June 2013
An Earlier U.S. Judgment Insufficient to Enjoin a Foreign Arbitration Where Issues in the U.S. Litigation and Foreign Arbitration Are Not Identical or Functionally the Same
| Judges: Rader, Dyk (concurring), Reyna (author) |
| [Appealed from N.D. Cal., Judge Illston] |
In Sanofi-Aventis Deutschland GmbH v. Genentech, Inc., No. 12-1454 (Fed. Cir. May 10, 2013), the Federal Circuit affirmed the district court’s ruling against enjoining a foreign arbitration of a license to the patents-in-suit despite a U.S. judgment of noninfringement.
The dispute originated from an agreement (“the Agreement”) in which Behringwerke AG (“Behringwerke”) licensed Genentech, Inc. (“Genentech”) intellectual property, including Behringwerke’s patent applications that matured into U.S. Patent Nos. 5,849,522 and 6,218,140 (collectively “the patents-in-suit”), related to DNA enhancers for amplification of drug production rate in a cell. In addition to requiring a fixed annual payment for Genentech to practice the patents-in-suit for research purposes, the Agreement also required Genentech to pay a running royalty of 0.5% on the sale of commercially marketable goods incorporating a “Licensed Product.” The Agreement defined Licensed Product as “materials (including organisms), the manufacture, use or sale of which would, in the absence of this Agreement, infringe one or more unexpired issued claims of the Licensed Patent Rights.” Slip op. at 3. The Agreement was governed by German law and required disputes to be settled by arbitration under International Chamber of Commerce (“ICC”) rules.
Behringwerke later became Hoechst AG (“Hoechst”), which transferred its pharmaceutical business to a company that eventually became Sanofi-Aventis Deutschland GmbH (“Sanofi”). Both the Agreement and the rights in the patents-in-suit remained with Hoechst.
Sanofi accused Genentech and another entity of infringing the patents-in-suit by using the patented enhancers in the manufacture and sale of two drugs: Rituxan and Avastin. Genentech did not identify either drug as licensed products, nor did it pay the 0.5% royalty on them. Hoechst transferred the patents-in-suit to Sanofi and later sought arbitration before a European arbitrator of the ICC for breach of the Agreement.
Three days after Hoechst initiated the foreign arbitration, Genentech terminated the Agreement and filed a complaint for DJ of invalidity and noninfringement. On the same day, Sanofi sued Genentech and another entity for infringement of the patents-in-suit based on sales of Rituxan and Avastin. The two district court actions were consolidated and, after a Markman hearing, the trial court granted SJ of noninfringement. Sanofi appealed and the Federal Circuit affirmed.
While the litigation proceeded in the United States, the ICC arbitration continued abroad. After the Federal Circuit affirmed, Genentech argued to the arbitrator that the Federal Circuit’s judgment disposed of all issues in the arbitration. Hoechst and Sanofi urged the arbitrator to proceed to determine an appropriate amount of royalties. In the Second Partial Award, the arbitrator appeared inclined to agree with Hoechst, stating that Rituxan was produced with the help of the patents-in-suit.
Following the appeal, Genentech moved the district court to enjoin Sanofi from continuing with the foreign arbitration. The district court denied the motion. The arbitrator later issued his Third Partial Award, determining that German substantive law, not U.S. patent law, would be used to determine whether Rituxan was a licensed article under the Agreement. Applying that law, the arbitrator concluded that the enhancers were used in making Rituxan, and held Genentech liable for damages under the Agreement. Genentech appealed the denial of its request for an anti-arbitration injunction (“anti-suit injunction”).
“The first step . . . in deciding if an anti-suit injunction is appropriate is determining ‘whether or not the parties and the issues are the same, and whether or not the first action is dispositive of the action to be enjoined.’ The issues need not be identical; it is enough that they are functionally the same such that the result in one action is dispositive of the other.” Slip op. at 8-9 (quoting Applied Med. Distrib. Corp. v. Surgical Co., 587 F.3d 909, 915 (9th Cir. 2009)).
On appeal, the Federal Circuit applied Ninth Circuit law as the issue of whether to grant an anti-suit injunction is not unique to patent law. The Court noted that it is well settled that U.S. courts have the power to enjoin parties from pursuing litigation before foreign tribunals. “[I]n evaluating a request for an anti-suit injunction, [the district court] must determine (1) ‘whether or not the parties and the issues are the same, and whether or not the first action is dispositive of the action to be enjoined’; (2) whether the foreign litigation would ‘frustrate a policy of the forum issuing the injunction’; and (3) ‘whether the impact on comity would be tolerable.’” Id. at 8 (alterations in original) (quoting Applied Med. Distrib. Corp. v. Surgical Co., 587 F.3d 909, 913 (9th Cir. 2009)).
Regarding the first factor articulated in E. & J. Gallo Winery v. Andina Licores S.A., 446 F.3d 984 (9th Cir. 2006), the Court explained that “[t]he issues need not be identical; it is enough that they are functionally the same such that the result in one action is dispositive of the other.” Slip op. at 8-9. In explaining this functional analysis, the Court found instructive the reasoning in Applied Medical, a Ninth Circuit case on anti-suit injunctions. The agreement in Applied Medical was governed by California law, and the parties agreed that California courts would have exclusive jurisdiction over any disputes arising out of the agreement. There, the Ninth Circuit explained that the functional inquiry required the district court to determine whether the issues were the same such that all of the issues in the foreign action fell under the forum selection clause and could be resolved in the U.S. action. The Ninth Circuit determined that although the foreign claims were not identical to the U.S. claims, they were functionally the same because they arose out of the agreement and were subject to the forum selection clause.
