ADVANCED MICRO DEVICES INC v. INTEL CORPORATION

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Court of Appeal, Sixth District, California.

ADVANCED MICRO DEVICES, INC., Plaintiff and Respondent, v. INTEL CORPORATION, Defendant and Appellant.

No. H009897.

Decided: June 04, 1993

Robert A. Van Nest, Karin Kramer, Laird J. Lucas, Keker, Brockett & Van Nest, San Francisco, Terry E. Fenzl, Michael F. Bailey, Brown & Bain, P.A., Phoenix, AZ, for defendant and appellant. Terrence P. McMahon, David T. Alexander, George M. Schisler, Sean A. Lincoln, Jackson, Tufts, Cole & Black, San Jose, Gerald Z. Marer, Marer, Marer & Schuck, Palo Alto, for plaintiff and respondent.

Intel Corporation appeals from a judgment confirming an arbitration award in favor of Advanced Micro Devices, Inc. (AMD).  Intel challenges those portions of the award in which the arbitrator granted AMD the right to Intel intellectual property contained in the Am386 microprocessor (paragraph 5 of the award) and extended for two years certain rights conferred upon AMD by Intel under a 1982 agreement insofar as those rights related to the Am386 microprocessor and any revisions or modifications of it (paragraph 6 of the award).   We hold that the arbitrator exceeded his powers by fashioning a remedy which did not fall within the scope of the parties' agreement, but that the award may be corrected without affecting the merits of the decision.   Accordingly, we reverse the judgment with directions to correct the award and to confirm the award as corrected.  (Code Civ.Proc., § 1286.6, subd. (b).)

Facts and Proceedings

Both AMD and Intel are semi-conductor companies which create, design, produce and market microprocessors.   In February 1982, AMD and Intel entered into a 10–year contract in which they agreed to exchange “technical information so that each party acquire[d] the capability to develop products suitable for sale as an alternate source for products developed by the other party.”   Thus, the contract permitted AMD to earn rights to manufacture Intel products by developing new products accepted by Intel.   If AMD earned such rights, it would receive a “how-to-kit” of technical and other data to allow it to manufacture the product, known as a “Manufacturing Package.”   AMD would also receive certain license rights, excluding “have-made” rights, that is, the right to have another company fabricate the product for sale by AMD.   The grant of these rights to AMD was coupled with an obligation by AMD to pay royalties on each sale of an exchanged product.   The purpose of this type of contract is to provide a steady supply or second source of a particular product.

In April 1987, AMD filed a petition to compel arbitration pursuant to the contract arbitration clause.   AMD sought the rights to manufacture and sell the Intel 386 or 80386 microprocessor.   Following a hearing, the court issued an order of reference which itemized the claims submitted to arbitration and the scope of the arbitrator's jurisdiction to award remedies.   The issues submitted to arbitration included whether Intel had breached the covenant of good faith and fair dealing and whether Intel was required to give AMD the manufacturing package and licenses to manufacture and sell the Intel 386 microprocessor.   With respect to the issue of remedies, the parties stipulated the arbitrator would be limited to awarding remedies that originated in the contract:  “The Arbitrator may grant any remedy or relief which the Arbitrator deems just and equitable and within the scope of the agreement of the parties, including, but not limited to, specific performance of a contract.”   The order of reference also confined the arbitrator to remedies “as he may in his discretion determine to be fair and reasonable but not in excess of his jurisdiction.”

In September 1987, the arbitration hearings began.   After almost five years of hearings, the arbitrator concluded, inter alia, that AMD was not entitled to rights to the Intel 386 under the contract.   The arbitrator rejected each claim that Intel should have accepted various AMD products, finding that the AMD products were inferior and Intel had sound business reasons for rejecting them.   The arbitrator next determined that Intel breached the contract by failing to deliver promptly certain product information promised AMD.   The arbitrator also found Intel breached the covenant of good faith and fair dealing by concealing its intention to take no products from AMD under the contract.   However, the arbitrator determined that following Intel's decision, AMD did not offer any products, that both parties knew AMD had no products to offer in the foreseeable future, and that any harm suffered by AMD was not the result of Intel's conduct.  “AMD became a victim—but not of Intel's plan:  AMD was victimized by its own inability to adjust to what it knew to be reality in 1984 and 1985 and 1986.”  (Emphasis omitted.)

