Sun_Microsystems_Opp_and_Counter_Mot_in_Response_to_Microsoft_Mot_For_Partial_Summ_Jud_Re_Damage_Limitations_2_ 12_99.

18. Sun Microsystems, Inc.'s Opposition and Counter-Motion in Response to
Microsoft's Motion For Partial Summary Judgment Re: Damage
Limitations
Legal document filed with the court on February 12th, 1999.

Sun Microsystems, Inc.'s Site
http://java.sun.com/lawsuit/021299damages.html

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

On March 12, 1999, Sun Microsystems, Inc. ("Sun"), pursuant to Local Rule 7-3(c), will move for summary adjudication against Microsoft Corporation ("Microsoft"). Pursuant to Rule 56 of the Federal Rules of Civil Procedure, Sun will ask this Court to enter an order adjudicating as a matter of law the following:

Read in context, section 10.1 means exactly what the parties intended and the law permits: a limitation of liability for breaches of contract claims and claims based on negligent tortious conduct. No more, no less. This interpretation is supported by reference to other provisions in the TLDA where the parties demonstrated their ability to agree about willful and intentional breaches and aggregation of liability. Such language is noticeably absent from section 10.

Microsoft asks this Court to find that the parties agreed in section 10 of the TLDA to limit Microsoft's liability to Sun for Microsoft's intentional and willful tortious conduct, for Microsoft's violation of California's Unfair Business Practices Act, and for Microsoft's violation of federal copyright and trademark laws. Although such an interpretation contravenes public policy and rules of construction, Microsoft argues that the Court should so find because terms like "relating to," "arising out of," and "concerning" the TLDA provide Microsoft a broad shield behind which to limit its liability for any deliberate and wrongful acts, so long as they involve the JAVA™ Technology.

Microsoft's motion raises many questions that Microsoft makes no attempt to answer. For example, Microsoft asks this Court to limit all damages to "license fees paid" for any and all claims. Yet Microsoft never tells the Court, or Sun, whether it means by this phrase that Microsoft is liable only for the fees that it has already paid to Sun and no more, or whether Microsoft intends this phrase to limit liability to the fees paid during a period of breach, during the entire course of the relationship until adjudication, or all fees payable under the TLDA. Microsoft baldly asserts that the limitation of license fees applies to all claims in the aggregate, but makes no attempt to support this proposition legally or textually, and indeed can not, since any textual support to be found favors the opposite conclusion.

Microsoft's argument about the availability of treble damages under 15 U.S.C. § 1117(a) is equally specious. Microsoft attempts to shoehorn these damages into the appellation, "special damages," without any authority or logical argument to support this proposition and in disregard of established judicial construction of that term.

Taken in its entirety, Microsoft's motion merely rattles the saber of the language of section 10.1 without the contextual and legal analysis required to support its positions. The Court should deny Microsoft's motion and instead grant Sun's Counter-Motion for Summary Adjudication.

1. The Negotiation And Language Of Section 10.1 Of The TLDA

Section 10.1 of the TLDA provides:

10.1 Limitation of Liability. Except for express undertakings to indemnify under this Agreement:

a. Each party's liability to the other for claims relating to this Agreement, whether for breach or in tort, shall be limited to the license fees paid by Licensee for the Technology; and

b. IN NO EVENT WILL EITHER PARTY BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT (INCLUDING LOSS OF PROFITS, USE, DATA, OR OTHER ECONOMIC ADVANTAGE), NO MATTER WHAT THEORY OF LIABILITY, EVEN IF THE EXCLUSIVE REMEDIES PROVIDED FOR IN THIS AGREEMENT FAIL OF THEIR ESSENTIAL PURPOSE AND EVEN IF EITHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OR PROBABILITY OF SUCH DAMAGES. FURTHER, LIABILITY FOR SUCH DAMAGE SHALL BE EXCLUDED, EVEN IF THE EXCLUSIVE REMEDIES PROVIDED FOR IN THIS AGREEMENT FAIL OF THEIR ESSENTIAL PURPOSE. The provisions of this Section 10.0 allocate the risks under this Agreement between SUN and Licensee and the parties have relied upon the limitations set forth herein in determining whether to enter into this Agreement.

Ex. 1.

