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Microsoft's Appeal Brief in Microsoft v. Sun Microsystems (part 2).
Case No. 99-15046, U.S. Court of Appeals, 9th Circuit.
Date filed: January 13, 1999.
Source: Microsoft. This document has been edited for HTML, but not for content.

Due to the size of this brief, it is divided into three HTML pages:
Page 1.
    Table of Contents.
    Table of Authorities.
• Page 2  (this page).
    I. Statement of Jurisdiction.
    II. Statement of the Issues.
    III. Statement of Facts.
    IV. Statement of the Facts.
    V. Summary of the Argument.
    VI. Standards of Review.
Page 3.
    VII. Argument.
    VIII. Conclusion.

CORPORATE DISCLOSURE STATEMENT

Pursuant to Federal Rule 26.1, Appellant Microsoft Corporation states that it has no parent company and no wholly-owned subsidiary which has issued shares to the public.

I.  STATEMENT OF JURISDICTION

Microsoft appeals from the district court’s order granting a preliminary injunction against Microsoft. The district court had jurisdiction over the proceedings below pursuant to 15 U.S.C.  1121 and 28 U.S.C.  1331, 1332, and 1338. This Court has jurisdiction over the appeal of an interlocutory order pursuant to 28 U.S.C.  1292(a)(1). The district court entered the order on November 17, 1998, and Microsoft filed its notice of appeal on December 16, 1998. E.R. 1157-59. The appeal is timely under Fed. R. App. P. 4(a)(1).

II.  STATEMENT OF THE ISSUES

A. Did the district court commit an error of law by issuing a preliminary injunction based on copyright infringement standards when Sun asserted a breach of contract claim?

B. Did the district court commit an error of law by failing to enforce the parties’ agreement to limit the remedies available for breach of contract?

C. Did the district court commit an error of law by issuing a preliminary injunction under the Copyright Act that restrains development and distribution of Microsoft’s independently developed products which contain no Sun copyrighted technology?

D. Did the district court commit an error of law by entering a preliminary injunction under California’s unfair competition statute that enjoins certain discontinued license provisions where there was no evidence that these challenged practices would resume and no showing of imminent harm?

E. Did the district court commit an error of law by granting preliminary injunctive relief based on an interpretation of the parties’ license agreement that is contrary to its unambiguous language?

III.  STATEMENT OF THE CASE

A.  Nature of the Case

This dispute arises out of Sun’s claim that Microsoft’s products do not meet certain obligations under the parties’ 1996 Technology Licensing and Distribution Agreement, E.R. 217-43 (hereinafter "TLDA"), by which Sun licensed to Microsoft its Java Technology. The TLDA includes a broad license for Microsoft to:

Make, use, import, reproduce, license, rent, lease, offer to sell, sell or otherwise distribute to end users as part of a Product or an upgrade to a Product, the Technology and Derivative Works thereof in binary form.

TLDA  2.2(a)(iii). The Microsoft products at issue in this case are "Products" as defined in the TLDA. Id. at  1.20.

Sun alleges that Microsoft breached compatibility obligations that are found in other provisions of the TLDA. The district court treated the case as one for copyright infringement, rather than breach of contract. Under the copyright infringement preliminary injunction standard, the district court enjoined Microsoft’s distribution of thousands of Microsoft’s present and future products without requiring Sun
to demonstrate irreparable harm and based on an express discounting of the harm to Microsoft. Microsoft appeals the district court’s preliminary injunction order.

B.  Course of Proceedings

On October 7, 1997, Sun filed its complaint alleging breach of contract, trademark infringement, and related claims. E.R. 1. Sun’s complaint did not allege copyright infringement. Sun’s claims were based on the allegation that certain Microsoft products did not pass "compatibility" tests distributed by Sun. E.R. 19-20 ( 54, 57).

On November 17, 1997, Sun moved for a preliminary injunction barring Microsoft’s use of a "JAVA Compatible" logo. E.R. 276. On March 24, 1998, the district court granted Sun’s motion. E.R. 146-64 (hereinafter "Order (3/24/98)").

