There was a teleconference early in June, on the 5th, and the presiding judge, the Hon. James L. Robart, asked the parties to file briefs with the court "to provide an overview of what is required by the duty of good faith and fair dealing in the context of RAND licensing". So I'll show you their arguments:

• Microsoft's [PDF]
• Motorola's [PDF]

So far, as far as I'm concerned, this litigation has been fought on a slanted playing field, whether consciously or not on the judge's part, where everything has ended up tilting Microsoft's way. I think Motorola's lawyers think so too, because they went to a lot more effort than did Microsoft's lawyers, as I'll show you.

Just to give you a taste, Microsoft's filing has no Table of Authorities. Instead it opens with reminding this judge that he's already ruled in a way that favors Microsoft's interpretation of good faith and fair dealing. Motorola lists 3 and a half pages of cases, including the recent ITC ruling granting Samsung an exclusion order against Apple on a RAND patent of Samsung's. That's a polite way of letting a judge know he's out of step when he ruled you can't get an injunction with a RAND patent.

That's all you can do when a judge won't give you a fair shot, hem him in with so many cases, it's hard for him to be too awful without looking obviously biased and/or getting overruled in the end, so Motorola stresses that other courts don't support Microsoft, or for that matter, this judge, who has already said that Motorola is not allowed to seek injunctive relief anywhere in the world:

No tribunal has held that essential patent holders are contractually barred from seeking injunctions by virtue of their RAND commitments to standards organizations like ITU and IEEE. To the contrary, recent cases have held to the contrary. For example, in Apple, Inc. v. Motorola Mobility, Inc., No. 11-cv-178-BBC, 2012 WL 5416941, at *12-16 (W.D. Wis. Oct. 29, 2012), Apple sued Motorola inter alia, on a third-party beneficiary theory similar to Microsoft’s here, alleging that Motorola had breached its RAND commitments to IEEE and ETSI by seeking an injunction against Apple for infringing Motorola’s SEPs. Judge Crabb held, however, that “Motorola did not breach its contract simply by requesting an injunction and exclusionary order in its patent infringement actions.” Id. at *15. Noting that, because patent holders generally have the right to seek injunctive relief in district courts under 35 U.S.C. § 283 and in the ITC under 19 U.S.C. § 1337(d), “any contract purportedly depriving a patent owner of that right should clearly do so,” Judge Crabb concluded that nowhere in Motorola’s agreements with those standard-setting organizations was there any provision plainly prohibiting seeking injunctions based on SEPs. Absent any plain contract term prohibiting injunctive enforcement of SEPs, it follows a fortiori that the duty of good faith, which must derive from a contract term, cannot bar such enforcement.

Similarly, in Apple v. Samsung, the ITC issued an exclusion order against certain Apple iPhones based on Apple’s infringement of a Samsung SEP—applying the administrative equivalent of injunctive relief notwithstanding Samsung’s RAND commitments to SSOs. See Ian Sherr and Jessica Lessin, Ruling Blocks iPhone Sales, The Wall Street Journal Online, (June 10, 2013), http://online.wsj.com/article/SB1000142412788732346980457852572388 5896616. html.

This will in time arrive at a jury. I once was involved in a case where the judge was patently unfair, grievously so, and I was talking with the lead lawyer, trying to make him see the value of trying to get out of that jurisdiction. He was a lot calmer about it, and getting out was nearly impossible anyway. If I was right about the judge, he said, "we'll just have to rely on the jury." That was the end of that conversation. He wasn't worried. And he turned out to be correct not to be, because it all worked out fine. But after the farcical jury decision in Apple v. Samsung, which the judge tried to mop up some but is still incredibly misaligned with the facts and the tech, I don't have the same confidence in juries in the back yards of large tech companies, frankly. But, it is what it is, and one can also rely on juries and on the appeals process, so I don't want to get so cynical we can't follow along respectfully, remembering that it isn't over until it's over, meaning after all the appeals are resolved.

Microsoft opens by reminding the judge that he's already ruled Microsoft's way in part:

As the Court has already found, and as the parties agree, blatantly unreasonable offers always breach the RAND licensing contract. In addition, the cases and commentators have identified a number of examples of actions that constitute a breach of the duty of good faith and fair dealing.

No case of which Motorola is aware in Washington or any other jurisdiction finds a breach of the duty of good faith based on an initial offer that one party deems too high or too low. To the contrary, various cases find that the size of an offer alone is not dispositive of the reasonableness of the offer or of whether the offeror has breached a duty of good faith.

Like Microsoft wouldn't ever do such a thing. You forgot "Get the Facts" already? Or that dingbat argument a Microsoft lawyer, who tried to hide his connection to Microsoft, made about Google violating the GPL when it hadn't. Linus himself said it hadn't, and it's his kernel that the lawyer was opining about. Microsoft quotes from the law on contracts to list what is considered good faith and fair dealing:

In general, there is no one-size-fits-all definition of good faith and fair dealing. It “varies somewhat with the context” and “[a] complete catalogue of types of bad faith is impossible.” But traditional examples of prohibited conduct include “evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms, and interference with or failure to cooperate in the other party’s performance.” Restatement § 205 cmt. d.

Motorola raises that very point:

The duty of good faith is a reciprocal one that may be breached by either performance or enforcement. Any finding of breach of the implied duty of good faith and fair dealing in the context of Motorola’s RAND contract with the ITU and IEEE would require consideration of a totality of factors and circumstances, including both Motorola’s subjective intent and industry practice with respect to RAND licenses, and extending beyond a mere opening offer containing a rate that a potential licensee like Microsoft deems unreasonable. A RAND contract contemplates the give-and-take of negotiations, and considerable case law in other contract contexts establishes that the amount of any single offer alone, especially an initial offer designed to get negotiations started, cannot be dispositive of a breach of good faith and fair dealing.

Here's Microsoft's, as text:

HONORABLE JAMES L. ROBART

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF WASHINGTON
AT SEATTLE

MICROSOFT CORPORATION,

Plaintiff,

v.

MOTOROLA INC., et al.,

Defendants.

______________

Case No. C10-1823-JLR

MICROSOFT CORPORATION’S
BRIEF REGARDING THE DUTY OF
GOOD FAITH AND FAIR DEALING
IN THE CONTEXT OF RAND
LICENSING

__________

INTRODUCTION

During the June 5, 2013 telephone conference, the Court asked the parties to provide an overview of what is required by the duty of good faith and fair dealing in the context of RAND licensing.¹ As the Court has already found, and as the parties agree, blatantly unreasonable

offers always breach the RAND licensing contract. In addition, the cases and commentators have identified a number of examples of actions that constitute a breach of the duty of good faith and fair dealing. While there is no one-size-fits-all definition, two examples have particular relevance to RAND disputes and are discussed in more detail below. First, it would be a breach for the party given discretion by the contract (in this case, Motorola) to make an offer that is not commercially reasonable. Second, it would also be a breach to act in a way that frustrates the purpose of the contract (in the case of RAND licensing, the purpose of the contract includes making the patented technology readily and equally available to all industry participants, and avoiding patent hold-up and royalty stacking).

DISCUSSION

I. THE COURT’S PRIOR RULINGS

As the Court is now well aware, Motorola holds certain patents it has declared essential to the 802.11 wireless networking standard and the H.264 video coding standard. These standards are governed by Standard Setting Organizations (“SSOs”) called the IEEE and ITU, respectively. The IEEE and ITU allowed Motorola to participate in the standard setting process and the final standards incorporate technology Motorola asserts is covered by certain Motorola patents. In exchange for giving Motorola the opportunity to participate in the standard-setting process, the SSO’s required Motorola to promise to license its standard essential patents to all industry participants on RAND terms. (See generally Dkt. 335.)

The Court has held that this bargain constitutes a binding and enforceable contract between Motorola and the SSOs — a contract of which standard implementers, like Microsoft, are beneficiaries. (Dkt. 335 at 11–14.) The terms of the contract are set forth in the ITU and IEEE policy documents and in Motorola’s RAND declarations. (Dkt. 335 at 13 n. 6.) Through these contracts, the SSOs sought to ensure that the necessary technology would be readily and equally available to all industry participants. (Trial Ex. 1575 (ITU Common Patent Policy) at 9) (making technology “accessible to everybody” is “sole objective” of ITU policies); (Trial Ex. 1130 (IEEE Operations Manual) at 19) (technology can only be included if “accessible to all in the industry” on RAND terms). RAND commitments advanced this objective by preventing, among other things, the problems of patent hold-up and royalty stacking, either of which could cripple a standard. (Dkt. 673 at ¶¶ 51–69.) Indeed, preventing hold-up and royalty stacking are a central purpose of RAND commitments. (Id.)

The Court has held that “any offer by Motorola (be it an initial offer or an offer during a back-and-forth negotiation) must comport with the implied duty of good faith and fair dealing inherent in every contract.” (Dkt. 335 at 25.) The Court has also found, and the parties agree, that blatantly unreasonable offers for licenses to standard essential patents always breach the contract. (Dkt. 335 at 25; Dkt. 188 at 15 (“To wit, during the February 13, 2012 status conference, counsel for Motorola agreed that blatantly unreasonable offers would violate its RAND obligations under the policies.”).)²

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II. THE IMPLIED DUTY OF GOOD FAITH AND FAIR DEALING

As recognized by this Court, a duty of good faith and fair dealing is implied in every contract. Dkt. 335 at 25; see also, e.g., Frank Coluccio Construction Co., Inc. v. King County, 150 P.3d 1147, 1154 (Wash. App. 2007) (“There is an implied duty of good faith and fair dealing in every contract.”); Restatement (Second) of Contracts § 205 (“Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.”). This duty applies to RAND commitments no less than to any other contract. Dkt. 335 at 25; Realtek Semiconductor Corp. v. LSI Corp., No. 12-3451, 2012 WL 4845628, *4 (N.D. Cal. Oct. 10, 2012); Agere Systems Guardian Corp. v. Proxim, Inc., 190 F. Supp. 2d 726, 738–39 (D. Del. 2002).

