ORDER GRANTING DEFENDANT'S SECOND MOTION IN LIMINE

Re: Dkt. No. 187

HAYWOOD S. GILLIAM, Jr., District Judge.

Pending before the Court is Defendant VMware, Inc.'s ("VMware") second motion in limine seeking to preclude Plaintiff Phoenix Technologies, Inc. ("Phoenix") from introducing evidence or argument that "(1) [] departs from its contention, throughout the case, that both VMware's ESX and ESXi products infringe Phoenix's copyrights, or (2) [] the removal of the Linux [operating system] from ESX to create ESXi introduced a `new' infringing feature in ESXi." Dkt. No. 187 at 5. Phoenix opposes. Dkt. No. 19. Having carefully considered the papers filed in connection with this motion and oral arguments made by the parties at the pretrial conference and a subsequent telephonic conference, the Court GRANTS VMware's motion in limine for the reasons set forth below.

I. HISTORY

To clarify the basis for VMware's motion, the Court first recounts Phoenix's shifting characterization of its theory of infringement.

Phoenix filed its complaint on March 27, 2015, alleging that several VMware products infringed Phoenix's copyright in four ways. See Dkt. No. 1. Specifically, Phoenix alleged that

Id. ¶ 68.

VMware then propounded an interrogatory asking Phoenix to "[i]dentify each [VMware] product that [Phoenix] contend[ed] infringe[d] [Phoenix's] copyright and for which [Phoenix] [sought] damages." Dkt. No. 295-7 at 5. In response, on April 13, 2016, Phoenix identified VMware's GSX Server, VMware Server, ESX, and ESXi products, and stated that they each infringed through the "[u]nlicensed use of [Phoenix] BIOS beyond the terms of the MLA and its amendments, as set forth in the Complaint." Id. at 6-7. Phoenix's response further stated that "the basis for [Phoenix's] contention that each product or product version infringes involves expert issues that will be the subject of the reports of Phoenix's experts. Phoenix incorporates by reference all such expert reports and testimony." Id. at 7. At the time of this response, of course, there were not yet any expert reports to incorporate.

On May 13, 2016, fourteen days after the close of fact discovery,1 two Phoenix experts, Dr. Nathaniel Polish and Dr. Robert Zeidman, filed reports noting a distinction between ESX and ESXi not alleged in Phoenix's complaint. Dkt. Nos. 120-4 ¶¶ 60-65, 122-2 ¶ 67. For example, Dr. Polish stated that ESXi's "removal of the Linux OS Service Console further demonstrates that ESXi neither installs on nor operates with any standard PC operating system." Dkt. No. 122-2 ¶ 67. Dr. Zeidman stated that "VMware's ESXi product functions entirely independently of any standard operating system, let alone a standard PC operating system, as that term is defined by Dr. [] Polish . . . [because] VMware's ESX product is also installed on physical servers without a standard operating system, but incorporates and relies upon a Linux-based operating system to launch," while "ESXi eliminates this use of Linux and therefore operates without the use of any standard operating system." Dkt. No. 120-4 ¶ 65. Similarly, Phoenix's damages expert, Dr. Matthew Lynde, testified that for purposes of drafting his expert report he "was asked to assume" that ESXi was the infringing product, rather than ESX, and that "[i]f [he] were asked to assume that ESX were in breach of the [] license agreement [as well], that would require further economic analysis." Dkt. No. 193-11 at 10:15, 14:16-19.

