The U.S. Court of Appeals for the Federal Circuit recently held that an arbitration clause in an agreement did not apply to claims made in an infringement lawsuit, where the agreement was terminated six years prior to suit. According to the Court, when it would be “wholly groundless” for a party requesting arbitration to argue that the claims of the lawsuit fall under the arbitration clause, it is proper for a Court to deny the party’s request for arbitration even where the parties intended the issue of arbitrability to be determined by the arbitrator.
When the scope or applicability of an arbitration clause is in question, courts generally resolve the dispute in favor of arbitration for reasons of judicial efficiency and economy. Thus, for a Court to deny a party’s request to arbitrate, it must be able to positively affirm that no interpretation of the arbitration clause covers the claims in dispute. Recently, in Evans v. Building Materials Corp. of America, the U.S. Court of Appeals for the Federal Circuit affirmed a district court holding that an arbitration clause in an agreement terminated six years prior to the suit did not apply because the claims in dispute did not involve any issue related to the performance or interpretation of the since-terminated agreement.
Roof N Box, Inc., ("RNB"), together with its founder and president, Stephen Evans, brought a design patent suit against Building Materials Corp. of America d/b/a GAF-ELK Corp. ("GAF") in the Eastern District of Virginia. RNB alleged design-patent infringement, trade-dress infringement, and unfair competition related to its three-dimensional roofing model product for use by sellers of roofing products to display various roofing components when making a sales pitch to a homeowner.
In 2009, RNB and GAF entered into a promotional agreement, under which GAF would promote RNB’s roofing model product to GAF’s network of building-construction contractors. The agreement contained an arbitration clause, stating that any dispute "arising under" the agreement would be subject to binding arbitration. In 2010, RNB and GAF terminated the agreement. After termination, GAF developed and marketed its own roofing model that directly competed with RNB’s patented product.
After RNB brought the present lawsuit in the Eastern District of Virginia in 2016, GAF moved to dismiss or stay the lawsuit pending arbitration based on the arbitration clause in the 2009 agreement. The district court denied GAF’s motion to dismiss or stay and GAF appealed to the Federal Circuit.
The Evans Decision
On appeal, GAF raised two issues. First, it argued that the district court improperly decided whether the claims were arbitrable (rather than reserving that issue for the arbitrator). Second, it argued the district court erred in its conclusion that the claims were not arbitrable.
As to the first issue, the Federal Circuit applied its "wholly groundless" standard, under which, if an agreement contains a delegation of arbitrability to the arbitrator, a court can only step in to decide the issue itself when it would be "wholly groundless" to make an argument that the asserted claims fall within the scope of the arbitration clause. In its decision, the Federal Circuit found that the allegations in RNB’s complaint challenged actions performed by GAF in developing its own product after termination of the 2009 agreement. The Court found that the wrongfulness of GAF’s actions was independent of the 2009 agreement’s existence, and thus RNB’s claims were so plainly outside of the arbitration clause that a contrary argument would be "wholly groundless." Because of this, the Federal Circuit held the district court acted properly in deciding the issue of arbitrability itself.
As to the second issue, the Federal Circuit affirmed the district court’s denial of GAF’s motion to dismiss or stay. The Federal Circuit pointed to the narrow language used in the arbitration clause, only reaching claims "arising under" the 2009 agreement. Under this language, claims subject to arbitration are limited to those claims involving performance or interpretation of the agreement itself. Because the Federal Circuit found that the present dispute only dealt with GAF’s actions in marketing and selling its own competing product—after termination of the agreement in 2010—it found there were no issues related to the performance or interpretation of the 2009 agreement in RNB’s complaint. The Federal Circuit noted that the parties could have used broader language, such as "relating to," under which a claim may be arbitrable if it has a "significant relationship" to the prior agreement. Thus, the Federal Circuit affirmed the district court, finding there was no link between RNB’s currently asserted claims and the arbitration clause of the 2009 agreement.
Strategy and Conclusion
This opinion demonstrates the importance of carefully drafting arbitration provisions in an agreement. Whether a dispute is subject to arbitration will often turn on the particular phraseology used by the parties in their arbitration provisions. Further, this case also shows that even where an agreement delegates the issue of arbitrability to an arbitrator, a court may be empowered to decide the issue in the first instance when there is no legitimate link between the asserted claims and the arbitration clause in an agreement.
Further Information The Evans opinion can be found here.
Originally printed in LES Insights on June 13, 2017.