U.S. 9th Circuit Court of Appeals
SUN MICROSYSTEMS v MICROSOFT
SUN MICROSYSTEMS, INC., aDELAWARE CORPORATION,No. 99-15046Plaintiff-Appellee,D.C. No.v.CV-96-20884-RMWMICROSOFT CORPORATION, aOPINIONWashington corporation,Defendant-Appellant.
Appeal from the United States District Courtfor the Northern District of CaliforniaRonald M. Whyte, District Judge, PresidingArgued and SubmittedJune 16, 1999--San Francisco, CaliforniaFiled August 23, 1999Before: Mary M. Schroeder, Robert Boochever, andCynthia Holcomb Hall, Circuit Judges.Opinion by Judge Schroeder
_____________________________COUNSEL Barbara A. Caulfield, Orrick, Herrington & Sutcliffe, MenloPark, California, for the defendant-appellant.Lloyd R. Day, Jr., Day, Casebeer, Madrid, Winters & Bat-chelder, Cupertino, California, for the plaintiff-appellee.
_____________________________OPINION SCHROEDER, Circuit Judge:OverviewThis case illustrates how fast technology can outdistancethe capacity of contract drafters to provide for the ramifica-tions of a computer software licensing arrangement. Thelicense in question runs from plaintiff-appellee SunMicrosystems to defendant-appellant Microsoft. It involvesJava, a computer programming language Sun developed toenable the writing of programs that work on any computeroperating system. The license agreement was negotiated on arushed basis in 1996, and by 1997 both Microsoft and Sunhad developed what they believed to be significant improve-ments to Java.Sun filed this suit for copyright infringement, claiming thatMicrosoft had exceeded the scope of its license by creating anenhanced version of Java that was fully operable only onMicrosoft's operating system, and further, by not adapting itsimplementation of Java to be compatible with Sun's additionto Java of a component known as the "Java Native Interface"("JNI"). Sun sought an injunction barring Microsoft fromincluding incompatible Java technology in its products. Thedistrict court granted a preliminary injunction to Sun, andMicrosoft appeals. The underlying facts, the details of thenegotiations, and the nature of the software involved are allmore fully described in the district court's detailed opinion.See Sun Microsystems v. Microsoft Corp., 21 F. Supp. 2d1109 (N.D. Cal. 1998).Before the district court, the parties bitterly contested theproper interpretation of the terms of the license agreement.Microsoft maintained that the agreement fully authorized allof the conduct that Sun challenged as infringing. Sun's inter-pretation was, of course, to the contrary. After a careful analy-sis of the parties' contentions, the district court held that Sunwas likely to prevail on the merits of its claim that Microsofthad violated the license agreement.The parties also disputed whether Sun's suit was properlyconsidered as one for copyright infringement, as Sun con-tended, or as one for breach of contract, as Microsoft con-tended. The district court concluded that the claim wasproperly considered as an infringement action, thereby enti-tling Sun to a presumption of irreparable harm. See CadenceDesign Systems v. Avant! Corp., 125 F.3d 824, 826-27 (9thCir. 1997), cert. denied, 118 S. Ct. 1795 (1998) (copyrightplaintiff that demonstrates likely success on the merits entitledto a presumption of irreparable harm). The district court didnot elaborate on why the case was a copyright infringementrather than a contract interpretation dispute, and it is on thispoint that Microsoft expends most of its ammunition on thisappeal. It contends that the disputed compatibility require-ments of the license agreement are affirmative covenantsrather than limitations on the scope of the license, and thataccordingly contractual rather than copyright remedies areappropriate if there has been any breach. The district courtapparently did not expressly rule on this issue.We review the grant of a preliminary injunction generallyfor abuse of discretion, and "that discretion is abused wherethe district court based its ruling on an erroneous view of thelaw or on a clearly erroneous assessment of the evidence."Roe v. Anderson, 134 F.3d 1400, 1402 (9th Cir. 1998) (inter-nal quotations and footnote omitted). We agree with Sun thatsignificant evidence supports the district court's holding thatSun is likely to prevail on its interpretation of the language ofthe agreement and to prove that Microsoft's conduct violatedit. We agree with Microsoft, however, that the district courtshould not have invoked the presumption of irreparable harmapplicable to copyright infringement claims before it deter-mined that the compatibility requirements were a limit on thescope of the license rather than independent contractual cove-nants. We therefore vacate the preliminary injunction andremand for further