Thereafter, in Phoenix's June 6, 2016 Second Supplemental Responses and Objections to VMware's Interrogatory Nos. 7-10, Phoenix stated that while it "[did] not concede that other VMware products comply with the [Master License Agreement ("MLA")] (as defined in the Complaint), it [would] not seek hypothetical license damages in connection with VMware products other than the ESXi products based on [] information made available to Phoenix in discovery." Dkt. No. 130-1 at 4:2-5. Instead, Phoenix stated that it intended to seek damages specifically relating to VMware's infringing use of the Phoenix BIOS in VMware's ESXi products, because those products "(1) run on servers instead of `standard PC platforms'"; (2) "operate with their own host kernel, without a host operating system, and are thus not compatible with `standard PC operating systems'"; (3) "support multiple processors beyond the limitation of two processors"; and (4) require the Phoenix BIOS to "interact[] with a virtual chipset that is not a 440BX chipset." Id. at 4:26-5:5 (internal quotation marks omitted). Three weeks later, Dr. Lynde submitted a Sur-Rebuttal Expert Report stating that "[t]he 2005 and 2006 dates that [VMware's damages expert] assumes as the dates of the hypothetical negotiation are unsupported and predate the sale of ESXi, the first accused product, by at least 18 months." Dkt. No. 215-20 at 5.

On July 22, 2016, Phoenix filed a motion for summary judgment arguing, in part, that VMware's "ESXi software violates [the MLA] licensing restriction" because the MLA's definition of "`Licensee's Products' can only be construed in one way: the hardware platform on which ESXi runs must have a standard PC operating system.'" Dkt. No. 121 at 16:6-9. Phoenix reasoned that because "ESXi, in contrast to prior versions of [VMware's] software, `operates independently from any general-purpose operating system [("OS")],'" there was "no room for doubt that the ESXi products violate the `Licensee's Products' restriction . . . ." Id. at 16:13-20. Phoenix further stated that ESXi's removal of the general purpose Linux OS that was incorporated into ESX constituted a "significant departure from its prior technology." Id. at 9:22.

On August 26, 2016, Phoenix opposed VMware's cross-motion for summary judgment, arguing that VMware "misleadingly conflate[d] [the] ESX and ESXi products, referring to them jointly as `ESX/ESXi' in its Motion, [when] VMware's own marketing materials demonstrate[d] these products [were] markedly different." Dkt. No. 212 at 7:3-5. Instead, Phoenix argued that ESXi was the "only product at issue here." Id. at 6:20. Furthermore, Phoenix stated that "[t]he only component of VMware's earlier products[, such as ESX,] that conceivably constituted a `standard PC operating system' was the Linux operating system in the service console of the software," which VMware removed from ESXi, thereby "eliminat[ing] any colorable claim that the ESXi software runs on `platforms with a standard PC operating system' and introduc[ing] new grounds for finding infringement." Id. at 9:2-6, 9:8-10 (emphasis added).

On September 16, 2016, Phoenix filed a reply in support of its motion for summary judgment, again arguing that VMware's ESX and ESXi products were "markedly" different "in that [ESXi] eliminated all reliance on a general purpose operating system." Dkt. No. 158 at 1 n.2. Phoenix therefore contended that VMware's opposition to its motion for summary judgment, in which VMware argued that Phoenix's claims were barred by the doctrines of copyright estoppel and waiver, Dkt. No. 216 at 24-25, "misleadingly conflate[d] ESXi with [ESX], and refer[red] to them jointly as "ESX/ESXi" so that it [could] exaggerate the extent of its purported defenses," Dkt. No. 158 at 1 n.2.

On November 10, 2016, the Court held a hearing on the parties' cross motions for summary judgment. See Dkt. No. 207. At the hearing, Phoenix represented that: (1) ESX's inclusion of a Linux-based OS constituted a "very material" difference "from the ESXi product, which the Defense admits had no operating system at all at the level of the hardware platform," Dkt. No. 205 at 5:19-25; and (2) the ESX and ESXi products are "fundamental[ly] differen[t]" because "ESX arguably has an operating system; ESXi does not," id. at 8:17-18. Phoenix therefore stated that "what we are electing to do is go forward only with the causes of action that we have on the merits as to ESXi, and damages as to ESXi." Id. at 8:19-21.

