], at 6-7. Typically, the double recovery rule is applicable only where

the patent holder has been fully compensated for infringement by another party. See Transclean Corp.
v.

Jiffy

Lube Int'l, Inc., 474 F.3d 1298, 1303 (Fed. Cir. 2007) (stating "a patentee may not sue users

of an infringing product for damages ifhe has collected actual damages from a manufacturer or seller, and
those damages fully compensate the patentee for infringement by users"). This case, however, does not
implicate the double recovery rule as Crossroads is attempting to collect two separate royalties, arising
from distinct licenses with differentparties. Dot Hill cites no authority suggesting Crossroads is prohibited

from recovering two royalties based on the double recovery rule?
Second, Dot Hill cites Quanta Computer, Inc.

v.

LGElecs., Inc., 553 U.S. 617 (2008)to argue

the authorized sale of a patented product exhausts the patent rights in that product. Def. 'S Mot. Partial
Summ. J. [#50], at 10. As Dot Hill concedes, though, Quanta applies to downstream sales of products

after an authorized, unrestricted first sale. Quanta, 553 U.S. at 626 (noting that it was the practice of
restraining competition downstream from an authorized sale that motivated the rule of patent exhaustion).
For instance, a patent holder cannot pursue a licensee's customers for infringement when it authorized the

first sale of the patented product without restriction. This case, however, involves an upstream

2Dot Hill does cite a case stating "a party's 'attempt to collect royalties from two parties for the same product
violates the exhaustion doctrine, and impermissibly extends the scope of the patent grants." Def.'s Combined Reply
[#79], at 10 (quotingPSClnc. v. Symbol Techs., Inc., 26 F. Supp. 2d 505, 509 (W.D.N.Y. 1998)). Without addressingthe
merits of this contention, the Court finds the case inapplicable for two primary reasons. First, the patent owner in Symbol
was impermissibly attempting to collect a royalty from a downstream customer. Symbol, 26 F. Supp. 2d at 507-08. As
explained in the following paragraph, however, the instant case involves collection of a royalty from an upstream
manufacturer in Dot Hill, and Dot Hill cites no case applying patent exhaustion to upstream manufacturers. Second, the
Symbol court discussed the impropriety of collecting a double royalty in response to the licensee's assertion of the
"patent misuse" affirmative defense. Id. at 509-11. Dot Hill has not asserted this defense.

manufacturer, and Dot Hill cites no case applying Quanta to an upstream manufacturer. In fact, other
courts have rejected the argument. See, e.g, Global Comms., Inc.

v.

DirecTV, Inc., No. 4:12CV651-

RH/CAS, 2014 WL 805498, at *2 (N.D. Fla. Feb. 28, 2014) (finding Quanta and patent exhaustion

inapplicable to upstream manufacturers); AsetekHoldings, Inc. v. CoolITSys. ,No. c-i 2-4498 EMC,
2013 WL 5640905, at *2 (N.D. cal. Oct.

ii, 2013) ("No court that this Court is aware of has ever

applied the patent exhaustion doctrine to protect anyone

'upstream'e.g., the person/entity's

suppliersnor has [defendant] identified any such authorities."). This Court agrees and does not find
patent exhaustion applicable to the facts of this case.
Third, Dot Hill contends the release in § 3.1 of the HP License applies to Dot Hill. Def. 's Mot.

Partial Summ. J. [#50], at 9. Section 3.1 provides in its entirety:
3.1 Crossroads' Release of HP and 3PAR. Subject to the terms and conditions ofthis
Agreement, Crossroads. . . releases and forever discharges HPCO, 3PAR, and each of
their Subsidiaries, directors, officers, employees, attorneys, consultants, and
customers from any and all claims, damages, and/or liability based on (a) claims asserted
in the Lawsuit, and (b) infringement of any Crossroads Patent based on the manufacture,
use, sale, offer to sell, lease, import, export, or other form oftransfer of any HP Licensed
Product occurring on or prior to the effective date.

HP License, § 3.1 (emphasis added). The release explicitly applies only to HP, 3 PAR, their subsidiaries,
directors, officers, employees, attorneys, consultants, and customers. There is no mention of manufacturers

like Dot Hill. Nevertheless, Dot Hill boldly claims, based on this provision, it not only has no obligation to

pay royalties under the Dot Hill License since the 2011 effective date of the HP License, but it also "is not

liable for infringement or breach of contract for the non-payment of royalties on products it make for, and

sold to, HP prior to the effective date of the HP License in 2011." Def. '5 Mot. Partial Summ. J. [#50],

at 9 (emphasis added). Clearly, § 3.1 does not apply to Dot Hill, and the Court rejects the argument.

Fourth, Dot Hill directs the Court to extrinsic evidence. In particular, Dot Hill provides an affidavit
from HP's Vice President and Associate General Counsel who was involved in negotiating the HP License,

which describes her understanding of HP' s intentions and the relative significance of 8.7.1.

See Def.' s

Mot. Partial Summ. J. [#501, at 8; Def.'s Combined Reply [#79], at 4. As both parties represent,
however, the HP License is unambiguous, making resort to extrinsic evidence inappropriate. The contract

speaks for itself, and HP negotiated a lump sump payment for, among other things, "have made" rights.
There is no language specifically referencing Dot Hill, the Dot Hill License, or Dot Hill's preexisting royalty

obligations under the Dot Hill License regardless ofwhatever HP's corporate representative now claims

HP' s intentions were.
Therefore, the Court concludes Crossroads is entitled to summaryjudgment on Dot Hill's defenses

of license and waiver as they relate to the breach of contract claims.
Conclusion
The parties' cross motions for partial summary judgment boil down to the interaction oftwo license
agreements: (1) the Dot Hill License between Crossroads and Dot Hill from 2006; and (2) the HP License

between Crossroads and HP from 2011. Because Dot Hill manufactured products for HP via HP' s "have
made" rights from the HP License, Dot Hill is not subject to patent infringement claims concerning these
products made for HP using the '035 patent. As such, the Court GRANTS Dot Hill's motion for partial

summaryjudgment with respect to these claims and DENIES Crossroads' motion for partial summary

judgment on the defenses of license and waiver as they pertain to these claims.
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While the HP License shields Dot Hill from the infringement claims, the HP License says nothing

about Dot Hill's preexisting obligation to pay Crossroads a royalty for products it sells using the '035
patent. As such, the Court GRANTS Crossroads' motion for partial summary judgment on the defenses

of license and waiver as they relate to the breach of contract claims and DENIES Dot Hill's motion for
partial summary judgment concerning these claims.
Accordingly,
IT IS ORDERED that Defendant Dot Hill System Corp.'s Motion for Partial Summary

Judgment [#50] is GRANTED IN PART and DENIED IN PART, as described in this opinion;
IT IS FINALLY ORDERED that Plaintiff Crossroads Systems, Inc.'s Cross Motion for
Partial Summary Judgment [#67] is GRANTED IN PART and DENIED IN PART, as described

in this opinion.

SIGNED this the

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ay of September 2014.

SPARKS1

SAM
UNITED STATES DISTRICT JUDGE

800 eros mpsj ordjtwfrm

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