Various circumstances may give rise to disputes surrounding this duty. One common example in commercial settings is contracts that allow for discretion — e.g., contracts that leave a price, quantity, or time subject to a party’s subsequent judgment. See Wion Decl. Ex. 2, Steven J. Burton & Eric G. Andersen, Contractual Good Faith: Formation, Performance, Breach, Enforcement 45 (1995) (“Burton & Andersen”) (“The centrality of discretion to good faith in contract performance has become well established by the case law since 1980.”); Aventa Learning, Inc. v. K12, Inc., 830 F. Supp. 2d 1083, 1101 (W.D. Wash. 2011) (Robart, J.) (“The duty of good faith and fair dealing applies when one party has discretionary authority to determine certain terms of the contract, such as quantity, price, or time”) (quoting Goodyear Tire & Rubber Co. v. Whiteman Tire, Inc., 935 P.2d 628, 632 (Wash. App. 1997)).

4

In general, there is no one-size-fits-all definition of good faith and fair dealing. It “varies somewhat with the context” and “[a] complete catalogue of types of bad faith is impossible.” But traditional examples of prohibited conduct include “evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms, and interference with or failure to cooperate in the other party’s performance.” Restatement § 205 cmt. d.

Cases make clear that a showing of dishonesty or subjective bad faith is not required to establish a breach of the duty (although it certainly would be sufficient). Even if a party does nothing dishonest, it can still breach the implied duty of good faith and fair dealing, and most cases do not involve “smoking gun” evidence of subjective bad faith. Two recognized standards for assessing the duty of good faith and fair dealing have particular relevance to this case and will be discussed below. First, commercially unreasonable conduct — including a commercially unreasonable offer — by the party with discretion breaches the duty. Second, taking actions that frustrate the purpose of the contract or are otherwise contrary to the reasonable expectations of the other party is a breach of the duty.

A. Dishonesty Or Subjective Bad Faith Is Not Required To Breach The Duty.

The cases and commentators have emphasized that dishonesty or subjective bad faith is not required to breach the implied duty of good faith and fair dealing:

We do not question that the Committee felt it was treating Scribner fairly and lawfully by allowing him to exercise some of his options, or that it honestly felt it was acting in the best interests of the company. These facts, however, are not dispositive, and WorldCom’s argument mischaracterizes the law. That a party can breach the duty of good faith and fair dealing by acting dishonestly or unlawfully does not mean that dishonesty or an unlawful purpose is a necessary predicate to proving bad faith.

5

Scribner v. Worldcom, Inc., 249 F.3d 902, 910 (9th Cir. 2001) (reversing and finding breach under Washington law). In Scribner, the Ninth Circuit also stated that a plaintiff “need not show that the [defendant] acted with affirmative malice towards him, or even that it knew its decisions were inappropriate when it made them.” Id. at 909; see also, e.g., Boland, Inc. v. Rolf C. Hagen (USA) Corp., 685 F. Supp. 2d 1094, 1103 (E.D. Cal. 2010) (“breach [of the duty of good faith and fair dealing] does not require subjective bad faith”).

Similarly, the Restatement provides that “[s]ubterfuges and evasions violate the obligation of good faith in performance even though the actor believes his conduct to be justified” and that “fair dealing may require more than honesty.” Restatement § 205 cmt. d (emphasis added).

The RAND duty exemplifies the basis for a rule that does not limit breach of the duty to cases of subjective bad faith. Such a narrow definition of the duty would leave technology implementers at the mercy of patent holders with idiosyncratic beliefs. If just one essential patent holder withholds a RAND license, the ability of an industry to comply with the technology standard can be compromised. This is true regardless of whether the patent holder honestly believes its conduct is permissible. Moreover, such an inquiry would allow patent holders to skirt the duty of good faith and fair dealing by willfully maintaining ignorance of the fair value of their patents to the standard or the importance of the standard to the implementer’s product. These patent holders could use their ignorance as a shield, offering categorically non- RAND royalties but absolving themselves through lack of knowledge as to what appropriate royalties should be.

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B. Taking Actions That Are Not Commercially Reasonable Is A Breach In
Circumstances Where A Party Has Discretion Or In Other Analogous
Circumstances.

Instead of focusing on honesty or subjective bad faith to evaluate compliance with the duty of good faith and fair dealing, most cases and commentators focus on objective factors. See generally Wion Decl. Ex. 2, Burton & Andersen at 83 (focusing on objective factors because subjective assessments may leave “interests in nonarbitrary and foreseeable action in contract performance unprotected”).

For example, courts say that a party given discretion by a contract must exercise that discretion reasonably. Craig v. Pillsbury Non-Qualified Pension Plan, 458 F.3d 748, 752 (8th Cir. 2006) (Washington law) (“[D]iscretion must be exercised in good faith — a requirement that includes the duty to exercise the discretion reasonably”); Curtis v. Northern Life Ins. Co., 147 Wash. App. 1030, 2008 WL 4927365, at *5 (Wash. App. 2008) (same); Restatement § 205 cmt. a (good faith excludes conduct that violates community standards of reasonableness). In commercial settings, courts apply the standard of commercial reasonableness. In Vylene Enterprises, Inc. v. Naugles, Inc., 90 F.3d 1472 (9th Cir. 1996), for example, the court affirmed a lower court’s ruling that a party breached the duty of good faith and fair dealing by proposing a franchise agreement that was “commercially unreasonable.” Id. at 1477. The Uniform Commercial Code, as another example, applies in commercial settings and requires “honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.” UCC §§ 2-103(1)(b), 1-201(19) (emphasis added).³

7

Accordingly, in the context of RAND licensing, it would be a breach of the duty to make a commercially unreasonable offer. Vylene, 90 F.3d at 1477; Best v. U.S. Nat. Bank of Oregon, 303 P.3d 554, 559 (1987) (“When a party has the contractual right to specify a price term, the term specified may be so high or low that the party will be deemed to have acted in bad faith . . . .”).

C. Actions That Frustrate The Purpose Of The Contract Or Are Otherwise
Contrary To The Reasonable Expectations Of The Other Party Breach The
Duty.

Even if a party acts in a way that might otherwise be commercially reasonable, the party would still breach the duty of good faith and fair dealing if the action frustrates the purpose of the contract, or is otherwise contrary to the reasonable expectations of the other party. One of the central goals of the duty of good faith and fair dealing is to promote “faithfulness to an agreed common purpose and consistency with the justified expectations of the other party.” Frank Coluccio, 150 P.3d at 1155 (quoting Restatement § 205 cmt. a); see also Restatement § 205 cmt. d (prohibiting “evasion of the spirit of the bargain”); Wion Decl. Ex. 2, Burton & Anderson at 21 (“The now-considerable case law has taken on a distinctly free market orientation, regularly construing good faith to protect and serve the parties’ justified expectations arising from their agreements.”)

A discretion-exercising party performs in good faith when it exercises its discretion for a purpose within the reasonable contemplation of the parties. This view was most famously articulated by Steven J. Burton, Breach of Contract and the Common Law Duty to Perform in Good Faith, 94 Harv. L. Rev. 369, 369 (1980) (“Burton”). Wion Decl. Ex. 3. See also Wion Decl. Ex. 2, Burton & Anderson at 51 (“Good faith is a matter of exercising contractual discretion for reasons within the justified expectations of the parties arising from their

8

agreement”). It has been widely adopted by courts. Thus it is a breach of the duty to “engag[e] in conduct that frustrates the other party’s right to the benefits of the contract.” Aventa, 830 F.2d at 1101 (citing Woodworkers of Am. v. DAW Forest Prods. Co., 833 F.2d 789, 795 (9th Cir. 1987)); Best, 303 P.3d at 558 (“If the discretion is exercised for purposes not contemplated by the parties, the party exercising discretion has performed in bad faith”); see also Frank Coluccio, 150 P.3d at 1154–55 (affirming finding of breach of duty of good faith and fair dealing where defendant’s conduct was contrary to the purpose of the contract); Lizotte v. Schumacher, 105 Wn. App. 1029, 2001 WL 293165, at * 7 (Wash. App. Mar. 27, 2001) (finding breach of duty of good faith and fair dealing due to conduct “designed to frustrate [the] purpose” of the contract).

In Best, for example, the court concluded that “the Bank’s [$5 fee for bounced checks was] not so high as to be evidence of bad faith for that reason alone,” but the court still held that there could be a violation of the duty because it appeared that the $5 fee was contrary to “the reasonable expectations of the parties.” 303 P.3d at 559. In Scribner, an employer retained broad discretion under a contract to determine whether the termination of an employee was with or without “cause.” 249 F.3d at 906. The court ruled that the employer violated its duty of good faith and fair dealing when it defined “cause” in an unusual and self-serving way, finding that the employer “could breach the duty of good faith and fair dealing simply by disregarding [the plaintiff’s] justified expectations under the [contracts].” Id. at 909. The court went on to observe that “[g]ood faith limits the authority of a party retaining discretion to interpret contract terms; it does not provide a blank check for that party to define terms however it chooses.” Id. at 910. And in Curtis, the Court found that an insurance company may have breached the duty of good faith and fair dealing by improperly exercising discretion in selecting interest rates using methods contrary to what policy holders had expected. Curtis, 2008 WL 4927365, at *6.

