Agreement to Arbitrate Does Not Cover Infringement Occurring After the Agreement Is Terminated

Authored by D. Brian Kacedon, John C. Paul, and Nicole Sharer

Abstract

A Virginia court found that the arbitration clause in an expired contract did not cover a patent infringement claim because the conduct giving rise to the claim—unauthorized copying and selling of a patented design—occurred after the contract between the parties expired and the dispute did not fall within the scope of the arbitration clause.

Under Supreme Court precedent, parties to a contract are released from their contractual obligations when a contract expires. But a court will compel arbitration under an expired contract if a dispute falls within the scope of the arbitration clause of that contract.

Recently, in Evans & Roof n Box, Inc. v. Building Mtls. Corp. of America, the district court found an arbitration clause in the parties' expired contract did not cover the patent owner's claims because the conduct giving rise to the claim of infringement—unauthorized copying and selling of the patented design—occurred after the contract between the parties expired. The court also held that even if the arbitration clause survived termination of the contract, the dispute did not fall within the scope of the clause because the patent owner did not rely on the contract to establish the infringement claim.

Background

The patent owner developed and patented a three-dimensional roofing model used during sales presentations to homeowners and agreed to sell the model to defendant at discounted prices. The agreement gave the defendant the right to promote the model to their contractors, but it did not give defendant the right to manufacture, develop, or sell another product using the patented design.

After the parties terminated the promotional agreement, the defendant began manufacturing and selling a competing product. The patent owner filed suit for patent infringement, trade-dress infringement, and unfair competition. The defendant filed a motion to dismiss or to enforce the arbitration clause of the promotional agreement because it required the parties to arbitrate any dispute "arising under" it. In doing so, the defendant argued that the factual allegations in the patent owner’s complaint related to the promotional agreement.

The Roof N Box, Inc. Decision

The court denied defendant's motion to dismiss or to enforce the arbitration clause of the promotional agreement, noting that the arbitration clause did not cover claims which arose from conduct occurring after the agreement ended. Further, even if the arbitration clause survived the agreement’s termination, the claims were unrelated to the promotional agreement.

The court found the arbitration clause did not cover the claims in part because the parties had terminated the promotional agreement before the dispute arose. Under Supreme Court precedent, all parties are released from their respective contractual obligations once a contact expires. A court will compel arbitration under an expired contract only if the dispute arises under the contract. A post-expiration dispute arises under a contract only where (1) the dispute arises from facts occurring before expiration, (2) an action taken after expiration infringes on a right vesting during the life of the contract, or (3) a contractual right is interpreted to survive the contract’s expiration under normal principles of contract interpretation.

According to the court, the arbitration clause failed to cover the plaintiffs' claims because (1) the dispute arose from defendant's alleged unauthorized copying and selling of the patented design after the parties terminated the agreement, (2) the plaintiffs' right to protect their design vested under patent law long before the agreement, and (3) nothing in the agreement indicated that the arbitration clause was meant to survive the agreement's expiration.

The court also found that even if the arbitration clause survived after the parties terminated the agreement, the plaintiffs' claims for patent infringement, trade-dress infringement and unfair competition fell outside the scope of the arbitration clause. The factual allegation underlying plaintiffs' claim was that defendant manufactured and sold the model without authorization. The agreement established how the model would be supplied and paid for but did not address the unauthorized use of the model years after the agreement was terminated. Consequently, the court found, the promotional agreement between the parties did not constitute any part of plaintiffs' claims against defendant.

Strategy and Conclusion

This case demonstrates the difficulty of compelling arbitration to adjudicate conduct occurring after an agreement expires if the agreement does not indicate that the arbitration clause survives the agreement’s expiration.

Endnotes
¹ The Roof N Box, Inc. opinion may be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2016/RoofnBoxvBuildingMaterialsCorpvaed-1-16-cv-00282-32_2016-07-05.pdf.