hmaly, here is the decision. Please note this was not a lawsuit but the results of arbitration. There was a completely seperate lawsuit regarding copyright violations steming from AMD's use of i287 microcode. That was a seperate case.
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9 Cal. 4th 362, *; 885 P.2d 994, **;
1994 Cal. LEXIS 6588, ***; 36 Cal. Rptr. 2d 581
ADVANCED MICRO DEVICES, INC., Plaintiff and Respondent, v. INTEL
CORPORATION, Defendant and Appellant.
No. S033874.
SUPREME COURT OF CALIFORNIA
9 Cal. 4th 362; 885 P.2d 994; 1994 Cal. LEXIS 6588; 36 Cal. Rptr. 2d 581; 95 Cal. Daily
Op. Service 59; 95 Daily Journal DAR 128
December 30, 1994, Decided
PRIOR HISTORY: [***1] Superior Court of Santa Clara County, No. 626879, Read
Ambler, Judge.
DISPOSITION: We conclude the challenged portions of the arbitrator's award were
within his authority to fashion remedies for a breach of contract. The superior court
correctly confirmed the award under section 1286. The judgment of the Court of Appeal,
reversing that of the superior court, is reversed.
COUNSEL:
Keker, Brockett & Van Nest, Robert A. Van Nest, Karin Kramer, Laird J. Lucas, Brown
& Bain, Terry E. Fenzl and Michael F. Bailey for Defendant and Appellant.
Jackson, Tufts, Cole & Black, Terrence P. McMahon, David T. Alexander, George M.
Schisler, Sean A. Lincoln, Marer, Marer & Schuck, Gerald Z. Marer, Alan G. Marer,
John F. Schuck III, O'Melveny & Meyers, Thomas M. McCoy, Carl R. Schenker, Jr.,
Daniel H. Bookin, George A. Riley and Patrick Lynch for Plaintiff and Respondent.
J. Lani Bader as Amicus Curiae on behalf of Plaintiff and Respondent.
Farella, Braun & Martel, Douglas R. Young and Tamar Pachter as Amici Curiae.
JUDGES: Opinion by Werdegar, J., with Lucas, C. J., Arabian and George, JJ.,
concurring. Separate dissenting opinion by Kennard, J., with Mosk, J., and Spencer, J., *
concurring. [***2]
* Presiding Justice, Court of Appeal, Second Appellate District, Division One, assigned
by the Acting Chairperson of the Judicial Council.
OPINIONBY: WERDEGAR, J.
OPINION: [*366] [**996]
WERDEGAR, J.
California law allows a court to correct or vacate a contractual arbitration award if the
arbitrators "exceeded their powers." (Code Civ. Proc., õ 1286.2, subd. (d), 1286.6, subd.
(b).) In Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 28 [10 Cal.Rptr.2d 183, 832 P.2d
899], we held arbitrators do not exceed their powers merely by erroneously deciding a
contested issue of law or fact; we did not, however, have occasion there to further
delineate the standard for measuring the scope of the arbitrators' authority. This case
requires us to decide the standard by which courts are to determine whether a contractual
arbitrator has exceeded his or her powers in awarding relief for a breach of contract.
[*367]
An arbitrator determined the Intel Corporation (Intel) had breached portions of its 1982
technology exchange agreement with Advanced Micro Devices, Inc. (AMD), including
the implied covenant of good faith and fair dealing. The [***3] superior court confirmed
the award, but the Court of Appeal, holding the arbitrator had exceeded his authority in
awarding AMD the right to use certain Intel intellectual property, ordered the award
corrected by eliminating the disputed relief.
We conclude that, in the absence of more specific restrictions in the arbitration
agreement, the submission or the rules of arbitration, the remedy an arbitrator fashions
does not exceed his or her powers if it bears a rational relationship to the underlying
contract as interpreted, expressly or impliedly, by the arbitrator and to the breach of
contract found, expressly or impliedly, by the arbitrator. The remedy fashioned by the
arbitrator here was within the scope of his authority as measured by that standard. We
therefore reverse the contrary judgment of the Court of Appeal.