On May 12, 1998, Sun moved to amend its complaint to add a claim for copyright infringement based on the same alleged failure to pass the compatibility tests on which its breach of contract claims were based. E.R. 201-02, 204-05 ( 118, 138).

Also on May 12, 1998, Sun filed two motions seeking preliminary injunctions based on 17 U.S.C.  502 (copyright infringement) and Cal. Bus. & Prof. Code  17200 (unfair competition). E.R. 42-68, 244-66. Sun asked the district court to enjoin the distribution of certain Microsoft products until Microsoft modified them to be consistent with Sun’s interpretation of Microsoft’s obligations. On November 17, 1998, the district court granted Sun’s motion for preliminary injunction. E.R. 1126-56 (hereinafter "Order (11/17/98)"). The district court found Sun likely to succeed on its claim that Microsoft’s products failed certain compatibility tests required by the TLDA, but based its order on the preliminary injunction standards applicable to a copyright infringement claim, rather than those applicable to a breach of contract claim. See Order (11/17/98) at 13:21-14:12, 25:13-26:1. The district court concluded that Sun did not need to show actual or threatened harm, but rather was entitled to a presumption of harm. In weighing Sun’s presumed harm, the district court regarded the actual harm to Microsoft as a "minor consideration." Order (11/17/98) at 25:13-25.

Sun’s motion for preliminary injunction based on unfair competition was granted only with regard to certain discontinued advertising and licensing practices. The district court noted Microsoft’s testimony that the allegedly offending practices had ceased and made no finding regarding the likelihood that they would be resumed or potential harm if they were resumed. Order (11/17/98) at 27:16-28:19.

C.  Disposition Below

The district court’s order prohibits Microsoft from distributing products that incorporate Sun’s licensed program code unless they are reprogrammed to include certain Sun features that the court found were required by the TLDA and unless they pass Sun’s compatibility tests. Order (11/17/98) at 29:8- 30:9. The order requires the re-engineering of thousands of Microsoft products within ninety days. E.R. S-45 - S-47, S-49 - S62. C. Jones Decl ( 2, 5, 16, & Ex. B). The district court also extended its order to prohibit Microsoft from future distribution of certain types of products, even if they are not derived from and do not contain any of the licensed Sun technology. Order (11/17/98) at 29:16-30:22. Finally, the district court enjoined Microsoft from engaging in certain licensing and advertising practices that were not in use at the time of the Order. Order (11/17/98) ( D-F). The district court imposed an injunction bond of $15 million. Id. (31:11-13).

Microsoft appeals from this order.

IV.  STATEMENT OF FACTS

A.  The Java Programming Language and the Licensed Java Technology

Java is a software programming language, which is largely based on the C and C++ programming languages. E.R. 407. Software developers may use Java or other programming languages to write computer programs in source code form. Id. Before the program will run on a computer, the source code must be run through a software tool called a "compiler." The compiler translates the program from source code form to machine language form, which is understood and executed by a computer. E.R. 364-65 ( 34); E.R. 391 ( 48). Microsoft is a long-time vendor of programming tools, including tools such as Visual J++, which enable software developers to write programs using the Java programming language. E.R. 464-65, 498-99.

Computer programs are typically written to run on a particular operating system and will not run on another operating system unless the program is modified. E.R. 279 ( 3). For example, a program written to run on Macintosh computers will not run on Windows-based computers without modification. E.R. 430-31 ( 11). Programmers using the Java language can, if they choose, create programs which will run unmodified on different operating systems. E.R. 73 ( 4). Such programs are referred to as "cross-platform" programs. Id.

The licensed Sun technology at issue consists of software contained in what Sun refers to as the Java Development Kit or JDK. E.R. 397. The JDK contains a Java virtual machine (also known as a "Java Interpreter"). Id. A Java virtual machine is a program that acts as a translator between a Java program and the underlying operating system. E.R. 144. The virtual machine also uses program files, called Java classes, which are resources used by the Java program. E.R. 383-84, 386-87 ( 21, 31, & 33). The JDK includes certain Java classes and also includes a Java compiler. E.R. 397.