On October 21, 2016, each party filed a motion in limine seeking to exclude the expert opinions of the other party's damages expert for being based on the wrong hypothetical negotiation date. See Dkt. Nos. 291, 294. In its motion in limine, VMware argued that Phoenix's expert Dr. Lynde "selected a legally erroneous date for his hypothetical negotiation, which led to an artificially inflated hypothetical royalty," because "[a]ccording to Phoenix's complaint and its sworn interrogatory responses, VMware first allegedly exceeded the MLA by using the BIOS in server products, like GSX, beginning in 2001, and in `bare metal' server products, like ESX, beginning in 2002." Dkt. No. 294 at 2:8-9, 2:25-3:1. In contrast, Phoenix argued in its third motion in limine that the correct hypothetical negotiation date was the date when the "infringing distributions of ESXi began in 2008," because "the infringements at issue involve VMware's unauthorized use of Phoenix's BIOS program in ESXi." Dkt. No. 291 at 1:21-2:1 & 1 n.1. Plaintiff further stated:

Id. at 1 n.1. Phoenix later reiterated its position on this point in its opposition to VMware's third motion in limine, stating:

Dkt. No. 238 1:8-15. Phoenix further stated that it "ha[d] narrowed this case to the ESXi products because (1) VMware's infringement in ESXi is ongoing, whereas VMware no longer distributes the other products listed in the Complaint, and (2) ESXi has unique infringing features that will streamline the case for trial and allow Phoenix to prove infringement based on VMware's own statements." Id. at 1 n.1; see also id. at 2:4-5 ("As compared to VMware's earlier products, ESXi has a distinct feature that supports a distinct theory of infringement."), 3:11-13 ("VMware cites no authority holding that a hypothetical license for an infringing product should be based on a hypothetical negotiation tied to other infringements involving other products that are not at issue and do not share a key infringing feature of the product in dispute.").

On January 17, 2017, Phoenix filed an opposition to VMware's second motion in limine, arguing that "Phoenix is entitled to present evidence and argue that ESX and ESXi are materially different (based on the removal of the Linux-based COS) . . . ." See Dkt. No. 237 at 5:9-10. Furthermore, Phoenix stated that "VMware argues in its [second motion in limine] (and presumably will do so at trial) that Phoenix's knowledge of ESX `is equally applicable to ESXi.' Phoenix must be permitted to rebut that argument with evidence of further differences between ESXi (which contains no embedded Linux COS) and ESX (which contains the Linux COS)." Id. at 4:5-8.

At the February 2, 2017 pretrial conference, the Court questioned Phoenix as to the apparent shift in its theory of infringement, stating that in its view, there was "really a question here as to whether this is a narrowing at all or whether it's an expansion or a shifting of the theory that was the operating basis of the case through at least fact discovery." See Dkt. No. 266 at 9:12-15. In response, Phoenix's counsel offered conflicting statements. First, Phoenix stated that

Id. at 16:16-17:6. Later, however, counsel had the following exchange with the Court:

Id. at 19:22-21:14, 22:12-18. However, later still, the following exchange occurred:

Id. at 22:20-23:1.

Finally, on February 14, 2017, the Court held a further telephonic conference, and again addressed this issue, asking Phoenix's counsel if it had previously represented in its opposition to VMware's third motion in limine that "there was a distinct theory of infringement as to ESXi." See Dkt. No. 275 at 10:3-4 (referencing Dkt. No. 238 1:8-15). In response, counsel stated: "Yes, Your Honor. I'm looking at it right now and that is what we said." Id. at 10:21-22. Counsel further stated:

Id. at 11:10-16, 11:22-25 (emphasis added). The Court thus asked Phoenix when it had "inform[ed] [VMware] before the close of fact discovery about that unique, distinct theory of infringement," to which Phoenix responded: "Well, again, Your Honor, the way we think of it is a narrowing of the case and not as a new affirmative theory but rather as a way to preemptively address defenses that they could raise." Id. at 12:15-21.

With this history in mind, the Court now turns to the substance of VMware's motion.

