Nissim Corp. v. Clearplay, Inc. , 374 F. App'x 987 ( 2010 )

NOTE: This disposition is nonprecedential.
United States Court of Appeals for the Federal Circuit
2009-1327
NISSIM CORP.,
Plaintiff-Appellant,
v.
CLEARPLAY, INC.,
Defendant-Appellee,
and
MATTHEW JARMAN,
LEE JARMAN, and WILLIAM AHO,
Defendants.
John C. Carey, Carey, Rodriquez, Greenberg & Paul, LLP, of Miami, Florida,
argued for plaintiff-appellant. With him on the brief was Allison J. Cammack.
David J. Jordan, Stoel Rives LLP, of Salt Lake City, Utah, argued for defendant-
appellee. With him on the brief was David L. Mortensen. Of counsel on the brief was
Thomas J. Meeks, Carlton Fields, P.A., of Miami, Florida.
Appealed from: United States District Court for the Southern District of Florida
Judge Paul C. Huck
NOTE: This disposition is nonprecedential.
United States Court of Appeals for the Federal Circuit
2009-1327
NISSIM CORP.,
Plaintiff-Appellant,
v.
CLEARPLAY, INC.,
Defendant-Appellee,
and
MATTHEW JARMAN,
LEE JARMAN, and WILLIAM AHO,
Defendants.
Appeal from the United States District Court for the Southern District of Florida in case
no. 04-CV-21140, Judge Paul C. Huck.
___________________________
DECIDED: May 10, 2010
___________________________
Before GAJARSA, LINN, and MOORE, Circuit Judges.
MOORE, Circuit Judge.
Nissim Corporation (Nissim) appeals from a district court’s order denying
Nissim’s Motion to Enforce Settlement Agreement. Nissim Corp. v. ClearPlay, Inc., No.
04-CV-21140 (S.D. Fla. Mar. 31, 2009) (Order). Because the district court erred in its
construction of the terms of the settlement agreement, we vacate and remand.
BACKGROUND
The technology at issue pertains to content-filtering products for DVD movies.
The products are a combination of hardware and software that allow users to filter
objectionable content (OC) from DVD movies based on the category of OC and the
level of explicitness. Nissim’s subsidiary, CustomPlay, LLC, developed content coding
specifications, the details of which it protects as a confidential trade secret. The
CustomPlay OC Specifications (Specifications) provide detailed guidelines and
examples relating to the classification of categories and levels of explicitness.
Categories of OC include things such as violence, nudity, blasphemy, sex, and
vulgarity. There are also three levels of explicitness for each category: implied, explicit,
and graphic. The combination of OC categories and levels of explicitness allows the
user to tailor its filters: for example, the products allow the user to broadly exclude
nudity (implied, explicit, and graphic) but more narrowly exclude only graphic violence.
The choice of degree is up to the user, specified through the level of explicitness
adopted. Nissim alleges that it had these Specifications developed “with the
longstanding goal of establishing an industry standard that would facilitate widespread
utilization of objectionable-content control technology.” According to Nissim, this
technology will only be commercially successful if there is consistent application of the
CustomPlay OC Specifications. For example, Nissim argues that if a parent wishes to
exclude all substance abuse from a movie their child will watch, the parent will be
unhappy if some drug abuse is allowed and will cease to use the technology if the
standard is not consistently applied. Reply Br. 15.
ClearPlay develops and sells a combination of hardware and software that allows
for OC filtering. Customers who purchase ClearPlay DVD players download individual
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software OC maps for each movie and customize the maps by selecting the categories
and levels of explicitness to filter. The customized OC map tells the ClearPlay DVD
player when to mute or skip over OC based on the user’s filter selections.
In May 2004, Nissim sued ClearPlay for infringement of five patents pertaining to
technology for the editing of video programs based on content. In November 2005 (five
days prior to the start of trial), the parties entered into a Settlement and License
Agreement (the Agreement). Nissim granted ClearPlay a license in exchange for,
among other things, royalty payments and certain compliance with the CustomPlay
Specifications for filtering.
