September 20, 2005
More on Altera and Software Licenses
Posted by Mike Madison

Yesterday I posted some thoughts about Altera Corp. v. Clear Logic, decided in the Ninth Circuit last week.  Altera, which makes semiconductors, sued Clear Logic, also a semiconductor manufacturer, for stealing Altera's chip designs and for inducing Altera's customers to breach their Altera software license agreements.  Altera won in the trial court, and the Ninth Circuit affirmed. 

But IP licensing issues are tricky, and the case isn't as conceptually simple as it sounds.  The complexities have been nagging at me.

Altera's customers use Altera software to generate designs for programmable semiconductors that can then be etched into Altera-supplied chips.  The software license comes with a restriction on use:  the customers can use the software "for the sole purpose of programming logic devices manufactured by Altera and sold by Altera or its authorized distributors."  This seems straightforward, and a lot of practicing lawyers may look at licenses as mere contracts.  So long as the parties assent, they can agree on pretty much whatever they want.  But (i) even under state law, some terms in ordinary contracts are unenforceable, and (ii) license agreements deal in federally-granted rights (copyrights) that come with some important limitations.  Copyright law preempts some licensing provisions; antitrust law (for example) invalidates others.  License agreements need justification that goes beyond mutual assent.  Is this the sort of contract term that a court should enforce?

The Ninth Circuit blows by the preemption question pretty quickly, and it is pretty quick to reject an antitrust-style argument (framed not as an actual antitrust claim, but as a copyright misuse claim).  I think that the result is right, but the reasoning could use some more explication.

The specific problem is that the Altera software isn't being used to produce the Clear Logic chips.  The Altera software, used by Altera customers, produces a data stream that is used to produce the chips.  The license restriction, as interpreted by Altera and the court, means that the data stream can be used only in connection with Altera chips.  Altera, in effect, "owns" the data stream, by virtue of the license term. 

Though the opinion isn't particularly clear on this, I infer that Clear Logic argued that once Altera customers paid for use of the Altera software, and generated these data streams, then (i) the customers had complied with their obligations under the licenses, and (ii) the customers could choose to have the design information contained in the data streams burned onto whatever chips they chose.  In effect, CL might have argued, Altera's license term amounted to an unlawful tie: users of the Altera software were required to buy Altera chips.  And, worse, Altera's implicit claim to ownership of the data stream created by its customers amounts to assertion of an intellectual property interest in something that lies outside the scope of the Copyright Act (because the "data" isn't copyrightable subject matter, or its "use" isn't within the scope of Section 106)

The argument isn't a winner, but the reason is interesting:  For reasons have to do with its business model and with the nature of programmable logic chips, Altera has effectively unbundled products and services that used to be delivered all together, and not so long ago, as function-specific, programmed semiconductors.  Altera argued, in effect, that the unbundling didn't affect its legal interest in selling the integrated product.  CL argued the reverse -- Altera created two things from one, and having done so, has to suffer competition in the second market even if it limits competition (via the licenses) in the first.  The court disagrees, reading the Altera customer contracts in effect to preserve the identity of the designed chips, even if technologically, the Altera software and the chips themselves are distinct things.  What looks like an (invalid) equitable servitude on the software turns out to be a (valid) method of defining the single thing that Altera is selling.

I'm reading some analysis into the court's opinion, and as a result it's always possible that I'm off the mark.  But the court's analysis of the state law (interference) claim, and of the copyright misuse claim, don't do justice to what I think was really going on here, either as a matter of the respective companies' business models, or as a matter of the technology.  It looks to me like the mismatch between the conceptual categories supplied by copyright law, unfair competition law, and licensing law, on the one hand, and what technology companies are actually doing, on the other hand, is pretty substantial in this case. 

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