9

Acting in a retaliatory manner would also violate the duty, even if the action in the abstract could be justified in other circumstances, since retaliation is outside the reasonable expectations of the parties. Consider a contract that gives an oil company the discretion to prohibit its distributor from transferring the distributorship to another party. “[T]he oil company could, consistent with its obligation to perform in good faith, reject a transfer to someone inexperienced in the oil business . . . . But the oil company would have performed in bad faith if, for example, it had rejected a transfer in order to retaliate against the distributor for some reason.” Best, 739 P.3d at 558. Likewise, in Cavell v. Hughes, 629 P.2d 927 (Wash. App. 1981), the court found a breach of the duty of good faith and fair dealing because the actor had “the specific purpose of frustrating” the agreement and because the actor, with knowledge of the truth, allowed certain false pretenses to persist. Id. at 929. Similarly, the Restatement provides that “willful rendering of imperfect performance” constitutes a basis for breach. Restatement § 205 cmt. d (emphasis added).

Applying these principles to RAND licensing, a patent holder violates the duty of good faith and fair dealing by engaging in conduct that frustrates the purpose of the RAND commitment. SSOs and participating patent holders entered RAND contracts for the purpose of preventing patent hold-up and royalty stacking. (Dkt. 673 at ¶¶ 51-69, 538; Dkt. 335 at 13.) Conduct that frustrates these purposes would not be faithful to the “agreed common purpose and ... justified expectations” of the SSOs. Restatement § 205 cmt. a.

It would also frustrate the purposes of the RAND commitment to make offers designed to avoid actually consummating a license on RAND terms, such as offers that are retaliatory in nature. The terms of the contracts in the present case expressly left the determination of RAND terms up to licensors and licensees. (Trial Ex. 1575 (ITU Common Patent Policy) at 9); (Trial

10

Ex. 1568 (IEEE Bylaws) at 17). As such, while Motorola had discretion in crafting its offers, the duty of good faith and fair dealing required Motorola to exercise that discretion in a manner consistent with the purposes of the RAND commitment and with the IEEE’s and the ITU’s expectations. The only rational reading of the applicable IEEE and ITU policies was that patent holders were to exercise their discretion for the purpose of actually consummating licenses on RAND terms. (Trial Ex. 1575 (ITU Common Patent Policy) at 9) (making technology “accessible to everybody” is “sole objective” of ITU policies); (Trial Ex. 1130 (IEEE Operations Manual) at 19) (technology can only be included if “accessible to all in the industry” on RAND terms).

D. Neither Protestations Of Blind Good Faith, Nor Failure Of Another Party To
Attempt To Rectify Bad Faith Conduct, Excuses A Breach.

Attempts by parties whose conduct objectively violates the standard to argue that they were acting with subjective good faith — known as the “kind heart, empty head” defense — have been rejected. See supra p. 5 (citing, inter alia, Scribner, 249 F.3d at 910); see also Wion Decl. Ex. 2, Burton & Andersen at 83 (focusing on objective factors because “good faith performance clearly requires something more than a ‘kind heart and an empty head.’”) A party cannot defend based on ignorance of information that commercially reasonable conduct would reveal, including conduct called for by the duties described above (e.g., avoiding frustrating the purpose of the contract or the parties’ reasonable expectations). Motorola cannot use its own purported ignorance as an excuse for objectively unreasonable conduct that undermines its RAND licensing commitments.

Here, this standard has already been applied by the Court to exclude as a defense that the non-breaching party take action to cure a breach of the duty of good faith and fair dealing as a condition precedent. Specifically, the Court has held that “applying for a patent license and

11

negotiating towards a patent license were not conditions precedent to Motorola’s obligations to grant licenses on RAND terms.” (Dkt. No. 465 at 9.) See also id. at 14–16 (noting that the Court had “twice rejected Motorola’s contention” that “interminable good faith negotiation” would satisfy its RAND commitment, and that Microsoft’s suit is proper because “the courthouse acts as an appropriate forum to resolve disputes over legal rights”); Dkt. 335 at 19 (“Motorola’s contracts with the IEEE and the ITU do not condition Motorola’s RAND obligations on [Microsoft] first applying for a license and then negotiating in good faith.”); Dkt. 188 at 15–16.

This approach is consistent with applicable law. Although the Washington Pattern Jury Instructions and certain Washington cases state that the duty of good faith and fair dealing obligates the “parties to cooperate with each other so that each may obtain the full benefit of performance,” (see, e.g., Badgett v. Security State Bank, 807 P.2d 356, 360 (Wash. 1991); Wion Decl. Ex. 4 (Washington Pattern Instruction 302.11) (“WPI”)), the term “cooperate” in the context of a RAND licensing dispute does not suggest that Microsoft had to engage in back-and- forth negotiations with Motorola before Motorola could violate its duty. Rather, the duty to “cooperate” is on the defendant and is a short-hand expression of the rule already discussed requiring a defendant to avoid conduct that hinders the plaintiff’s realization of the benefits of the contract or reasonable expectations. In Cavell, for example, the Court applied the obligation to cooperate to conclude that a plaintiff’s failure to satisfy a condition precedent did not excuse the defendant where the defendant hindered the plaintiff’s ability to satisfy the condition. Cavell, 629 P.2d at 53. See also Long v. T-H Trucking Co., 486 P.2d 300, 302–03 (Wash. App. 1971) (finding that defendant did not cooperate in good faith because its actions “substantially hindered plaintiff’s production of logs in adequate volume”).

12

Other cases state that parties have no obligation to “affirmatively assist” in the other party’s performance. State v. Trask, 957 P.2d 781, 791 (Wash. App. 1998) (citing Badgett v. Security State Bank, 807 P.2d 356, 359 (Wash. App. 1991)). This general statement is also consistent with the Court’s prior rulings in this case and does not impose a condition of first seeking an accommodation with the defendant before asserting breach. Badgett makes clear that this statement of law simply means that courts cannot “expand the existing duty of good faith to create obligations on the parties in addition to those contained in the contract” and that “there cannot be a breach of the duty of good faith when a party simply stands on its rights to require performance of a contract according to its terms.” Badgett, 807 P.2d at 360.

Good faith and fair dealing is a context-driven inquiry. Restatement § 205 cmt. d (the duty’s meaning “varies somewhat with the context.”). In the RAND licensing context, statements that parties should “cooperate with each other” and that parties have no obligation to “affirmatively assist” the other’s performance are not pertinent and have the potential to mislead a jury in a manner contrary to the law and the Court’s prior rulings. They should not guide the Court’s analysis or jury’s deliberations.

CONCLUSION

As requested by the Court, the foregoing provides an overview of what is required by the duty of good faith and fair dealing in the context of RAND licensing.

DATED this 1st day of July, 2013.

RESPECTFULLY SUBMITTED,
CALFO HARRIGAN LEYH & EAKES LLP

By s/Arthur W. Harrigan, Jr.
Arthur W. Harrigan, Jr., WSBA #1751

By s/Christopher Wion
Christopher Wion, WSBA #33207

13

By s/Shane P. Cramer
Shane P. Cramer, WSBA #35099
[address, phone, emails]

By s/T. Andrew Culbert
T. Andrew Culbert

By s/David E. Killough
David E. Killough

MICROSOFT CORPORATION
[address, phone, fax]

David T. Pritikin
Richard A. Cederoth
Constantine L. Trela, Jr.
William H. Baumgartner, Jr.
Ellen S. Robbins
Douglas I. Lewis
David C. Giardina
John W. McBride

SIDLEY AUSTIN LLP
[address, phone, fax]

Carter G. Phillips
Brian R. Nester

SIDLEY AUSTIN LLP
[address, phone, fax]

Counsel for Microsoft Corp.

_______
¹ The Court stated, “[W]hat are the parameters of a good-faith offer, or, the reverse of that, outside a good-faith offer or bad faith, in the context of a contractual dispute. . . .Counsel, please understand, this is not intended to persuade me one way or the other. . . . This is background of what the law is on this issue. You don't have to finely tailor it to your ultimate position. . . . It seems to me that the real fight in this is going to be jury instructions. That will be not for some period of time, but to help us get started that would be of significant benefit.” (Dkt. No. 703 at 16:11–:13, 19:12–:23.)

² Defendant Motorola Solutions agrees that an SEP holder breaches its RAND commitments by making blatantly unreasonable licensing demands: Motorola Solutions brought a breach of contract claim against a holder of patents allegedly essential to the 802.11 standard based, in part, on the patent holder’s pursuit of “a licensing program that is blatantly unreasonable on its face, including blatantly unreasonable offers and other conduct in violation of good faith and fair dealing inherent in all contracts.” Wion Decl. Ex. 1 (Plaintiffs’ Amended Complaint, Dkt. No. 431, In re Innovatio IP Ventures, LLC, Patent Litig., Case No. 1:11-cv-9308 (N.D. Ill. Oct. 1, 2012)) at ¶ 312.

