Foxconn breached Microsoft patent contract, rules judge

A California federal judge has ruled in favour of  Microsoft in a lawsuit against  Foxconn over unpaid patent royalties.

In an opinion issued on Tuesday, August 25, Judge Lucy Koh of the US District Court for the Northern District of California granted Microsoft summary judgment on its breach of contract claim.

But the case is not yet resolved, as Foxconn’s affirmative defenses—which could mitigate against any potential liability—and counterclaims against Microsoft remain pending.

Microsoft and Foxconn signed a patent licensing agreement (PLA) in 2013 covering a wide range of devices including smartphones, smart TVs, and “general purpose consumer devices”.

The deal granted Foxconn a worldwide licence to all Microsoft patents covering the devices. As part of the agreement, Foxconn undertook to report sales, submit to audits, and pay royalties to Microsoft based on the number of devices sold.

But the parties’ relationship soon ran into difficulty, with Microsoft complaining in 2014 that Foxconn was “underreporting and underpaying its royalty obligations”.

Michael Traino, Microsoft’s assistant general counsel, emailed Foxconn attorneys in November of that year informing the company that it was “now more than six months past due on royalties owed to Microsoft”.

According to court documents, Foxconn stopped submitting royalty reports altogether in 2015.

The dispute led to Microsoft suing in California federal court. In Tuesday’s ruling, Koh found that Foxconn had breached the contract as a matter of law and dismissed some of the Taiwanese company’s defences as “frivolous”.

Foxconn, also known as Hon Hai Precision Industry, argued that it was in dispute whether the contract required it to purchase a licence for each and every one of the covered products it sold.

According to Foxconn, the deal gave it the option to buy a licence for these products at the agreed-upon rates.

The Taiwanese company also argued that it was not obligated to pay royalties for devices sold to customers with a licence from the Open Invention Network (OIN), a defensive patent pool of which both companies are members.

Koh rejected these arguments as meritless, finding that the PLA “unmistakably requires” Foxconn to purchase a licence for all of the covered products.

The judge also described Foxconn’s OIN defence as “frivolous”, as the OIN agreement does not affect any prior-agreed licensing deals.

But the case is set to continue, as Koh refused to grant Microsoft summary judgment against Foxconn’s counterclaims, including negligent misrepresentation and breach of good faith.

According to Koh, Microsoft’s motion to dismiss the counterclaims was premature as discovery is still ongoing.

For the same reason, Koh also dismissed the US company’s motion for summary judgment on Foxconn’s affirmative defences against the breach of contract claim.

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