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Minnesota Law Does Not Generally Allow an Arbitration Clause in a Licensing Agreement to Bind Successors to the Agreement

April 16, 2008

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Last Month at the Federal Circuit - May 2008

Judges: Mayer, Bryson, Fogel (author, District Judge sitting by designation)

[Appealed from: E.D. Tex., Judge Folsom]

In Datatreasury Corp. v. Wells Fargo & Co., No. 07-1317 (Fed. Cir. Apr. 16, 2008), the Federal Circuit affirmed the district court’s decision denying Wells Fargo & Company (“WFC”) and Wells Fargo Bank, N.A.’s (collectively “Wells Fargo”) motion to dismiss or stay litigation pending arbitration. The Federal Circuit held that under governing Minnesota law, the arbitration clause of the relevant contract could not be enforced against nonsignatories.

Datatreasury Corporation (“Datatreasury”) sued Wells Fargo for infringement of four patents, which had been assigned to Datatreasury by WMR e-Pin LLC (“WMR”). One of the patents, U.S. Patent No. 5,265,007 (“the ’007 patent”), was the subject of an earlier patent license agreement (“PLA”) between WMR and a subsidiary of WFC. The PLA contained a covenant not to sue and an arbitration clause expressly covering the ’007 patent and “patent disclosures related thereto.” The PLA also stated that it was to be interpreted under Minnesota law.

Wells Fargo filed a motion to dismiss or, in the alternative, stay pending arbitration, arguing that the PLA prohibited Datatreasury from bringing this action. The district court denied the motion. Applying Minnesota law, the district court concluded that Datatreasury was not a party that could be bound by the PLA’s arbitration clause, either in its own right or as a “successor” of WMR. The district court also found that a plain reading of the PLA did not support Wells Fargo’s conclusion that the PLA encompassed all of the patents-in-suit. Wells Fargo appealed.

On appeal, the Federal Circuit noted that regional circuit law applies to contractual disputes, including disputes involving license agreements. It observed that in determining whether parties have agreed to arbitrate a particular dispute, courts in the Fifth Circuit consider: (1) whether a valid agreement between the parties exists, and (2) whether the dispute in question falls within the scope of that arbitration agreement. It noted that because in deciding whether there is a valid agreement between the parties, the Fifth Circuit applies state law, the question of arbitrability in the instant case turned on whether, under Minnesota law, there was a valid agreement to arbitrate between Wells Fargo and Datatreasury.

The Court observed that under Minnesota law, a party is not bound by an arbitration clause unless it is a signatory to the underlying contract, and that a nonsignatory can enforce an arbitration clause in only limited circumstances, such as equitable estoppel, agency, and third-party beneficiary. The Court noted that none of those theories were asserted by Wells Fargo. Wells Fargo instead argued that the arbitration clause ran with the patent. The Court rejected this theory, however, noting that procedural terms of a licensing agreement unrelated to the actual use of the patent (e.g., an arbitration clause) are not binding on a subsequent owner of the patent. It concluded that because neither party in this case signed the PLA or participated in negotiating its terms, the dispute between them was not subject to the arbitration clause of the PLA. Accordingly, it affirmed the district court’s order denying Wells Fargo’s motion to dismiss or stay pending arbitration.