proceedings.There is also a claim of unfair competition under Californialaw. The district court entered an injunction on that claimsolely on the basis of past conduct. Microsoft correctly con-tends that under California law an injunction must be basedon the prospect of future conduct. We therefore also vacatethe injunction insofar as it relates to the unfair competitionclaim and remand for consideration of that issue.Factual BackgroundIn March 1996, Microsoft and Sun entered into a"Technology License and Distribution Agreement " ("TLDA")for Java. Microsoft agreed to pay Sun $3.75 million a year forbroad rights to use the language. In exchange, Sun grantedMicrosoft a non-exclusive license to "make, access, use, copy,view, display, modify, adapt, and create Derivative Works ofthe Technology in Source Code form" and to "make, use,import, reproduce, license, rent, lease, offer to sell, sell or oth-erwise distribute to end users as part of a Product . . . theTechnology and Derivative Works thereof in binary form."Sun Microsystems, 21 F. Supp. 2d at 1113.Sun had created Java so that programmers could write asingle program that would work on any operating system.Because Sun wanted Java to remain cross-platform compati-ble, the TLDA includes compatibility requirements. Section2.6(a)(iv) requires Microsoft to produce a compatible imple-mentation of Java within six months of the date that Suncreates a "significant upgrade" to Java. Section 2.6(a)(vi) pro-vides that Microsoft shall make available only products thatare compatible implementations. See id. at 1113. Section2.6(b)(iv) contains the compatibility requirements for compil-ers. It provides that Microsoft's Java compilers "shall includea mode which a Tool Customer may use to permit such Prod-uct to pass the Java Language Test Suite that accompanie[s]"any upgrades of Java that Sun creates. Id. at 1114. To deter-mine compatibility, the TLDA refers to a set of mostly auto-mated tests that Sun had developed.In late 1997, Sun became concerned that Microsoft was dis-tributing a "polluted" version of Java that Microsoft had mod-ified in ways that made it incompatible with Sun's standards.Sun filed suit against Microsoft on October 7, 1997, alleging,among other things, trademark infringement, unfair competi-tion, and breach of contract. In November 1997, Sun movedfor a preliminary injunction barring Microsoft from usingSun's "Java Compatible" logo on products that failed Sun'scompatibility tests. On March 24, 1998, the district courtentered a preliminary injunction. See Sun Microsystems v.Microsoft Corp., 999 F. Supp. 1301 (N.D. Cal. 1998). Micro-soft did not appeal this injunction.Sun then amended its complaint to add a claim for copy-right infringement and filed motions for a preliminary injunc-tion under 17 U.S.C. S 502 for copyright infringement andunder California Business & Professions Code S 17200 forunfair competition. The copyright infringement motion soughtan order immediately enjoining Microsoft from distributingits development kit for Java programmers, and enjoining itfrom distributing Internet Explorer or Windows98 unless itcould show within ninety days that those products passedSun's compatibility tests. The unfair competition motionsought to enjoin Microsoft from abusing its dominant positionin the software market by conditioning licenses for Microsoftproducts upon use of Microsoft's version of Java.On November 17, 1998, the district court granted bothmotions. It found that Sun was likely to prevail on its claimsthat Microsoft had failed to comply with several of the TLDAcompatibility provisions and had engaged in unfair businesspractices. The court entered a detailed injunction that per-tained to both motions and that barred Microsoft from, amongother things: (1) distributing any operating systems or internetbrowsers containing Java technology unless they supportedJNI; (2) distributing any Java development tools unless theysupported JNI and included a compiler with a default modethat disabled Microsoft's incompatible modifications; (3)incorporating any additional Microsoft keyword extensions orcompiler directives into its Java software development tools;and (4) conditioning licenses to Microsoft products or theright to use the "Designed for Windows" logo on the exclu-sive use of either Microsoft's Java virtual machine or Micro-soft's native code interfaces. See Sun Microsystems, 21 F.Supp. 2d at 1127-28. Microsoft appeals.AnalysisI. The Copyright Infringement Claim The standard for a preliminary injunction balances theplaintiff's likelihood of success against the relative hardshipsto the parties. To receive a preliminary injunction, Sun wasrequired to show "either a likelihood of success on the meritsand the possibility of irreparable