Arbitration award can be set aside only for a Federal Arbitration Act enumerated reason

AFFYMAX v. ORTHO-MCNEIL-JANSSEN PHARMACEUTICALS (October 3, 2011)

Affymax and Ortho-McNeil-Janssen Pharmaceuticals created a joint venture in 1992 to develop peptide compounds. Their agreement assigned ownership based on development efforts. If a compound was jointly developed, it was jointly owned. If a compound was solely developed by either company, that company owned it. The parties also agreed to arbitrate all ownership disputes. Affymax brought suit in 2004 with respect to the ownership of the so-called '940 family and '078 family. After arbitration, a panel concluded that Ortho owned the ‘078 family and that the parties jointly owned the ‘940 family. Judge Kennelly (N.D. Ill.) confirmed most of the arbitration ruling but vacated the award with respect to its conclusion that Ortho owned the foreign patents in the ‘078 family. Ortho appeals (Affymax also appealed, but to the Federal Circuit).

In their opinion, Seventh Circuit Chief Judge Easterbrook and Judges Wood and Tinder reversed. The Court first addressed appellate jurisdiction. Patent controversies that arise over a contractual dispute, as this one does, arise under the contract, not the patent. Therefore, the Federal Circuit's jurisdiction over patent disputes has not been triggered. The Court concluded that it was the proper forum, with jurisdiction over the district court's order vacating a part of the panel's award. On the merits, the Court noted that the Federal Arbitration Act gives four reasons a district court may rely on in vacating an arbitration award. The reason given by the district court here – the panel’s disregard of law -- is not one of those four reasons. The court's order was therefore error, if in fact that was the only basis for its conclusion. Before finding error, the Court considered whether the panel exceeded its powers, which is one of the four reasons permitting the vacation of an award, and is somewhat related to the district court's rationale. The Court concluded that the panel resolved the dispute pursuant to the 1992 contract’s directions and did not exceed its powers in doing so.