Challenges to the Validity or Termination of a License Agreement Must Be Decided by an Arbitrator When Agreement Contains an Arbitration Clause

Authored by D. Brian Kacedon, John C. Paul, and Benjamin A. Saidman

When a party moves to compel arbitration of a dispute based on the terms of an agreement, district courts first determine whether the parties have agreed to submit a particular dispute to arbitration. As part of this determination, the courts consider whether the parties agreed to arbitrate their disputes and whether the particular dispute in question falls within the arbitration provision of the agreement. In a recent order, a Pennsylvania district court considered the impact of a party's challenge to the validity of a license agreement on a motion to compel arbitration. Under the district court's ruling, challenges to the validity of a license agreement as a whole must be decided by an arbitrator. The parties, therefore, had to submit to arbitration.

In Sue Valeri v. Mystic Industries Corp.,¹ Valeri brought suit against Mystic, claiming patent infringement and breach of contract. Valeri had licensed her patents to Mystic, and in her complaint, alleged that Mystic breached their license agreement by failing to pay her royalties, among other things. The license agreement contained an arbitration clause obligating the parties to "submit all disputes relating to this agreement . . . to binding arbitration."

Because of this provision, Mystic moved to dismiss or stay Valeri's action and to compel arbitration under the Federal Arbitration Act. In response, Valeri argued that (1) the parties' arbitration clause no longer applied because she terminated the license agreement and (2) Mystic waived its right to arbitration because it failed to give notice of its intent to arbitrate as required by the agreement.

The district court first considered whether the parties' arbitration clause applied if, as Valeri argued, she had terminated the license agreement. Citing the Supreme Court's decision in Buckeye Check Cashing, Inc. v. Cardegna, the district court found that a challenge to the validity of the contract as a whole—and not specifically to the arbitration clause itself—must go to the arbitrator. Further, unlike a challenge to an arbitration provision, a dispute invoking the termination clause of an agreement constitutes an attack on the agreement itself. Therefore, the district court held, an arbitrator must decide whether Valeri terminated the license agreement.

The district court then considered the impact of a possible waiver by Mystic to the arbitration provision. Citing the Third Circuit's decision in Ehleiter v. Grapetree Shores, Inc., the district court held that the arbitrator should presumptively decide issues of waiver, delay, or like defenses arising from noncompliance with contractual conditions precedent to arbitration. As a result, the arbitrator must decide whether Mystic waived the right to arbitrate. So, following the Third Circuit's "traditional practice of treating a motion to compel arbitration as a motion to dismiss for failure to state a claim upon which relief can be granted," the district court granted Mystic's motion and compelled arbitration.

Strategy and Conclusion

Courts rigorously enforce arbitration clauses in license agreements. Even if one party challenges the validity of an agreement containing an arbitration provision, that challenge must come before an arbitrator, rather than a federal judge. And even if one party, by making a motion, apparently waives the right to arbitration, an arbitrator, rather than a judge, must decide the issue of waiver. As a result, parties to agreements containing arbitration provisions should be prepared to address licensing disputes before an arbitrator, not a judge.

Endnotes

¹ The Valeri order can be found here.

Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.