³ Article 1 of the UCC had previously only required honesty. However, “amendments to the Uniform Commercial Code brought the Article 2 merchant concept of good faith (subjective honesty and objective commercial reasonableness) into other Articles,” including Article 1. Official Comment to UCC § 1-201.

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EXHIBITS

Wion Decl. Ex. 1: Plaintiffs’ Amended Complaint, Dkt. No. 431, In re Innovatio IP Ventures, LLC, Patent Litig., Case No. 1:11-cv-9308 (N.D. Ill. Oct. 1, 2012)

Wion Decl. Ex. 2: Selected chapters from Steven J. Burton & Eric G. Andersen, Contractual Good Faith: Formation, Performance, Breach, Enforcement. Little, Brown & Company, 1995.

Wion Decl. Ex. 3: Steven J. Burton, Breach of Contract and the Common Law Duty to Perform in Good Faith, 94 Harv. L. Rev. 369 (1980).

Wion Decl. Ex. 4: Washington Pattern Jury Instruction (6th Ed.) 302.11 (available at http://government.westlaw.com/linkedslice/default.asp?SP=wciji-1000.)

15

[For CERTIFICATE OF SERVICE, see PDF.]

16-17

The Honorable James L. Robart

UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF WASHINGTON
AT SEATTLE

MICROSOFT CORPORATION, a Washington
corporation,

Plaintiff,

v.

MOTOROLA, INC., and MOTOROLA
MOBILITY LLC, and GENERAL
INSTRUMENT CORPORATION,

Defendants.

___________

CASE NO. C10-1823-JLR

DEFENDANTS’ BRIEF ON DUTY OF
GOOD FAITH AND FAIR DEALING IN
CONTRACTUAL DISPUTE CONTEXT

TABLE OF CONTENTS

I. INTRODUCTION .................................... 1

II. BACKGROUND ......................................... 1

A. The Implied Duty of Good Faith ............................... 1

B. The Role of Subjective Intent ........................... 3

C. The Role of Industry Practice or Custom ......................... 4

D. Reciprocity In Duties of Good Faith........................... 6

E. Enforcement by Third Party Beneficiaries .................... 7

III. ARGUMENT .............. 8

A. Cases Finding Breach of the Duty Good Faith ................................. 8

1. Frustration of Contract Performance ............................. 8

2. Failure to Cooperate.................................... 8

3. Misleading a Counterparty..................................... 9

4. Failure to Disclose .................................. 9

5. Agreements to Negotiate............................. 10

B. Cases Rejecting a Claimed Breach of the Duty of Good Faith............................. 11

1. Claim of Breach of Good Faith Based on a High/Low Offer ................... 11

2. Claim of Breach of Good Faith for Seeking Injunctive Relief ................. 14

IV. CONCLUSION.............................. 15

i

TABLE OF AUTHORITIES

Cases

Page

ABA Distributors, Inc. v. Adolph Coors Co.,
542 F. Supp. 1272 (W.D. Mo. 1982) ...........................................................7

Alliance Atlantis Releasing Ltd. v. Bob Yari Prods.,
No. CV 08-5526-GW (SSX), 2010 WL 1525687 (C.D. Cal. Apr. 12, 2010) ................................................... 11

Am. Mfrs. Mut. Ins. Co. v. Osborn,
104 Wn. App. 686, 17 P.3d 1229 (2001)............................13

Amerigraphics, Inc. v. Mercury Cas. Co.,
182 Cal. App. 4th 1538 (Cal. App. 2010).........................6

Apple, Inc. v. Motorola Mobility, Inc.,
No. 11-cv-178-BBC, 2012 WL 5416941 (W.D. Wis. Oct. 29, 2012).................................14, 15

Aventa Learning, Inc. v. K12, Inc.,
830 F. Supp. 2d 1083 (W.D. Wash. 2011)..............................................8

Axthelm & Swett Const., Inc. v. Caudill,
No. 35995-9-I, 86 Wn. App. 1002 (Wash. Ct. App. 1997)................................5

BBS Technologies, Inc. v. Remington Arms Co., Inc.,
No. Civ. A. 05-98-DLB, 2005 WL 3132307 (E.D. Ky. Nov. 22, 2005)....................................12

Badgett v. Sec. State Bank.,
116 Wn.2d 563, 807 P.2d 356 (1991)..............................1

Baker v. Goldman Sachs & Co.,
656 F. Supp. 2d 226 (D. Mass. 2009) ......................... 7

Barrett v. Weyerhaeuser Co. Severance Pay Plan,
40 Wn. App. 630, 700 P.2d 338 (1985).........................1

Barstad v. Stewart Title Guar. Co., Inc.,
145 Wn.2d 528, 39 P.3d 984 (2002)............................5

Betchard-Clayton, Inc. v. King,
41 Wn. App. 887, 707 P.2d 1361 (1985).............................................2

Bushbeck v. Chicago Title Ins. Co.,
No. C08-0755JLR, 2010 WL 2262340 (W.D. Wash. June 1, 2010).........................9

Cargill Global Trading v. Applied Dev. Co.,
706 F. Supp. 2d 563 (D.N.J. 2010)...........................................7

ii

Cargolux Airlines Int’l, S.A. v. Sea-Tac Air Cargo L.P. ex rel. Transiplex (Seattle) Inc.,
No. 65498-5-I, 2012 WL 2688782 (July 9, 2012) .............................. 9

Casey Elec., LLC v. Constr. Mgmt. Servs., Inc.,
No. 3:09-cv-00469 (PCD), 2009 WL 3853819 (D. Conn. Nov. 17, 2009) .................................7

Cavell v. Hughes,
29 Wn. App. 536, 629 P.2d 927 (1981)......................................4, 8

City of Alton v. Sharyland Water Supply Corp.,,
145 S.W.3d 673 (Tx. Ct. App. 2004)...............................7

Columbia Park Golf Course, Inc. v. City of Kennewick,
160 Wn. App. 66, 248 P.3d 1067 (2011).........................10

Continental Bank N.A. v Modansky,
997 F.2d 309 (7th Cir. 1993) ...................................4

Curtis v. Northern Life Ins. Co.,
147 Wn. App. 1030 (2008) .............................. 4, 5

Donald B. Murphy Contractors, Inc. v. King Cnty,
112 Wn. App. 192, 49 P.3d 912 (2002)...........................1

Edmonson v. Popchoi,
155 Wn. App. 376, 228 P.3d 780 (2010)...............................8

Fairhaven Land & Livestock Co. v. Chuckanut Trails Water Ass’n,
Case No. 60909-2-I, 148 Wn. App. 1046 (Feb. 23, 2009)................................3

Flight Sys., Inc. v. Elec. Data Sys. Corp.,
112 F.3d 124 (3d Cir. 1997)............................10

Foster Enters., Inc. v. Germania Fed. Sav. & Loan Ass’n,
97 Ill. App. 3d 22, 421 N.E.2d 1375 (1981) .................................. 10

Frank Coluccio Constr. Co., Inc. v. King Cnty.,
136 Wn. App. 751, 150 P.3d 1147 (2007).......................1, 8

G Four Bellingham, LLC v. Oishii Teriyaki, Inc.,
No. 58305-1-I, 2008 WL 176389 (Jan. 22, 2008) ............................ 9

Gardner & White Consulting Servs., Inc. v. Ray,
474 S.E.2d 663 (Ga. Ct. App. 1996)..............................7

Gaskill v. Travelers Ins. Co.,
2012 WL 1327819 (W.D. Wash. April 17, 2012) ...................................7

Gillenardo v. Connor Broad. Delaware Co.,
C.A. 98C-06-015 WLW, 2002 WL 991110 (Del. Super. Ct. Apr. 30, 2002)..........................10

iii

In re Hardesty Co., Inc.,
336 N.L.R.B. 18 (Sep. 28, 2001) ........................... 14

Helicopter Transport Servs., Inc. v. Erickson Air-Crane Inc.,
No. CV 06-3077-PA, 2008 WL 151833 (D. Or. Jan. 14, 2008) .................................. 7

Matter of Hollingsworth’s Estate,
88 Wn.2d 322, 560 P.2d 348 (1977)...........................4, 8

Iliadis v. Wal-Mart Stores, Inc.,
191 N.J. 88, 922 A.2d 710 (2007)..............................4

KLB Industries, Inc.,
357 N.L.R.B. 8 (July 26, 2011)..........................13, 14

Keller v. Allstate Ins. Co.,
81 Wn. App. 624, 915 P.2d 1140 (1996)........................13

Keystone Land & Dev. Co. v. Xerox Corp.,
152 Wn.2d 171, 94 P.3d 945 (2004)........................1, 10

L-7 Designs, Inc. v. Old Navy, LLC,
647 F.3d 419 (2d Cir. 2011)...........................12

Lichtenberg Constr. & Dev., Inc. v. Paul W. Wilson, Inc.,
No. C-000811, 2001 WL 1141236 (Ohio Ct. App. Sept. 28, 2001)....................6

Liebergesell v. Evans,
93 Wn.2d 881, 613 P.2d 1170 (1980)........................9

Lloyd v. Allstate Ins. Co.,
167 Wn. App. 490, 275 P.3d 323 (2012).......................13

Lonsdale v. Chesterfield,
99 Wn.2d 353, 662 P.2d 385 (1983)...........................9

McCarthy W. Constructors, Inc. v. Phoenix Resort Corp.,
169 Ariz. 520, 821 P.2d 181 (Ct. App. 1991).......................7