On June 11, 2007, Nissim filed a Motion to Enforce Settlement Agreement,
alleging that certain OC maps being sold by ClearPlay violate the Agreement. The
present dispute centers on the degree of compliance with the CustomPlay
Specifications that is required by the Agreement. Paragraph 1.4 of the Agreement
defines “ClearPlay CustomPlay OC Map”:
“ClearPlay CustomPlay OC Map” shall mean a CustomPlay OC Map
generated by ClearPlay. A ClearPlay CustomPlay OC Map; i) identifies
the beginning frame and the ending frame of video segments that contain
possibly objectionable content, and assigns a category and a level of
explicitness, using the categories and levels standardized by the
CustomPlay OC Specifications; ii) shall not modify, expand, reduce, or
combine, content categories, or levels of explicitness specified by the
CustomPlay OC Specifications, and; iii) shall be in substantial compliance
with the CustomPlay Specifications, it being recognized by the parties that
application of the CustomPlay OC Specifications requires flexibility of
artistic judgment within the overall goal of maintaining consistency.
J.A. 449 (emphasis added). Nissim alleged that ClearPlay’s OC maps were not
substantially compliant with the Specifications as required by Paragraph 1.4. With the
parties’ consent, the district court appointed a Special Master to hear evidence in order
to determine whether ClearPlay OC maps satisfy the requirements of the Agreement.
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On February 11, 2009, the Special Master filed his Amended Report and
Recommendation. Nissim Corp. v. ClearPlay, Inc., No. 04-CV-21140 (S.D. Fla. Feb.
11, 2009) (Report). The Special Master agreed with ClearPlay’s contention that the
issue of substantial compliance is whether ClearPlay “has complied with the general
intent of the Agreement as a whole, not whether it identified and classified possibly
objectionable content in the same way Nissim would have identified and classified the
same content.” Id. at 11. The Special Master also concluded that “substantial
compliance within the context of Paragraph 1.4 is not determined by percentages or
numbers.” Id. at 14. Instead, the Special Master read the language of Paragraph 1.4
as granting ClearPlay the discretion to depart from the Specifications and still be in
substantial compliance as long as ClearPlay exercised its “reasonable ‘artistic
judgment.’” Id.
With respect to the phrase “flexibility of artistic judgment” as used in Paragraph
1.4, the parties proposed a variety of interpretations. Nissim argued that the phrase
relates to determining the timing of “cut in” and “cut out” points on either side of OC in
order to create the most seamless transitions possible. ClearPlay argued that the
phrase gives it the discretion “to decide whether to code potentially objectionable
material when the degree of objectionableness may be outweighed by the material’s
relevance to the movie.” Id. at 13–14. The Special Master concluded that the phrase
“flexibility of artistic judgment” unambiguously grants ClearPlay discretion to determine
“when to code material that may technically fall within the definitions of the
specifications.” Id. at 15–16. “In the Special Master’s view, substantial compliance
within the context of Paragraph 1.4 is not determined by percentages or numbers.
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Rather, the plain language of 1.4 allows ClearPlay to depart from the specifications, in
exercising reasonable ‘artistic judgment,’ and still be in substantial compliance with the
OC specifications.” Id. at 14. Hence, if ClearPlay determines in the exercise of its
artistic judgment that it should not exclude otherwise objectionable material because
“the degree of objectionableness may be outweighed by the material’s relevance to the
movie,” it is free to include such objectionable content regardless of the level of
explicitness selected by the user—and, according to the Special Master, ClearPlay will
still be in substantial compliance. After hearing testimony and reviewing evidence
relating to selected OC maps released by ClearPlay and viewing all of the selected
movies with and without various filters enabled, the Special Master determined that
ClearPlay’s selected OC maps each substantially complied with the Specifications and,
therefore, the Agreement.