In late 1995 and early 1996, the Java programming language was used to write simple programs called "applets." Applets written in Java could be viewed by any type of computer on which a Java virtual machine was installed and were well-suited for use on worldwide web pages. E.R. 383 ( 20); E.R. 327 ( 3); E.R. 431-32 ( 12). However, writing full-featured, cross-platform Java programs is problematic because doing so requires a developer to program only to the "lowest common denominator" set of features found on all operating systems. E.R. 362 ( 28). Thus, for example, a cross-platform program may not provide two-button mouse capabilities because not all computers (e.g., Macintosh) have a two-button mouse. E.R. 84 ( 7); E.R. 355-56 ( 7).

B.  The Parties’ Competing Interests in Java

As interest in the Internet and the worldwide web increased in 1995, Microsoft decided to create its own independent Java implementation based on publicly available information. E.R. 343 ( 2); E.R. 337 ( 2); E.R. 327 ( 3). By early 1996, Microsoft’s own implementation of the Java technology was nearly ready for distribution. E.R. 337 ( 2); E.R. 346 ( 13).

In late 1995, Sun expressed an interest in licensing its Java technology to Microsoft. E.R. 343 ( 3-4). Sun wanted Microsoft to implement Java technology in order to increase the number of Java-enabled systems. E.R. 1062, 1063-64 (105:16-24, 168:11-169:2); E.R. 83 ( 4); E.R. 474. Sun also knew that Microsoft’s endorsement of Sun’s fledgling technology would give it credibility. Muglia Hearing Transcript (9/9/98), p. 19. In the words of one of Java’s creators, James Gosling, "Java would instantly become a galactic standard." E.R. 1095; see also E.R. 1062 (105:16-24).

Microsoft was interested in licensing the Java technology to ensure its own implementation would be timely brought to market. E.R. 1051-52 (267:24-268:4). Microsoft also wanted to obtain the right to receive new versions of the Java technology on the same basis as Sun’s other licensees. E.R. 344, 347-48 ( 7, 22); TLDA  31. Because Microsoft’s developer customers were interested in the Java programming language, Microsoft wanted to create an enhanced implementation of Java optimized for Windows. E.R. 343, 344, 346, 348-49 ( 2, 5, 9, 16, 27); E.R. 84-85 ( 8); E.R. 476.

Sun and Microsoft also had conflicting interests regarding Java programming. E.R. 343 ( 5). Sun hoped that Java programming would gain popularity, and that Sun could then evolve and enhance the underlying Java technology until it became a full-fledged operating environment that would ultimately displace Microsoft’s popular Windows operating system. E.R. 1063-65. Sun had a "fundamental belief that it will be Java that kills MSFT [Microsoft] …." E.R. 1098. Sun actively sought to discourage developers from writing platform-specific Windows programs in favor of cross-platform Java programs. E.R. 1065 (B-D). Microsoft sought to demonstrate the value of Windows to attract developers to write full-featured Windows programs that customers would want. E.R. 343 ( 5). Microsoft was not interested in allowing Sun to dictate future Sun enhancements for inclusion in Microsoft’s products, which would handicap or interfere with Windows. E.R. 495-97; E.R. 84-85 ( 8-9). It was in this context that these competitors negotiated the TLDA at arm’s length. Id.

C.  The Terms of the Parties’ Technology Licensing and Distribution Agreement

The TLDA granted Microsoft a source code license to JDKs and associated documentation. Microsoft’s license is very broad:

SUN hereby grants to Licensee, and Licensee hereby accepts from SUN, a perpetual and irrevocable (without regard to any termination or expiration of this Agreement, except as provided in Section 11.2(b)), worldwide, non-exclusive, non-transferable license, under the Intellectual Property Rights of SUN to make, access, use, copy, view, display, modify, adapt, and create Derivative Works of the Technology in Source Code form for the purposes of developing, compiling to binary form and supporting Products.

TLDA  2.1(a) (emphasis added). The TLDA grants to Microsoft a similarly broad distribution license to:

Make, use, import, reproduce, license, rent, lease, offer to sell, sell or otherwise distribute to end users as part of a Product or an upgrade to a Product, the Technology and Derivative Works thereof in binary form.

