Microsoft Corp. v. Timeline Inc.
DO NOT CITE. SEE RAP 10.4(h).
Court of Appeals Division I
State of Washington
Opinion Information Sheet
Docket Number: 47888-5-I
Title of Case: Microsoft Corporation, Respondent
v.
Timeline Inc., Appellant
File Date: 03/04/2002
SOURCE OF APPEAL
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Appeal from Superior Court of King County
Docket No: 99-2-16323-1
Judgment or order under review
Date filed: 12/01/2000
Judge signing: Hon. Stephen G. Scott
JUDGES
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Authored by H. Joseph Coleman
Concurring: Susan R. Agid
COUNSEL OF RECORD
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Counsel for Appellant(s)
Robert E. Rohde
1000 2nd Ave Ste 3100
Seattle, WA 98104-1084
Charles K. Wiggins
Wiggins Law Office
241 Madison Ave N
Bainbridge Is, WA 98110
Kenneth W. Masters
Wiggins Law Office
241 Madison Ave N
Bainbridge Is, WA 98110
Marilyn L. Taylor
Wiggins Law Offices
241 Madison Ave N
Bainbridge Is, WA 98110
Counsel for Respondent(s)
Marvin L. Gray Jr.
Davis Wright & Jones
2600 Century Square
1501 4th Ave.
Seattle, WA 98101-1662
Cassandra L. Kinkead
Davis Wright Tremaine
2600 Century Square
1501 4th Ave
Seattle, WA 98101-1688
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
MICROSOFT CORPORATION, ) NO. 47888-5-I
a Washington corporation, )
) DIVISION ONE
Respondent, ) )
v. ) )TIMELINE, INC.,
) Unpublished Opinion
a Washington corporation, )
) FILED: Appellant.
)
)
COLEMAN, J. Under the 'context rule,' extrinsic evidence may be
considered to show what the parties to a written contract meant by the
words they used, but not for the purpose of adding to, modifying, or
contradicting what the parties have written. In this case, Timeline, Inc.
and Microsoft Corporation dispute the scope of a patent licensing
agreement. We reverse because extrinsic evidence was improperly used to
contradict or subtract terms of the written agreement.
FACTS
Timeline sells computer software that takes data from one database and
rearranges it in a new database that makes the creation of reports and
analysis of the data easier. Timeline patented a computer system that
allows the user to automatically retrieve data that may be in different
formats from one or more different sources. Microsoft had previously
developed SQL Server, a software product designed to manage large databases
for businesses. In early 1999, Microsoft released a new version of SQL
Server with new analysis and reporting functions. Shortly after this new
version was released, Timeline and Microsoft began discussing the
possibility that the new functions infringed Timeline's patent. Microsoft
at first asserted that it had not infringed the patent and that Microsoft
owned the disputed patent. Eventually, however, the two companies
negotiated an agreement in which Microsoft agreed to purchase a license to
use the patented technique.
The Negotiations
On April 13, 1999, Timeline CEO Charles Osenbaugh met with Microsoft's
attorneys. The parties dispute the nature of the discussions and the scope
of the license discussed at the meeting. Microsoft alleges that it made it
clear to Timeline that any licensing agreement would have to protect
Microsoft's customers. SQL Server is a program designed to be modified by
Microsoft users by additional programming. Thus, Microsoft sought an
agreement that would allow modification of its product by its customers
without patent liability. The trial court found that Microsoft had
consistently maintained this position throughout the negotiations and that
this concern was communicated to Timeline. Osenbaugh testified that his
understanding of Microsoft's April 13 proposal was that the proposed
agreement would not protect any customer adding code or product that was a
'step in the process' of patent infringement. Osenbaugh also testified
that the majority of third-party products that added features to SQL Server
would be protected under such an agreement because the majority of added
code did not infringe an element of the patent.
No agreement was reached at the April 13 meeting, but Osenbaugh said
he would consult with his attorneys. Soon thereafter, Osenbaugh contacted
Microsoft's attorneys and asked them to outline their proposal in a letter.
Microsoft e-mailed Osenbaugh two documents: a 'brief outline' of
Microsoft's proposal and 'proposed text' of the agreement.
The 'brief outline' described the license as follows:
2)Timeline grants Microsoft a non-exclusive license to the
'511 patent for SQL Server and all other Microsoft products.
a)The license would cover use s by customers,
[independent software vendors], end users, etc.
b)The license would not cover customers' add-on products or
technology that includes additional features or functionality not provided
by Microsoft products.