FACTS AND PROCEEDINGS n1
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n1 The facts stated are taken primarily from the arbitrator's award and memoranda of
decision. As the parties recognize, courts may not review for sufficiency the evidence
supporting an arbitrator's award. (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at p. 11.)
We therefore take the arbitrator's findings as correct without examining a record of the
arbitration hearings themselves; indeed, the appellate record contains neither a reporter's
transcript of the hearings nor the exhibits introduced therein.
- - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - [***4]
AMD and Intel are both engaged in the creation, design, production and marketing of
complex integrated circuits, also known as computer chips. In the period 1978-1981 both
AMD and Intel were pursuing strategies for producing and marketing 16-bit
microprocessors and the 32-bit microprocessors that were expected to follow. AMD was
attempting to secure entry into this market through an agreement with a third chip maker,
Zilog, while Intel had developed its own 16-bit microprocessor, the 8086. Intel, needing
another producer to "second source" n2 the 8086, approached AMD.
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n2 The chip makers' customers, computer manufacturers, frequently prefer a product be
made by more than one source, as this helps ensure competition and a reliable supply.
Hence the common practice of second sourcing, in which the company developing a
product licenses to another company the right, for a royalty, to make and sell it.
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Intel hoped to establish the 8086's basic architecture, known as iAPX, as the market
standard, guaranteeing [***5] future sales of the 8086's expected progeny as well. AMD,
having had what it saw as a bad experience in a previous second-source agreement with
Intel, wanted to be sure it would not be cut off from second-sourcing future generations
of the 8086 family. In addition, reaching an agreement with Intel would mean
abandoning [**997] AMD's relationship with Zilog; AMD therefore sought a long-term
arrangement. [*368]
The parties entered into the contract at issue in February 1982. According to its
preamble, the agreement was intended "to establish a mechanism for exchanging
technical information so that each party acquires the capability to develop products
suitable for sale as an alternate source for products developed by the other party." During
the 10-year term of the contract (cancelable after 5 years on one year's notice by either
party), either company could elect to be a second source for products offered it by the
other. The nondeveloping company would receive technical information and licenses
needed for it to make and sell the part. The developing company would receive a royalty.
In addition, the developing company would earn the right to be a second source [***6]
for products developed by the other party. The terms of exchange--the respective value of
the products--were to be calculated by a specified equation from the complexity and size
of the parts.
The parties had fundamentally different views of the contract. AMD believed the
agreement created a partnership or joint venture under which the two companies would
agree in advance on products to be developed by each of them, avoiding duplicative
research expenditures and guaranteeing each a more complete product line. Intel, on the
other hand, saw the agreement as "little more than an armed truce," in which each
proposed second-source agreement was to be the subject of combative bargaining with no
continuing obligations from episode to episode. The arbitrator rejected both extremes,
finding that, "while a party was not obligated to act substantially against its self interest
in deciding to transfer or accept a part, there was an implied covenant to make the
relationship work which obligated a party to consider in good faith ... the purposes of the
contractual relationship ... and to negotiate reasonably to accomplish this purpose. If it
could not do this it should terminate the arrangement--as [***7] Intel finally did." n3 The
purposes of the agreement, according to the arbitrator, were expansion of product line
and savings on research and development.
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n3 Intel gave notice of termination in April 1987, after AMD petitioned for arbitration.
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The contract provided for arbitration of "disagreements aris[ing] under this Agreement
...." Arbitration was to be by a single arbitrator, whose decision would be considered "a
final and binding resolution of the disagreement." Disagreements over product exchanges
led AMD to petition the superior court to compel arbitration in April 1987. The parties
agreed on an arbitrator and to the rules he would follow, including section 42, entitled
"Scope of the Award," WHICH PROVIDED: "The Arbitrator may grant any remedy or
relief which the Arbitrator deems just and equitable and within the scope of the
agreement of the parties, including, but not limited to, specific performance of a
contract." Section 41 further instructed the arbitrator to "interpret and apply these Rules
[***8] insofar as they relate to his powers [*369] and duties." After hearings in superior
court, a temporary judge (who was also the chosen arbitrator) made an order of reference
stating the issues for arbitration and providing, as to each issue, that "the Arbitrator is
authorized to fashion such remedy as he may in his discretion determine to be fair and
reasonable but not in excess of his jurisdiction."