Miller v. Othello Packers, Inc.,
67 Wn.2d 842, 410 P.2d 33 (1966)...........................1, 9

Monahan v. GMAC Mortgage Corp.,
179 Vt. 167, 893 A.2d 298 (2005).......................7

In re Nieves,
648 F.3d 232 (4th Cir. 2011) ...........................4

Race v. Fleetwood Retail Corp. of Wash.,
No. 20722-6-III, 2003 WL 1901274 (2003) ...................... 10

iv

Realtek Semiconductor Corp. v. LSI Corp.,
No. C-12-03451 RMW, 2012 WL 4845628 (N.D. Cal. Oct. 12, 2012) ........................12

Rhino Linings USA, Inc. v. Harriman,
658 F. Supp. 2d 892 (S.D. Ind. 2009)........................5

Riveredge Assocs. v. Metro. Life Ins. Co.,
774 F. Supp. 897 (D.N.J. 1991) ....................... 7

Ross Bros. Const. Co. v. Int’l Steel Servs. Inc.,
283 F.3d 867 (7th Cir. 2002) ........................7

Spinks v. Equity Residential Briarwood Apartments,
171 Cal. App. 4th 1004, 90 Cal. Rptr. 3d 453 (Cal. Ct. App. 2009) ............................7

Universal Fuel, Inc. & Int’l Assoc. of Machinists & Aerospace Workers, AFL-CIO, Dist. Lodge 4,
358 N.L.R.B. 150 (Sept. 27, 2012) .......................... 13, 14

Warner Theatre Associates Ltd. P’ship v. Metro. Life Ins. Co.,
1997 WL 685334 (S.D.N.Y. Nov. 4, 1997), aff’d, 149 F.3d 134 (2d Cir. 1998), the …………… 11, 12

Zuver v. Airtouch Commc’ns, Inc.,
153 Wn.2d 293, 103 P.3d 753 (2004)............................6

Statutes

19 U.S.C. § 1337(d) ................................................................ 15

35 U.S.C. § 283..............................................................15

37 C.F.R. § 75.65(b) .......................................................... 14

29 U.S.C.A. § 158(d) ...................................................... 13

RCW § 48.01.030 ........................................................... 5

RCW § 62A.1-201(b)(20).................................................4

RCW § 62A.1-203 ...................................................... 10

Miscellaneous

Cable Television Consumer Protection and Competition Act of 1992, Pub. L. 102-385, 106 Stat.
1460…………………………………………….. 14

Restatement (Second) of Contracts § 205 cmt. a (1979) .................................................. 1, 3

Restatement (Second) of Contracts § 205(d) (1981) ....................................... 3, 6, 7

v

I. INTRODUCTION

Defendants Motorola, Inc., Motorola Mobility LLC, and General Instrument Corporation (collectively, “Motorola”) respectfully submit this brief in response to the Court’s request for briefing on “the parameters of a good-faith offer, or, the reverse of that, outside a good-faith offer or bad faith, in the context of a contractual dispute.” See Hr’g Tr. 16:11-15, June 5, 2013. Per the Court’s instruction, Motorola here Seeks to provide relevant background law while reserving argument for subsequent briefing. As set forth below, the inquiry is fact intensive and includes both subjective and objective components. The duty of good faith includes the concept of reciprocity: the duty applies to the party performing and the party seeking to enforce the contract.

II. BACKGROUND

A. The Implied Duty of Good Faith

Under Washington state law (which the Court has assumed governs here), there is an implied duty of good faith and fair dealing in all contracts. See, e.g., Miller v. Othello Packers, Inc., 67 Wn.2d 842, 843-44, 410 P.2d 33 (1966). This duty obligates parties to cooperate with each other so that the parties may receive the benefits of performance of the contract. Id. A party may breach the duty by failing to promote the contract’s common purpose. See, e.g., Frank Coluccio Constr. Co., Inc. v. King Cnty., 136 Wn. App. 751, 764-66, 150 P.3d 1147, 1154-55 (2007) (citing Restatement (Second) of Contracts § 205 cmt. a (1979)).

The implied duty of good faith and fair dealing arises out of the obligations created by a contract and exists only in relation to performance of specific contract terms. See Badgett v. Sec. State Bank, 116 Wn.2d 563, 569-74, 807 P.2d 356, 359-62 (1991). ¹

Washington does not recognize “a free-floating duty of good faith unattached to the underlying legal document,” id. at 570, and thus the duty cannot “‘inject any substantive terms into the parties’ contract,’” id. at 569.

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Nor does the duty require parties to accept any “material change in the terms of the contract,” See Betchard-Clayton, Inc. v. King, 41 Wn. App. 887, 890-91, 707 P.2d 1361, 1363-64 (1985).

In this case, the express contract terms to which the implied duties of good faith apply are the RAND obligations of Motorola’s contracts with the IEEE and ITU. Under the law of the case, Motorola’s obligation is “to license its essential patents on RAND terms” (Dkt. 355, p.13). The Court has held that “Motorola’s statements to the IEEE and ITU constituted a binding agreement to license its essential patents on RAND terms” (Dkt 335, p. 13), and that “ Microsoft, as a member of both the IEEE and the ITU, is a third-party beneficiary of Motorola’s commitments to the IEEE and ITU” (Dkt 188, p.10). The Court has noted that such an agreement contemplates a process of negotiation between Motorola and potential licensees like Microsoft in order to arrive at a RAND license, and does not require that any initial offer or any other offer made during the give-and-take of negotiations itself be made on RAND terms:

• “[T] he language of Motorola’s agreements with the IEEE and the ITU envisions a negotiation between the parties towards a resulting RAND license.” (Dkt 335, p.24.)

• “[B]oth policies lend themselves to a negotiation process. For instance, the ITU Policy places a requirement on the patent holder to ‘negotiate licenses with other parties on a non-discriminatory basis on reasonable terms and conditions.’ (Dkt. # 79-3 at 9-12.) Additionally, both policies state that the negotiating parties will determine the final RAND license, again indicating that the policies contemplate a negotiation process.” (Dkt. 188, p. 14)

• “Still, the court is mindful that at the time of an initial offer, it is difficult for the offeror to know what would in fact constitute RAND terms for the offeree. Thus, what may appear to be RAND terms from the offeror’s perspective may be rejected out-of-pocket as non-RAND terms by the offeree. Indeed, it would appear that at any point in the negotiation process, the parties may have a genuine disagreement as to what terms and conditions of a license constitute RAND under the parties’ unique circumstances.” (Dkt. 188 p. 15.)

• “Because the IEEE and the ITU agreements anticipate that the parties will negotiate towards a RAND license, it logically does not follow that initial offers must be on RAND terms. Here, critical to the court is the observation that RAND terms cannot be determined until after a negotiation by the parties. . . As stated above, the purpose behind the IEEE and the ITU agreements is to ensure widespread access to

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standard essential patents. Thus, a requirement that the standard essential patent holder (here, Motorola) make unsolicited offers on RAND terms would frustrate this purpose by discouraging the standard essential patent holder to make initial contact with implementers for fear that it will later be sued for making an initial offer that is later determined as not RAND. Accordingly, the court concludes that under Motorola’s agreements with the IEEE and the ITU, Motorola need not make initial offers on RAND terms.” (Dkt 335, pp. 24-25.)

It is against this backdrop that the Court held that, “although the language of Motorola’s agreements do not require it to make offers on RAND terms, any offer by Motorola (be it an initial offer or an offer during a back-and-forth negotiation) must comport with the implied duty of good faith and fair dealing inherent in every contract.” (Dkt 335, 25.)

Microsoft initiated this litigation immediately after Motorola sent its opening offer—letters sent at Microsoft’s request after suing Motorola for patent infringement—to initiate negotiations. Thus, the proper focus on the parties’ compliance with the duties of good faith should be directed to the context and circumstances surrounding Motorola’s sending of its letters in October 2010.

B. The Role of Subjective Intent

As the Court noted earlier, “[w]hile the court will not at this time set forth a legal standard with respect to Motorola’s duty to offer its patents in good faith, it is likely that any analysis of Motorola’s duty will involve, at least in part, an examination of the intent behind Motorola’s offers.” (Dkt 335, 27.) The Court is correct in this regard. The Restatement (Second) of Contracts Section 205, which relates to good faith and fair dealing and which Washington cases rely upon, See, e.g., Fairhaven Land & Livestock Co. v. Chuckanut Trails Water Ass’n, Case No. 60909-2-I, 148 Wn. App. 1046 (Feb. 23, 2009) (unpublished opinion), suggests that there is both an objective and a subjective component to the assessment of good faith and fair dealing. For example, the Restatement (Second) of Contracts, in the section entitled “Good Faith Performance,” provides that, while “[a] complete catalogue of types of bad faith is impossible,... “willful rendering of imperfect performance” is an example of bad faith. Restatement (Second) of Contracts § 205(d) (1981) (emphasis added).

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Several Washington cases likewise suggest that subjective intent should be taken into consideration in assessing good faith. For example, in Matter of Hollingsworth’s Estate, 88 Wn.2d 322, 330, 560 P.2d 348, 352 (1977), the court found that a party to a stipulated settlement of a will acted in bad faith when he refused to accept a tax compromise “not because he, in fact and in good faith, found the tax compromise unacceptable, but because he later decided he had made a bad bargain” (emphasis added). In Cavell v. Hughes, 29 Wn. App. 536, 539-40, 629 P.2d 927, 929 (1981), the court held that the “record shows clearly that defendant did not proceed in good faith after signing the earnest money agreement” because the defendant, inter alia,, “sought the advice of counsel for the specific purpose of frustrating the sale, and testified at trial that he wanted out of the agreement because he felt he had made a bad bargain by fixing a price that was too low” (emphasis added).