The limitation of liability provision that appears at section 10.1 of the executed TLDA was originally proposed by Sun in its November 1995 draft of the TLDA. 2/12/99 Patch Decl. Ex. E at section 9.1 [11/95 Draft]. Microsoft removed what is currently section 10.1(a) from the next draft of the TLDA. 2/12/99 Patch Decl., ¶ 12 and Ex. F at § 10.1 [2/21/96 draft]. Given their divergent positions regarding section 10.1(a), the parties discussed this provision during negotiations in late February and early March. 2/12/99 Patch Decl., ¶¶ 13. Sun explained to Microsoft that the purpose of the provision was to limit Sun's liability arising from any defects in the code Sun delivered to its licensees. Sun explained that section 10.1(a) would limit Sun's liability to license fees for breaches of contract or torts alleging negligence in the preparation of Sun's computer code. 2/12/99 Patch Decl., ¶¶ 13.

Microsoft's negotiators told Sun that it too wished to limit its liability to license fees and agreed to the reinstatement of section 10.1(a). 2/12/99 Patch Decl., ¶¶ 14, 15. However, Microsoft never expressed to Sun during the course of negotiations that it intended Section 10.1(a) to apply to any claims other than those for breach of contract or torts based on negligence. Patch Decl., ¶ 16.

2. Sun's Claims

In its Second Amended Complaint, Sun asserted eleven claims for relief. Five of these claims are based on breach of contract theories. The remaining six claims for relief comprise torts requiring intent or wrongdoing and violations of statute.

In its Prayer for Relief, Sun asked for treble damages for its First and Second Claims, both of which state causes of action for violations of federal trademark law. Sun's request for treble damages is based on violation of 15 U.S.C. section 1125, not counterfeiting, as Microsoft erroneously asserts. Motion at 10.

Sun also seeks an accounting of Microsoft's profits resulting from Microsoft's copyright infringement (Third Claim).

Sun does not expressly seek compensatory damages for its Unfair Competition claim (Eleventh Claim). However, Sun does pray "On all Claims, such additional and further relief as the Court deems just and proper."

Argument

1. Section 10.1 Does Not Limit Damages For Willful Misconduct Or Violations Of The Law.
1. The Parties Agreed That "Breach or Tort" In Section 10.1(a) Excluded Willful Torts Or Violations Of Statute.
1. The Negotiation History Shows That The Parties Intended Section 10.1(a) To Apply Only To Breaches Of Contract And Negligent Torts.

Under California law, "[a] contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful." Cal.Civ.Code § 1636. Whether a contract provision is ambiguous is a question of law. Maffei v. Northern Ins. Co. of New York, 12 F.3d 892, 898 (9^th Cir. 1993). If it is, summary judgment is ordinarily improper because differing views of the intent of the parties will raise genuine issues of material fact. Id. (citing United States v. Sacramento Mun. Util. Dist., 652 F.2d 1341, 1344 (9^th Cir. 1981)). Under California law, a party may present extrinsic evidence to support an interpretation to which a contract is reasonably susceptible of another interpretation. Id. (citing Brobeck, Phleger & Harrison v. Telex Corp., 602 F.2d 866, 873 (9^th Cir. 1979).

Section 10.1(a) limits the liability of the parties for "claims relating to this Agreement, whether for breach or in tort." Ex. 1. The contractual text provides no further explanation for the phrase "relating to" or the term "tort." However, when viewed in light of the negotiations between the parties, section 10.1(a) clearly applies only to claims for breach of contract and torts based on negligence.

Microsoft initially opposed inclusion of section 10.1(a). 2/12/99 Patch Decl., ¶ 12. Sun explained to Microsoft that Sun wanted to limit its liability for any breach of contract claim based on imperfections in the code Sun delivered to its licensees. 2/12/99 Patch Decl., ¶ 13. Sun also explained that it wanted to avoid additional liability for tort claims based on negligence that might be asserted based on the same imperfections in the delivered code. 2/12/99 Patch Decl., ¶ 13 Microsoft indicated that it, too, wished to limit its liability. 2/12/99 Patch Decl., ¶ 14. However, Microsoft never said that it intended the limitation of liability in section 10.1(a) to extend beyond the contract claims and negligent torts Sun had indicated it wished to limit. 2/12/99 Patch Decl., ¶ 16.

Sun's interpretation is bolstered by the language of sections 11.2(b) and 11.2(d), which expressly distinguish between "breaches" and "willful[] and intentional[] breaches." Ex. 1. The parties knew how to make explicit provision for willful and intentional breaches. Had the parties truly intended section 10.1(a) to apply to willful and intentional acts, they presumably would have included express language to that effect, as they did in section 11.2(b).

2. Microsoft Has Offered No Evidence In Support Of Its Argument That The Parties Intended Section 10.1(a) To Limit Damages For "Every Type Of Claim That Could Be Brought."