The arbitration lasted four and one-half years and included three hundred and fifty-five
days of hearings. As the current dispute focuses narrowly on two items of relief awarded,
only a small portion of the arbitrator's extensive findings need be summarized here.
Under the contract AMD could initially obtain second-source rights to Intel's 8086 chip
and other specified products for cash. After 1985, AMD would have open access to Intel's
product line if Intel accepted AMD products of sufficient value, as determined from the
complexity-size formula. In 1984 the parties negotiated an amendment to the contract,
under which AMD was to second source the successors of the 8086--the 80186 and
80286--in exchange for substantial royalties to Intel. Intel also agreed at that time to
accept [***9] certain AMD products then in development, conditional in some instances
on final specifications. The arbitrator found [**998] that "f Intel took all these
products, or even some of them, AMD would have access to the Intel line of products
without restriction--and no royalties."
The arbitrator found Intel extensively breached its obligations to act in good faith and
deal fairly. Beginning in mid-1984 Intel, anxious to be the sole source for the 80386 (its
32-bit chip, which was to prove vastly successful) and convinced the contract was to its
disadvantage, decided to frustrate the operation of the contract by taking no more
products from AMD. Intel also resolved to keep this decision from AMD and the public,
leaving AMD and others in the industry with the belief AMD would be a second source
for the 80386. This "ke[pt] AMD in the Intel competitive camp" and avoided public
knowledge of Intel's sole-source strategy for the 80386, a strategy Intel feared could limit
its market if known. n4 The plan succeeded: AMD continued for about two years to
believe, incorrectly, its agreement with Intel "had a future."
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n4 The arbitrator relied on numerous Intel internal memoranda produced during the
arbitration. An October 1984 memorandum states the Intel strategy succinctly: "*Assure
AMD they are our primary source through regular management contact and formal
meetings. [P]* Take no more AMD products under the current agreement." In 1985 an
Intel manager described the company's objective this way: "Keep AMD in the Intel
camp." THE SAME NOTE CONTINUES: "Key point--we are in no hurry. We don't need
a 386 2nd source, especially since everyone assumes AMD will be one." A 1986
memorandum articulates this strategy: "Maintain a second-source, business as usual
posture in the marketplace.... Our strategy is to keep talking .... We do not want them
[AMD] to go on to Hitachi or NEC, and should not stimulate them to do so."
- - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - [***10] [*370]
One concrete example of Intel's failure to negotiate in good faith was its treatment of
AMD's Quad Pixel Display Manager (QPDM), a graphics chip. Although Intel promised
in 1984 to accept the QPDM from AMD provided the parties agreed on its specifications,
the arbitrator found Intel made no actual attempt to negotiate the remaining differences
as to specifications. Instead, partly in order to avoid having both to give AMD the 80386
and to eliminate royalties on other products, Intel summarily rejected the QPDM. In
doing so, the arbitrator found, Intel breached the implied covenant of good faith and fair
dealing as well as "its implied covenant to negotiate reasonably to further the goals of the
relationship between the parties ...."
The arbitrator also found, however, Intel was not obliged under the contract to accept the
QPDM or other products that would have earned AMD the 80386 rights. Apart from
Intel's breach, moreover, the arbitrator found AMD had unnecessarily delayed in seeking
alternative ways to enter the 32-bit chip market. Having inferred by mid-1985 that Intel
was not going to accept the AMD parts that could earn AMD the 80386, AMD should
have sought arbitration [***11] at that time or immediately begun reverse engineering
the 80386 when it became available in July 1986. n5 Instead, AMD did not begin reverse
engineering the 80386 until a later time and did not produce its own 80386 chip--known
as the Am386--until March 1991. "In short, Intel's plan succeeded ... because of AMD's
inertia." For this reason, the arbitrator declined to award AMD the hundreds of millions
of dollars it sought in lost 80386 profits.