The district court found “that the Special Master’s conclusions as to the meaning
of the relevant provisions of the Settlement and Licensing Agreement are well
reasoned, thorough, and in harmony with the Court’s de novo review of the contract
interpretation issues.” In fact, in its order the district court stated that the Special
Master’s report is “ratified and affirmed.” Order at 5. The district court likewise
concluded that the Agreement “grants ClearPlay discretion to depart from the
CustomPlay Specifications,” Order at 4, “when doing so is reasonably necessary, in
ClearPlay’s reasonable artistic judgment, for the general appreciation of understanding
of the motion picture at issue.” Id. The court found, on its own review, that the
evidence demonstrated that ClearPlay’s decision not to code certain material is
2009-1327 5
supported by reasonable deference to ClearPlay’s artistic judgment. Nissim appeals
the district court’s order. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(1).
DISCUSSION
Paragraph 12.4 of the Agreement states that issues of interpretation shall be
governed by Florida state law. J.A. 462. Under Florida law, interpretation of a contract
is a question of law that is reviewed by appellate courts de novo. O’Keefe Architects,
Inc. v. CED Constr. Partners, Ltd., 944 So. 2d 181, 185 (Fla. 2006); Miren Int’l Lodging
Corp. v. Manley, 982 So. 2d 1203, 1204 (Fla. Dist. Ct. App. 2008). The trial court held
that the Agreement was unambiguous. Whether an ambiguity exists in the terms of a
contract is a question of law, and the ambiguity must be resolved as a question of fact.
Soncoast Cmty. Church of Boca Raton, Inc. v. Travis Boating Ctr. of Fla., Inc., 981 So.
2d 654, 655 (Fla. Dist. Ct. App. 2008). “Language in a document is ambiguous when it
is uncertain in meaning and may be fairly understood in more ways than one and is
susceptible of interpretation in opposite ways.” Barnett v. Destiny Owners Ass’n, Inc.,
856 So. 2d 1090, 1092 (Fla. Dist. Ct. App. 2003).
The parties dispute the meaning of two phrases in Paragraph 1.4(iii) of the
Agreement, namely “substantial compliance” and “flexibility of artistic judgment.”
Paragraph 1.4 requires the ClearPlay CustomPlay OC map to:
be in substantial compliance with the CustomPlay Specifications, it being
recognized by the parties that application of the CustomPlay OC
Specifications requires flexibility of artistic judgment within the overall goal
of maintaining consistency.
J.A. 449 (emphasis added). The key questions to be resolved are how much
compliance with CustomPlay OC Specifications is required, and on what basis is
ClearPlay allowed to deviate from the CustomPlay specifications.
2009-1327 6
Nissim argues that “substantial compliance with the CustomPlay Specifications”
requires “compliance in the range of 90% or greater.” 1 Appellant’s Br. 43. Nissim
asserts that to determine a percentage of compliance, ClearPlay’s filtering choices
should be measured against choices Nissim made for the same movies based on the
Specifications. 2 ClearPlay argues that the parties could have drafted the License
Agreement to require compliance with a numerical standard, but instead chose a more
subjective standard, substantial compliance.
The Agreement uses a subjective standard; it does not define this standard with
quantitative precision. We will not rewrite the agreement to do so. Nissim
acknowledges that coding decisions require subjective judgment. Appellant’s Br. 45
(stating that “judgment is sometimes involved in determining what falls within the
Specifications’ twelve content categories and three explicitness levels”). We also agree
that ClearPlay’s substantial compliance should not be measured against Nissim’s
sample OC maps nor should it be measured against the general intent of the
Agreement. The Specifications are the standard against which the substantial
compliance of ClearPlay’s OC maps must be measured according to the plain language
1
For this proposition, Nissim cites Blinderman Construction Co. v. United
States, 39 Fed. Cl. 529 (1997), in which the Court of Federal Claims cited several cases
from the Board of Contract Appeals for the proposition that objective qualitative
measures are important in a test for “substantial completion” in construction contracts.