In late 1990, AMD began introducing its own reverse engineered version of the Intel 386, known as the Am386.   Thus, AMD entered the market even though it never received a manufacturing package from Intel.   Although license rights were significant to AMD, it no longer needed the rest of the Intel 386 manufacturing package.

The hearings relating solely to remedies began on March 7, 1991, and ended on October 30, 1991.   The arbitrator awarded AMD over $15 million for Intel's failure to deliver certain product information.1  The arbitrator also discussed the remedy for Intel's breach of the covenant of good faith and fair dealing:  “The award of the Arbitrator in this matter is as follows:  1. The covenant case:  [¶] For breach of the covenant of good faith and fair dealing AMD is awarded damages in the nominal amount of $1 plus the relief afforded in paragraphs 5 and 6 hereof․  [¶] 5. AMD is hereby awarded a permanent, royalty-free, non-exclusive, non-transferable, worldwide right (but not the right to assign, license or sublicense such right to any other party) under any and all Intel copyrights, patents, trade secrets and maskwork rights contained in the current versions of AMD's reverse-engineered 80386 family of microprocessors, to make, have made by a third party solely for AMD, use and sell the prior, current and future revisions and modifications of those products․  The intent of this paragraph is to provide a complete and dispositive defense to AMD as to the Intel claims against AMD regarding the technology and intellectual property used in AMD's current versions of the 80386 in such lawsuits as Intel Corp. v. Advanced Micro Devices, Inc. (A 91 CA 800) in the United States District Court for the Norther[n] District of California, and Intel Corp. v. Advanced Micro Devices, Inc. (C 90 20572 WAI) in the United States District Court for the Northern District of California, and to preclude and defeat other potential Intel intellectual property infringement claims with respect to the technology used in AMD's aforedescribed past and current versions, and future revisions and modifications, of the 80386․  [¶] 6. In addition to the nominal damages awarded AMD for Intel's breaches as set forth in paragraphs 1 and 4 hereof it is ordered that the rights conferred upon AMD under the 1982 AMD/Intel Agreement (which extended until 1995 the patent and copyright licenses originally granted by an agreement between the parties in 1976) are hereby extended two years from their present date of expiration only insofar as they relate to or concern the AMD 80386 and its revisions or modifications, if any.”

The arbitrator explained this portion of the award as follows:  “It is the purpose of these paragraphs to attempt to abort the incessant warfare which has gone on between these companies for the past five years.   Each of them has attempted to use the court system as a means of corporate strategy.   By means of the orders contained in these paragraphs of the Award I intend that AMD be permitted to go forward in its production and sale of the AMD reverse engineered 80386 without harassment from Intel from any further law suit alleging that AMD has incorporated into that product any Intel intellectual property;  and because of the manner in which Intel to some extent lulled AMD into some sense of well-being about the continuation of the relationship and to some extent contributed to AMD's delay in reverse engineering the 80386, I have decided that it is just and equitable that AMD be permitted to use the rights which it has under the 1982 AMD/Intel agreement (i.e., that part which extends until 1995 the patent and copyright licenses originally granted by an agreement between the parties in 1976) for an additional two years from the present date of the expiration of those rights.”  (Emphasis omitted.)

On March 5, 1992, AMD filed a petition to confirm the award of the arbitrator.   Shortly thereafter, Intel filed a petition to correct the arbitration award.   Following a hearing, the superior court confirmed the arbitrator's award.

Discussion

California's private arbitration statute provides that when a petition to confirm an arbitrator's award is duly served and filed, “the court shall confirm the award as made ․ unless in accordance with this chapter it corrects the award and confirms it as corrected, vacates the award or dismisses the proceeding.”  (Code Civ.Proc., § 1286.)   Specific provisions of the statute govern vacation, correction, and dismissal.   There is no ground for dismissal in this record.

The California Supreme Court recently discussed the scope of judicial review of arbitration awards.  (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 10 Cal.Rptr.2d 183, 832 P.2d 899.)   It reiterated that “the Legislature has expressed a ‘strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution.’ ”  (Id. at p. 9, 10 Cal.Rptr.2d 183, 832 P.2d 899, quoting Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312, 322, 197 Cal.Rptr. 581, 673 P.2d 251.)  “ ‘[T]he essence of the arbitration process is that an arbitral award shall put the dispute to rest.’ ”  (Id. 3 Cal.4th at p. 10, 10 Cal.Rptr.2d 183, 832 P.2d 899, quoting Comment, Judicial Deference to Arbitral Determinations:  Continuing Problems of Power and Finality (1976) 23 UCLA L.Rev. 948–949.)   Thus, the court reaffirmed the general rule that the grounds for vacating an award are limited to those enunciated in the statutes.  (Id. at pp. 12–13, 10 Cal.Rptr.2d 183, 832 P.2d 899.)