injury, or that serious ques-tions going to the merits were raised and the balance of hard-ships tips sharply in its favor." Sega Enters. v. Accolade, Inc.,977 F.2d 1510, 1517 (9th Cir. 1992) (citations omitted).These two alternatives represent "extremes of a singlecontinuum," rather than two separate tests. Benda v. GrandLodge of Int'l Ass'n of Machinists & Aerospace Workers, 584F.2d 308, 315 (9th Cir. 1978). Thus, "the greater the relativehardship to the moving party, the less probability of successmust be shown." National Ctr. for Immigrants Rights v. INS,743 F.2d 1365, 1359 (9th Cir. 1984). Under federal copyright law, however, a plaintiff thatdemonstrates a likelihood of success on the merits of a copy-right infringement claim is entitled to a presumption of irrepa-rable harm. See Cadence Design Systems v. Avant! Corp., 125F.3d 824, 826-27 (9th Cir. 1997), cert. denied, 118 S. Ct.1795 (1998). That presumption means that "the balance ofhardships issue cannot be accorded significant"--ifany--"weight in determining whether a court should enter apreliminary injunction to prevent the use of infringing mate-rial in cases where . . . the plaintiff has made a strong showingof likely success on the merits." Id. at 830.The district court found that Sun was likely to succeed onits contentions that Microsoft had violated the terms of theTLDA by failing to support JNI and by extending the Javalanguage and modifying the compiler. See Sun Microsystems,21 F. Supp. 2d at 1119, 1123. It therefore held that Sun wasentitled to a presumption of irreparable harm. See id. at 1125(citing Johnson Controls v. Phoenix Control Sys. , 886 F.2d1173, 1174 (9th Cir. 1989)). The district court did not makeany finding on whether there would be irreparable harmabsent the copyright presumption. Finally, the district courtbriefly addressed hardship, stating that the potential harm toMicrosoft was not "unduly burdensome" and that therequested relief would not harm the interests of third parties.Id. at 1126. It did not discuss the likely extent of harm to Sunif a preliminary injunction were not entered.We address in turn the likelihood of success on the meritsand the applicability of a presumption of irreparable harm.With regard to the likelihood of success, the issue is whetherthere is sufficient evidence to support the district court's con-clusion that Sun was likely to prove that Microsoft's conductviolated the terms of the TLDA. We conclude that there issuch evidence. With regard to the applicability of a presump-tion of irreparable harm, we agree with Microsoft that theissue turns upon whether the terms Microsoft allegedlybreached were limitations on the scope of the license, whichwould mean that Microsoft had infringed the copyright byacting outside the scope of the license; or whether the termswere merely separate contractual covenants, which wouldmake this a contract dispute in which the copyright presump-tion of irreparable harm has no application. We conclude thatthe district court must decide this latter issue before it decideswhether Sun is entitled to a presumption of irreparable harm,and so we vacate the injunction and remand the case.A. Likelihood of SuccessThe district court held that Sun had shown that it was likelyto prove that Microsoft had violated the TLDA in two ways:by adding new features to its compiler that caused it to failSun's compatibility tests referenced in the TLDA and by fail-ing to support Sun's "Java Native Interface" ("JNI"), a toolfor integrating platform-specific (or "native") code into a Javaprogram. There is significant evidence to support the districtcourt's holding that Sun has a reasonable likelihood of prov-ing that Microsoft's Java compiler violated the compatibilityprovisions of the TLDA. The TLDA generally permits Micro-soft to modify its compiler, for section 2.1(a) allows Micro-soft to "modify" the "Java Technology," and section 1.25defines the Java "Technology" to include the "JavaCompiler." Microsoft modified the Java compiler by addingan extended mode that includes two keyword extensions andthree compiler directives that enable programmers to usesome Windows features and to program more efficiently inthe Windows environment. The district court found that theuse of Microsoft's additional compiler directives and keywordextensions can result in programs that fail Sun's compatibilitytests. Microsoft's compiler, however, contains a mode thatdisables the compiler directives and keyword extensions;when the compiler is operated in that mode, there are no com-patibility problems. Microsoft argues that because of theinclusion of this mode, TLDA S 2.6(b)(iv) permits the com-piler modifications. That section provides that any new Javacompilers that Microsoft makes commercially available "shallinclude a mode which a Tool Customer may use to permitsuch Product to pass the Java Language Test Suite thataccompanied the Significant Upgrade." Section 2.6(b)(iv),however, says only that the compiler must have the describedmode; it does not say that any compiler that includes thedescribed mode is allowable. The disputed issue is whetherthe extended mode of Microsoft's compiler, which the districtcourt concluded causes the compiler to fail the Java LanguageTest Suite, violates the TLDA. Considerable evidence supports the district court's con-clusion that Microsoft's extended compiler mode is impermis-sible. Microsoft's extended compiler fails a requirement,contained in the documentation to the Java Language TestSuite, that "[t]he output from your Java compiler implementa-tion (if applicable) must execute properly with a JavaSoft Vir-tual Machine of the same version as the Java CompatibilityKit you are using." Moreover, the Java Language Specifica-tion implicitly prohibits the addition of keywords by defininga complete list of keywords and then reserving only twowords for later inclusion. This reading of the specification isbuttressed by the preface, which states that the specificationis meant to ensure that "the behavior of every language con-struct [be] specified, so that all implementations of Java willaccept the same programs." There is also evidence to support the district court'sholding that Sun has a reasonable likelihood of proving thatthe TLDA obligates Microsoft to support JNI. In the districtcourt, the parties disputed whether JNI is part of the AAPI(the "Applet Application Programming Interface"), withwhich Microsoft's products must comply under sections 1.15and 2.6(a)(vi) of the TLDA. See Sun Microsystems , 21 F.Supp. 2d at 1119-22. Section 1.1(a) of the TLDA defines theAAPI in relevant part as "the public application programminginterface to the Java Applet Environment." The issues beforethe district court thus reduced to whether JNI is a "publicapplication programming interface," a term the TLDA doesnot define, and whether it is an interface to the Java AppletEnvironment. Although Microsoft's experts testified to thecontrary, there is substantial evidence in the record fromSun's experts that JNI is a "public application programminginterface." According to section 2.9(e) of the TLDA, more-over, native code interfaces, such as JNI, are interfaces to theJava Reference Implementation virtual machine. Because sec-tion 1.25 of the TLDA states that the virtual machine is partof the Java Applet Environment, JNI appears to be an inter-face to the Java Applet Environment. There is thus consider-able evidence that JNI falls within Microsoft's complianceobligations.Microsoft nevertheless stresses that the district court erredin holding that the TLDA requires Microsoft to support JNIbecause JNI did not even exist at the time the parties signedthe TLDA. The district court concluded that the addition ofJNI was a permissible upgrade to Java under section 1.1(a) ofthe TLDA. See id. at 1122. That section defines the AAPI, ofwhich JNI is a part, as "(a) the public application program-ming interface to the Java Applet Environment . . . and (d) theOEM Java API Specification, as modified by SUN during theterm of this agreement." Id. The district court did not err inadopting the grammatically plausible reading that the "asmodified" language refers not only to section 1.1(d), but tosection 1.1(a) as well, and thus allows the AAPI to be modi-fied to include JNI. We therefore hold that sufficient evidencesupports the district court's finding that Sun demonstrated aprobability of success on the merits of its claim that Micro-soft's modifications of Java violated the TLDA.B. Presumption of Irreparable HarmFederal copyright law presumes irreparable harm from theinfringement of a copyright. See Cadence Design Systems,125 F.3d at 826-27. The district court held that this case is acopyright infringement case and not a contract case and there-fore presumed irreparable harm. See Sun Microsystems, 21 F.Supp. 2d at 1125. It is not clear, however, how the districtcourt reached its decision that this case should be analyzedunder the copyright infringement standard. It stated only that"Microsoft's argument that . . . Sun does not enjoy a presump-tion of irreparable harm merely rehashes its argument, whichthe court has rejected, that Sun's claims arise out of breach ofcontract rather than copyright infringement." Id. We wereunable to determine, and the parties were unable to inform usat oral argument, where in the record before us the districtcourt had previously addressed this issue. Whether this is a copyright or a contract case turns onwhether the compatibility provisions help define the scope ofthe