Ex. 15.
The "proposed text" provided:
The license granted herein does not include the right for Microsoft to
grant sublicenses to the Licensed Patents except to the extent necessary
to: (1) enable Microsoft's Licensees to manufacture, use, sell, import,
lease, license, reproduce, distribute or otherwise transfer Microsoft
Products as designed, and (2) enable independent software vendors to use
Microsoft Technology to develop, distribute and sell products which use
such technology provided or exposed by Microsoft Products.
Ex. 1.
On April 23, Osenbaugh told Microsoft 'he thought they were agreed on
structure and where they were drawing the line.' The trial court found
that '{a}t this point it is clear that the structure and line the parties
agreed on was that which, according to the Microsoft witnesses, Microsoft
proposed at the April 13 meeting.'
Drafting of the Agreement
The parties then exchanged several drafts of the proposed written
agreement. Microsoft sent a draft with language that mirrored its first
written proposal. Timeline countered with a draft that deleted clause (2)
of the above language and added a second sentence to paragraph 2.2 which
was very similar to that which appears in the final agreement:
No license is granted herein to expressly or impliedly sublicense any
person or entity to add or to use any code, features, products or services
to or in conjunction with any Licensed Product or any Other Product in a
way that would constitute, facilitate or support an infringement of any
Licensed Patent.
Ex. 20. The trial court found that this proposal was 'consistent with the
position {Timeline} has taken in this litigation.'
On May 24, Microsoft proposed another revised draft, stating it could
not agree with Timeline's changes. The trial court again found this draft
to be consistent with the position Microsoft took at trial regarding the
scope of the license. Paragraph 2.2 of the revised draft contained the
following language:
Timeline hereby further grants to Microsoft, and its Subsidiaries and
Affiliates, a limited right to grant sublicenses of the license granted to
the Licensed Patents under Section 2.1 only to Microsoft's Licensees but
only for the manufacture, use, sale, license, importation, lease or other
distribution or transfer of Licensed Products and for the formation, use,
sale, license, importation, lease or other distribution or transfer of any
combination which includes a Licensed Product, provided, however, that such
sublicensing rights shall not cover or extend to any third party product in
such combination which third party product itself directly infringes or
contributorily infringes a Licensed Patent. No other sublicensing rights
are granted.
Ex. 22. The first sentence of this paragraph was virtually unchanged
in the final agreement.
The second sentence, however, was replaced after a May 26 conference
call in which Timeline expressed concern that the second sentence was
insufficiently specific.
Later that day, after the conference call, Timeline sent an e-mail to
Microsoft, proposing the following additional language:
1.7 'Infringement' shall include direct infringement,
contributory infringement, and inducement to infringe.
2.3 No license is granted herein to expressly or impliedly
sublicense any person or entity to add any code or product to or in
combination with any Licensed Product in a way that constitutes
Infringement.
3.3 No release, acquit, covenant not to sue or discharge is
granted herein to any Microsoft Licensee to add any code or product to or
in combination with any Licensed Product in a way that constitutes
Infringement.
Ex. 23. The parties eventually adopted all of the proposals; the proposed
paragraph 2.3 became the last sentence of paragraph 2.2 of the final
agreement.
After Microsoft received the above proposals, the parties had another
telephone conversation to discuss them. The parties dispute the substance
of the conversation. Microsoft's attorney Bart Eppenauer testified that he
asked Osenbaugh the purpose of the new language, because it seemed to him
to say essentially the same thing as the first sentence of paragraph 2.2 in
Microsoft's draft. Osenbaugh responded that there 'really wasn't a
difference' but Timeline 'just preferred' the new language. The trial
court found that this conversation occurred as Eppenauer recalled it.
The court further found:
{M}ore probably than not Mr. Osenbaugh was attempting to 'clarify' that
companies already infringing the . . . patent independently could not get
off the hook by combining their own products with Microsoft's in such a way
that Microsoft's product then performed one or more steps of the infringing
process. If, on the other hand, Timeline was attempting to add language
that would result in the extremely limited license it now seeks from this
court, it attempted to do so without adequately communicating the intent to
Microsoft and the attempt, therefore, fails.
In the final version of the written licensing agreement, the parties
used the following language to describe the license granted to Microsoft by
Timeline (the underlined portion was the chief source of the dispute
between the parties):
2. License
2.1 Timeline hereby grants to Microsoft, and its Subsidiaries and
Affiliates and Microsoft Licensees, a non-exclusive, perpetual,
irrevocable, fully paid, worldwide right and license, under the Licensed
Patents, to make, have made, use, sell, import, lease, license, reproduce,
distribute, transfer or commercially exploit the Licensed Products.