The only arguably pertinent statutory provision for either vacating or correcting the award in this case would be that “[t]he arbitrators exceeded their powers․”  (Code Civ.Proc., §§ 1286.2, subd. (d);  1286.6, subd. (b).)  Where an award in excess of the arbitrator's powers “may be corrected without affecting the merits of the decision upon the controversy submitted,” the court shall correct the award and confirm it as corrected (id., § 1286.6, subd. (b));  if such an award cannot be so corrected it shall be vacated (id., § 1286.2, subd. (d)).

 The scope of the arbitrator's powers is to be defined without reference to the abstract propriety of the manner in which the arbitrator purported to exercise those powers.   As the court noted in Southern Cal. Rapid Transit Dist. v. United Transportation Union (1992) 5 Cal.App.4th 416, 6 Cal.Rptr.2d 804, “the scope of judicial review ․ is extremely narrow.  ‘Even if the arbitrator's decision on the issue submitted was wrong ․ [if] it was within his power to make that decision [the] plaintiff is bound by it.’   Thus, ‘ “[n]either the merits of the controversy ․ nor the sufficiency of the evidence to support the arbitrator's award are matters for judicial review.” ’  [Citations.]”  (5 Cal.App.4th at pp. 422–423, 6 Cal.Rptr.2d 804.)

Intel does not question the power of the arbitrator to have found that Intel had breached the parties' agreements and the covenants of good faith and fair dealing implicit in those agreements.   Intel asserts narrowly that the arbitrator lacked the power to order the remedies represented by paragraphs 5 and 6 of the award.

AMD argues that at least with respect to remedies the scope of the arbitrator's powers, like the manner of exercise of powers once established, is for the arbitrator himself or herself to determine without judicial interference.   We disagree.   Case law has held that the court determines the scope of the arbitrator's jurisdiction except where the parties have unambiguously and expressly given such power to the arbitrator.  (Key Ins. Exch. v. Biagini (1967) 250 Cal.App.2d 143, 147, 58 Cal.Rptr. 408.)   Thus, in all but the exceptional case, “[w]hether the arbitrator's decision exceeded the arbitrator's powers is a question of law we review de novo on appeal.”   (Southern Cal. Rapid Transit Dist. v. United Transportation Union, supra, 5 Cal.App.4th at p. 423, 6 Cal.Rptr.2d 804;  cf. Hacienda Hotel v. Culinary Workers Union (1985) 175 Cal.App.3d 1127, 1133–1134, 223 Cal.Rptr. 305.)

 Here the record of the jurisdictional hearings establishes that the parties did not give the arbitrator exclusive authority to decide which remedies were within the scope of his jurisdiction.   As the court stated:  “The Court is not going to take up the issues now of what the remedies [are] that the arbitrator can or cannot make.   That's a matter for the Court after the arbitrator makes a mistake, if he does.”   AMD also acknowledged this point.  “In the event either party believes that any relief awarded is beyond the jurisdiction of the arbitrator, that is a specific ground upon which to challenge its confirmation or to appeal from the Arbitrator's award.”

At the conclusion of the jurisdictional hearings, the court again indicated that the arbitrator's authority was limited to what was specified in the contract.  “THE COURT:  ․  Now, you see, what these rulings do, they give you an out and a protection.   If I come up with wrong answers to all of these in the arbitration, you've got to appeal.   Yes, you do.  [¶] [MICHAEL BAILEY] [for Intel]:  I've got to appeal they were improperly submitted to arbitration, yes.   Can we talk about the relief that's prayed for?  [¶] THE COURT:  No, because what we're going to do is talk about relief when we get to the arbitration․  [¶] I'm not going to rule on any of the remedies available until I get into the arbitration․  Now, if I've made an award which cannot be sustained under the contract in which I have no power to make, it can't be confirmed, beyond my jurisdiction, Michael․  [¶] [GERALD] MARER [for AMD]:  Well, if the arbitrator exceeds his jurisdiction in giving certain relief, it's set aside.”