TLDA  2.2(a)(iii). "Products" are defined as any present or future Microsoft products or services which may include Sun’s Technology "in whole or in part." TLDA  1.20.

The TLDA allows Microsoft to determine whether, and to what extent, Java technology is included in Microsoft products. TLDA  2.7, 8.2. Microsoft retained the right to decline to include future technology upgrades delivered by Sun in Microsoft’s Java implementation. TLDA  2.7, 8.2. Microsoft agreed that if Microsoft’s products incorporated the licensed technology, the products would have the compatibility necessary to run programs written in the Java programming language. TLDA  2.6(a)(vi). Sun also undertook certain minimum compatibility obligations with respect to Sun’s licensed technology. TLDA  2.6(a)(iii), 2.6(b)(iii), 2.7. Sun received a broad license to a Microsoft implementation of the Java technology on Windows. TLDA  2.5. Microsoft agreed to pay $3.75 million yearly, for a total of $18.75 million over the term
of the agreement. TLDA  4.1, 4.2.

1.  Sun’s Agreement to Limit Its Remedies

Microsoft gave particular importance to provisions regarding terminating the technology license and limiting remedies. E.R. 85-86 ( 10);E.R. 510-15. Sun agreed that, even if the TLDA were terminated, Microsoft’s license to use the Sun technology in existing products would continue. TLDA  11.2(b). Microsoft’s licenses to use, modify, and distribute Sun’s Technology are perpetual and irrevocable "except as provided in 11.2(b)." Section 11.2(b) provides:

[I]f at any time during the Term an officer, director, or General Manager of a product group of Licensee willfully and intentionally breaches a material provision of Section 2.6 of this Agreement and Licensee fails to cure such breach within a period of one (1) year after the date that SUN provides Licensee with notice thereof, SUN shall have the right to terminate this Agreement and terminate the license grants set forth in Section 2, except with respect to any Products, including any upgrades, versions or successors thereto … (collectively, "Surviving Products"). Licensee’s rights under Section 2 of this Agreement with respect to Surviving Products shall survive any expiration or termination of this Agreement.

TLDA  11.2(b) (emphasis added). The parties also agreed to limit remedies to money damages:

Except as expressly stated in this Section 11.2 and in Section 12.6, the parties agree that in the event that either party breaches any material term of this Agreement … the non-breaching party’s sole remedy shall be to seek monetary damages in a court of competent jurisdiction.

TLDA  11.2(d) (emphasis added). In addition, section 10 of the TLDA precludes liability for consequential or punitive damages, and limits liability for any claim arising out of the TLDA to the amount of license fees paid by Microsoft.
TLDA  10.1(a), (b).

The district court previously determined that, except to the extent section 11.2(b) applies, Sun’s sole remedy for any material breach of the TLDA is limited to damages by virtue of section 11.2(d). See Order (3/24/98) at 9 n.2. In granting Sun injunctive relief, however, the district court made no finding that an officer, director, or General Manager had willfully and intentionally breached a material provision of section 2.6 of the TLDA. See generally Order (11/17/98).

Although Sun styled its motion for preliminary injunction as based on copyright infringement, Microsoft’s licenses to the Java technology have not been terminated by Sun. E.R. 349 ( 30). Indeed, Sun continues to collect $3.75 million in license and support fees annually from Microsoft. Id.; E.R. 346 ( 14).

2.  Microsoft’s Java Implementations

Since entering into the TLDA, Microsoft has introduced new versions of its Java virtual machines. E.R. 327-E ( 12). These are widely regarded as the best, fastest, and most compatible Java implementations available. E.R. 516; E.R. 354-55 ( 4); E.R. 1066-89. In April 1998, PC Magazine awarded Microsoft’s Java implementation the prestigious Editor’s Choice award:

For the second year in a row, Microsoft has produced the fastest and most reliable Java implementation available …. The Microsoft Java environment came close to a perfect score on our compatibility tests.