Id. at 573 & n.40. Blinderman, however, relates to interpretation of terms in a
construction contract, not a patent settlement agreement, and interprets a different term
than the one at issue before us. Blinderman is not binding on this court and irrelevant to
our interpretation of the Agreement at issue.
2
Nissim submitted filters that it created for the selected movies to the
Special Master and district court, along with documentation quantitatively comparing its
coding choices to those of ClearPlay for the selected movies. Nissim cites these
comparisons throughout its briefs as evidence that ClearPlay’s OC maps do not
substantially comply with the Specifications.
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of the Agreement. It is up to the finder of fact to determine if ClearPlay meets that
standard for each selected OC map.
The fact that a standard is subjective does not render it per se ambiguous. See
Flood v. Union Planters Bank, 878 So. 2d 407, 410 (Fla. Dist. Ct. App. 2004) (“The
absence of a definition for this term in [an agreement] does not mean that the term is
ambiguous.”) (citing State Farm Fire & Cas. Co. v. CTC Dev. Corp., 720 So. 2d 1072,
1076 (Fla. 1998)); id. (“Furthermore, just because a provision may be complex and
needs to be analyzed in order to be applied does not mean that it is ambiguous.”) (citing
Swire Pac. Holdings, Inc. v. Zurich Ins. Co., 845 So. 2d 161, 165 (Fla. 2003)). Merriam-
Webster’s Collegiate Dictionary (11th Ed. 2003) defines “substantial” as “being largely
but not wholly that what is specified.” Id. at 1245. Both parties cited the same Black’s
Law Dictionary definition for “substantial compliance”—“[c]ompliance with the essential
requirements.” Report at 11 (quoting Black’s Law Dictionary 1428 (6th ed. 1990)).
Whether a particular filter for a movie is in “substantial compliance” is a question of fact
to be determined by the fact finder—namely, whether ClearPlay’s OC maps each
comply with the essential requirements of the Specifications. See Moore v. Chodorow,
925 So. 2d 457, 461 (Fla. Dist. Ct. App. 2006) (“Whether a party’s failure to commit
certain actions constitutes a material breach of an agreement is reviewed as a question
of fact.”).
There are undoubtedly factual questions which will need to be resolved in the
course of determining whether there exists substantial compliance for any given filter.
For example, and as noted by the Special Master, in Ocean’s Eleven the character
Reuben constantly holds his signature cigar, an act that is coded as Substance Abuse
2009-1327 8
in the Specifications. Report at 23. Coding all the scenes in which Reuben is holding a
cigar would virtually eliminate him from the movie, turning it into “Ocean’s Ten.” Id.;
Appellee’s Br. 14. It is up to the fact finder to determine whether the decision to not
code Reuben holding a cigar is a single act of non-compliance or multiple acts for the
purposes of determining substantial compliance. As another example, if ClearPlay
decided to not code much of the final battle in The Last Samurai, with the exception of
the most graphic violence, it could also be considered either a single act that may result
in substantial compliance or many individual acts of noncompliance that may result in a
breach of the Agreement. The fact finder must determine whether ClearPlay’s filters are
in substantial compliance with the CustomPlay Specifications.
Nissim also argues that the trial court erred when it concluded that “Paragraph
1.4(iii) grants ClearPlay discretion to depart from the CustomPlay Specifications,” Order
at 4, “when doing so is reasonably necessary, in ClearPlay’s reasonable artistic
judgment, for the general appreciation of understanding of the motion picture at issue.”