Other jurisdictions also take into consideration such subjective factors when determining breach of good faith and fair dealing. See, e.g., Iliadis v. Wal-Mart Stores, Inc., 191 N.J. 88, 109– 110, 922 A.2d 710, 722 (2007) (holding that “good faith” turns not only on “reasonableness” but also on “bad motive or intention”); Continental Bank N.A. v Modansky, 997 F.2d 309, 312-14 (7th Cir. 1993) (applying Illinois law and stating that, “when a creditor acts honestly when activating guaranties and utilizing insecurity clauses, the creditor does not violate the duty of good faith even if such actions are not reasonable”) (emphasis added). ²

C. The Role of Industry Practice or Custom

Industry custom or practice—here, industry practice with respect to licensing terms and negotiations for SEPs—is relevant to the scope and character of parties’ good faith obligations and should be taken into consideration in determining breach of good faith. See, e.g., Curtis v.

4

Northern Life Ins. Co., 147 Wn. App. 1030, *6 (2008). In Curtis, the Washington Court of Appeals cited conflicting evidence as to industry practice in finding a factual dispute as to whether defendant had complied with its implied duty of good faith and fair dealing. Plaintiffs represented employees who had purchased fixed deferred annuities issued by defendant Northern. Under the contract, Northern was required to credit interest to plaintiffs’ account at a minimum rate of three percent, but had the discretion to credit at a higher rate. Id. at *5. Plaintiffs claimed that Northern had relied on arbitrary and unfair methods in setting the interest rate, and had thus breached a duty of good faith. In response, Northern cited industry practice, noting that its “method ... was an acceptable and commonly used interest crediting practice in the industry.” Id. at *6. Plaintiffs countered with testimony from a former insurance commissioner who testified that defendant’s “approach amounted to an unfair trade practice.” Id. The court deemed this competing evidence about industry practice relevant as “these factual disputes relate directly to the question of whether Northern acted in good faith in exercising its discretion to set higher rates.” Id. See also Axthelm & Swett Const., Inc. v. Caudill, No. 35995-9-I, 86 Wn. App. 1002, *4 (May 12, 1997) (rejecting defendant’s argument that construction company had breached its good faith obligation to obtain proper permits in a timely manner based, in part, on trial court’s finding that the construction company’s actions were “in compliance with industry standards” and had been performed “in a more expeditious manner than typical.”); Rhino Linings USA, Inc. v. Harriman, 658 F. Supp. 2d 892, 899-900 (S.D. Ind. 2009) (applying Indiana law, holding there was sufficient evidence to avoid summary judgment on issue of whether plaintiff franchisor negotiated in bad faith with the defendant franchisee in light of the plaintiff franchisor’s past quota offers to defendant franchisee and to other potential franchisees and plaintiff franchisor’s failure to enforce other quotas).

Industry practices have also been applied to the interpretation of the “good faith” provision of the Revised Code of Washington (RCW) § 48.01.030, an insurance statute. See Barstad v. Stewart Title Guar. Co., Inc., 145 Wn.2d 528, 543-44, 39 P.3d 984, 992 (2002) (interpreting “bad faith” in violation of RCW 48.01.030 as requiring an act that is unreasonable, frivolous or

5

unfounded, and finding that industry practice supported defendant’s belief that information would be disclosed elsewhere and defendant title company therefore had well-founded, reasonable basis for not including this information in their preliminary commitments).

Other jurisdictions have likewise looked to industry standards as a guide in defining the parties’ good faith obligations. For example in Lichtenberg Constr. & Dev., Inc. v. Paul W. Wilson, Inc., No. C-000811, 2001 WL 1141236, at *2-3 (Ohio Ct. App. Sept. 28, 2001), the Ohio Court of Appeals looked to industry practices in the construction industry to determine whether a subcontractor had breached a duty of good faith in refusing the adhere to a strict deadline despite a “time-is-of-the-essence” clause in the agreement. Industry experts testified that, unless a contractor specified a fixed deadline in the bid specifications, it was customary for the parties to work out a timeline through good-faith negotiations in which contractors could not impose completion terms unilaterally or refuse entirely to negotiate. Id. Based on this testimony, the Court of Appeals upheld a finding that the contractor’s bad-faith conduct excused the subcontractor from honoring the bid. Id. at *3. A California Court of Appeals similarly permitted an insurer to introduce evidence of “custom and practice in the industry” to support its argument that it had not acted in bad faith in denying payment to the insured. Amerigraphics, Inc. v. Mercury Cas. Co., 182 Cal App. 4th 1538, 1556 (Cal. App. 2010).

D. Reciprocity In Duties of Good Faith

“Washington courts have long held that mutuality of obligation means both parties are bound to perform the contract’s terms,” even if both parties do not “have identical requirements” under the contract. Zuver v. Airtouch Commc’ns, Inc., 153 Wn.2d 293, 317, 103 P.3d 753, 766-67 (2004). Accordingly, the duty of good faith and fair dealing implied in every contract applies not only to the party alleged to have breached the contract, but also the party seeking to enforce it. “Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” Restatement (Second) of Contracts § 205 (1981) (emphasis added). Specifically, “the obligation of good faith and fair dealing extends to the assertion, settlement and

6

litigation of contract claims and defenses.” Id. § 205, cmt. e. As explained in the Restatement, “the obligation is violated by dishonest conduct such as conjuring up a pretended dispute, asserting an interpretation contrary to one’s own understanding, . . . taking advantage of the necessitous circumstances of the other party . . . . [and] willful failure to mitigate damages.” Id.

Similarly, “a legal position asserted in bad faith may constitute a breach of contract even when that legal position, far from being frivolous, is actually supported by the express language of the contract.” Riveredge Assocs. v. Metro. Life Ins. Co., 774 F. Supp. 897, 900 (D.N.J. 1991). See also Monahan v. GMAC Mortgage Corp., 179 Vt. 167, 179, 893 A.2d 298, 310 (2005); ABA Distributors, Inc. v. Adolph Coors Co., 542 F. Supp. 1272, 1285 (W.D. Mo. 1982); McCarthy W. Constructors, Inc. v. Phoenix Resort Corp., 169 Ariz. 520, 526, 821 P.2d 181, 187 (Ct. App. 1991). Accordingly, a party’s filing of a contract lawsuit can breach the implied duty to enforce a contract in good faith even if that lawsuit is non-frivolous.

E. Enforcement by Third Party Beneficiaries

Third-party beneficiaries to contracts are generally held to have the same rights and standing as contracting parties to enforce contracts, See, e.g. City of Alton v. Sharyland Water Supply Corp., 145 S.W.3d 673, 682 (Tx. Ct. App. 2004); Ross Bros. Const. Co. v. Int’l Steel Servs. Inc., 283 F.3d 867, 875 (7th Cir. 2002) (applying Pennsylvania law), including to enforce implied covenants such as the implied duty of good faith and fair dealing. ³

7

III. ARGUMENT

A. Cases Finding Breach of the Duty Good Faith

1. Frustration of Contract Performance

Washington courts have found breach of good faith and fair dealing in cases where a party frustrates the performance of the contract. This may occur, for example (i) when a party Seeks to escape contractual obligations for self-serving reasons, See, e.g., Hollingsworth’s Estate, supra (finding that petitioner’s refusal of tax compromise was not in good faith because he had refused the compromise after he decided he had made a bad bargain); Cavell v. Hughes, supra (finding that defendant did not proceed in good faith because he sought the advice of counsel for the specific purpose of frustrating the sale based on testimony that he wanted out of a bad bargain); (ii) when a party engages in deliberate conduct to prevent the contract’s goals from being achieved, See, e.g., Frank Coluccio Const. Co., Inc. v. King Cnty., 136 Wn. App. 751, 764-66, 150 P.3d 1147, 1154-55 (2007) (finding breach of duty of good faith where the county falsely represented to a contractor that it had procured an all-risk policy for the project and colluded with the insurance company to avoid coverage); Aventa Learning, Inc. v. K12, Inc., 830 F. Supp. 2d 1083, 1101–02 (W.D. Wash. 2011) (applying Washington law and holding there existed a triable issue of fact as to whether an acquiring firm breached its duty of good faith by improperly calculating the value of plaintiff company’s earnings, thereby reducing the value of future payouts to plaintiff’s executives); or (iii) when a party fails to diligently perform contractual obligations, See Edmonson v. Popchoi, 155 Wn. App. 376, 388-90, 228 P.3d 780, 787 (2010) (applying Washington law to good faith principle to find that a grantor had breached a statutory covenant to defend grantee’s title by refusing to adequately investigate the merits of an adverse possession claim against grantee’s property).

2. Failure to Cooperate

Washington courts also have found breach of good faith and fair dealing in cases where a party to a contract failed to cooperate with the other party in performance of the contract. See,

8

e.g., G Four Bellingham, LLC v. Oishii Teriyaki, Inc., No. 58305-1-I, 2008 WL 176389, at *4 (Jan. 22, 2008) (affirming trial court’s conclusion that a property owner breached the implied duty of good faith in a rental agreement by refusing to accept tenant’s proposed solution for compliance with city permit requirements); Lonsdale v. Chesterfield, 99 Wn.2d 353, 662 P.2d 385 (1983) (holding that the assignor’s failure to install a water system for use of lots in development plot, as promised in each of the contracts for the purchasers, was a breach of the implied covenant of good faith); Miller v. Othello Packers, Inc., 67 Wn.2d 842, 410 P.2d 33 (1966) (holding breach of duty of good faith where processor’s unreliable sampling and grading processes destroyed basis of grower’s compensation under the contract).