The arbitrator also recognized the limitations on his power by making each paragraph of the award severable “in the event the Arbitrator's conclusion in respect to a particular issue or issues be deemed to be in violation of Code of Civil Procedure section 1286.2 ․ [or] 1286.6․”  Thus, the record establishes that the arbitrator was not authorized to determine which remedies were within the scope of his jurisdiction without judicial review.

Under the general rule it follows that we may consider de novo whether remedial paragraphs 5 and 6 of the award exceeded the arbitrator's powers.

“[W]hen it comes to formulating remedies ․ an arbitrator is confined to interpretation and application of the ․ agreement;  ․ his award is legitimate only so long as it draws its essence from the ․ agreement.   When the arbitrator's words manifest an infidelity to this obligation, courts have no choice but to refuse enforcement of the award.”  (Steelworkers v. Enterprise Corp. (1960) 363 U.S. 593, 597, 80 S.Ct. 1358, 1361, 4 L.Ed.2d 1424.)

California courts have also followed this principle by vacating or correcting awards where the remedy was not derived from the parties' agreement.   In Drake v. Stein (1953) 116 Cal.App.2d 779, 254 P.2d 613, the arbitrator awarded damages rather than the transfer of a parcel of realty.   The reviewing court reversed, stating “when appellants agreed in clear and unambiguous language to transfer a specific parcel of real estate and a policy of title insurance for the faithful performance of certain services by respondent it was not intended thereby to authorize the future arbitrators to award something else to respondent in case of an arbitration.”  (Id. at p. 785, 254 P.2d 613.)

In Firestone Tire & Rubber Co. v. United Rubber Workers (1959) 168 Cal.App.2d 444, 335 P.2d 990, the issue for the board of arbitration was whether an employee in classification A who was temporarily working in classification B was entitled to the A or B rate of pay.   When the board of arbitration concluded the employee was entitled to a rate of pay from classification C, the court vacated the award because it violated the unambiguous language of the parties' agreement.   The court reasoned that an arbitrator is not “ ‘released from the obligation to be guided by the basic agreement of the litigants.’ ”  (Id. at p. 448, 335 P.2d 990, quoting Drake v. Stein, supra, 116 Cal.App.2d 779, 254 P.2d 613.)

The case before us is more difficult.   The parties' agreement itself does not address remedies.   When this dispute arose the parties stipulated that the arbitrator could “grant any remedy or relief which the Arbitrator deems just and equitable and within the scope of the agreement․”  The subsequent order of reference also limited the arbitrator to remedies “as he may in his discretion determine to be fair and reasonable but not in excess of his jurisdiction.”   Patently neither the stipulation nor the order of reference explicitly defined the arbitrator's power to specify a remedy.

 In such cases we have tended to give credence to an arbitrator's rational assessment of the scope of the underlying agreement.  (Cf., e.g., Tate v. Saratoga Savings & Loan Assn. (1989) 216 Cal.App.3d 843, 855, 265 Cal.Rptr. 440;  cf. also Summit Industrial Equipment, Inc. v. Koll/Wells Bay Area (1986) 186 Cal.App.3d 309, 320, 230 Cal.Rptr. 565.)   Nevertheless the question of the arbitrator's remedial powers remains one of law, subject to our de novo review, and the standard must be whether the remedial provision in issue “draws its essence from the ․ agreement.”  (Steelworkers v. Enterprise Corp., supra, 363 U.S. at p. 597, 80 S.Ct. at p. 1361.)

AMD argues, on the basis of Southern Cal. Rapid Transit Dist. v. United Transportation Union, supra, 5 Cal.App.4th 416, 6 Cal.Rptr.2d 804, that because nothing in the agreement expressly prohibited the relief specified in paragraphs 5 and 6, the relief was within the arbitrator's powers and must be upheld.   We could not endorse so broad a rule, and in any event we do not read Southern Cal. Rapid Transit Dist. as broadly as AMD would.