2.2 Timeline hereby further grants to Microsoft, and its Subsidiaries and
Affiliates, a limited right to grant sublicenses of the license granted to
the Licensed Patents under Section 2.1 only to Microsoft's Licensees but
only for the manufacture, use, sale, license, importation, lease or other
distribution or transfer of Licensed Products and for the formation, use,
sale, license, importation, lease or other distribution or transfer of any
combination which includes a Licensed Product, provided, however, that such
sublicensing rights shall not cover or extend to any third party product in
such combination if that third party product itself directly or
contributorily infringes a Licensed Patent. No license is granted herein
to expressly or impliedly sublicense any person or entity to add any
software code or software product to or in combination with any Licensed
Product in a way that constitutes Infringement of a Licensed Patent.
Ex. 1 (emphasis added). In addition, the agreement contains a 'merger'
clause, which states that the writing 'sets forth the entire agreement and
understanding between the parties' and 'merges all prior discussions
between them.' Ex. 1, 12.1.
Sometime after the parties signed the agreement, Timeline contacted
several Microsoft customers in an attempt to negotiate separate licensing
agreements. Microsoft then initiated this action for declaratory judgment.
Microsoft argued that the above language allows Microsoft customers to add
code and software to Microsoft products, even if the resulting combination
infringes Timeline's patent, as long as the code or software added does not
independently infringe Timeline's patent. Timeline claimed that the
agreement also prohibited Microsoft customers from combining their own code
or software with Microsoft products if the added code performed a step in
the patented process and the resulting combination infringed Timeline's
patent.
Timeline moved for summary judgment, claiming that Microsoft's
interpretation of the agreement was contrary to the unambiguous terms of
the contract. The trial court denied the motion, ruling that the contract
on its face was capable of either interpretation given it by the parties.
Accordingly, the trial court determined that extrinsic evidence was
necessary to ascertain the parties' intent. The matter proceeded to a
bench trial.
After considering evidence of the above negotiations, drafting
history, and testimony regarding the nature and purpose of SQL Server, the
trial court concluded that the agreement gave Microsoft the right to
sublicense its customers to add code or other software products, as long as
the added programming does not itself independently infringe Timeline's
patent. The court further ruled:
In any infringement analysis of a combination of third-party code or
software with SQL Server or any other Licensed Product (as that phrase is
defined in the License Agreement), steps performed by the Licensed Products
must be entirely disregarded.
This appeal followed.
DISCUSSION
Interpretation of a contract is a mixed question of law and fact.
Where the trial court's interpretation hinges on the credibility of
conflicting evidence, we will uphold the court's factual findings as long
as they are supported by substantial evidence in the record. See Berg v.
Hudesman, 115 Wn.2d 657, 668, 801 P.2d 222 (1990) (adopting Restatement
(Second) of Contracts sec. 212 (1981)). But the question of whether a
contract is ambiguous is a legal question for the court, and we review that
determination de novo. Schwab v. City of Seattle, 64 Wn. App. 742, 751,
826 P.2d 1089 (1992). We also conduct de novo review to determine whether
the trial court's factual findings support its legal construction of the
contract. E.g., Griffith v. Centex Real Estate Corp., 93 Wn. App. 202,
214, 969 P.2d 486 (1998) (whether party committed particular act is
question of fact; whether act violated statute is question of law).
When interpreting a contract, our primary goal is to determine the
intent of the parties. U.S. Life Credit Life Ins. Co. v. Williams, 129
Wn.2d 565, 569, 919 P.2d 594 (1996). We determine intent by the objective
manifestations of the agreement rather than subjective intent of either
party. Max L. Wells Trust by Horning v. Grand Cent. Sauna & Hot Tub Co. of
Seattle, 62 Wn. App. 593, 602, 815 P.2d 284 (1991). This means that where,
as here, the parties have put their agreement in writing and have indicated
that the writing is the final and complete agreement of the parties, we
must discern the parties' intent from the language of the writing. A
voluntary signatory is generally bound to a signed contract even if
ignorant of its terms. Grand Cent., 62 Wn. App. at 602. And under the
parol evidence rule, extrinsic evidence is not admissible for the purpose
of adding to, modifying, or contradicting the terms of a final and
integrated written contract, in the absence of fraud, accident, or mistake.
