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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11. Posted by ac on September 23, 2005 @ 8:47 | Permalink
AFAICT, the economics of the old model have the customer designing a chip, possibly using 3rd party EDA software, and then shopping around for a semiconductor fabricator. Altera modifies this by combining the EDA and the fabriaction. As long as the combination of IP and contract law allows the Altera software license their EDA software in such a manner, their claim of contract interference is legitimate.
Also of interest is that Altera's site mentions compatibility with 3rd party EDA packages. I'm wondering if future Altera customers will rely on those 3rd party software packages to a greater extent.
12. Posted by Mike Madison on September 23, 2005 @ 12:14 | Permalink
So it seems that my question was a right one (the legitimacy of the combination), but it got the history upside down (Altera is combining what was separate, not separating what was combined). Interesting.
13. Posted by ee on September 23, 2005 @ 12:35 | Permalink
To help understand the business models, take a look at Altera's Design Services “Partners” by business model. Particularly notice how many of those companies offer turnkey design services (column 1). Also take a look at Altera's “What Customers Are Saying About Quartus II Software”. Notice how many of those quotes trash Xilinx. Don't necessarily believe them (this is Altera's PR after all), but take away the impression that many companies design with competing tools and use competing devices.
Altera may use the Ninth circuit's decision that they control the use of their software's output to obtain the same result all over the U.S. That's irrelevant to an electronic design services firm in India. Altera might be able to leverage the decision into customs interdiction of products designed in India, but realistically how are they going to know how a third-party designed an imported product? Sue and obtain discovery? Does that mean that anyone anywhere in the world who has ever used an Altera device for prototyping is at risk for a lawsuit if they try to import into the US?
14. Posted by Mike Madison on September 23, 2005 @ 14:31 | Permalink
OK: The decision puts design jobs in the U.S. at risk because Altera customers will take their Altera devices to electronic design services overseas for prototyping rather than to electronic design services here. Correct me (again), please, if I've got that wrong.
As an answer to the last question: Basically, yes. If "many companies design with competing tools and use competing," then the industry sounds competitive. Again, if that's true, I don't see the harm from the judgment v. CL.
15. Posted by aa on October 12, 2005 @ 23:09 | Permalink
Just some comments regarding the statement
"Does that mean that anyone anywhere in the world who has ever used an Altera device for prototyping is at risk for a lawsuit if they try to import into the US?"
This should not happen because the IC Designers are creating their design using open sourced Hardware Description Language and these design files are portable to third party EDA Tool to convert to ASIC. The problem with CL is that it is using an output file compiled by Altera Software. If CL has its own software to take in the design files (even if they are prototyped using Altera Device) and generate its own output file to program CL Device, then the problem won't exist at all.
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