Microsoft asks this Court to summarily adjudicate that the parties intended Section 10.1(a) to limit damages on any claim that might be brought by Sun. The sole support for Microsoft's argument regarding the parties' intention is set forth below:

Finally, by expressly noting that the limitations of remedies in the TLDA were to apply to "claims relating to this Agreement, whether in breach or in tort", the parties confirmed their intention to limit remedies with respect to every type of claim that could be brought. Barrett v. Superior Court, 272 Cal. Rptr. 304, 310, 222 Cal. App. 3d 1176 (1990) ["A tort is any wrong, not consisting in mere breach of contract, for which the law undertakes to give to the injured party some appropriate remedy against the wrongdoer." (internal quotations omitted)].

Microsoft Memo at 7:23-8:3.

Thus, the entirety of Microsoft's argument is that use of the word "tort" in section 10.1(a), when combined with the holding in Barrett, leads to the conclusion that the parties must have intended to include within section 10.1(a) "every type of claim that could be brought."

Microsoft misses the point. The issue is not whether the law views every action other than breach as a tort, but whether the parties intended that by using the word "tort," they meant to include every action, including statutory actions, that might be brought under the agreement. Cal. Civ. Code § 1636 ("A contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful.") And the only evidence before the Court of the parties' intentions with respect to section 10.1(a) is in the Declaration of Lee Patch, who testifies that the use of the term "tort" in section 10.1(a) was intended to include only common law, negligent torts. 2/12/99 Patch Decl. at ¶ 13. See also Cal. Civ. Code § 1644 ("The words of a contract are to be understood in their ordinary and popular sense, rather than according to their strict legal meaning; unless used by the parties in a technical sense, or unless a special meaning is given to them by usage, in which case the latter must be followed."). Microsoft's unsupported argument cannot provide the basis for summary adjudication of this issue in its favor.

Moreover, a review of cases wherein multiple causes of action are discussed -- including those sounding in tort as well as those authorized by statute -- indicates that courts also generally differentiate between the two types of actions. See, e.g., Saridakis v. United Airlines, No. 97-17354, 1999 WL 44446 at *4 (9^th Cir. 1999) ("In addition to statutory claims, Saridakis's complaint brings [] state tort claims. . ."); Damian v. Tamondong, 65 Cal. App. 4th 1115, 1128 (1998) ("the fees were incurred in defending against noncontractual (e.g., tort and statutory) claims"); Bailey v. State Farm Mut. Auto. Ins. Co., No. 19992-1-II 1998 WL 386273 (Wash. App. Div. 2 1998) ("the trial court erred in: (1) dismissing her various statutory and tort claims. . ."); Winkler v. National Union Fire Ins. Co., 930 F.2d 1364, 1367 (9^th Cir. 1991) ("appellants' tort and statutory causes of action were properly denied as well"); Waters v. United States, 812 F. Supp. 166, 167-68 (N.D. Cal. 1993) ("Plaintiff's first amended complaint . . . alleges nine causes of action. Seven of Plaintiff's causes of action allege common law tort claims. Two causes of action allege statutory claims. . ."); Gibraltar Fin. Corp. v. Federal Home Loan Bank Bd., No. CV 89 34891990 WL 394298, at *6 (C.D. Cal. 1990) ("Unlike the statutory claims in Woodbridge and Morrison, this is a tort claim. . . ."); Horizen Unlimited, Inc. v. Silva, No. Civ-A. 97-7430 1998 WL 88391, at *7 (E.D. Pa. 1998) ("The [statutory] claim is also distinct from plaintiffs' common law tort actions. . . .").

There is simply no evidence before the Court on which it could conclude that the parties intended to include willful torts or violations of statute within the limitations set forth in section 10.1(a).

2. Microsoft's Interpretation Of Section 10 As A Purchase Price Cap On Damages For Intentional Torts And Violations Of Statute Is Untenable Because It Would Nullify Section 10 As Void Against The Public Policy Of California.

Microsoft asks this Court to interpret section 10 as limiting Microsoft's damages to actual damages not exceeding the license fees paid by Microsoft, regardless of the nature of Sun's claim, so long as that claim "arises out of," "relates to," or "concerns" the TLDA. Microsoft Memo at 2:4-8; 13:7-13. Microsoft contends that all of Sun's claims -- including unfair competition, intentional interference with prospective economic advantage, and inducing breach of contract -- "arise out of" the TLDA. Microsoft Memo at 8:4-9:2. Microsoft argues that commercial interests are free to contract to limit their liability. Microsoft Memo at 6:5-17. Microsoft's argument is too much by half. Microsoft's interpretation of "arising out of," "relating to" and "concerning" the TLDA would render Section 10 void as against the public policy articulated in Cal. Civ. Code § 1668.

All contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.

Cal. Civ. Code § 1668. Under section 1668, private parties are free to limit or waive damages for negligent acts, but not for the consequences of fraud, willful injury, or the negligent or willful violation of a law. Gardner v. Downtown Porsche Audi, 180 Cal. App. 3d 713, 716 (1986) (Section 1668 "made it clear that a party could not contract away liability for his fraudulent or intentional acts or for his negligent violations of statutory law."); Werner v. Knoll, 89 Cal. App. 2d 474, 475-76 (1948).

Section 1668 was applied in Klein v. Asgrow Seed Co., 246 Cal. App. 2d 87 (1966), to hold as void against public policy a liability limitation limiting damages to the price paid for seed where the seller tried to use the limiting language to shield liability for his knowing misrepresentations and violations of federal statute. In Klein, defendant Asgrow Seed Company sold a strain of tomato seeds called VF-36, and represented that they were "true type." In fact, Asgrow was aware that the seed contained some "rogues" (other tomato strains), but did not know what percentage of rogues were contained. Id. at 90-91. Asgrow tried to limit its liability with the following limitation language on its cans of seed and on its invoice: "Asgrow limits its liability on the foregoing warranty and its liability by reason of any other cause whatsoever to the amount of the purchase price of such seeds, bulbs, and plants." Id. at 92.

When plaintiff's harvest was compromised by the rogue strains, plaintiff sued Asgrow for the damages arising from the reduced harvest. Asgrow defended that plaintiff was limited to the purchase price paid by way of the contract and by way of customary dealing. Id. at 93-94.

The court held that there was no customary dealing to limit liability for Asgrow's knowing and deliberate acts. Id. at 99-100. The court further held that, to the extent Asgrow asserted its contractual limitation as a defense to plaintiff's damages claim, an agreement to limit damages for defendant's misconduct would be void as a violation of the policy of section 1668 for two reasons. First, section 1668 prohibited contracts exculpating liability for fraud, and Asgrow had misrepresented the nature of its seed. Second, section 1668 prohibited contracts exculpating liability for violations of statute, and Asgrow's mislabeling and false or misleading advertising violated section 914 of the Cal. Agricultural Code. Accordingly, Asgrow's limitation of liability to plaintiff's purchase price was void against public policy. Id. at 100-01. Accord Vision Air Flight Serv., Inc. v. M/V Nat'l Pride, 155 F.3d 1165, 1175 (9^th Cir. 1998) (using the same reasoning to hold that the contractual damages cap authorized by COGSA could not limit a carrier's liability for intentional or willful acts).

If the Court were to adopt Microsoft's interpretation of section 10 of the TLDA, it too would be void under Cal. Civ. Code § 1668. Microsoft proposes that section 10 relieves Microsoft of all damages above the "purchase price" for intentional torts such as intentional interference with prospective economic advantage and inducing breach of contract, for violations of California's Unfair Business Practices Act (which implicates Microsoft's false and misleading advertising, among other conduct), and for violations of federal copyright and trademark statutes. Limitations on liability for these claims would violate section 1668 because each involves either an intentional tort, fraud, or a violation of statutory law.

Microsoft will likely rely on Farnham v. Superior Court, 60 Cal. App. 4th 69 (1997), to argue that section 1668 does not prevent commercial entities from limiting their liability. Such reliance would be misguided, however, because in spite of its seemingly broad language, Farnham is not about limitations on the amount of damages available, but rather about limitations as to who will pay for the damages. In Farnham, an executive signed an employment agreement waiving his right to sue directly the directors and officers of the corporation for claims arising from the agreement, but instead leaving the corporation itself liable and accountable. Id. at 71-72. The court based its decision on the very fact that plaintiff could seek unlimited redress from the corporation: "we hold that [plaintiff's] retention of his rights against his corporate employer validates his waiver of his right to sue the corporation's directors and officers for defamation, and that the waiver is not per se unenforceable." Id. at 71. "[A] contractual limitation on the liability of directors for defamation arising out of their roles as directors is [] valid where, as here, the injured party retains his right to seek redress from the corporation." Id. at 77 (emphasis added).