E.R. 1079. Microsoft has also produced enhanced developer tools, such as Visual J++ 6.0, which allow developers to use the Java programming language to produce commercial grade Windows applications, and also, if they choose, to write least common denominator Java applets intended to be cross-platform compatible. E.R. 330-31 ( 2-4); see generally E.R. 363 ( 30).

3.  The Present Dispute

Sun’s claims relate to the interpretation of Microsoft’s TLDA obligations regarding "compatibility." Specifically, Sun alleges that Microsoft breached the TLDA by not implementing certain Sun technology in its products, and by providing certain enhancements in its software developer tools that permit developers to create Windows applications more easily using the Java programming language. E.R. 189-91, 204-05 ( 76-78, 83, 138). Microsoft maintains that its products meet the compatibility requirements of the TLDA.

a.  JNI

In early 1997, Sun delivered to Microsoft an upgrade of the licensed technology called JDK 1.1. E.R. 268 ( 5). JDK 1.1 included a non-Java programming interface called Java Native Interface or "JNI." E.R. 389 ( 40); E.R. 348 ( 24). JNI cannot be used by developers to write cross-platform Java programs. JNI is not specified in Sun’s specification of the Java programming interfaces and it cannot be invoked by Java programs. E.R. 389 ( 40); E.R. 597; E.R. 340-41 ( 12-13). Rather, JNI is used to create programs which run only on a specific operating system. E.R. 389 ( 40); E.R. 348 ( 24); E.R. 340-41 ( 12, 13). Microsoft also determined that JNI was inferior to its own preexisting technology. E.R. 338-39 ( 8). Microsoft did not believe it was required by the TLDA to support this native interface and did not implement it. E.R. 348-49 ( 24, 27-28); E.R. 517-19.

Sun disagreed, and included with JDK 1.1 compatibility tests which tested for the presence of JNI. E.R. 349 ( 28); E.R. 271 ( 15(b)). When Microsoft began distributing products without JNI in September 1997, Sun contended that the products failed to pass its test suites because they did not support JNI, and such support was required by the agreement. E.R. 271-73 ( 15(b), 19(b), 23(b)); E.R. 189-90 ( 76-78). Shortly thereafter, Sun filed its complaint in this matter, alleging that Microsoft had breached the TLDA by not including JNI in Microsoft’s products. E.R. 25-26, 39 ( 74, 76-78, 138).

b.  Microsoft’s Enhanced Java Compiler

In March 1998, Microsoft released the latest version of its Visual J++ software development tool, called VJ++ 6.0 ("VJ6"). Hejlsberg Decl.,  2. The compiler in VJ6 contains two "modes." In one mode, the compiler enables developers, if they choose, to write only "pure" Java programs, which run across all platforms. In the compiler’s other mode, developers can use several high performance Microsoft enhancements that make it easier for software developers to write full-featured applications for Microsoft Windows. E.R. 330-31 ( 3, 4); E.R. 363 ( 30); E.R. 380, 394-95 ( 11, 58). Developers can easily switch between these modes according to the type of program they wish to create. E.R. 363 ( 30); E.R.380 ( 11). TLDA section 2.6(b)(iv) provides that Java compilers shall "include a mode … to permit such Product to pass the Java Language Test Suite …." TLDA  2.6(b)(iv) (emphasis added).

When its "standard" mode is used, Microsoft’s Java compiler passes the Java Language Test Suite. See Order (11/17/98) at 20:11-13. Sun contends the compiler must also pass when the "enhanced" mode is used. E.R. 191 ( 83).

c.  Microsoft’s Alleged "Unfair Competition"

Sun alleges that Microsoft’s exercise of its broad license rights to enhance and improve upon Sun’s Java-related products and to compete with Sun constitutes unfair competition. E.R. 210-13 ( 170-77). In addition, Sun objected to two particular provisions in Microsoft’s licenses to third parties, which required them to use Microsoft’s virtual machine. Id. Microsoft disputes that it ever acted unfairly, and also provided unrefuted evidence that these practices have been discontinued. E.R. 306  3.170-3.177); E.R. 1054-55, 1058-60 (40:2-41:21; 239:1-241:25).