3. Misleading a Counterparty

Washington courts have further found breach of duty in cases where a party fails to perform according to a contract and misled the other party into believing the first party performed according to the contract. See, e.g., Cargolux Airlines Int’l, S.A. v. Sea-Tac Air Cargo L.P. ex rel. Transiplex (Seattle) Inc., No. 65498–5–I, 2012 WL 2688782, at *8 (July 9, 2012) (finding that plaintiff’s evidence was sufficient to raise an issue of fact for the jury as to whether defendant had acted in bad faith where plaintiff had alleged that landlord attempted to conceal unrelated litigation as “building operating costs” chargeable to the tenant); Bushbeck v. Chicago Title Ins. Co., No. C08–0755JLR, 2010 WL 2262340, at *6 (W.D. Wash. June 1, 2010) (applying Washington law, finding that plaintiff home buyers had raised a triable issue of fact as to whether defendant title insurance company had acted in bad faith by failing to refund unused fees and thus misleading plaintiffs into believing that the title company had performed a reconveyance on a lender’s behalf).

4. Failure to Disclose

Washington courts have also recognized a good faith obligation to disclose “relevant facts while negotiating a contract” that are relevant to enjoyment of the benefits of the contract. Liebergesell v. Evans, 93 Wn.2d 881, 891–93, 613 P.2d 1170, 1176 (1980). Applying

Liebergesell, a Washington Court of Appeals found in Race v. Fleetwood Retail Corp. of Wash., No. 20722-6-III, 2003 WL 1901274, at *1 (2003) (unpublished opinion), that a mobile home retailer had breached the duty of good faith under the Uniform Commercial Code, RCW §62A.1- 203, by failing to inform plaintiffs that the site they had purchased was not suitable for a mobile home and that their construction permits would thus likely be denied. Id. at *10.

5. Agreements to Negotiate

At least one Washington court has imposed liability for breach of the duty of good faith in a contract to negotiate. See, e.g., Columbia Park Golf Course, Inc. v. City of Kennewick, 160 Wn. App. 66, 78, 248 P.3d 1067, 1074 (2011) (upholding a jury finding that the City had breached the implied covenant of good faith in the parties’ development option agreement (DOA)—which the trial court had characterized as a “contract to negotiate”—by, inter alia,, entertaining competing offers in violation of the DOA’s exclusivity provision). ⁴

Other jurisdictions have also imposed liability for breach of an agreement to negotiate in good faith. See, e.g., Foster Enters., Inc. v. Germania Fed. Sav. & Loan Ass’n, 97 Ill. App. 3d 22, 28-32, 421 N.E.2d 1375, 1380-82 (1981) (upholding jury finding that a lending institution’s refusal to accept a low market value appraisal of apartment complex was in bad faith where the defendant had impliedly promised to accept a reasonable market value appraisal); Flight Sys., Inc. v. Elec. Data Sys. Corp., 112 F.3d 124, 130-31 (3d Cir. 1997) (applying Pennsylvania law, allowing allegation that defendant acted in bad faith by concealing from plaintiff that it did not intend to execute a lease if it could not obtain additional business in the Harrisburg area); Gillenardo v. Connor Broad. Delaware Co., C.A. 98C-06-015 WLW, 2002 WL 991110 (Del. Super. Ct. Apr. 30, 2002) (finding sufficient evidence that a reasonable jury could find that a party

10

to a negotiation to sell a radio station pursuant to a letter of intent made no attempt in good faith to finalize the sale agreement after the defendant stopped negotiating out of anger).

B. Cases Rejecting a Claimed Breach of the Duty of Good Faith

In contrast to the cases finding breach of good faith, numerous decisions have rejected attempted breach claims based on any single offer alleged to be too high or too low, including any initial offer standing alone. Moreover, several tribunals have rejected arguments that a RAND declaration forecloses an effort to obtain injunctive relief to enforce a SEP.

1. Claim of Breach of Good Faith Based on a High/Low Offer

No case of which Motorola is aware in Washington or any other jurisdiction finds a breach of the duty of good faith based on an initial offer that one party deems too high or too low. To the contrary, various cases find that the size of an offer alone is not dispositive of the reasonableness of the offer or of whether the offeror has breached a duty of good faith.

For example, in Alliance Atlantis Releasing Ltd. v. Bob Yari Prods., No. CV 08-5526-GW (SSX), 2010 WL 1525687 (C.D. Cal. Apr. 12, 2010), the district court held on summary judgment, applying California law, that a proposal to reduce a $1.3 million minimum guarantee to $300,000 did not constitute a breach of good faith even though defendants characterized the amount of that reduction as “patently unreasonable.” Id. at *11. The court reasoned that even “a low offer still qualifies as a good faith offer,” id. at *12, noting that, in a commercial transaction, “both sides presumably try to get the best deal,” Id. The court further noted that the obligation to negotiate in good faith “has been generally described as preventing one party from renouncing the deal, abandoning negotiations, or insisting on conditions that do not conform to the agreement,” not on any single offer in the course of negotiations. Id.

Similarly, in Warner Theatre Associates Ltd. P’ship v. Metro. Life Ins. Co., 1997 WL 685334, *6 (S.D.N.Y. Nov. 4, 1997) (Sotomayor, D.J.), aff’d, 149 F.3d 134 (2d Cir. 1998), the district court rejected a claim that a party had breached its duty of good faith and fair dealing under New York law by making an offer “insisting upon terms it knew would be deal-breakers.”

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Then-Judge Sotomayor noted that “[n]othing in the duty of good faith requires that parties to a negotiation propose only such terms as the other party is happy with,” and that any such rule “would turn the normal negotiating process on its head.” Id. The court contrasted the claim it rejected with hypothetical cases in which it acknowledged bad faith might have been plausibly alleged: e.g., if the defendant had “sat back for the thirty-day period and refused all of [the counterparty’s] terms while offering none of its own” or had “propos[ed] terms that were illegal or literally impossible” Id. See also BBS Technologies, Inc. v. Remington Arms Co., Inc., No. Civ. A. 05-98-DLB, 2005 WL 3132307, at *4 (E.D. Ky. Nov. 22, 2005) (rejecting claim that “there was no good faith effort to resolve the parties’ disputes through negotiation,” reasoning that “back and forth, low ball high ball negotiations ... are nothing unusual” and emphasizing that “just because one side views another side’s settlement offer as unreasonable does not mean that the offer was made in bad faith”).

In cases that do entertain breach of good faith claims, moreover, courts insist on a course of conduct extending beyond any single offer. See, e.g., L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419 (2d Cir. 2011) (applying New York law, finding good faith breach claim plausible based on an offer alleged to be economically unfair, but only in the context of allegations of delay tactics over the course of lengthy negotiations); Realtek Semiconductor Corp. v. LSI Corp., No. C-12- 03451 RMW, 2012 WL 4845628, at *4 (N.D. Cal. Oct. 12, 2012) (applying this Court’s reasoning in the instant case in denying a defendant’s motion to dismiss a claim alleging breach of good faith in a RAND contract, but emphasizing that “the royalty rate as compared to selling price” was merely “one relevant factor” and that “reasonableness turns on “the entirety of the terms and circumstances”) (emphasis added).

In other analogous contexts involving a duty to make offers in good faith or to negotiate in good faith, courts have similarly declined to find a breach of good faith based on initial offers, even where a counterparty deemed them unreasonably low (or high).

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Insurance settlement offers. Washington imposes a duty of good faith on insurers in making settlement offers to their insureds, but Washington courts have found that “[a] mere number comparison is inadequate to show bad faith where the lower offer was reasonable in light of evidence available at the time the offer was made.” Lloyd v. Allstate Ins. Co., 167 Wn. App. 490, 497, 275 P.3d 323, 326 (2012) (rejecting bad faith claim based on insurer’s original low offers even though they forced plaintiff to hire an attorney and take on additional expense); See also Keller v. Allstate Ins. Co., 81 Wn. App. 624, 629-35, 915 P.2d 1140, 1143-46 (1996) (holding that a bare dollar disparity between an $8,000 offer and a $75,200 verdict was not enough to show bad faith under Washington unfair trade practices statute, and noting “adoption of a strict number comparison approach would make an insurer strictly liable for damages any time its pretrial evaluation of a claim turned out to be substantially less than the jury’s verdict,” id. at 633-34); Am. Mfrs. Mut. Ins. Co. v. Osborn, 104 Wn. App. 686, 701-2, 17 P.3d 1229 (2001) (holding that disparity between settlement offers by an insurer and an ultimate arbitration award standing alone cannot establish bad faith, which turns on all circumstances surrounding the insurer’s conduct).