Southern Cal. Rapid Transit Dist. involved asserted breach of a labor contract between the rapid transit district and a union which represented district employees.   One provision of the contract required, as a condition to sale, transfer or other disposition of district facilities, that the transferee be required to observe all existing labor contracts and to provide job security for employees covered by this labor contract.   The union sought arbitration under the labor contract, asserting that the district had consented to a transfer of bus lines to a newly-created district without complying with the summarized provision.   The arbitrator agreed with the union and, as a remedy, held the district's consent to transfer of the bus lines was “ ‘void and invalid and ․ should be withdrawn.’ ”  (5 Cal.App.4th at p. 422, 6 Cal.Rptr.2d 804.)   A question on appeal was whether this remedy exceeded the arbitrator's powers.   The Court of Appeal concluded it did not:  “The stipulation of submission only precluded the arbitrator from awarding monetary damages.   Thus, it is assumed the arbitrator had the power to order any other remedy not inconsistent with the collective bargaining agreement.   [Citations.]  Because nothing in the agreement expressly prohibited the remedies imposed, their imposition by the arbitrator must be held proper.   [Citations.]”  (Id., at p. 424, 6 Cal.Rptr.2d 804.)

 It is apparent to us that the remedy ordered in Southern Cal. Rapid Transit Dist. was in the nature of direct enforcement of an explicit provision of the underlying agreement and thus unquestionably drew its essence from the agreement.   We do not view the suggestion that nothing in the agreement expressly prohibited the remedy to have been an alternative test;  instead it is apparent that any proposed remedy must both be within the range of remedies rationally related to the meaning and purpose of the agreement and not be explicitly foreclosed by the agreement.

 In this case, although (as AMD asserts) the parties' agreement does not explicitly foreclose the remedies the arbitrator directed, we cannot find the requisite rational nexus between the agreement and paragraphs 5 and 6 of the award.   The parties' dispute grew directly out of a written agreement, the agreement provided for arbitration of disputes which might “arise under this Agreement,” and the arbitrator was charged by the order of reference to determine whether there had been breaches of explicit or implicit covenants of that agreement and, if so, to fashion fair and reasonable remedies.   Patently the agreement contemplated, and the order of reference must be deemed to have authorized, contract remedies.   But the arbitrator granted to AMD rights which exceeded those it could have obtained from Intel under the contract.   Although AMD claimed it had earned rights to the Intel 386 under the contract, the arbitrator concluded Intel never agreed to transfer rights to the Intel 386 and AMD did not earn the right to manufacture the Intel 386 by developing new products accepted by Intel.   Nevertheless, the arbitrator awarded to AMD a right to Intel intellectual property contained in the Am386.   While the Intel 386 was a product that AMD could have earned under the contract, the Am386 was not.   Thus, by granting AMD the right to manufacture and sell what is claimed to be an infringing product absent an exchange of products under the contract, the arbitrator rewrote the parties' agreement.   He rewrote the agreement in other ways as well.   The arbitrator also awarded to AMD the right to have the Am386 manufactured by a third party.   This right was specifically withheld in the contract.   The contract required royalty payments of three percent on one party's use of the other's technology pursuant to the contract license, while the award does not require royalty payments.   The arbitrator extended the 1976 patent licensing agreement for two years which the parties could not have done under the contract.   Since the arbitrator fashioned a remedy which was not within the scope of the parties' agreement, he exceeded his power.

 It follows that the judgment confirming the arbitration award must be reversed.2  The remaining question is whether the award may be corrected without affecting the merits of the decision.   If so, we may direct that the trial court simply correct the award and confirm it as corrected.   If not, we must direct that the award be vacated.

 We conclude that the award may be corrected without affecting the merits.   It is apparent that the arbitrator added paragraphs 5 and 6 because he felt he had exhausted all remedies available within the scope of the agreement without satisfying his own sense of what the circumstances required.   So long as the arbitrator remained within the scope of the agreement he exercised powers the parties had granted him;  we cannot and will not interfere with the remedial provisions of the award other than paragraphs 5 and 6.   Paragraphs 5 and 6, on the other hand, may be treated as surplusage:  The award will stand without them.

The judgment is reversed.   The cause is remanded to the superior court with directions to correct the award by deleting paragraphs 5 and 6 and to confirm the award as so corrected.   Each party shall bear its costs on appeal.

FOOTNOTES

1.   The arbitrator also awarded AMD the rights included in the 8087 manufacturing package as required under the agreement.

2.   The opinion of another Court of Appeal in Pacific Gas and Electric Co. v. Superior Court (1993) 15 Cal.App.4th 576, 19 Cal.Rptr.2d 295, filed after oral argument in this case and not yet final for all purposes, is not inconsistent with the conclusion we reach.

COTTLE, Presiding Judge.

BAMATTRE–MANOUKIAN and WUNDERLICH, JJ., concur.