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n5 A chip may be "reverse engineered" by disassembling, studying and analyzing its
structure. "This knowledge may be used to create an original chip having a different
design layout, but which performs the same or equivalent function as the existing chip,
without penalty or prohibition [under the federal Semiconductor Chip Protection Act]."
(Brooktree Corp. v. Advanced Micro Devices, Inc. (Fed. Cir. 1992) 977 F.2d 1555,
1565.)
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Despite AMD's delay, the arbitrator found AMD had actually been damaged by Intel's
breach: "One knows that AMD lost some goodwill [***12] as the result of the Intel
conduct; one knows that AMD lost some profits from not having the 80386 as the result
of the Intel conduct .... The actual damages are immeasurable; and nominal damages only
are inequitable." (Underlining in original.) The proper remedy, the arbitrator decided,
was to relieve AMD from "legal harassment by Intel over AMD's alleged use of Intel
intellectual property in the reverse engineered AMD 386."
The arbitrator therefore awarded AMD a permanent, nonexclusive and royalty-free
license [**999] to any Intel intellectual property embodied in the Am386 (paragraph 5 of
the award). He also awarded AMD a further two-year extension of certain patent and
copyright licenses, insofar as they related to [*371] the Am386, that originated in a 1976
agreement between the parties, which had been extended under the 1982 contract to 1995
(paragraph 6 of the award). n6 The arbitrator designated these items as remedies for
breach of the covenant of good faith and fair dealing, as well as for failure to negotiate in
good faith over the QPDM specifications and for other breaches.
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n6 For Intel breaches involving other products, AMD was awarded more than $ 10
million plus prejudgment interest, as well as manufacturing rights to the Intel 8087 chip.
These aspects of the award are no longer in dispute.
Paragraphs 5 and 6 of the award, the relief at issue here, state more fully: "[P] 5. AMD is
hereby awarded 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, to make,
have made by a third party solely for AMD, use and sell the prior, current and future
revisions and modifications of those products .... The intent of this paragraph is 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 20572 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 .... [P] By this award, I do not intend to express or imply an opinion as to whether
any Intel intellectual property rights are incorporated in any of the AMD 80386 family of
microprocessors or whether any of the AMD 80386 family of microprocessors infringes
any Intel intellectual property rights, the intent of the award (as indicated above) being to
grant AMD all rights necessary to allow AMD to produce and sell its AMD 80386 family
of microprocessors, and revisions and modifications, thereof, free from harassment by
Intel. [P] 6. In addition to the nominal damages awarded AMD for Intel's breaches as set
forth in paragraphs 1 and 4 hereof it is ordered that the rights conferred upon AMD under
the 1982 AMD/Intel Agreement (which extended until 1995 the patent and copyright
licenses originally granted by an agreement between the parties in 1976) are hereby
extended two years from their present date of expiration only insofar as they relate to or
concern the AMD 80386 and its revisions or modifications, if any."
- - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - [***13]
AMD petitioned the superior court to confirm the award (Code Civ. Proc., õ 1286); Intel
petitioned for the award to be corrected (Code Civ. Proc., õ 1286.6) by vacating
paragraphs 5 and 6, on the ground they exceeded the arbitrator's powers. The superior
court confirmed the award, but the Court of Appeal reversed. Although it recognized the
scope of judicial review did not extend to redeciding the merits of the controversy, the
court believed the extent of the arbitrator's remedial powers was reviewable "de novo."
The Court of Appeal found itself unable to locate a "rational nexus" between paragraphs
5 and 6 of the award and the contract itself. Therefore, the court concluded, the arbitrator
had improperly "rewr[itten] the parties' agreement" in paragraphs 5 and 6 of the award.
Determining those paragraphs could be treated as surplusage without affecting the merits
of the decision, the court [*372] ordered the award corrected and confirmed rather than
vacated. We granted review. |