The court further expressly limited its holding to the narrow facts before it: "We are concerned in this case with a claim of defamation, and express no view about the validity of the ‘sole remedy' provision if Farnham's claim alleged fraud or some other intentional tort." Id. at 77 n.7.

Microsoft may also try to rely on dicta in Farnham that "limitations on liability," as compared with exemptions from liability, do not fall within section 1668's ambit. This is unpersuasive for two reasons. First, Farnham did not involve a damages cap. Indeed, the plaintiff had been awarded $1.5 million in an arbitration against the corporate defendant. Rather, Farnham dealt with a waiver that was more akin to an indemnification contract, whereby one party pays for the wrongdoing of another party as against a third party. Such indemnification contracts -- as contrasted with exculpatory contracts -- do not offend section 1668. Smoketree-Lake Murray, Ltd. v. Mills Concrete Constr. Co., 234 Cal. App. 3d 1724, 1735 (1991); 1 Witkin, Summary of California Law § 633 (9^th ed. 1987) (distinguishing treatment under 1668 of exemptions and limitations on liability from indemnity for liability).

Second, the Farnham court appeared to misapprehend the facts of Klein, and therefore proceeded from the incorrect belief that there had been no cases addressing limitations on liability for intentional wrongs or violations of the law. Farnham, 60 Cal. App. 4th at 74. However, the facts of Klein show that it is exactly such a case, since it deals with a limitation of liability capped at the purchase price. Since the Farnham court cites Klein and is thus aware of the case, the court either misunderstood the facts in Klein, or considered the purchase price cap not as a limit on liability, but as an exemption from liability. Microsoft's interpretation of section 10 of the TLDA similarly would cap damages at the "purchase price," that is the license fees paid. Either Klein is a case finding that section 1668 extends to limitations on liability, or caps limited to purchase prices are considered to be exemptions from liability for purposes of section 1668.

Given the strong public policy codified in section 1668, the Court should not construe section 10 to limit the nature or amount of damages resulting from Microsoft's intentional tortious conduct or violation of statute.

3. The Appropriate Interpretation Of Section 10.1(a) Limits Its Effect To Breaches Of The TLDA And Torts Based On Negligence.

Limitations on liability are strictly construed, and any ambiguities are resolved against the party seeking to limit its liability. Nunes Turfgrass Inc. v. Vaughan-Jacklin Seed Co., Inc., 200 Cal. App. 3d 1518, 1538 (1988); Philippine Airlines, Inc. v. McDonnell Douglas Corp., 189 Cal. App. 3d 234, 237 (1987). Furthermore, the Ninth Circuit requires that copyright licenses be construed narrowly to effectuate federal copyright policy. See S.O.S., Inc. v. Payday, Inc., 886 F.2d 1081, 1088 (9^th Cir. 1989) (relying on federal copyright policy and narrow construction to find that copyright license only granted limited use rights).

The limitation of liability set forth in section 10.1(a) is limited in scope to "claims relating to this Agreement, whether in breach or in tort." The course of negotiation between the parties indicates that this limitation was intended to apply only to breach of contract claims and negligence claims regarding the commercial viability of the code being delivered to licensees. 2/12/99 Patch Decl., ¶¶ 13-16. The backdrop of statutory law and public policy articulated in Cal. Civ. Code § 1668 suggests the same. Accordingly, the phrase "claims relating to this Agreement, whether in breach or in tort" should be construed as limiting damages only for claims for breach of contract or negligence torts. At the very least, the phrase "claims relating to this Agreement, whether in breach or in tort" is ambiguous in scope and this ambiguity should be resolved against Microsoft, the party seeking to limit its liability.

Microsoft proposes that the ambiguous phrase be interpreted in light of judicial constructions given similar language in arbitration provisions and congressional enactments pursuant to the commerce clause. Microsoft Memo. at 6-7. Consequently, Microsoft argues that the phrases "relating to" and "arising out of" the TLDA should be construed in the broadest possible terms to encompass each and every non-contractual claim and limit Microsoft's liability. Id. at 8:4-9:12.

Microsoft's argument ignores the different policy considerations underlying broad interpretations of arbitration clauses and Congressional enactments under the Commerce Clause, and narrow interpretation of contractual limitations of liability. Compare Vianna v. Doctors' Management Co., 27 Cal. App. 4th 1186, 1189 (1994) (strong public policy favoring arbitration requires liberal interpretation of arbitration agreements and resolution of all ambiguities in favor of arbitration) and Barnett Bank of Marion County v. Nelson, 517 U.S. 25, 38 (1996) ("The word ‘relates' is highly general, and this Court has interpreted it broadly in other pre-emption contexts.") with Nunes Turfgrass, 200 Cal. App. 3d at 1538 (limitations on liability narrowly construed).

