United States District Court, S.D. New York
For Microsoft Corporation, Microsoft Licensing GP, Plaintiffs: Andrew J. Levander, Matthew Lester Mazur, LEAD ATTORNEYS, Dechert, LLP (NYC), New York, NY; Richard Scott Goldstein, LEAD ATTORNEY, Orrick, Herrington & Sutcliffe LLP (NYC), New York, NY; Frederick G. Herold, PRO HAC VICE, Dechert LLP, Mountain View, CA; John A. Jurata, PRO HAC VICE, Orrick, Herrington & Sutcliffe, LLP (DC), Washington, DC; Robert A Rosenfeld, Orrick, Herrington & Sutcliffe LLP, San Francisco, CA.
For Samsung Electronics Co., Ltd., Defendant, Counter Claimant: Andrew Jay Frackman, LEAD ATTORNEY, Brad Michael Elias, Jeffrey Allen Nuxoll Kopczynski, O'Melveny & Myers LLP, New York, NY; Gary Svirsky, LEAD ATTORNEY, Garabed Mihran Hoplamazian, Jr., O'Melveny & Myers, LLP (NYC), New York, NY; George A. Riley, LEAD ATTORNEY, O'Melveny & Myers, LLP (SanFran), San Francisco, CA; Ryan Ken Yagura, LEAD ATTORNEY, Brian Merrill Cook, O'Melveny & Myers LLP, Los Angeles, CA; Bo Kyoung Moon, O'Melveny & Myers, LLP (N'portBch), Newport Beach, CA; Ian Thomas Simmons, O'Melveny & Meyers LLP, Washington, DC; John Kappos, O'Melveny & Myers, Newport Beach, CA.
For Microsoft Corporation, Microsoft Licensing GP, Counter Defendants: Andrew J. Levander, Matthew Lester Mazur, LEAD ATTORNEYS, Dechert, LLP (NYC), New York, NY; Richard Scott Goldstein, LEAD ATTORNEY, Orrick, Herrington & Sutcliffe LLP (NYC), New York, NY; Frederick G. Herold, PRO HAC VICE, Dechert LLP, Mountain View, CA; John A. Jurata, PRO HAC VICE, Orrick, Herrington & Sutcliffe, LLP (DC), Washington, DC; Robert A Rosenfeld, Orrick, Herrington & Sutcliffe LLP, San Francisco, CA.
JED S. RAKOFF, United States District Judge.
Plaintiffs Microsoft Corporation and Microsoft Licensing GP (together, " Microsoft" ) bring this action against defendant Samsung Electronics Company, Ltd. (" Samsung" ) for breach of contract and declaratory judgment. At issue are two related agreements, the Confidential Patent License Agreement (" PLA" ), which provides for cross-licensing of both companies' patent portfolios, and the Confidential Business Collaboration Agreement (" BCA" ), which provides that Samsung will develop and market devices that use Microsoft software in exchange for credits against royalties it owes under the PLA. Both agreements provide for arbitration of certain types of disputes under the International Chamber of Commerce (" ICC" ) Rules. On October 10, 2014, Samsung filed a motion to compel arbitration and to stay the case pending the conclusion of the arbitration. Following full briefing and oral argument, the Court, on November 13, 2014, issued a " bottom line" order denying Samsung's motion. This Opinion explains the reasons for that ruling.
The two agreements were executed concurrently on or about September 28, 2011, and have an effective date of July 1, 2011. The PLA provides that each party grants to the other party and its subsidiaries, including subsidiaries and business units acquired after the effective date, a worldwide license to its patent portfolio for use in certain products for a term of seven years. PLA § § 3.1-3.2. The licensed products include " Android" -based smartphones and tablets, of which Samsung is the world's largest producer, and which Microsoft alleges infringe its patents. See Amended Complaint dated Oct. 3, 2014 (" Amended Compl." ) ¶ 7. For Fiscal Year 1, Samsung is to pay Microsoft a predetermined lump sum. PLA § 4.1. For Fiscal Years 2 through 7, Samsung owes Microsoft a royalty based on the number of devices distributed during that fiscal year. Id. § 4.2.2. Samsung, in turn, is entitled to deduct certain license fee credits from the total royalties due as consideration for Microsoft's use of its patents. Id. § 4.2.1.
The PLA further gives Microsoft the right to audit Samsung's books and records on a periodic basis. Id. § 4.2.4. If Samsung " does not agree with the auditor's results or the scope of the audit," then the parties must go through a good faith discussion process. Id. § 4.2.5. If, after that process, " the parties are then still unable to resolve any disputes arising out of an audit per this Section 4," they agree to submit the dispute to binding arbitration under the ICC Rules in Tokyo, Japan. Id. Finally, the parties agree to exclusive jurisdiction and venue in the Southern District of New York, or, if no federal jurisdiction exists, in New York state court in Manhattan " [w]ith respect to all civil actions or other legal or equitable proceedings directly arising between the Parties or any of their Subsidiaries under this Agreement." Id. § 7.6.
The second agreement, the BCA, provides that, for Fiscal Years 2 through 7, Microsoft will give Samsung credits to be applied against the royalties it owes under the PLA in exchange for Samsung's efforts to develop and market Samsung devices that use Microsoft Windows software and Microsoft search services. The first type of credits are " Collaboration Credits," which Samsung may earn by creating and executing plans for the development and marketing of Windows phones and tablets, and for making Windows search services available on Samsung devices. BCA § 3.1.1 & Exs. B-D. The second type of credits are " Success Credits," which Samsung may earn by increasing the percentage of Windows devices in its total product mix. Id. § 3.1.2 & Ex. E. Samsung is obligated to invest any success credits earned in a given fiscal year in qualified marketing expenses for the following fiscal year. Id. If its marketing expenses are less than the success credits from the previous year, then Samsung must return the balance to Microsoft (" Success Credit Recapture" ). Id. Finally, if Microsoft stops offering Windows phone software, then Samsung will be entitled to a fixed credit per phone in lieu of any success credits (" WP Termination Credits" ). Id. § 8.3.
The BCA sets forth a consolidated reporting and invoicing process for both the PLA and the BCA. Within sixty days after the end of each fiscal year, Samsung is to submit a " Royalty and Credit Calculation Report" detailing the number of smartphones and tablets distributed during that year, Samsung's qualified marketing expenses, and Samsung's calculation of any Success Credits, Success Credit Recapture, or WP Termination Credits. Id. § 3.1.4. As under the PLA, Microsoft has the right to audit Samsung's books and records. Id. § 3.1.5. After receiving the Royalty and Credit Calculation Report, Microsoft prepares a single " Annual Invoice" calculating royalties due and credits earned under both agreements and determining the net amount owed by Samsung. Id. § 3.2.1. Samsung then has thirty days to pay the amount due under the invoice, with late payments carrying an interest rate of 5%. Id. § § 3.2.2-3.2.3.
Like the PLA, the BCA provides for resolution of certain types of disputes through a good faith discussion process followed by binding arbitration under the ICC Rules. The BCA's arbitration provision applies to " any dispute between the parties with respect to any Royalty and Credit Calculation Report, the calculation of any Reinvestment Credits under Section 3.1.4, the calculation of any Success Credit Recapture, the calculation of any WP Termination Credits, the scope or results of any audit under Section 3.1.5 or any Annual Invoice." Id. § 3.3.1-3.3.2. In addition, the BCA provides that the parties consent to jurisdiction and venue in the Southern District of New York, or, alternatively, in New York state court in Manhattan,
" [w]ith respect to all civil actions or other legal or equitable proceedings directly arising between the parties or any of their Subsidiaries under this Agreement (other than those ...