Here, the Federal Circuit noted that, had Genentech not terminated the Agreement, it would have been easy to apply Applied Medical. Whether Genentech had infringed, and therefore owed royalties under the Agreement, would have been a claim arising out of the Agreement and subject to the Agreement’s forum selection clause. But by terminating the license, the Court explained, Genentech created a situation where, at least for the period after it had terminated the license, neither the Agreement nor the forum selection clause applied, and Genentech was free to litigate infringement in the United States. As such, to the extent that the U.S. judgment of noninfringement concerned Genentech’s actions after the Agreement was terminated, it did not arise out of the Agreement.
The Court noted that the question then became whether the U.S. judgment was dispositive of the foreign arbitration for the period during which the Agreement was in effect. Agreeing with Sanofi, the Court found that the U.S. judgment was not dispositive as to breach of the Agreement and explained that the arbitrator, applying German law, had already deviated from U.S. patent law by concluding that infringement was possible even if the patents-in-suit were invalid. The Court further noted that the arbitrator had adopted a definition of infringement that included using the enhancer to produce Rituxan, even if the enhancer was not in the ultimate product. The Court agreed with the district court that the meaning of infringement under the Agreement versus under U.S. law was not functionally the same. Accordingly, the Court concluded that the issues in the U.S. litigation and foreign arbitration were not the same.
Regarding the second factor, the Court first addressed Genentech’s argument that res judicata required the Court to ensure that the arbitrator respected the judgment of U.S. courts. The Court found the argument had no merit, because Genentech was not arguing that the district court in this case be bound by res judicata. Rather, by suggesting that the noninfringement judgment had res judicata effects on the foreign arbitration, Genentech was essentially asking the Court to find that res judicata be applied in another case. The Court found that Genentech cited no authority suggesting that res judicata could be applied in this manner. The Court also found Collins v. D.R. Horton, Inc., 505 F.3d 874, 880 (9th Cir. 2007), persuasive that although arbitrators may not ignore res judicata, they generally are entitled to determine in the first instance whether to give the prior judicial determination preclusive effect. The Court found it especially appropriate here, where there was no reason to believe that res judicata operated identically under German law. Moreover, given that the Court acknowledged the issues were not the same, and the named parties in the foreign arbitration were different from those in the U.S. litigation, the Court concluded that the res judicata argument was not persuasive.
Turning to the substance of the second factor, whether the injunction would frustrate the policies of the forum, the Court noted an undeniably strong U.S. policy favoring forum selection clauses. Concluding that enjoining the foreign arbitration would undermine the parties’ choice of forum and frustrate the interest in enforcing forum selection clauses, the Court reasoned that the parties agreed that disputes under the Agreement would be governed by German law and heard by the ICC. The Court explained that Hoechst remained faithful to that agreement, initially seeking relief in the ICC after Genentech asserted that Rituxan and Avastin were not licensed articles, and the parties sought relief in the United States only after Genentech terminated the license. The Court noted that by seeking to impose the U.S. judgment of noninfringement on the foreign arbitration, Genentech effectively asked the Federal Circuit to relieve its obligation to settle such disputes in the ICC. Accordingly, the Court rejected Genentech’s request.
Regarding the third factor, whether the impact on comity would be tolerable, the Court noted that because forum selection was involved, this factor overlapped with the second factor. The Court explained that “[g]lobalization has enhanced the significance of international trade, and those in business who would trade across national lines confront many varying legal systems in different countries. If we do not give primacy to parties’ choice of forum and choice of law, there will be insufficient certainty to foster international trade relations.” Id. at 14 (quoting Applied Med., 587 F.3d at 916). The Court reiterated that the parties in this case agreed to the ICC as a forum for disputes over the license. “In a situation like this one, where private parties have previously agreed to litigate their disputes in a certain forum, one party’s filing first in a different forum would not implicate comity at all.” Id. (quoting Gallo, 446 F.3d at 994).
Accordingly, the Court found that the district court’s denial of Genentech’s request for an anti-suit injunction was not an abuse of discretion, and affirmed the district court’s denial.
Judge Dyk concurred, agreeing with the majority that the issues litigated in the foreign arbitration and the U.S. patent infringement proceeding were not identical. Lack of identical issues, Judge Dyk explained, was alone sufficient to demonstrate that the district court did not abuse its discretion by denying the anti-suitinjunction. Judge Dyk pointed out, however, that even though the majority addressed the two remaining factors, comity and public policies favoring forum selection clauses do not necessarily foreclose anti-suit injunctions where issues are the same. Judge Dyk reasoned that an anti-suit injunction against a foreign proceeding may be appropriate in a situation where the issues raised and resolved in the U.S. patent infringement action were identical to those raised in the international forum to prevent the patent holder from making an end run around the U.S. determination by later invoking an international proceeding.