Id. Nissim disagrees with the district court’s determination that the Agreement
unambiguously grants ClearPlay the right to not code OC that falls within the
Specifications, and Nissim argues that the Agreement is much more restrictive in the
types of coding choices ClearPlay is allowed to make when exercising its “flexibility of
artistic judgment.” Nissim proposes two types of flexibility that it believes ClearPlay may
exercise under the Agreement. First, Nissim argues that the phrase should be
interpreted as allowing some judgment in determining what falls within the
Specifications’ twelve content categories and three explicitness levels. As Nissim
describes in its brief, “a hard back-slap might depict either camaraderie that would not
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be coded, or an act of violence that would be coded.” Second, Nissim argues that
artistic judgment may be used to identify the exact frames at which to start and stop
coding in order to provide a seamless artistic impression when removing objectionable
content.
ClearPlay disagrees that Paragraph 1.4(iii) is as restrictive as Nissim proposes
and argues that the phrase “flexibility of artistic judgment” should be interpreted to allow
ClearPlay to choose to code or not code individual instances of possible OC whenever
ClearPlay determines that the degree of objectionableness may be outweighed by the
material’s relevance to the movie. ClearPlay’s argument is that it has the discretion
under the agreement to code or not code by exercising its artistic judgment, and by
doing so ensure that its customers are able to watch a filtered movie that is still
understandable and enjoyable. Without this discretion, ClearPlay argues that strictly-
filtered films would be incomprehensible and disliked by consumers. For instance, strict
compliance with the Specifications when coding both The Last Samurai and The
Postman would require the coding of the entire final battle scenes in each as Violence
and Bloodshed. Report at 22, 24. A viewer of The Postman would not even know who
won the battle. Id. at 24. Similarly, as mentioned above, strictly coding Ocean’s Eleven
for Substance Abuse would eliminate not only Reuben’s character from the film but also
many minutes of critical dialogue, such as the scene in which the characters discusses
their plan for the heist. Report at 23. Strict coding in West Side Story would require
ClearPlay to code the song “Maria” as Mushiness, removing a pivotal scene in the
movie. Order at 3.
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The problem with ClearPlay’s definition of Paragraph 1.4 is that under its
interpretation the artistic judgment exception would swallow the substantial compliance
rule. The rule is substantial compliance—the Agreement makes that much clear.
Whether there is substantial compliance is for the fact finder to determine on a case-by-
case basis. The flexibility of artistic judgment allows ClearPlay the discretion to deviate
from compliance with the CustomPlay Specifications only in application of the
CustomPlay OC Specifications. It defines the way in which something less than full
compliance is acceptable under the Agreement. But even exercise of artistic judgment
is only allowed “within the overall goal of maintaining consistency.” Nissim argues that it
was paramount to the successful development of its standard that consistency in
application exists, and points out that the most frequent consumer criticism of
ClearPlay’s prior filtering products was a lack of consistent application. When a user
opts for exclusion of certain types of content, the user must be able to rely upon the
filter to actually filter out that content. If a user chooses to edit all violence from an
inherently violent movie such as The Last Samurai or The Postman, the user may not
be able to understand the plot or even know who prevailed in the end. But that is the
choice of the user. Neither the CustomPlay Specifications, nor Paragraph 1.4, indicate
that ClearPlay can deviate from the Specification whenever it determines that the
objectionable material is too important to plot line or movie relevance. ClearPlay’s
proposed construction would effectively allow 0% compliance to be “substantial
compliance” so long as the decisions not to code were each based on ClearPlay’s
determination that objectionableness was outweighed by the material’s relevance. We
conclude that this cannot be the correct construction.
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The Agreement does, in fact, contain language elsewhere regarding material
“essential to general appreciation of understanding of the motion picture.” J.A. 453.
Paragraph 4.8 allows ClearPlay “to omit coding a category at a specified level of
explicitness for a particular motion picture only when the content falling within that
category of content at that specified level of explicitness is essential to general
appreciation of understanding of the motion picture.” Id. The parties both agree that
this section allows ClearPlay to choose not to code a particular category at a particular
explicitness level if ClearPlay determines that the material is essential to understand the
movie. This language appears in Paragraph 4.8; it does not appear in Paragraph 1.4.
