In reviewing the scope of an arbitration agreement that was part of a supply agreement, the US Court of Appeals for the Federal Circuit affirmed the district court’s decision, determining that the defendant’s breach of contract counterclaims were related to the plaintiff’s patent infringement claims and thus were exempt from compulsory arbitration under the supply agreement. Verinata Health, Inc., v. Ariosa Diagnostics, Inc., Case No. 15-1970 (Fed. Cir., July 26, 2016) (Reyna, J).
Illumina, a developer of DNA analysis products and owner of a patent, entered into an agreement with Ariosa to supply specific products to Ariosa. In return, Ariosa, creator of the Harmony Prenatal Test that detects fetal aneuploidies, was granted a non-exclusive license to Illumina’s Core Intellectual Property Rights in Goods, but not Illumina’s Secondary IP Rights in Goods. According to the supply agreement’s arbitration clause, the parties agreed that disputes arising out of or relating to the breach of termination, enforcement, interpretation or validity of the agreement would be determined by arbitration, but that disputes relating to issues of scope, infringement, validity and or enforceability of intellectual property rights would be exempt from arbitration.
After Verinata sued Ariosa for patent infringement, Illumina purchased Verinata, making it a wholly owned subsidiary of Illumina. Illumina then sued Ariosa alleging that Ariosa’s Harmony Prenatal Test infringed Illumina’s patent. In its answer, Ariosa raised license and estoppel as affirmative defenses, and counterclaimed against Illumina for declaratory judgment of invalidity and non-infringement, breach of contract, and breach of the covenant of good faith and fair dealing. Illumina thereupon invoked the arbitration clause of the supply agreement and moved to dismiss Ariosa’s counterclaims. The district court denied the motion, concluding that Ariosa’s counterclaims for breach of contract and the covenant of good faith and fair dealing were not subject to compulsory arbitration since Ariosa’s license defense was directly related to whether the patent was infringed. Illumina appealed.
The Federal Circuit, applying its law to substantive and procedural federal patent law issues, and applying US Court of Appeals for the Ninth Circuit law to other substantive and procedural issues, affirmed the district court’s holding that Ariosa’s counterclaims were exempt from the scope of the supply agreement’s arbitration clause. The Court reasoned that the national policy favoring arbitration when parties contract for that mode of dispute resolution under the Federal Arbitration Act applies only in circumstances where the scope of the agreement is ambiguous as to the dispute at hand, and only where the presumption in favor of arbitration cannot be rebutted. The Court rebuffed Illumina’s argument that the arbitration clause was ambiguous, finding that the arbitration provision unambiguously stated that disputes relating to issues of patent scope and infringement would not be subject to mandatory arbitration, and that under Ninth Circuit law, “relating to” should be given broad meaning. The Federal Circuit explained that Illumina put the scope of licensed patent rights in issue by suing Ariosa for patent infringement. Specifically, Ariosa’s counterclaims for declaratory judgment of non-infringement, breach of contract and breach of certain covenants were based on Ariosa’s defense that Illumina’s patent infringement claims could not stand because of the licensing provision within the supply agreement. The Court reasoned that Ariosa’s counterclaims were exempt from compulsory arbitration because they related to “issues of scope, infringement, validity and/or enforceability of Intellectual Property Rights” as stated in the arbitration clause.