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Incorporation of AAA Rules in License Creates Clear and Unmistakable Intent to Arbitrate

October 20, 2006

Decision icon Decision

Last Month at the Federal Circuit - November 2006

Judges: Newman (dissenting), Schall, Prost (author)

[Appealed from: S.D. Cal., Judge Brewster]

In Qualcomm Inc. v. Nokia Corp., No. 06-1317 (Fed. Cir. Oct. 20, 2006), the Federal Circuit considered the propriety of a district court’s denial of a motion to stay litigation pending arbitration.

In July 2001, Qualcomm Incorporated (“Qualcomm”) and Nokia Corporation (“Nokia”) entered into a licensing agreement that included a broad arbitration clause specifying that “[a]ny dispute, claim, or controversy arising out of or relating to this Agreement . . . shall be settled by arbitration . . . .” In November 2005, Qualcomm sued Nokia for patent infringement in the United States District Court for the Southern District of California. While the technology involved in the patent infringement lawsuit did not appear to relate to the technology encompassed by the license agreement, Nokia asserted that one specific assertion made in the complaint involved technology that it “believes is licensed under the . . . Agreement.” Nokia also sought to assert the affirmative defense of estoppel, in which it asserted that Qualcomm engaged in misleading conduct that caused Nokia to believe that Qualcomm did not hold any patents it intended to assert against Nokia’s products. Accordingly, Nokia instituted arbitration via the arbitration clause in the agreement and filed a motion to stay litigation. The district court denied the motion to stay.

On appeal, the Federal Circuit indicated that it “applies regional circuit law to questions of arbitrability that are not ‘intimately involved in the substance of [the] enforcement of a patent right’” in determining the standard of review that should be applied. Slip op. at 7. The Federal Circuit ultimately concluded that regardless of what standard of review the Ninth Circuit would apply, the district court erred because it undertook a full arbitrability analysis as if the parties had not clearly and unmistakably delegated arbitrability decisions to an arbitrator.

Under the Federal Arbitration Act, a district court must stay the judicial proceeding in favor of the arbitration if the court is “satisfied that the issue involved . . . is referable to arbitration.” In this case, the Federal Circuit considered whether the district court properly determined that the issue was not referable to arbitration.

The Federal Circuit then put forth a two-part analysis. First, the district court must ask who has the primary power to decide arbitrability under the relevant agreement. This, in essence, becomes a question of whether the parties clearly and unmistakably intendedto delegate arbitrability decisions to an arbitrator. Second, if the court concludes that the parties did not clearly and unmistakably intend to delegate arbitrability decisions to an arbitrator, the general rule that the question of arbitrability is for judicial determination applies and the court should undertake a full arbitrability inquiry in order to be satisfied that the issue involved is referable to arbitration.

If, however, the court concludes that the parties did clearly and unmistakably intend to delegate the power to decide arbitrability to an arbitrator, then the court must perform a limited inquiry as to whether the assertion of arbitrability is “wholly groundless.” If the court finds that the assertion is wholly groundless, then it may conclude that it is not “satisfied” under section 3 of the Federal Arbitration Act and deny the moving party’s request for a stay. If the court concludes that the assertion is not wholly groundless, then it should stay the trial of the action pending a ruling on arbitrability by an arbitrator. The Federal Circuit explained in a footnote that this “wholly groundless” analysis serves as a check on a party’s ability to assert “any claim at all, no matter how divorced from the parties’ agreement, to force an arbitration.” Id. at 11 n.5.

In analyzing the first step, the Federal Circuit looked at the agreement and concluded that the incorporation of the American Arbitration Association rules (“the AAA rules”) “evidences a clear and unmistakable intent to delegate the determination of arbitrability to an arbitrator.” Id. at 10. The Federal Circuit thus concluded that the district court should have limited itself to answering whether Nokia’s assertions of arbitrability were “wholly groundless” and remanded the case to the district court.

Judge Newman wrote a one-line dissent, in which she stated that she would affirm the judgment of the district court.