V.  SUMMARY OF THE ARGUMENT

The unambiguous language of the license grants in the TLDA confirms Microsoft’s right to distribute products containing Sun’s technology. These license grant provisions define the scope of Microsoft’s license. Sun has not rescinded this license. Rather, Sun contends that Microsoft breached a separate covenant which requires Microsoft products to meet certain disputed compatibility requirements. The district court erroneously determined that the disputed compatibility covenants, which appear three pages after Microsoft’s license grant, limit the scope of Microsoft’s license. This error led the court to deny Microsoft the benefit of its license and the TLDA’s limitations of remedies, and to enter a far-reaching injunction based solely on the presumption of irreparable harm that attaches to copyright infringement.

Compounding the error, the district court’s expansive preliminary injunction restrains not only distribution of Microsoft’s products that include Sun’s technology, but also other independently developed Microsoft products (present and future) which make no use of Sun’s copyrighted material. The effect of this restraint is that Sun is effectively given control over future Microsoft products in which it has no intellectual property rights. The court also erroneously issued an injunction against certain discontinued licensing practices in the absence of any finding that they were likely to resume or of any showing of harm. The district court’s injunction grievously harms Microsoft, its customers, and the public by restraining competition and depriving the industry of Microsoft’s technology innovations.

The primary role of the district court in this case should have been to discern and enforce the intent of the parties as recorded in their agreement. That role is not fundamentally changed by the fact that one subject matter of the agreement is copyrighted material. Here, the district court abandoned that role by ignoring the plain language of the agreement. As a result, the district court misinterpreted the compatibility requirements of the TLDA by erroneously concluding that Microsoft must support JNI and cannot use any Microsoft keyword extensions or compiler directives in its Java software development tools.

Under the standard this Court requires for preliminary injunctions in contract cases, the district court should have concluded that this was not a case for granting preliminary injunction. Under any standard, the district court should not have enjoined Microsoft’s independently developed products, which do not incorporate any of the technology licensed to Microsoft in the TLDA. Moreover, the district court should not have "enjoined" discontinued past conduct where there was no evidence that it was likely to be repeated.

In sum, the district court put the cart before the horse. This is a breach of contract case and the district court should have applied the rules applicable to such disputes. The resolution of Sun’s motion should have been based on the explicit language of Microsoft’s license. Notwithstanding the fact that the district court devoted ten out of eleven pages of its copyright infringement analysis to interpreting the agreement, it "rejected [the argument] that Sun’s claims arise out of a breach of contract rather than copyright infringement." Order (11/17/98) at 25:27-26:1. In doing so, the district court applied an erroneous legal standard and reached too far in exercising its power of injunction.

VI.  STANDARDS OF REVIEW

The grant of a preliminary injunction will be reversed where the district court "abused its discretion or based its decision on an erroneous legal standard or on clearly erroneous findings of fact." Federal Deposit Ins. Corp. v. Garner, 125 F.3d 1272, 1276 (9th Cir. 1997), cert. denied, 118 S. Ct. 1299 (1998). Review is plenary where the district court is alleged to have relied on erroneous legal premises. See id. The district court relies on an erroneous legal premise "if the court does not employ the appropriate legal standards which govern the issuance of a preliminary injunction." Sports Form, Inc. v. United Press Int’l, Inc., 686 F.2d 750, 752 (9th Cir. 1982).

The Ninth Circuit reviews de novo the district court’s determination of whether a contractual term is ambiguous. See Brobeck, Phleger & Harrison v. Telex Corp., 602 F.2d 866, 871 (9th Cir. 1979). The interpretation of an unambiguous contract provision is a question of law. See id. at 871-72. The district court’s interpretation of an ambiguous contract presents a mixed question of fact and law. See Hanson v. Prudential Insurance Co. of America, 783 F.2d 762, 764 (9th Cir. 1985). Findings of fact relied on by the district court in interpreting the ambiguous provisions are reviewed for clear error. See Martin v. United States, 649 F.2d 701, 703 (9th Cir. 1981). The principles of contract interpretation applied to those facts are reviewed de novo. See In re U.S. Fin. Sec. Litig., 729 F.2d 628, 632 (9th Cir. 1984).

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