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Decision Compelling Arbitration Affirmed Where Valid Agreement Exists

March 28, 2012

Decision icon Decision

Last Month at the Federal Circuit - April 2012

Judges: Rader, Newman (dissent), Dyk (author)

[Appealed from: W.D. Wis.. Judge Crabb]

In Promega Corporation v. Life Technologies Corporation, No. 11-1263 (Fed. Cir. Mar. 28, 2012), the Federal Circuit affirmed the district court’s decision granting Invitrogen IP Holdings, Inc.’s (“IP Holdings”) motion to compel arbitration.

In 1996, Research Genetics, Inc. (“Research Genetics”) was the exclusive worldwide licensee of patents and patent applications in the United States, Europe, and Japan (collectively, the “licensed patents”) relating to genetic identification, including U.S. Patent No. RE37,984 (“the ’984 patent”). On June 19, 1996, Research Genetics entered into a license agreement (the “1996 agreement”) with Promega Corporation (“Promega”), which granted Promega “an exclusive, worldwide, license under [the licensed patents] “ in certain markets and a nonexclusive license under the licensed patents for all other uses, other than those exclusively reserved for Research Genetics.

Under the terms of the 1996 agreement, Promega was required to pay Research Genetics a royalty on all products sold pursuant to the exclusive license grant. Additionally, Promega had the right to sublicense the licensed patents. The 1996 agreement included an arbitration clause which provided that “[a]ll controversies or disputes arising out of or relating to this Agreement, or relating to the breach thereof, shall be resolved by arbitration.”

The 1996 agreement also provided that the agreement could “not be assigned by either party without the express written consent of the other party.” In 2001, in connection with Research Genetics’ merger into its parent company, Invitrogen Corporation (“Invitrogen”), Promega granted written consent to assign Research Genetics’ rights under the 1996 agreement to Invitrogen. In 2003, Promega granted Invitrogen written consent to assign its rights under the 1996 agreement to IP Holdings, a wholly-owned subsidiary of Invitrogen. On November 21, 2008, Invitrogen merged with Applied Biosystems Inc. (“AB”), one of Promega’s sublicensees, and changed its name to Life Technologies Corporation (“Life Technologies”). IP Holdings remained a wholly-owned subsidiary of Life Technologies.

After the merger with AB, Life Technologies concluded that Promega had been paying less than it was required to pay on Promega’s sublicensees’ sales of products incorporating the licensed patents. Promega disagreed with Life Technologies’ calculation of the royalties due. After negotiations between the parties failed, Life Technologies demanded arbitration pursuant to the 1996 agreement, contending that Promega failed to comply with the 1996 agreement and demanding an accounting of all sales of the licensed technology by Promega’s sublicensees.

Rather than submit to arbitration, Promega sued Life Technologies in district court, seeking a DJ of nonarbitrability of Life Technologies’ claims under the 1996 agreement, and alleging, inter alia, infringement of five U.S. patents, including the ’984 patent. Specifically, Promega contended that the rights under the 1996 agreement had never been assigned to Life Technologies, and that Life Technologies was therefore not entitled to demand arbitration. In the course of preparing its responses to Promega’s filings, Life Technologies discovered that IP Holdings had not assigned its rights under the 1996 agreement to Life Technologies. Accordingly, IP Holdings served Promega with a demand for arbitration on behalf of IP Holdings. IP Holdings also filed a motion to compel arbitration.

After limited discovery on the questions of whether IP Holdings was the current assignee of the 1996 agreement and whether IP Holdings maintained its legal existence, the district court entered an order compelling arbitration between Promega and IP Holdings with respect to those claims relating to the 1996 agreement. The district court’s order was certified as a final order pursuant to Federal Rule of Civil Procedure 54(b).

On appeal, the Federal Circuit first concluded that the issues of arbitrability were not intimately involved in the substance of enforcement of a patent right, and thus the Court applied Seventh Circuit law. In the Seventh Circuit, arbitration agreements are governed by state contract law, except to the extent that state law is displaced by “federal substantive law regarding arbitration” under the Federal Arbitration Act (“FAA”). The Court explained that the FAA mandates enforcement of valid, written arbitration provisions.

The Court next rejected each of Promega’s various arguments as to why the district court’s arbitration order should be reversed. Promega first contended that the arbitration clause at issue is permissive rather than mandatory. The Court concluded that, while the agreement does not compel a party to demand arbitration, once a party does so, the plain language of the 1996 agreement shows that arbitration is mandatory.

Promega also argued that IP Holdings is merely a shell subsidiary and that the real party-in-interest is Life Technologies. Because there was no agreement between Promega and Life Technologies to arbitrate, Promega maintained that the district court erred in compelling arbitration. The Federal Circuit, however, found no question that Promega consented to Invitrogen’s assignment of the rights and obligations under the 1996 agreement to IP Holdings. Thus, the Court found a valid agreement between Promega and IP Holdings to arbitrate.

Next, Promega argued that the arbitration provision does not encompass the dispute over Promega’s alleged failure to pay royalties because the parties intended arbitration to apply only to small disputes between non-competitors. The Federal Circuit, however, found that “[t]he arbitration provision here clearly and unambiguously applies to all disputes arising out of or relating to the 1996 agreement. The unexpressed ‘intent’ of the parties cannot limit the scope of this broad arbitration clause. Imposing limits on such a clause would be inconsistent with the well-established presumption in favor of arbitration.” Slip op. at 9, citing AT&T Techs., Inc. v. Commc’ns Workers of Am., 475 U.S. 643, 650 (1986).

Promega further argued that compelling arbitration would be unjust and unfair because the agreed-upon arbitration procedures set forth in the 1996 agreement do not permit third-party discovery. Promega contended that such discovery is essential to the dispute because important discoverable information remains in the possession of Life Technologies. The Court, however, found that IP Holdings had represented that Life Technologies would consent to discovery. More important, the Court explained that Promega was free to accept or reject the contract provisions when it entered into the agreement with Research Genetics, and cannot now claim that the terms that it agreed to are unfair.

In addition, Promega argued that arbitration would be inappropriate because its claims of patent infringement against Life Technologies and AB remain pending in district court. The Federal Circuit reminded, however, that the Supreme Court has instructed that “the relevant federal law requires piecemeal resolution when necessary to give effect to an arbitration agreement.” Slip op. at 12, quoting Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 20 (1983). Thus, the district court’s duty to compel arbitration is not altered by the fact that nonarbitrable claims may remain pending in the district court.

Finally, the Court rejected Promega’s attempt to rely on equitable defenses such as laches, waiver, unjust enrichment, and estoppel to preclude arbitration. The Federal Circuit concluded that defenses to liability under the 1996 agreement must be raised before the arbitrator. For these reasons, the Federal Circuit affirmed the grant of the motion to compel arbitration.
Judge Newman, in a dissenting opinion, concluded that no consent was given to assignment of the contract to Life Technologies, although consent was required. Thus, there was no agreement to arbitrate between the parties and, in the absence of an agreement to arbitrate, arbitration cannot be imposed.

Summary authored by Joyce Craig, Esq.