Sun has provided evidence of the parties' discussions surrounding section 10.1(a), while Microsoft has resorted only to dictionary definitions and inapposite case law. The requirements of California public policy dictate that section 10.1 not extend to fraud, willful and intentional torts, or violations of statute. Rules of contract construction dictate that any ambiguity be resolved in favor of Sun. Accordingly, Sun is entitled to summary adjudication that section 10.1(a) was intended to limit damages only for breach of contract and negligent tort claims, not for intentional torts or violations of statute.

2. Disgorgement Under The Unfair Business Practices Act And The Copyright Act of 1976 Is Distinct From A Damages Remedy And Not Subject To Any Limitations Provided By Section 10 Of The TLDA.

Microsoft argues that section 10.1(a) limits "damages" to license fees paid and that section 10.1(b) prohibits recovery of "indirect, incidental, special, consequential or punitive damages in connection with or arising out of this agreement…." Neither the language of section 10 nor Microsoft's interpretation of section 10 work to prohibit Sun from seeking disgorgement of any profits Microsoft has received due to its behavior in violation of Business & Professions Code sections 17200 et seq. and 17500 et seq. and federal copyright laws.

1. The Unfair Business Practices Act Authorizes Disgorgement To Deter Wrongdoing.

Business & Professions Code section 17203 authorizes both injunctive and restitutionary relief. Bus. & Prof. Code § 17203. The latter is different and distinct from "damages." "[D]amages are not available under § 17203. The only nonpunitive monetary relief available under the Unfair Business Practices Act is the disgorgement of money that has been wrongfully obtained…." Bank of the West v. Superior Court, 2 Cal. 4th 1254, 1266 (1992) (citations omitted). Unlike the compensatory purpose of "damages," the purpose of disgorgement is "to deter future violations of the unfair trade practice statute and to foreclose retention by the violator of its ill-gotten gains." Id. at 1267 (quoting Fletcher v. Security Pacific Nat'l Bank, 23 Cal. 3d 442, 449 (1979)). "‘Damages' describes a payment made to compensate a party for injuries suffered. [Disgorgement] is more properly characterized as restitutionary rather than compensatory in nature." Id. at 1268 (quoting Jaffe v. Cranford Ins. Co., 168 Cal. App. 3d 930, 935 (1985)). See also MAI Systems Corp. v. UIPS, 856 F. Supp. 538, 541 (N.D. Cal. 1994) (distinguishing between "damages," which are unavailable under California's unfair competition statute, and "disgorgement," which is); People v. Thomas Shelton Powers, M.D., Inc., 2 Cal. App. 4^th 330, 341 n.8 (1992) ("An order of restitution/disgorgement in a 17203 action is not an order of damage.").

The difference between restitutionary disgorgement and damages is evident in light of the divergent policies underlying the two remedies. The purpose of "damages" for breach of contract is to restore the expectancy of the injured party. Dan B. Dobbs, Dobbs Law of Remedies § 3.1 at 280 (2d ed. 1993). The focus is on the expectancy and loss suffered by the nonbreacher and the remedy is private, arising as it does out of a contractual duty affecting the rights and obligations of the parties only. The public's interest, if any, is primarily in the benefits derived from enforcing valid contracts. This interest promotes the contractual ordering of private affairs.

By contrast, the purpose of the Unfair Business Practices Act and of disgorgement under section 17203 is to deny the wrongdoer ill-gotten gains and therefore deter wrongdoing. Bank of the West, 2 Cal. 4th at 1267. This public policy of deterrence transcends the interests of the individual parties to the contract, and defeats the freedom to contract out of this remedy. See 8 Samuel Williston & Richard A. Lord, Williston on Contracts § 19:26 (4^th ed. 1997) (any contractual exemption for liability under a statute based on a strong public policy is void).

In Bank of the West, the Supreme Court of California held that insurance coverage against disgorgement under section 17203 would violate public policy because it would permit the wrongdoer to keep the fruits of his wrongdoing and eviscerate the deterrent effect of the law. Bank of the West, 2 Cal. 4^th at 1269. "When the law requires a wrongdoer to disgorge money or property acquired through a violation of the law, to permit the wrongdoer to transfer the cost of disgorgement to an insurer would eliminate the incentive for obeying the law." Id.

