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Netlist, Inc. v. Diablo Technologies, Inc.

United States District Court, N.D. California

March 10, 2015

NETLIST, INC., Plaintiff,
v.
DIABLO TECHNOLOGIES, INC., Defendant.

ORDER REGARDING PROFFERS AND EXTRINSIC EVIDENCE RELATED TO CONTRACT INTERPRETATION

YVONNE GONZALEZ ROGERS, District Judge.

On January 26, 2015, Diablo Technologies, Inc. ("Diablo") submitted its Motions In Limine to Exclude Certain Evidence and Testimony (Dkt. No. 303-9). Diablo's second motion in limine (MIL No. 2) sought to exclude: "(1) Netlist's current interpretation of the Supply Agreement; (2) post-contract emails confirming Netlist's alleged understanding of the Supply Agreement; and (3) Chuck Hong's (or any other Netlist witness) testimony that Netlist's interpretation of the Supply Agreement conforms to the industry standard for supply agreements." ( Id. at 6.) Diablo contends that each of these categories of evidence is inadmissible extrinsic evidence.

In the course of oral argument on the proper scope of extrinsic evidence to be admitted, the Court inquired of the parties as to which terms, if any, in the contract at issue they contend are ambiguous or the proper subject of extrinsic evidence as to their meaning. The parties have now submitted proffers and responses and the Court has heard additional argument. Diablo has identified five terms as ambiguous and the proper subject of extrinsic evidence, and Netlist, while maintaining that the Supply Agreement is not ambiguous, identified one provision as a possible subject of extrinsic evidence.

The Court has carefully reviewed the parties' submissions and re-reviewed the language of the Supply Agreement in light of the parties' arguments. The Court finds that Diablo's proffers do not establish that the identified terms of the Supply Agreement are reasonably susceptible of the meanings Diablo asserts. Consequently, their meanings are not the proper subject of extrinsic evidence.

In light of Netlist's position in its proffer, and the Court's determination that no party has identified any terms the Court considers ambiguous, the Court ORDERS that neither party may offer extrinsic evidence as to the meaning or proper interpretation of the Supply Agreement. While the parties may offer evidence on whether the terms of the agreement were performed or breached, evidence offered solely for purposes of defining the terms therein will not be permitted.

Finally, based on the foregoing, the Court ORDERS that Diablo's MIL No. 2 is DENIED AS MOOT. The Court's reasoning follows:

I. APPLICABLE LEGAL PRINCIPLES

Under California law, "[t]he test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible." Pac. Gas & Elec. Co. v. G. W. Thomas Drayage & Rigging Co., 69 Cal.2d 33, 37 (1968). If a contract is "reasonably susceptible" to the meaning claimed, any relevant evidence may be offered so that "the Judge be placed in the position of those whose language [s]he is to interpret." Cal. Civ. Pro. Code § 1860.

The Court engages in a two-step process to determine whether to admit extrinsic evidence. First, the court "provisionally receives (without actually admitting) all credible evidence concerning the parties' intentions to determine ambiguity, ' i.e., whether the language is reasonably susceptible' to the interpretation urged by a party." Winet v. Price, 4 Cal.App.4th 1159, 1165 (1992). "If in light of the extrinsic evidence the court decides the language is reasonably susceptible' to the interpretation urged, the extrinsic evidence is then admitted to aid in the second step-interpreting the contract." Id.; see also Pacific Gas & Elec. Co., 69 Cal.2d at 40 ("If the court decides, after considering this evidence, that the language of a contract, in the light of all the circumstances, is fairly susceptible of either one of the two interpretations contended for...' extrinsic evidence relevant to prove either of such meanings is admissible."); see also F.B.T. Prods., LLC v. Aftermath Records, 621 F.3d 958, 963 (9th Cir. 2010). In other words, evidence is only admissible for contract interpretation purposes to the extent it is relevant to proving a meaning to which the disputed provision is reasonably susceptible. Skilstaff, Inc. v. CVS Caremark Corp., 669 F.3d 1005, 1015 (9th Cir. 2012); Pacific Gas & Elec. Co. v. G. W. Thomas Drayage & Rigging Co., 69 Cal.2d 33, 39-40 (1968).

Further, in contracts between two parties within an industry, "particular expressions may, by trade usage, acquire a different meaning in reference to the subject matter of a contract... and parol evidence is admissible to establish the trade usage even though the words in their ordinary or legal meaning are entirely unambiguous. Hayter Trucking, Inc. v. Shell W. E&P, Inc., 18 Cal.App.4th 1, 15 (1993).

Where the interpretation of contractual language turns on a question of the credibility of conflicting extrinsic evidence, interpretation of the language is not solely a judicial function... it is the jury's responsibility to resolve any conflict in the extrinsic evidence properly admitted to interpret the language of a contract. Morey v. Vannucci, 64 Cal.App.4th 904, 912-13 (1998). "The court must settle the proper interpretation of a contract as a matter of law even when conflicting inferences can be drawn from undisputed extrinsic evidence, or where that extrinsic evidence renders the contract language susceptible to more than one reasonable interpretation." F.B.T. Productions, LLC v. Aftermath Records, 827 F.Supp.2d 1092, 1102 (C.D. Cal. 2011). It is only where there is a conflict in the admissible and relevant extrinsic evidence that a "jury must resolve the factual conflict." Id. When there is a conflict in the extrinsic evidence, the California courts have suggested that the proper procedure would be for the trial court to require the jury to make special findings on the disputed subjects of extrinsic evidence, and then base its interpretation of the contract on those findings. Id. citing Med. Operations Mgmt., Inc. v. Nat'l Health Labs., Inc., 176 Cal.App.3d 886, 892, n. 4 (1986).

Here, the Court is at the first step of the process: looking to the proffered evidence to determine whether there is any ambiguity in the contract language such that the contract is reasonably susceptible to the interpretation urged by the proffering party.

II. THE PARTIES' PROFFERS

Netlist argues that the Supply Agreement is clear, but that Section 7(a) might potentially be susceptible of more than one meaning if read in isolation. Section 7(a) reads:

(a) Diablo. All rights, title and interest in and to the design and development of the Diablo Standard Register and Diablo's Implementation of the Netlist Chipset; and any improvement, update, modification or additional parts thereof, and all of Diablo's Intellectual Property Rights embodied in the Diablo Standard Register, shall at all times remain the sole and exclusive property of Diablo. For purposes of this Agreement, "Implementation" shall mean the development of a silicon chip set using the Netlist Technology (including without limitation the packaging) which will meet Netlist's Architecture requirements.

(Supply Agreement §7(a).) Essentially, Netlist offers an argument that, if the Court were to find some ambiguity in section 7(a), pre-contractual negotiation evidence and post-contractual evidence arising when Diablo sought to renegotiate the agreement, along with proposed testimony about the negotiations and common industry practice, show what the parties meant in Section 7's division of their respective intellectual property rights. It is this evidence that is the subject of Diablo's MIL No. 2.

Diablo's proffer identifies several terms it contends are ambiguous and the proper subject of extrinsic evidence in order to determine their meaning:

(1) "database design technology" from the definition of "Netlist Technology" in section 1 of the Supply Agreement;
(2) "with DxD/LRD physically enabled" from the definition of "Netlist Chipset" in section 1;
(3) "DDR3 industry standard register derivative of Netlist Chipset with either or both of DxD/LRD functionality physically disabled" from the definition of ...

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