Interpreting the Scope of Exclusion-From-Arbitration Clauses in the IP Rights Realm

The scope of arbitration clauses and exclusion-from-arbitration clauses are a common source of dispute. In the patent context, it is particularly important to understand the scope of exclusion-from-arbitration clauses concerning intellectual property rights. Recent case law provides guidance regarding whether exclusion-from-arbitration clauses for intellectual property rights cover defenses to patent infringement.

In Verinata Health, Inc. v. Ariosa Diagnostics, Inc., (Fed. Cir. 2016), Illumina, the parent company of Verinata Health, sued Ariosa Diagnostics for patent infringement. Prior to the dispute, Illumina and Ariosa entered into a supply agreement that gave Ariosa a license to a subset of Illumina’s intellectual property rights. Ariosa licensed Illumina’s systems for DNA analysis in order to create a test for chromosomal abnormalities that can cause genetic disorders. The supply agreement contained both an arbitration clause and an exclusion-from-arbitration clause. The relevant language of the exclusion-from-arbitration clause stated:

[N]o arbitration shall resolve[] disputes relating to issues of scope, infringement, validity and/or enforceability of any Intellectual Property Rights.

Illumina never informed Ariosa that it might need to license the patent-at-issue in order to perform its test. After Ariosa manufactured the new DNA-sequencing test, Illumina sued Ariosa in the Northern District of California alleging that the test infringed the patent-at-issue. Ariosa brought counterclaims alleging that Illumina breached the supply agreement by bringing the patent infringement suit and breached the covenant of good faith and fair dealing. Illumina then filed a motion to dismiss, arguing that Ariosa’s counterclaims fell under the supply agreement’s arbitration clause. The district court denied the motion.

The Federal Circuit affirmed the decision of the district court, reasoning:

We agree that Ariosa’s counterclaims are not subject to arbitration. The pertinent language of the arbitration provision is unambiguous and makes clear that “disputes relating to issues of” patent scope and infringement are not subject to mandatory arbitration. J.A. 219. Illumina put the scope of licensed patent rights in issue by suing Ariosa for patent infringement. The counterclaims at issue—declaratory judgment of non-infringement, breach of contract, and breach of certain covenants—are predicated on the notion that the infringement allegations cannot stand because of the licensing provisions within the supply agreement. Endo Pharm., Inc. v. Actavis, Inc., 746 F.3d 1371, 1374 (Fed. Cir. 2014) (noting that the burden of proving license as a defense rests with the alleged licensee). The scope of the licensed intellectual property rights is germane to whether Ariosa ultimately obtained a license to the ‘794 patent for goods that it has been exclusively purchasing from Illumina under the supply agreement. 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. Given the scope of the supply agreement term “any Intellectual Property Rights,” it 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.

A subsequent Delaware District Court decision sheds light on the reach of Verinata. In Gillette Company v. Dollar Shave Club, Inc., No. CV 15-1158-LPS-CJB (D. Del. Aug. 7, 2017), the scope of an arbitration clause and an exclusion-from-arbitration clause was at issue. Gillette argued that Verinata stood for the broad proposition that:

[W]hen an arbitration clause has an exclusion for patent infringement, any license, exhaustion or contract defenses to patent infringement are also excluded from arbitration.

The court disagreed:

Gillette overstates the holding of Verinata. The arbitration agreement involved there explicitly carved out “disputes relating to issues of scope, infringement, validity and/or enforceability of any Intellectual Property Rights.” 830 F.3d at 1337 (emphasis added). The Federal Circuit then found that the claims at issue were not arbitrable because they “centered on whether Ariosa is licensed to use, and thus is immunized from infringement of, the asserted claims of the ‘794 patent.” Id. at 1340. By contrast, the 2008 arbitration agreement here expressly makes arbitrable some intellectual property rights – namely the determination of whether the accused products are “Existing Product[s] or Reasonable Modification[s] encompassed by the Covenants not to sue.” (D.I. 37 Ex. 2 at§ 10.C.1.(e)) That the 2008 Agreement otherwise limits the arbitrability of patent-related claims does not negate the provision that explicitly makes some of those questions arbitrable.

In both cases, the court focused on the use of the word “any” in the exclusion-from-arbitration clause. By excluding “any Intellectual Property Rights,” the clause in Verinata had an extremely broad scope and covered defenses to a patent infringement claim. In contrast, the arbitration agreement in Gillette made some intellectual property rights arbitrable and therefore “any” intellectual property right was not automatically excluded from arbitration. Understanding the importance of broad, all-inclusive language is vital when drafting and litigating exception-from-arbitration agreements of intellectual property rights.

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