In a dispute over a patent licensing agreement, CAFC refuses to deny enforcement of an arbitration clause based on a technicality

Ryan Chirnomas | March 29, 2012

Promega Corporation et al. v. Life Technologies Corporation et al.

March 28, 2012

Panel:  Newman, Dyk.  Opinion by Dyk.  Dissent by Moore.

Summary

Despite an oversight relating to transfer of a patent licensing agreement during a licensee’s merger proceedings, the Federal Circuit held that the licensee retained its right to demand arbitration in a dispute with a sub-licensee. Although the licensee ultimately did not suffer any negative legal consequences due to this oversight, this case provides a good reminder to corporate IP counsel to carefully review all tech transfer agreements during mergers or reorganizations.  Here, a single letter to the sub-licensee could have saved the licensee from significant distraction.

Details

As of 1996, a company called Research Genetics was the exclusive worldwide licensee of the Max Planck Society’s various European, American, and Japanese patents relating to genetic identification.  In 1996, Research Genetics sublicensed the technology in an agreement with Promega.  Under the terms of this agreement, “[a]ll controversies or disputes arising out of or relating to this Agreement, or relating to the breach thereof, shall be resolved by arbitration.”  Furthermore, the assignment of the 1996 agreement by either party could not be done “without the express written consent of the other party.”

From 2001 to 2008, a series of mergers and reorganizations occurred.  In 2001, Research Genetics merged with its parent company, Invitrogen.  Written consent was requested from Promega and was granted.  Then, in 2003, Invitrogen assigned the agreement to a wholly-owned subsidiary called IP Holdings.  Again, written consent was requested from Promega, and was granted.  Finally, in 2008, Invitrogen merged with another company to form Life Technologies Corporation, with IP Holdings remaining a wholly owned subsidiary of Life Technologies.  Written consent was never requested from or granted by Promega.  In 2009, IP Holdings transferred to Life Technologies their interest in all agreements to which they were a party, except those requiring third party consent.  IP Holdings notified Promega of the transfer, but did not request consent from Promega.

After Life Technologies was formed, it discovered that Promega was allegedly under-paying its royalties.  Negotiations were attempted, but broke down.  Life Technologies demanded arbitration as per the 1996 assignment.  However, Promega refused, and filed an action in district court in 2010, seeking, among other things, declaratory judgment of non-arbitrability of the dispute.  Since the 1996 agreement was never assigned to Life Technologies, Promega argued that they had no right to demand arbitration.  After reviewing its files, , Life Technologies discovered that Promega was correct as to the non-transfer of the 1996 agreement, and instead demanded arbitration on behalf of its subsidiary, IP Holdings.

Last year, the district court ordered arbitration between IP Holdings and Promega, on the grounds that IP Holdings was still the current assignee of the 1996 agreement.  The district court decided that despite the fact that IP Holdings had failed to transfer the agreement to their parent company, they had not lost their rights to demand arbitration.

On appeal, the CAFC agreed.  The CAFC boiled the case down to two questions:  (1) whether the parties agreed to enter into an agreement to arbitrate, and (2) whether the dispute falls within the scope of the arbitration agreement.  As to the first point, the CAFC agreed that the transfer of rights from IP Holdings to Life Technologies was indeed a failure, due to the absence of Promega’s permission.  However, the Court explained that even if the IP Holdings -> Life Technologies assignment was void, there was no dispute over the previous Invitrogen -> IP Holdings assignment.  The previous assignment was performed with the permission of Promega, and thus there was no questioning of its validity.

The Court criticized Promega for trying to “have it both ways”:  On the one hand, to say that IP Holdings could not demand arbitration because its rights had been assigned to Life Technologies, and on the other hand, to say that Life Technologies could not demand arbitration because the assignment of rights to it was improper due to the lack of Promega’s permission.

In view of this, the CAFC held that the 1996 agreement was currently assigned to IP Holdings, and that their demand for arbitration must be granted.  As to the second question, the Court dismissed Promega’s argument that only “small disputes” between the parties were subject to arbitration, explaining that this alleged unexpressed intent could not control the agreement.  The Court also noted Life Technologies’ agreement to subject itself to discovery, and dismissed Promega’s argument that such third-party discovery was unjust.

As such, the CAFC affirmed the district court’s order for arbitration between IP Holdings and Promega.  However, Judge Newman dissented, stating that “[n]o consent was given to the assignment of the contract to Life Technologies.”  Therefore, Judge Newman stated that there is no agreement to be subject to arbitration.  Newman comments appear to be directed to arbitration between Life Technologies and Promega, fail to explain why she believes that arbitration between IP Holdings and Promega should not be enforced.

Commentary

It appears that IP Holdings’ failure to seek Promega’s permission for transfer of the assignment was an oversight.  The CAFC reached the proper conclusion and refused to punish Life Technologies for this.  Promega seemed to be attempting to improperly take advantage of Life Technologies’ corporate structural organization, and small blunders during the course of a merger.  Although Life Technologies did not suffer any negative consequences, the take-home lesson here for corporate IP managers is to carefully review all agreements, old and new, during any sort of merger or corporate reorganization.  It appears that a simple letter in 2008 would have saved Life Technologies from this distraction, which no doubt diverted company resources from focusing on the merits of their dispute with Promega.

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