Microsoft relies on language in section 10 that purports to "allocate the risks under this Agreement." Yet were this allocation of risk to be extended to Sun's unfair competition claim, section 10 would run afoul of the holding in Bank of the West because it would permit a private contract to eviscerate the public policy of deterrence embodied in California's statutory unfair competition laws.

2. Federal Copyright Law Bases Disgorgement On A Strong Public Policy Against Permitting Unfair Benefit From Wrongful Acts.

Even if this Court were to find that section 10.1(a) acts as a cap on any damages that might be recoverable by Sun, federal copyright law explicitly provides for the recovery of not only damages but disgorgement of profits from the infringer.

[A] copyright owner is entitled to recover the actual damages suffered by him or her as a result of the infringement, and any profits of the infringer that are attributable to the infringement and are not taken into account in computing the actual damages.

17 U.S.C.A. § 504(b) (emphasis added.)

The Act, together with its legislative history, makes clear that Congress intended for copyright owners to recover both damages and profits from an infringer:

"In allowing the plaintiff to recover "the actual damages suffered by him or her as a result of the infringement," plus any of the infringer's profits . . . section 504(b) recognizes the different purposes served by awards of damages and profits. Damages are awards to compensate the copyright owner for losses from the infringement, and profits are awarded to prevent the infringer from unfairly benefiting from a wrongful act. H.R. Rep. No. 1476, 94^th Cong., 2d Sess. 161, reprinted in 1976 U.S.Code Cong. & Admin.News 5777."

Kleier Advertising Co., Inc. v. James Miller Chevrolet, Inc., 722 F.Supp. 1544, 1545 (N.D. Ill. 1989); See also, JBJ Fabrics, Inc. v. Mark Industries, Inc., 5 U.S.P.Q. 2d 1414 (C.D. Cal. 1987) (Congress has amended the copyright law to provide for the recovery of both damages and profits); Sammons v. Colonial Press Inc., 126 F.2d 341, 345 (1st Cir. 1942) ("Damages and profits are distinct items of recovery, and are awarded upon quite different legal principles. . . . Liability of an infringer for profits is thus not . . . reparation to the plaintiff for the damages which he is presumed to have suffered from the infringement.")

As a result, even if this Court finds that section 10.1(a) acts as a limit on damages available to Sun, it does not shield Microsoft from disgorging profits it obtains by virtue of its wrongful acts. Furthermore, section 10.1(b) of the TLDA speaks only to certain types of damages, and is silent as to restitution or disgorgement. Limitations on liability are strictly construed against the party seeking their protection. Nunes Turfgrass, 200 Cal. App. 3d at 1538. The Court should avoid interpreting section 10 so as to make it void against public policy. Accordingly, Sun is entitled to a declaration that section 10 of the TLDA does not bar the remedy of disgorgement provided by Bus. & Prof. Code section 17203, or lost profits for copyright infringement under 17 U.S.C. section 504(b).

3. Microsoft's Unsupported Assertion That Section 10.1(a) Serves To Limit The Aggregate Damages Sun Can Recover In This Action Is Contradicted By The Plain Language Of The Agreement.

Similar to Microsoft's argument, addressed above, that section 10.1(a) was meant to provide a limitation on all damages regardless of the theory of liability asserted, Microsoft also argues that that same limitation places an aggregate cap on the damages available to Sun in an amount equal to the license fees paid by Microsoft to Sun under the TLDA. Microsoft Memo. at 3:13-15. In other words, according to Microsoft, no matter how many separate claims Sun may successfully prosecute against Microsoft, whether statutory, tort or contract, Microsoft's total liability on all of them -- rather than each of them -- cannot exceed the license fees paid to Sun.

Microsoft provides not a shred of support for its argument that section 10.1(a) provides an aggregate cap. It simply states that to be the case, and asks this Court, on that basis alone, to summarily adjudicate the issue. Microsoft ignores (1) an equally plausible construction of section 10.1(a) that would limit liability for each claim (rather than all claims) to the license fees paid by the Licensee; and (2) the fact that when the parties wished to implement an aggregate dollar limitation in the TLDA, they did so, using the precise term "aggregate."

At the bottom of Section 9.1, the parties set forth their agreement on Sun's obligation to indemnify Microsoft:

"Sun shall have no obligation to indemnify Licensee for claims, demands, costs, liabilities, losses, expenses and damages that exceed, in the aggregate, Seventeen Million Five Hundred Thousand Dollars ($17,500,000)."

(Ex. D) (emphasis added).

