The Importance of a Well Drafted License and Arbitration Clause

By: Joyce Klemmer

The Patent Act was amended in 1982 to recognize voluntary arbitration for patent disputes relating to validity or infringement and courts have extended the provision to include interference claims and questions of inventorship. 35 U.S.C. § 294.  “The Federal Arbitration Act mandates enforcement of valid, written arbitration provisions. When a party moves to compel arbitration of a dispute, a court must determine whether the parties agreed to arbitrate that dispute. This inquiry requires a court to determine whether the dispute between the parties falls within the scope of the arbitration agreement.  Thus, ‘a court may order arbitration of a particular dispute only where the court is satisfied that the parties agreed to arbitrate that dispute.’ In determining whether an agreement requires arbitration, courts must recognize that the Federal Arbitration Act  ‘establishes a national policy favoring arbitration when the parties contract for that mode of dispute resolution.’ Illumina v. Ariosa (Fed. Cir. July 26, 2016)(citations omitted; emphasis added).

Illumina develops, manufactures, and markets systems and tools for analysis of DNA. Illumina owns U.S. Patent No. 7,955,794, which covers DNA assay optimization techniques. The ’794 patent issued in 2011. In 2009, Ariosa Diagnostics, Inc. endeavored to develop a noninvasive prenatal diagnostic test for the detection of fetal aneuploidies, which can lead to conditions such as Down syndrome. Between 2010 and 2011, Ariosa provided Illumina, as a prospective investor in Ariosa, technical information about its product proposals under development.

In January 2012, seven months after the ’794 patent issued, Ariosa entered into a three-year supply agreement with Illumina. The agreement provided Ariosa with a non-exclusive license to Illumina’s “Core IP Rights in Goods,” and  excluded Illumina’s “Secondary IP Rights in Goods.” No patents were expressly identified. The parties agreed that certain disputes would  be subject to compulsory arbitration, excluding “disputes relating to issues of scope, infringement, validity and/or enforceability of any Intellectual Property Rights.”  In March 2012, Ariosa launched a DNA-sequencing test called the Harmony Prenatal Test. The test consisted of materials supplied by Illumina.

The arbitration clause of the supply agreement came into dispute when Illumina sued Ariosa for patent infringement, and Ariosa counterclaimed for breach of contract on grounds that, under the terms of the supply agreement, Ariosa had a license to the patent-in-suit, the ‘794 patent.

In response to the counterclaim, Illumina invoked the arbitration clause of the supply agreement and moved to compel arbitration. The district court concluded that Ariosa’s counterclaims were not subject to arbitration.  The Federal Circuit affirmed the district court’s order denying compulsory arbitration. The Court noted that the language of the arbitration provision was unambiguous and that disputes relating to issues of patent scope and infringement were clearly excluded. The Court ruled:

“The scope of the licensed intellectual property rights is germane to whether Ariosa ultimately obtained a license to the ’794 patent…Ariosa’s counterclaims are not about licensing or a license defense in the abstract—they are centered on whether Ariosa is licensed to use, and thus is immunized from infringement of, the asserted claims of the ’794 patent. …[I]t would be an odd circumstance to countenance parallel district court litigation, with license as an affirmative defense, while forcing arbitration over counterclaims arising from that very license.”

Because the parties expressly excluded patent issues, “Illumina cannot hijack the counterclaims and make them its own for purposes of compelling arbitration. The counterclaims all rise or fall on the scope determination of licensed intellectual property rights, a matter that the parties expressly agreed to exempt from arbitration.”

As Dennis Crouch points out in his article, License Arbitration Clause Ineffective Because it Excluded Issues of Patent Scope:

The lesson here relates to patent license agreements — if licensed patents are defined by their scope or technology coverage (rather than by a listing of patent numbers for example), then a determination of that scope will almost necessarily be a part of any dispute over which patents are licensed.  Excluding patent scope questions from the arbitration clause will end up excluding those licensing questions as well.

To read the Opinion, click here. For more information on this topic, contact your Intellectual Property counsel at Smith, Gambrell & Russell, LLP.

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