See Berg, 115 Wn.2d at 669. Because the meaning of language can rarely be
determined without reference to the context in which the language is used,
the Supreme Court in Berg held that a trial court may consider extrinsic
evidence to determine the meaning parties have assigned to particular
terms. But the Berg court qualified its holding by reaffirming the
following principle of contract interpretation:
'Such evidence, however, is admitted, not for the purpose of importing into
a writing an intention not expressed therein, but with the view of
elucidating the meaning of the words employed. Evidence of this character
is admitted for the purpose of aiding in the interpretation what is in the
instrument, and not for the purpose of showing intention independent of the
instrument. It is the duty of the court to declare the meaning of what is
written, and not what was intended to be written.'
Berg, 115 Wn.2d at 669 (quoting J.W. Seavey Hop Corp. of Portland, Or. v.
Pollock, 20 Wn.2d 337, 348-49, 147 P.2d 310 (1944) (emphasis added).
Timeline argues that the trial court erred because it used extrinsic
evidence to contradict portions of the written licensing agreement. We
agree. The trial court found that the parties intended to draft a
sublicensing provision that would protect any Microsoft licensee adding
code or software to Microsoft products, as long as that code or software,
standing alone, did not infringe Timeline's patent. This interpretation,
however, contradicts the language the parties agreed upon in paragraph 2.2
of the agreement:
Timeline hereby further grants to Microsoft, and its Subsidiaries and
Affiliates, a limited right to grant sublicenses of the license granted to
the Licensed Patents under Section 2.1 only to Microsoft's Licensees but
only for the manufacture, use, sale, license, importation, lease or other
distribution or transfer of Licensed Products and for the formation, use,
sale, license, importation, lease or other distribution or transfer of any
combination which includes a Licensed Product, provided, however, that such
sublicensing rights shall not cover or extend to any third party product in
such combination if that third party product itself directly infringes or
contributorily infringes a Licensed Patent. No license is granted herein
to expressly or impliedly sublicense any person or entity to add any
software code or software product to or in combination with any Licensed
Product in a way that constitutes Infringement of a Licensed Patent.
(Emphasis added.) This portion of the agreement expressly denies
sublicensing protection to anyone who adds code or product 'in a way that
constitutes Infringement of a Licensed Patent.' 'Infringement' is defined
within the agreement as including direct or contributory infringement.1
Microsoft argues that the second sentence of paragraph 2.2 was
intended merely to restate the first sentence. But it clearly does not
restate the first sentence, and neither Microsoft nor the trial court has
explained how the words in the second sentence could be so interpreted.
Try as we might, it is impossible to reconcile the wording of the two
sentences with Microsoft's proposed construction.
Microsoft reasons that because Timeline's president and Microsoft's
attorney allegedly agreed that the first and last sentences meant the same
thing, Timeline is bound by that interpretation. See Restatement (Second)
of Contracts sec. 201(1) (1981) ('Where the parties have attached the same
meaning to a promise or agreement or a term thereof, it is interpreted in
accordance with that meaning.') The 'meaning' of an agreement, however,
must be determined according to the words used. Unwritten understandings
may be used to define those words, but not to replace the language actually
written with what was intended to be written. Berg, 115 Wn.2d at 669; see
also In re Marriage of Schweitzer, 132 Wn.2d 318, 326, 937 P.2d 1062 (1997)
(holding community property agreement effective when signed even though
both parties intended it to take effect at death of spouse).
Further, even if we disregard the second sentence, Microsoft's
interpretation would make the reference to contributory infringement in the
first sentence meaningless. The proviso in the first sentence denies
sublicensing protection to anyone who adds code that itself 'directly
infringes' or 'contributorily infringes' the patent. A contributory
infringer is one who sells a material component of a patent, knowing that
it will be combined with other products and that the resulting combination
will directly infringe a patent. See 35 U.S.C. sec. 271(c). Microsoft
argues that because there can be no contributory infringement without a
direct infringement, and because a licensed use is not an infringing use, a
sublicensee under the agreement cannot contributorily infringe as a result
of a combination with Microsoft products. But by this reasoning, there
would be no way to add code that would constitute contributory
infringement.
We agree with Timeline that the only way to harmonize the first and
second sentences of paragraph 2.2 is to read the second sentence as a
clarification of how a Microsoft licensee 'contributorily infringes'
Timeline's patent: by adding code or software 'in a way that constitutes
{direct or contributory} Infringement of a Licensed Patent.' If, on the
other hand, we read the agreement as Microsoft suggests, we must interpret
the reference to contributory infringement in the first sentence as
meaningless surplusage and strike the second sentence altogether.
