May a party hijack its opponent's counterclaims and make them its own for purposes of compelling
May a party compel arbitration of patent license-related counterclaims when a contract says that “disputes relating to issues of scope [and] infringement…of any Intellectual Property Rights” are excluded from arbitration? In an unusual case arising from a supply agreement dispute, the Federal circuit said no.
The (somewhat baroque) backstory begins in 2009, when Ariosa started development of a DNA-based prenatal blood screening test for Down syndrome and other genetic conditions. At that time, Ariosa provided Illumina—a leading supplier of DNA sequencing machines and a potential investor—with information about its products under development.
In early 2012, Ariosa and Illumina signed a three-year supply agreement under which Illumina agreed to supply consumables, hardware and software to Ariosa for use in its prenatal blood screening test. Later that same year, Verinata Health—a company with a competing DNA-based prenatal blood screening test for Down syndrome—sued Ariosa for patent infringement. In 2013, Illumina acquired Verinata Health.
The dispute at issue here began approximately one year after this acquisition, when Illumina accused Ariosa of breaching a provision of the supply agreement requiring Ariosa to “identify and ensure that it has all rights from third parties” (and from Illumina) necessary to practice its blood screening test. Ariosa’s alleged breach was that it had not licensed the patents asserted in 2012 by Verinata, which were then (in January 2014) owned by Illumina.
Shortly after, Illumina sued Ariosa for infringement of its own patent (7,955,794), which issued seven months before the Illumina/Ariosa supply agreement was signed. Before filing suit, Illumina had never suggested that Ariosa needed a license to its ‘794 patent.
In addition to a license defense, Ariosa’s answer included breach of contract counterclaims based on its contention that it had been granted an express or implied license to the ‘794 patent.
In response, Illumina moved to dismiss all of Ariosa’s license and contract counterclaims in light of the supply agreement’s arbitration clause, which defines the following as subject to arbitration “…any dispute, claim or controversy arising out of or relating to the breach, termination, enforcement, interpretation or validity of this Agreement….” The arbitration provision also explicitly says that it “…shall not apply to…disputes relating to issues of scope [and] infringement…of any Intellectual Property Rights.”
After losing its motion to dismiss (and a brief trip to the Federal Circuit), Illumina moved to compel arbitration of Ariosa’s counterclaims. The District Court denied that motion on grounds that the breach of contract counterclaims were “directly related to whether a patent has been infringed,” and were therefore (according to the supply agreement) excluded from arbitration. This appeal followed.
Illumina’s position on appeal was that the supply agreement’s arbitration language is ambiguous, which triggers the Federal Arbitration Act’s presumption in favor of arbitrability; and that to prevail, it need only demonstrate that the relevant language is reasonably susceptible to an interpretation in favor of arbitration.
Illumina supported its position with three main arguments. First, Ariosa’s breach of contract/license counterclaims do not involve evaluating the scope of patent rights or patent infringement, because no claim construction or infringement analysis is needed to resolve them.
Second, the district court’s interpretation of the phrase “relating to…Intellectual Property Rights” to exclude Ariosa’s breach of contract counterclaims failed to give effect to the Federal policy in favor of arbitration; and under this (wrong) interpretation, general business issues like indemnification and supply disputes could evade arbitration if they “relate to” patent infringement.
Finally, Illumina argued that a breach of contract counterclaims represent a separate and distinct business harm from a license defense to patent infringement; therefore, Ariosa’s breach of contract claims should be sent to arbitration, even if its license defense cannot.
In a strongly worded opinion, the Federal Circuit ruled against Illumina.
First, it found no ambiguity in the supply agreement provision excluding from arbitration disputes related to the “scope of…all Intellectual Property Rights.”
The panel then rejected the argument that Ariosa’s breach of contract counterclaims are not related to the “scope” of the patent rights defined in the agreement; to the contrary, Illumina “put the scope of licensed patent rights in issue by suing Ariosa for patent infringement.” The Court also noted that Ariosa’s counterclaims “are not about licensing or a license defense in the abstract,” but rather, all rise or fall on the scope of Ariosa’s licensed intellectual property rights—“a matter that the parties expressly agreed to exempt from arbitration.”
The opinion ends by echoing the previous points: because Illumina filed the underlying infringement suit against Ariosa, it “cannot hijack the counterclaims and make them its own for purposes of compelling arbitration.”