Paragraph 1.4 does not give similar discretion across the broad spectrum of all
categories. In fact, if ClearPlay could in the exercise of its artistic judgment, refuse to
code material under Paragraph 1.4 whenever it determined the material’s relevance to
the movie to outweigh its objectionableness, there would be no need for Paragraph 4.8.
Paragraph 4.8 would be entirely superfluous if we accepted ClearPlay’s proposed
interpretation of Paragraph 1.4.
The Agreement requires “substantial compliance” but allows for some “flexibility
of artistic judgment” in applying the Specifications. Even the allowed flexibility must be
“within the overall goal of maintaining consistency.” Nissim articulates several
permissible manners in which artistic judgment may be exercised under Paragraph 1.4.
Additionally, the CustomPlay OC Specifications can not and do not detail every possible
scenario and how it should be coded. They provide guidelines and give examples from
movies explaining how particular scenes would be coded. This leaves a lot of discretion
for the exercise of artistic judgment in applying these Specifications. We cannot discern
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from the Agreement itself every possible basis upon which ClearPlay is allowed to
exercise its artistic judgment and leave individual determinations to the fact finder.
Paragraph 1.4 does not, however, allow ClearPlay to use its artistic judgment to refuse
to code objectionable material because it believes the relevance to outweigh the
objectionableness.
Nissim raises four other issues on appeal: (1) whether ClearPlay’s CP-007-USB
Players (the 007 Players) “incorporate or contain Modified ClearPlay Software” as
required under paragraph 1.13 of the Agreement; (2) whether the 007 Players’ software
interface “implements the CustomPlay OC Specifications content categories and . . .
levels of explicitness”; (3) whether the district court correctly held that ClearPlay’s late
royalty payments and non-compliant royalty reports did not constitute material breach
under paragraph 12.5 and whether Nissim waived the breach by accepting all royalty
payments and reports without protest; and (4) whether the district court correctly
referred future disputes concerning the compliance of ClearPlay’s 007 Filters to the
“Mapping Dispute Resolution” process under paragraph 4.6.
We have considered Nissim’s arguments with respect to the first two issues and
find them to be without merit. As to the third issue, we conclude that Nissim waived its
argument that ClearPlay’s late royalty payments and noncompliant royalty reports
constitute a material breach based on paragraphs 12.2 and 12.5 of the Agreement.
Nissim never raised this argument with the district court despite multiple opportunities to
do so. See J.A. 436; J.A. 4107; J.A. 5327–64. We therefore will not consider Nissim’s
argument in the first instance. See Sterling Fin. Inv. Group, Inc. v. Hammer, 393 F.3d
1223, 1226 (11th Cir. 2004) (“The law in our circuit is clear that ‘arguments not
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presented in the district court will not be considered for the first time on appeal.’”
(quoting Mills v. Singletary, 63 F.3d 999, 1008 n.11 (11th Cir. 1995))). With regard to
the fourth issue, we lack jurisdiction to consider Nissim’s argument that the district court
incorrectly referred future disputes concerning the compliance of ClearPlay’s 007 Filters
to “Mapping Dispute Resolution.” We must follow “the bedrock rule that a case or
controversy must be based on a real and immediate injury or threat of future injury that
is caused by the defendants.” Prasco, LLC v. Medicis Pharm. Corp., 537 F.3d 1329,
1339 (Fed. Cir. 2008). We would only have jurisdiction to consider Nissim’s final
argument if the parties filed a second dispute over the Agreement with the district court
and the district court refused to assert jurisdiction.
We vacate the order of the district court and remand for the fact finder to
determine whether ClearPlay’s OC maps substantially comply with the Specifications in
a manner consistent with this opinion.
VACATED and REMANDED
COSTS
No costs.
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