II. LEGAL STANDARD

Under Federal Rule of Civil Procedure ("FRCP") 37(c)(1), "[i]f a party fails to provide information . . . as required by Rule 26(a) or (e), the party is not allowed to use that information or witness to supply evidence on a motion, at a hearing, or at a trial, unless the failure was substantially justified or is harmless." Fed. R. Civ. P. 37(c)(1). "In addition to or instead of this sanction, the court, on motion and after giving an opportunity to be heard," may direct "that designated facts be taken as established for purposes of the action," and/or "prohibit[] the disobedient party from supporting or opposing designated claims or defenses, or from introducing designated matters in evidence." Fed. R. Civ. P. 37(b)(2)(A)(i)-(ii), 37(c)(1). "Implicit in Rule 37(c)(1) is that the burden is on the party facing sanctions to prove harmlessness." Yeti by Molly, Ltd. v. Deckers Outdoor Corp., 259 F.3d 1101, 1107 (9th Cir. 2001).

In general, under FRCP 26(e), "[a] party who has made a disclosure under Rule 26(a)—or who has responded to an interrogatory, request for production, or request for admission—must supplement or correct its disclosure or response . . . in a timely manner if the party learns that in some material respect the disclosure or response is incomplete or incorrect, and if the additional or corrective information has not otherwise been made known to the other parties during the discovery process or in writing." Fed. R. Civ. P. 26(e)(1).2

III. DISCUSSION

VMware makes two points. First, VMware argues that "Phoenix's infringement theory applies equally to both ESX and ESXi," such that "Phoenix should not be permitted to avoid it by a theory—developed after the close of discovery—that ESXi, but not ESX, infringes Phoenix's copyright." Dkt. No. 187 at 4:3-4, 4:5-7. Second, VMware contends that "Phoenix should also be barred from arguing that the removal of the Linux COS from ESX in creating ESXi represents a `new infringing feature.'" Id. at 4:17-19. The Court agrees with both contentions. However, because Phoenix also appears to agree with the substance of VMware's first contention, the Court will hold Phoenix to its past representations, and will only address VMware's second argument here. See Dkt. No. 266 at 25:17-25 ("Our [i.e., Phoenix's] position is [ESX and ESXi] both violate.").

Phoenix's complaint asserts a copyright infringement claim against a group of VMware products that Phoenix characterizes as the "infringing products." Compl. ¶ 68. Phoenix's complaint alleges, without differentiation, that the infringing products infringed Phoenix's copyright in four ways. Id. Phoenix confirmed in its response to VMware's interrogatories that the products infringed "as set forth in the Complaint." Dkt. No. 295-7 at 6-7. Based on those assertions, VMware proceeded through fact discovery under the impression that—given the grouped allegations against all of the infringing products—it need not explore each and every characteristic of each and every individual product in order to adequately develop its defense. That assumption was reasonable given that it was not until fourteen days after the close of fact discovery that Phoenix intimated for the first time that it intended to assert that ESXi infringed in different or unique ways based on the removal of the Linux OS. See Dkt. Nos. 120-4 ¶ 65, 122-2 ¶ 67. Thereafter, and as detailed above, Phoenix has taken a range of positions as to whether ESX and ESXi are "markedly" or "fundamentally" different products because "ESXi has a unique feature not present in VMware's earlier products . . . which supports a distinct theory of infringement," Dkt. Nos. 158 at 1 n.2, 205 at 8:17; 238 1:11-12, or whether the products do, in fact, "both violate in the same core way," Dkt. No. 266 at 20:21-22; see also Oracle USA, Inc. v. SAP AG, 264 F.R.D. 541, 544 (N.D. Cal. 2009) (stating that "[t]he orderly case management of complex litigation requires defining the basic contours of the litigation from the outset . . . .") (citing Manual for Complex Litigation (Fourth) § 11.41 (2004) ("Early identification and clarification of issues is essential to discovery control.")).