license. Generally, a "copyright owner who grants a non-exclusive license to use his copyrighted material waives hisright to sue the licensee for copyright infringement " and cansue only for breach of contract. Graham v. James , 144 F.3d229, 236 (2d Cir. 1998) (citing Peer Int'l Corp. v. PansaRecords, Inc., 909 F.2d 1332, 1338-39 (9th Cir. 1990)). If,however, a license is limited in scope and the licensee actsoutside the scope, the licensor can bring an action for copy-right infringement. See S.O.S., Inc. v. Payday, Inc., 886 F.2d1081, 1087 (9th Cir. 1989); Nimmer on Copyright , S 1015[A](1999). Microsoft argues, more strongly on appeal than beforethe district court, that the compatibility provisions on whichSun relies are contractual covenants that do not limit thescope of the license. Microsoft asserts that the broad grants ofsection 2.2 of the TLDA allow it an unrestricted right to mod-ify Sun's source code and create derivative works, and that itmade a separate contractual promise in section 2.6 to honorthe compatibility requirements. Sun argues that the grantinglanguage of section 2.2 and the compatibility terms of section2.6 must be read together to create a license that grants Micro-soft only the right to make compatible modifications andderivative works. The district court did not address thesearguments in its opinion. It is thus not clear whether it agreedwith Sun that the compatibility terms in question are limita-tions on the scope of the license or whether it believed the dis-tinction between affirmative covenants and limitations onscope to be immaterial. The enforcement of a copyright license raises issuesthat lie at the intersection of copyright and contract law, anarea of law that is not yet well developed. We must decide anissue of first impression: whether, where two sophisticatedparties have negotiated a copyright license and dispute itsscope, the copyright holder who has demonstrated likely suc-cess on the merits is entitled to a presumption of irreparableharm. We hold that it is, but only after the copyright holderhas established that the disputed terms are limitations on thescope of the license rather than independent contractual cove-nants. In other words, before Sun can gain the benefits ofcopyright enforcement, it must definitively establish that therights it claims were violated are copyright, not contractual,rights.In reaching this result, we find considerable support inVideo Trip Corp. v. Lightning Video, Inc., 866 F.2d 50 (2dCir. 1989), in which the Second Circuit held that preliminarycontractual issues, such as the ownership of the copyright,must be resolved before the copyright presumption of irrepa-rable harm applies. Video Trip, a company that producedcopyrighted travel videotapes, had granted an exclusivelicense to Lightning Video to promote and distribute thetapes. When the arrangement failed to work out, the partiesamended the agreement to require Lightning to dispose of itsremaining inventory and furnish Video Trip with an account-ing. The copyright was then to revert to Video Trip, unlessVideo Trip owed money under the accounting and failed topay. The parties disagreed about the amounts owed and Light-ning refused to return the tapes. Video Trip sued for aninjunction against copyright infringement, claiming that thelicense was no longer valid; Lightning claimed it was stillvalid because Video Trip owed it money.As here, the parties disputed what preliminary injunctionstandard should apply. The Second Circuit stated:"It is under-standable why a party claiming copyright protection wouldprefer to ignore the contract dispute and assume the validityof the ownership of the copyright. The rules for obtaining apreliminary injunction are less onerous than in other cases."Id. at 52. The court held that "[s]ince the issue as to the own-ership of the copyright is still to be determined, we review theorder of the court below in denying the application for a pre-liminary injunction in light of the rule applicable in any con-tract case." Id.The determination of whether the compatibility terms in theTLDA are covenants or limitations on the scope of the licenseis likewise a contractual issue, for it requires us to construethe license. We recognized this in S.O.S., Inc. v. Payday, Inc.,886 F.2d 1081 (9th Cir. 1989). In S.O.S., the plaintiff, whichheld a copyright in a computer program, had granted thedefendant a license to "use" the software and had explicitlyreserved all other rights. The plaintiff claimed that by modify-ing the software the defendant had exceeded the scope of thelicense and therefore infringed the copyright. The districtcourt, using California contract law to construe the license,applied the rule that contracts should be construed against thedrafter and