If, as Microsoft now asserts, section 10.1(a) was intended to provide an aggregate cap on the total amount of damages it would be liable for, then why did the parties not use the term "aggregate" to say so? Principles of contract interpretation compel the conclusion that by using the term in connection with section 9.1 but not with section 10.1, the parties did not intend section 10.1(a) to be an aggregate cap. Cal. Civ. Code § 1641 ("The whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other."); Berg v. MTC Electronics Technologies, 61 Cal. App. 4th 349, 361 (1998) (courts must avoid construing one clause so as to render another clause in the same contract surplusage).

There are simply no grounds upon which to find, as Microsoft asks, that section 10.1(a) provides an aggregate cap on the amount of damages available to Sun in this action.

4. Despite Microsoft's Claims to the Contrary, Sun Is Eligible for Treble Damages as a Remedy for Trademark Infringement.
1. 15 U.S.C. § 1117(a) Expressly Authorizes Trebling of Damages.

Microsoft argues that Sun is not entitled to treble damages under 15 U.S.C. section 1117(b) "because it has not alleged, and cannot show, that Microsoft has used a ‘counterfeit mark' within the meaning of the Lanham Act." Microsoft Memo at 11:8-9. In fact, however, Sun has not alleged any claims under section 1117(b), and Microsoft's analysis of counterfeit marks and treble damages under that provision is therefore irrelevant.

Sun does, however, allege claims under 15 U.S.C. section 1125(a), which explicitly provides for treble damages. Second Amend. Complaint, ¶¶ 107-110, 112-116. Section 1117(a) provides remedies for violations of section 1125(a). Section 1117(a) reads:

When a violation . . . under section 1125(a) of this title, shall have been established . . . the plaintiff shall be entitled . . . to recover (1) defendant's profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action. . . . In assessing damages the court may enter judgment, according to the circumstances of the case, for any sum above the amount found as actual damages, not exceeding three times such amount.

15 U.S.C. section 1117(a). Therefore, because Sun has pled claims and damages under section 1125(a), it is entitled to the remedies enumerated in § 1117(a), including treble damages.

2. Treble Damages Under 15 U.S.C. § 1117(a) Are Compensatory Damages Not Punitive Or Special Damages.

15 U.S.C. § 1117(a) explicitly states that trebling of damages "shall constitute compensation and not a penalty." Microsoft acknowledges this, but nonetheless asserts that these treble damages should be "deemed" special damages under TLDA section 10.1(b). Microsoft Memo at 10:14-22. Microsoft's argument is void of both support and logic.

Special damages are those that are unique to the individual plaintiff and "depend on the circumstances peculiar to the infliction of each respective injury." Myers v. Stephens, 233 Cal. App. 2d 104, 120-21 (1965) (citing Berry v. Bank of Bakersfield, 177 Cal. 206, 210 (1918)).

Here, by contrast, Sun is claiming the statutory trebling of damages available to every trademark holder. Under section 1117(a) there is no requirement that circumstances be unique in order for a trademark holder to be awarded these damages. Therefore, because trebling of actual damages is not unique to Sun, and because there is no requirement that circumstances be peculiar to Sun in order for it to be eligible for the trebled damages, these damages may not be classified as "special' and are not barred under section 10.1(b) of the TLDA.

Microsoft seeks to expand the limitations of section 10 far beyond that which the parties contemplated or the law allows. Microsoft declares, without any support, that the limitations will apply in the aggregate, despite no language to that effect in section 10. Microsoft also interprets section 10 to deprive this Court of its discretion under federal statute to treble Sun's damages for violation of the Lanham Act.

In light of the parties' negotiations, California's public policy, and proper interpretation of the contract in accordance with the rules of contract interpretation, Sun's interpretation of section 10 is the only tenable one.

For these and the foregoing reasons, the Court should deny Microsoft's Motion for Partial Summary Judgment re Damages Limitations and grant Sun's Counter-Motion for Summary Adjudication.

Dated: February 12, 1999

NOTICE OF COUNTER-MOTION *

                                                             _____________________

Sun_Microsystems_Opp_and_Counter_Mot_in_Response_to_Microsoft_Mot_For_Partial_Summ_Jud_Re_Damage_Limitations_2_ 12_99.

18. Sun Microsystems, Inc.'s Opposition and Counter-Motion in Response to
Microsoft's Motion For Partial Summary Judgment Re: Damage
Limitations
Legal document filed with the court on February 12th, 1999.
Sun Microsystems, Inc.'s Site
http://java.sun.com/lawsuit/021299damages.html