Labor negotiations. The National Labor Relations Act, 29 U.S.C.A. § 158(d), imposes on workers and employers the duty to “confer in good faith with respect to wages, hours, and other terms and conditions of employment.” The NLRB has defined bad-faith bargaining as, inter alia,, imposing “unreasonable bargaining demands that are consistently and predictably unpalatable to the other party.” Universal Fuel, Inc. & Int’l Assoc. of Machinists & Aerospace Workers, AFL- CIO, Dist. Lodge 4, 358 N.L.R.B. No. 150, *29 (Sept. 27, 2012) (emphasis added). As the Board emphasized in KLB Industries, Inc., 357 N.L.R.B. No. 8, *38 (July 26, 2011), even a “harsh” initial offer does not necessarily evince bad faith:

Most all bargainers—collective bargainers and consumers bargaining for a new car—start low, and allow themselves to be bargained back to something they were originally hoping for.... Such tactics are not condemnable in their own right unless they appear to veil a closed mind, an unwillingness to compromise ... and adjust proposals in an effort to reach agreement.

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Because the employers in KLB had not engaged in delaying tactics or otherwise refused to hear the union’s demands, the severity of their initial proposal was held not to violate their good-faith bargaining requirements. And even where the NLRB has cited the severity of initial demands in the course of finding bad faith, initial demands alone have not proved dispositive. See, e.g., In re Hardesty Co., Inc. 336 N.L.R.B. No. 18, *5-6 (Sep. 28, 2001) (finding bad faith where employer’s negotiation strategy “was to put forward a harsh bargaining proposal, stand by the proposal, then as the negotiations dragged on, concede no more than the status quo”); Universal Fuel, 358 N.L.R.B. No. 150, *29 (finding bad faith in an employer’s regressive offer only where it was introduced after months of bargaining and could be characterized as a bad-faith attempt to bring long-running negotiations to a halt).

Cable Act. Under Section 325(b)(3)(C) of the Cable Television Consumer Protection and Competition Act of 1992, Pub. L. 102-385, 106 Stat. 1460, television broadcast stations and programming distributors are required to “negotiate in good faith” the terms and conditions of retransmission agreements. In its implementing regulations, the Federal Communications Commission defines a number of bad-faith practices that would violate the act. 37 C.F.R. § 75.65(b). The FCC defines bad faith as, inter alia,, “[r]efusal by a Negotiating Entity to put forth more than a single, unilateral proposal.” Id. at 75.65(b)(iv) (emphasis added). This definition suggests in another context employing a good-faith negotiation duty that bad faith requires something more than merely putting forth an initial proposal with unfavorable terms.

2. Claim of Breach of Good Faith for Seeking Injunctive Relief

No tribunal has held that essential patent holders are contractually barred from seeking injunctions by virtue of their RAND commitments to standards organizations like ITU and IEEE. To the contrary, recent cases have held to the contrary. For example, in Apple, Inc. v. Motorola Mobility, Inc., No. 11-cv-178-BBC, 2012 WL 5416941, at *12-16 (W.D. Wis. Oct. 29, 2012), Apple sued Motorola inter alia, on a third-party beneficiary theory similar to Microsoft’s here, alleging that Motorola had breached its RAND commitments to IEEE and ETSI by seeking an

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injunction against Apple for infringing Motorola’s SEPs. Judge Crabb held, however, that “Motorola did not breach its contract simply by requesting an injunction and exclusionary order in its patent infringement actions.” Id. at *15. Noting that, because patent holders generally have the right to See k injunctive relief in district courts under 35 U.S.C. § 283 and in the ITC under 19 U.S.C. § 1337(d), “any contract purportedly depriving a patent owner of that right should clearly do so,” Judge Crabb concluded that nowhere in Motorola’s agreements with those standard-setting organizations was there any provision plainly prohibiting seeking injunctions based on SEPs. Absent any plain contract term prohibiting injunctive enforcement of SEPs, it follows a fortiori that the duty of good faith, which must derive from a contract term, cannot bar such enforcement.

Similarly, in Apple v. Samsung, the ITC issued an exclusion order against certain Apple iPhones based on Apple’s infringement of a Samsung SEP—applying the administrative equivalent of injunctive relief notwithstanding Samsung’s RAND commitments to SSOs. See Ian Sherr and Jessica Lessin, Ruling Blocks iPhone Sales, The Wall Street Journal Online, (June 10, 2013), http://online.wsj.com/article/SB1000142412788732346980457852572388 5896616. html. ⁵

IV . CONCLUSION

The duty of good faith is a reciprocal one that may be breached by either performance or enforcement. Any finding of breach of the implied duty of good faith and fair dealing in the context of Motorola’s RAND contract with the ITU and IEEE would require consideration of a totality of factors and circumstances, including both Motorola’s subjective intent and industry practice with respect to RAND licenses, and extending beyond a mere opening offer containing a rate that a potential licensee like Microsoft deems unreasonable. A RAND contract contemplates the give-and-take of negotiations, and considerable case law in other contract contexts establishes that the amount of any single offer alone, especially an initial offer designed to get negotiations started, cannot be dispositive of a breach of good faith and fair dealing.

DATED this 1st day of July, 2013.

Respectfully submitted,

SUMMIT LAW GROUP PLLC

By /s/ Ralph H. Palumbo
By /s/ Philip S. McCune
Ralph H. Palumbo, WSBA #04751
Philip S. McCune, WSBA #21081
[emails]

By /s/ Thomas V. Miller
Thomas V. Miller
MOTOROLA MOBILITY LLC
[address, phone]

And by

Kathleen M. Sullivan (pro hac vice)
Quinn Emanuel Urquhart & Sullivan, LLP
[address, phone]
[email]

Brian C. Cannon (pro hac vice)
Andrea Pallios Roberts (pro hac vice)
Cheryl A. Berry (pro hac vice)
Quinn Emanuel Urquhart & Sullivan, LLP
[address, phone]
[emails]

William C. Price (pro hac vice)
Quinn Emanuel Urquhart & Sullivan, LLP
[address, phone]
[email]

Jesse J. Jenner (pro hac vice )
Steven Pepe (pro hac vice )
Kevin J. Post (pro hac vice)
Ropes & Gray LLP
[address, phone]
[emails]

James R. Batchelder (pro hac vice)
Norman H. Beamer (pro hac vice )
Ropes & Gray LLP
[address, phone]
[emails]

Paul M. Schoenhard (pro hac vice
Ropes & Gray LLP
[address, phone]
[email]

Attorneys for Motorola Solutions, Inc.,
Motorola Mobility LLC and General
Instrument Corp.

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[For CERTIFICATE OF SERVICE, See PDF.]

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________
¹ See also Keystone Land & Dev. Co. v. Xerox Corp., 152 Wn.2d 171, 177, 94 P.3d 945, 949 (2004); Donald B. Murphy Contractors, Inc. v. King Cnty, 112 Wn. App. 192, 197, 49 P.3d 912, 915 (2002) (“If no [specific] contractual duty exists, there is nothing that must be performed in good faith.”); Barrett v. Weyerhaeuser Co. Severance Pay Plan, 40 Wn. App. 630, 635 n.6, 700 P.2d 338, 342 (1985).

² The Uniform Commercial Code, as codified in Washington, similarly defines “good faith” to require both “honesty in fact and the observance of commercial standards of fair dealing.” RCW § 62A.1-201(b)(20) (emphasis added). Courts interpreting this requirement have interpreted it to encompass both subjective and objective factors. See, e.g. In re Nieves, 648 F.3d 232, 239 (4th Cir. 2011) (noting that, under the UCC as interpreted in various states, good faith “contains both subjective ... and objective ... components. Under the subjective prong, a court looks to ‘the honesty’ and ‘state of mind’ of the party and ... [u]nder the objective prong, a party acts without good faith by failing to abide by routine business practices.”).

³ See, e.g., Cargill Global Trading v. Applied Dev. Co, 706 F. Supp. 2d 563, 579 (D.N.J. 2010); Casey Elec., LLC v. Constr. Mgmt. Servs., Inc., No. 3:09–cv–00469 (PCD), 2009 WL 3853819, at *2 (D. Conn. Nov. 17, 2009) (applying Connecticut law); Baker v. Goldman Sachs & Co., 656 F. Supp. 2d 226, 235 (D. Mass. 2009) (applying New York law); Spinks v. Equity Residential Briarwood Apartments, 171 Cal. App. 4th 1004, 1034, 90 Cal. Rptr. 3d 453, 477 (Cal. Ct. App. 2009) (applying California law); Gardner & White Consulting Servs., Inc. v. Ray, 474 S.E.2d 663, 665 (Ga. Ct. App. 1996); Helicopter Transport Servs., Inc. v. Erickson Air-Crane Inc., No. CV 06-3077-PA, 2008 WL 151833, at *4 n.4 (D. Or. Jan. 14, 2008) (applying Connecticut law). The insurance context provides a notable exception: there, Washington courts have rejected attempted assertions of bad-faith claims against insurers by third parties who are injured by insured parties. See, e.g., Gaskill v. Travelers Ins. Co., 2012 WL 1327819, *5 (W.D. Wash. April 17, 2012).

⁴ Although the Washington Supreme Court has not recognized agreements to negotiate as enforceable contracts, it has suggested in passing that enforcement of such agreements might under some circumstances be consistent with Washington contract law, See, e.g., Keystone Land & Dev. Co. v. Xerox Corp., 152 Wn.2d 171, 177, 94 P.3d 945, 949 (2004) (declining to resolve the question but noting that existing case law “supports a conclusion that, under Washington contract law, a specific course of conduct agreed upon for future negotiations is enforceable when it is contained in an existing substantive contract”).

⁵ The full public version of the ITC decision enforcing an exclusion order on an SEP is not yet available.