Although courts are entitled to consider extrinsic evidence in
determining what the parties meant by certain terms in the agreement, it
was impermissible for the trial court to use extrinsic evidence to
contradict or strike portions of the written agreement. See Schweitzer,
132 Wn.2d at 326 (holding court erred when it used parol evidence to
subtract entire section from agreement and give it no effect). In
Schweitzer, a husband and wife signed a form community property agreement.
At dissolution, Mrs. Schweitzer claimed that the agreement converted all
property to community property upon signing, while her husband argued that
the agreement was to take effect only upon the death of one spouse.
Although the trial court found that both parties intended the agreement to
function solely as an estate planning document, the Supreme Court held that
the parties should be held to the entire agreement, which unambiguously
converted all property to community property at the time of execution.
Microsoft argues that Schweitzer is distinguishable because in that
case, there was no evidence that the parties communicated with each other
regarding the meaning of the words used; the parol evidence that was
excluded concerned the parties' unexpressed, subjective intentions with
regard to the instrument. See Schweitzer, 132 Wn.2d at 322. It is true
that here, unlike Schweitzer, the court found that the parties expressed
mutual subjective intentions to each other regarding the scope of the
sublicense in prior negotiations. But the general rule as enunciated in
Schweitzer is equally applicable here: extrinsic evidence should be used
'only to elucidate the meaning of the words of a contract, and 'not for the
purpose of showing intention independent of the instrument.'' Schweitzer,
132 Wn.2d at 327 (quoting Berg, 115 Wn.2d at 669). Here, as in Schweitzer,
one party claims it intended the contract to have a legal effect that is
different than that specified by the writing. And here, as in Schweitzer,
extrinsic evidence, although properly considered in determining the meaning
of particular terms, should not have been used to contradict or nullify
select portions of the agreement.
Microsoft also argues that the agreement is not commercially
reasonable under Timeline's interpretation. 'Where one construction would
make a contract unreasonable, and another, equally consistent with its
language, would make it reasonable, the latter more rational construction
must prevail.' Byrne v. Ackerlund, 108 Wn.2d 445, 454, 739 P.2d 1138
(1987) (emphasis added). But where, as here, a party's interpretation is
not consistent with the language of the writing, it is not the duty of the
courts to correct what may be bad bargains, but rather to enforce an
agreement as written. Both Microsoft and Timeline argue that their
respective interpretations are the more commercially reasonable.2 And if
the trial court had been faced with two equally supportable interpretations
of paragraph 2.2, its finding that Microsoft's interpretation was more
commercially reasonable would support construing the agreement in
Microsoft's favor. But after all the extrinsic evidence is considered,
Microsoft's interpretation of paragraph 2.2 is simply not 'consistent with
its language,' and therefore we must enforce the contract as written.
Byrne, 108 Wn.2d at 454.
Accordingly, we reverse the trial court's declaratory judgment and
remand for entry of declaratory judgment in favor of Timeline. Our
construction of the agreement does not deny sublicensing protection to all
Microsoft customers who add code or combine software with SQL Server. If a
Microsoft licensee adds code to SQL Server that is not a 'material part'3
of Timeline's patent, no infringement has occurred, even if the resulting
combination would otherwise infringe Timeline's patent. But if the added
code is a material part of Timeline's patent, and the resulting combination
infringes the patent, the sublicensee has exceeded the scope of Microsoft's
sublicensing rights under the agreement.
Reversed and remanded.
WE CONCUR:
1 Contributory infringement, as defined by federal patent law, occurs when
a person sells a component of a patented invention that does not itself
independently infringe a patent, but constitutes a material part of the
patent. 35 U.S.C. sec. 271(c). Because the material component contributes
to an infringement when added to another person's product, a person who
sells the component and knows it is especially made or adapted for an
infringing use is guilty of contributory infringement. 35 U.S.C. sec.
271(c).
2 In this regard, it is important to note that Timeline does not seek a
construction of the agreement that would make any added code an infringing
use under the agreement. The trial court found that '{w}hile it is
possible to use SQL Server without adding any code or software, such use
would be extremely limited.' But Timeline does not dispute that SQL Server
was intended for code to be added to it. Timeline instead asserts that the
majority of code added would not infringe under its interpretation of the
contract, because the majority of code added is not a component of
Timeline's patented process.
3 In any infringement analysis, federal patent law will control the
determination of whether added code or software is a 'material part' of
Timeline's patent.