Northern District of Texas Orders Patent Royalty Dispute to Arbitration

The Northern District of Texas in Dallas has ordered a patent royalty dispute to arbitration. In Sazy v. DePuy Spine, LLC, No. 3:13-CV-4379-L (N. D. Tex., Sept. 18, 2014), a Texas physician entered into a Product Development Agreement (“PDA”) with several related corporations (“DePuy”) in early 2002. The agreement contained a Supplementary Agreement that outlined the circumstances under which the doctor could earn royalties if the proposed surgical mesh product became sold commercially. The PDA also contained an agreement to arbitrate any disputes “arising out of or relating to” the contract. About one year after the parties executed the PDA, the physician began to receive royalties for the mesh product.

In 2003, the parties executed an amendment to the PDA after DePuy developed a related product. The amendment provided the doctor with reduced royalties for five years and changed the definition of the term “patent” in the agreement. Despite this, the physician received the higher royalty rate included in the original PDA until January 2011. In September 2013, the doctor filed a lawsuit alleging breach of contract and other claims against DePuy in a Texas state court. The corporation removed the case to federal court before filing a motion to stay the proceedings and compel the parties’ dispute to arbitration.

After finding that a valid agreement to arbitrate existed, the Northern District of Texas examined the physician’s claim that the arbitral provision should not be enforced because he was fraudulently induced into signing it. According to the court, the doctor’s argument attacked “the validity of the entire agreement, constituting the PDA, and therefore is not a valid basis for foreclosing arbitration.” In addition, the court stated,

Further, the plain language of the arbitration provision of the PDA provides that a claim of “inducement” is subject to arbitration. PDA § 19, App. 12. By the plain language of the provision, any claims relating to the inducement of the agreement, such as Plaintiff’s claim of fraudulent inducement, are subject to arbitration. Since no legal restraints external to the 2002 PDA foreclose arbitration of Plaintiff’s claims, he is required to submit his claims to arbitration.

Next, the federal court addressed DePuy’s motion to stay the court proceedings and compel arbitration. The Northern District of Texas denied the corporation’s motion to stay the case by stating,

… When a court determines that all claims of a lawsuit are subject to arbitration, dismissal of the action with prejudice is appropriate and within the court’s discretion. Alford v. Dean Witter Reynolds, Inc., 975 F.2d 1161, 1164 (5th Cir. 1992) (citations omitted). The reason for dismissal with prejudice is that retaining jurisdiction of the action by the district court serves no purpose because any remedies after arbitration are limited to judicial review based on the grounds set forth in the Federal Arbitration Act. Id. (citation omitted). The court determines that all of Plaintiff’s claims are arbitrable and will dismiss this action with prejudice.

Because a valid agreement to arbitrate existed and all of the doctor’s claims were subject to arbitration, the Northern District of Texas denied the defendants’ motion to stay litigation, dismissed the case with prejudice, and ordered the parties’ dispute to arbitration.

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