VMware contends that Phoenix's development of the "new theory of infringement" after the close of fact discovery left it "without the opportunity to explore and respond [to the theory, thereby] prejudicing VMware's ability to conduct discovery, depose fact witnesses, or have its experts offer fulsome opinions on [it]." Dkt. No. 187 at 5: 11-14 (internal quotation marks omitted). Again, the Court agrees. VMware was not alerted to Phoenix's concededly "new grounds for finding infringement," Dkt. No. 212 at 9:10, until after the close of fact discovery, see Dkt. Nos. 120-4 ¶¶ 60-65, 122-2 ¶ 67. Nevertheless, Phoenix contends that VMware was on notice of the possibility that the factual basis for its theory of infringement might shift, because "Phoenix expressly put VMware on notice that the basis of its infringement claim involve[d] expert issues that w[ould] be the subject of its expert reports," and Phoenix "incorporated by reference all forthcoming expert reports and testimony into its response." Dkt. No. 237 at 1:14-16, 1:18-19. However, such an attempt to incorporate not-yet-existing expert reports into Phoenix's interrogatory response only supports the Court's finding that Phoenix's shift in theory effectively precluded VMware from understanding the central claim now alleged against it at the critical time: before fact discovery closed. See id. at 1:26-2:1; see also Apple, Inc. v. Samsung Elecs. Co., Ltd., 2012 WL 3155574, at *5 (N.D. Cal. 2012) (affirming magistrate judge's order striking portions of expert reports based on Rule 37 violation: "[B]ecause [defendant] did not disclose its theories prior to the close of fact discovery, [plaintiff] did not have the opportunity to conduct additional fact discovery regarding [defendant's] new theories."). The Court thus finds that Phoenix's shift in theory rendered its prior disclosures to VMware both incomplete and incorrect such that Phoenix was required to "supplement or correct" them under FRCP 26(e). Fed. R. Civ. P. 26(e).3

Phoenix's failure to do so before the close of fact discovery prejudiced VMware by forcing it to proceed through that phase of discovery without the ability to explore the particular theories of infringement alleged against it, or to establish the facts necessary to support its affirmative defenses, which hinge almost entirely on VMware's ability to point to information in the record demonstrating what Phoenix knew or should have known about the details of VMware's use of the Phoenix BIOS. Phoenix now openly admits that it intends to use its "distinct theory of infringement" with regard to ESXi in order to "eliminate[] potential defenses that VMware could have asserted as to GSX and ESX." That admission further supports the Court's conclusion, and underscores why it was critical for Phoenix to fully disclose its particular theories of infringement prior to the close of fact discovery, so VMware would have the opportunity to properly develop those defenses. See Dkt. No. 238 1:8-15. In fact, only after the close of fact discovery did Phoenix reveal what is now apparent: the "distinct theory of infringement" based on the removal of the Linux OS, which it disclosed for the first time in its expert reports, is the focal point of the case it seeks to put on at trial. Phoenix's belated disclosure of this "distinct theory" made it impossible for VMware to develop the factual record to support its affirmative defenses as to that theory, and to rebut the theory with evidence—not just "argument," as Phoenix suggests VMware can do now. See Dkt. No. 266 at 21:9. Phoenix's actions are thus neither "substantially justified" nor "harmless." Fed. R. Civ. P. 26(e), see also Apple, Inc., 2012 WL 3155574, at *6 ("[T]he parties needed to crystallize and disclose their theories and contentions in a timely manner. [Defendant's] failure to timely disclose its amended answers to contention interrogatories until after the close of fact discovery impeded [plaintiff's] ability to conduct fact discovery on the undisclosed theories .").

For the foregoing reasons, the Court GRANTS VMware's Second Motion in Limine. Accordingly, Phoenix will be precluded from introducing evidence or argument at trial that the removal of the Linux OS from ESX in creating ESXi constituted an independent infringement of the Phoenix BIOS copyright. In addition, because the majority of the prejudice VMware faces as a result of Phoenix's shifting theory of infringement concerns its affirmative defenses, the Court intends to provide the jury with the following instruction, to which the Court will also adhere when deciding VMware's affirmative defenses of estoppel and laches: "For purposes of determining when Phoenix discovered or should have discovered an infringement, you are not to distinguish between ESX and ESXi. Instead, you are to assume that the earliest date on which Phoenix discovered or should have discovered an infringement as to either ESX or ESXi is the date that it discovered or should have discovered an infringement as to ESXi."

IT IS SO ORDERED.