First published in LES Insights
A defendant was able to dismiss a litigation and to compel arbitration under a license agreement, even though it was not a signatory to the license agreement entered into between the plaintiff and the defendant's parent corporation, because the defendant had consented to arbitrate and because the issues underlying the litigation were intertwined with the arbitrable issues of the license agreement.
Arbitration can provide advantages in resolving disputes. For example, in some instances, it is quicker, cheaper, and more private than litigation. As a result, some patent license agreements include clauses requiring arbitration of certain disputes. In Kastner v. Vanbestco Scandanavia, AB,1 the U.S. District Court for the District of Vermont held that a patent owner who had entered into a licensing agreement with an arbitration clause with a parent corporation could be compelled to arbitrate issues related to infringement by a defendant subsidiary who had not signed the license agreement, because the issues underlying the district-court action were intertwined with the issues to be arbitrated under the license agreement.
Sidney Kastner, who does business under the name Tracktion Canada, Inc., owns two U.S. patents relating to footwear having metal studs that retract under pressure from the wearer's weight until the tips of the studs are substantially at the plane of the bottom surface of the footwear. Vanbestco Scandanavia, AB is a Swedish corporation that designs, develops, and distributes footwear with traction for use in icy or slippery conditions. Vanbestco does business in the United States through its U.S. subsidiary, Icebug USA.
In 2007, Tracktion and Vanbestco entered into a ten-year license agreement to allow Vanbestco to manufacture, import, use, or sell products that utilized the patents. Under the agreement, Vanbestco agreed to pay royalties for products that practice the patents, and both parties reserved the right to terminate the agreement at any time, for any reason, upon two years' written notice. The agreement also contained a provision requiring the parties to settle "any dispute arising out of or in connection with the Agreement" in accordance with the rules of conciliation and arbitration of the International Chamber of Commerce ("the ICC").
After entering into the agreement, Vanbestco discovered infringement of the patents in Finland and Norway. Vanbestco contacted Kastner, who stated that he had not sought patent protection in Finland and Norway. Believing it had overpaid royalties in countries where no royalties were owed, Vanbestco told Kastner that the overpayment should be credited toward future royalties. Vanbestco also sought to discuss the scope of the patents with Kastner after an unrelated litigation involving the same two patents resulted in a finding of no infringement by a Minnesota corporation. Kastner then terminated the agreement, claiming that Vanbestco had repudiated it. Vanbestco denied repudiation and notified Kastner that it was invoking the agreement's termination provision.
Kastner sued Vanbestco and Icebug USA, alleging infringement of the patents. Counsel for Vanbestco and Icebug USA tried to gain Kastner's consent to arbitrate but did not receive a response. Icebug USA then filed a motion seeking to compel arbitration, contending that the agreement required arbitration of Kastner's claims. Vanbestco did not join the motion but instead filed a request for arbitration with the ICC's International Court of Arbitration ("the ICA"). Kastner opposed the motion.
The District Court's Decision
In deciding whether to grant Icebug USA's motion, the court first considered whether the agreement included an enforceable arbitration provision. Noting that the Federal Arbitration Act ("the FAA") "requires the federal courts to enforce arbitration agreements," the court examined whether the arbitration agreement fell within the Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("the Convention"). The Convention and the FAA establish four requirements to enforce an arbitration agreement: "(1) there must be a written agreement; (2) it must provide for arbitration in the territory of a signatory to the [C]onvention; (3) the subject matter must be commercial; and (4) the agreement cannot be entirely domestic in scope." The court considered these requirements and concluded that the Convention applies because Tracktion and Vanbestco agreed in writing to settle disputes via arbitration; the agreement provided for arbitration in Canada, a signatory to the Convention; the agreement is commercial in nature because it allows Vanbestco to import and sell products; and the subject matter is international rather than solely domestic.
The court next considered whether the agreement requires arbitration of Kastner's claims. The agreement specifically provides that any dispute "shall be finally settled" in accordance with the ICC's rules, which state that the arbitrability of any claim must be determined by the ICA. Looking to Second Circuit precedent, the court noted that arbitration agreements subject to ICC rules commit any questions of arbitrability to the ICA, and therefore, Kastner must challenge the arbitrability of his patent claims in the arbitration.
The court then considered Kastner's argument that the arbitration provision was terminated because Vanbestco had repudiated the agreement. But the court rejected this argument, stating that, if true, it would apply to all cases of breach of contract. The court also noted that the ICC rules expressly state that repudiation of an agreement does not affect the enforceability of an arbitration provision.
Last, the court considered whether Icebug USA, a nonsignatory to the license agreement, could compel Kastner to arbitrate its dispute with Icebug USA and concluded that by seeking to arbitrate the pending claims, Icebug USA had consented to arbitration. Under Second Circuit law, a nonsignatory can compel a signatory to arbitrate a dispute based on principles of equitable estoppel, which requires the nonsignatory to show that the issues it seeks to arbitrate are intertwined with the arbitrable issues and that the relationship among the parties justifies estopping the signatory from denying arbitration of a similar dispute with the nonsignatory. Applying this test, the court determined that the issues Icebug USA sought to arbitrate were intertwined with the arbitrable disputes of the agreement. Specifically, Kastner alleged infringement of patents subject to the agreement and Vanbestco alleged that it had paid royalties for patent protection that appeared to be offered by the agreement, but which did not exist in two markets. Furthermore, the parties also disputed whether the agreement remained in effect and what royalties, if any, were due. Because these disputes arose directly out of, and were closely related to, the agreement, the court held that Icebug USA could compel arbitration with Kastner.
The court, therefore, granted Icebug USA's motion to compel arbitration and dismissed the case because every claim had been submitted to arbitration.
Strategy and Conclusion
This case illustrates how entities related to licensees can, in some cases, enforce the arbitration provisions of a license agreement against the patent owner even if the related entity is not a party to the license agreement.