Arbitration is Good, but it Needs Protection

Scott Daniels | August 17, 2016

Verinata Health, Stanford & Illumina v. Ariosa & Laboratory Corp.

July 26, 2016

Before Reyna, Clevenger and Wallach.  Opinion by Reyna.

Summary:

  • Plaintiff Illumina and Defendant Ariosa entered into a supply agreement which contained a compulsory arbitration clause.
  • Illumina sued Ariosa for patent infringement.
  • Ariosa counterclaimed for breach of contract and breach of good faith, asserting that the supply agreement gave it a license to Illumina’s patent.
  • Illumina moved the trial judge to order that the contract and good faith breach counterclaims go to compulsory arbitration.
  • The trial judge denied Illumina’s motion that Ariosa’s counterclaims go to arbitration.
  • The CAFC affirmed the trial judge’s denial of Illumina’s motion for arbitration.

Details:

January 2012

Illumina agreed to supply Ariosa with products related to DNA diagnostic systems.  The supply agreement included a non-exclusive license of Illumina’s “Core IP Rights in Goods,” but excluded from the license Illumina’s “Secondary IP Rights in Goods.”  The “Core IP” comprised rights to products common in all fields, and the “Secondary IP” comprised rights to products in only particular fields.

The supply agreement also provided an arbitration clause:

Subject to the terms and conditions of this Section 31(c), any dispute, claim or controversy arising out of or relating to the breach, termination, enforcement, interpretation or validity of this Agreement, shall be determined by arbitration . . . . This Section 31(c) shall not apply to, and no arbitration shall resolve, disputes relating to issues of scope, infringement, validity and/or enforceability of any Intellectual Property Rights.

 (Emphasis added).

March 2012

Ariosa launched its DNA-sequencing test.

October 2012

Illumina acquired Verinata.

January 2014

Illumina sent a warning letter to Ariosa, accusing it of breaching the supply agreement by failing to license certain Secondary IP rights, as required by the agreement.

April 2014

Illumina sued Ariosa, claiming that Ariosa’s DNA-sequencing test infringed the ‘794 patent.  Shortly thereafter Ariosa counterclaimed, seeking a declaratory judgment that the patent was invalid and not infringed, and alleging both breach of the supply agreement and breach of covenant of good faith.  Ariosa asserted that Illumina’s suit for patent infringement constituted a breach of the supply contract.  Significantly, Ariosa argued that the supply agreement, at least implicitly, gave it a license to the ‘794 patent.

June 2014

Illumina moved to dismiss Ariosa’s breach of contract and breach of good faith counter-claims, arguing that the supply agreement required that they be sent to arbitration.

July 2015

The trial judge Illumina’s motion to dismiss, finding that Ariosa’s counter-claims were directly related to the ‘794 patent-in-suit and therefore exempted from the arbitration clause.

Background Points of Law:

  • A court may order arbitration of a particular dispute where the parties have agreed to arbitrate that particular dispute.
  • There is a national policy favoring arbitration.
  • A presumption in favor of arbitration where there is an ambiguity on that point in the parties’ agreement.
  • The contractual phrase “relating to” is given a broad, inclusive meaning, as compared to arising hereunder.”

The Federal Circuit Decision

Illumina argued that the trial judge was wrong in not dismissing the counterclaims because

  • Ariosa’s contract counterclaims did not involve an evaluation of the scope of the ‘794 patent claims.
  • His broad interpretation of “relating to” in the arbitration clause was contrary to the national policy of presuming arbitration where the parties’ agreement is ambiguous.
  • He should have severed the contract counterclaims and sent them to arbitration

The Federal Circuit disagreed, finding that the presumption in favor arbitration did not apply because the supply agreement was not ambiguous – each of the counterclaims directly relates to the issue of whether there is patent infringement, an issue exempted by the supply agreement from arbitration.  The Court also cited the relevant state law for the proposition that the contractual phrase “relating to” has a broad meaning

“The counterclaims at issue—declaratory judgment of non-infringement, breach of contract, and breach of certain covenants—are predicated on the notion that the infringement allegations cannot stand because of the licensing provisions within the supply agreement.”

“The scope of the licensed intellectual property rights is germane to whether Ariosa ultimately obtained a license to the ’794 patent for goods that it has been exclusively purchasing from Illumina under the supply agreement. Ariosa’s counterclaims are not about licensing or a license defense in the abstract—they are centered on whether Ariosa is licensed to use, and thus is immunized from infringement of, the asserted claims of the ’794 patent.” (Emphasis added).

“Illumina’s argument fails to appreciate that the excluded issues are about disputes over the scope of the licensed intellectual property—not whether a party lacked capacity to contract or failed to ship product under agreed upon terms and conditions,” potential disputes that would be suitable under the supply agreement for arbitration, but are not present in this case.

“The nucleus of Ariosa’s counterclaims is patent infringement… .”

Full Opinion

 

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