held that the license therefore permitted any usesnot explicitly forbidden. On appeal, we agreed that we should"rely on state law to provide the canons of contractualconstruction" provided that "such rules do not interfere withfederal copyright law or policy." Id. at 1088. The principles illustrated by Video Trip and S.O.S.indicate that the disputed question in this case, whether thecompatibility terms in the TLDA are license restrictions orseparate covenants, is a preliminary contractual issue thatmust be resolved under California law favorably to Sunbefore Sun is entitled to the copyright presumption of irrepa-rable harm. The district court did not decide this issue.Although the parties have asked us to decide it, we concludethat it is appropriate to give the district court the first opportu-nity, especially given that the parties put almost no emphasison the issue when they litigated the preliminary injunctionbefore the district court. We therefore vacate the preliminaryinjunction and remand the case. Because we vacate theinjunction, we also leave it to the district court to consider inthe first instance Microsoft's argument that, under the districtcourt's prior interpretation of the TLDA, an injunction may begranted only if Microsoft intentionally and willfully violatedthe TLDA's compatibility requirements.Finally, we observe that the determination of whether ornot Sun is entitled to a presumption of irreparable harm maynot end the matter, for even if Sun is not entitled to the pre-sumption, it may still be able to demonstrate that an injunc-tion is warranted under the traditional standard forpreliminary injunctions, in which the court balances the likeli-hood of success against the relative hardships to Sun andMicrosoft. This too is an issue the district court has not yetconsidered.II. The Unfair Competition ClaimWe also vacate the portion of the district court's prelimi-nary injunction that is based on the California Unfair BusinessPractices Act. Sun claimed that Microsoft violated Califor-nia's rules against unfair competition, see Cal. Bus. & Prof.Code SS 17200 et seq., by forcing its business partners to useits non-compatible version of Java and by allowing develop-ers to use Microsoft's "Designed for Windows95/NT " logoonly if they exclusively used Microsoft's virtual machine. Thedistrict court agreed that several of Microsoft's Java distribut-ing and advertising practices violated California law. Itenjoined Microsoft from "[c]onditioning any licence to anyMicrosoft product on exclusive use or distribution of Micro-soft's Java virtual machine" and from "[e]ntering into anyagreement, condition or arrangement with any third party thatrequires such third party to exclusively use Microsoft's inter-faces to its runtime interpreter when invoking native code."Sun Microsystems, 21 F. Supp. 2d at 1128.Microsoft challenges the district court's entry of thisinjunction. It first contends that the district court abused itsdiscretion when it ruled that Microsoft conditioned the use ofits "Designed for Windows95/NT" logo on the exclusive useof its virtual machine. See id. at 1127. Microsoft correctlyargues that the literal terms of its contracts merely required itslicensees to use its virtual machine and did not forbid themfrom using Sun's as well. We agree with Sun, however, thatbecause Microsoft's virtual machine is incompatible withSun's standard, no licensee would ever use both, and soMicrosoft's policy is tantamount to requiring exclusive use. Microsoft's stronger assertion is that the district courtabused its discretion in enjoining Microsoft's exclusivity pro-visions for the virtual machine and the native code interfaceeven though Microsoft claimed that it had discontinued thesepractices and Sun had made no showing that they were likelyto recur. The district court apparently placed the burden onMicrosoft to prove that its conduct would not recur, relyingupon Polo Fashions, Inc. v. Dick Bruhn, Inc., 793 F.2d 1132(9th Cir. 1986), in which this court held that where a defen-dant in a trademark case has ceased the unlawful conduct, aninjunction should issue unless "the reform of the defendant[is] irrefutably demonstrated and total." Id. at 1135 (internalquotation marks omitted). Sun's unfair competition claim,however, is not brought under federal trademark law, butunder California law, which provides that a plaintiff cannotreceive an injunction for past conduct unless he shows that theconduct will probably recur. See People v. Toomey, 157 Cal.App. 3d 1, 20 (1984). The district court erred by entering itspreliminary injunction on Sun's unfair competition claimwithout making such a finding.The injunction is VACATED and the case REMANDED tothe district court for further proceedings. the end