Agreement Excluding Intellectual Property-Related Disputes from Arbitration Encompasses License Defense to Breach of Contract

  • August 9, 2016

By: Gregory K. Gerstenzang

August Federal Circuit Review

The Federal Circuit has affirmed a district court order denying compulsory arbitration because an agreement expressly excluded intellectual property-related disputes from arbitration.

Illumina, Inc. owns a patent directed to DNA assay optimization techniques. In 2009, Ariosa entered into a supply agreement with Illumina to develop non-invasive pre-natal diagnostic tests using Illumina’s products and technology. The supply agreement required Ariosa to obtain any necessary “secondary IP rights in goods,” which Illumina construed to include a license to its own patent on DNA assay optimization. The agreement contained an arbitration clause, but the clause exempted from arbitration, disputes related to the scope, infringement validity and/or enforceability of any intellectual property rights.

Ariosa did not license Illumina’s patent prior to developing its diagnostic test. Illumina, in conjunction with Verinata Health, Inc., whom it recently acquired, sued Ariosa for patent infringement. Ariosa argued in defense that the patent was licensed through the supply agreement, and also countersued for breach of the agreement. Illumina moved to compel arbitration of all of Ariosa’s claims related to the contract and alleged breach.

The district court declined to compel arbitration, finding that Ariosa’s counterclaim for breach and its defense of license “directly related to whether a patent has been infringed,” and therefore fell outside of the scope of the arbitration clause.

The Federal Circuit affirmed, stating that the arbitration clause unambiguously made issues related to patent scope and infringement exempt from mandatory arbitration. The Court reasoned that Illumina put the scope of the licensed patent rights in issue by suing for infringement, and that the suit was predicated on whether there was a license in the agreement.

Key Takeaway:

Federal law strongly favors enforcement of arbitration agreements and construes any ambiguity in an arbitration clause in favor of arbitration. However, the Federal Circuit has shown its willingness to broadly enforce a carve-out directed to intellectual property disputes. Contracting parties should carefully weigh the wording of arbitration provisions, particularly as they relate to intellectual property rights.

District Court Abused Its Discretion in Denying an Injunction for Patent Infringement Regarding a Life Saving Product

In WBIP v. Kohler, the Federal Circuit held that a district court abused its discretion in denying an injunction against a patent infringer where the lower court appeared to analyze only the public interest factor in the traditional injunction analysis.

WBIP is the owner of two patents directed to low carbon monoxide emitting marine generators used on houseboats to create electrical power. Kohler learned of WBIP’s marine generators and began manufacturing and selling generators that infringe WBIP’s patents. WBIP sued Kohler for patent infringement in the United States District Court for the District of Massachusetts. The district court found that Kohler infringed WBIP’s patents, but stated that it would not enjoin Kohler from manufacturing the infringing products because it did not believe that WBIP had sufficient manufacturing capacity to meet demand for what the court considered to be a potentially life-saving product. The district court stated that it was in the public interest to have more than one company manufacture low carbon monoxide emitting marine generators.

The Federal Circuit determined that the refusal to issue the injunction was an abuse of discretion. When deciding whether to enter an injunction, a court traditionally looks to the four-factor test set out by the Supreme Court in eBay v. MercExchange. The district court’s opinion considered only one of those factors, the public interest, and in analyzing the public interest factor, the district court did not explain how the public interest to uphold patent rights was outweighed by the public interest of having more than one manufacturer of the marine generators. The Federal Circuit also expressed concern that the lower court’s decision could create a categorical rule against injunctions for potentially life-saving products.

The case was remanded for the district court to conduct a more thorough analysis of the eBay factors.

Key Takeaway:

The propriety of an injunction following a finding of patent infringement depends on a full analysis of all four eBay factors. A strong showing with respect to the public interests will not be sufficient on its own to escape an injunction, particularly in view of the public interests in favor of enforcing patent rights.

Supplier Preparation According to Claimed Processes Did Not Constitute a Sale Barring Product-By-Process Claims

The en banc Federal Circuit upheld a district court’s decision that a contract manufacturer’s sale of a product to the developer of the product did not constitute a commercial sale, which would invalidate the developer’s patent directed to the product.

The Medicines Company is the owner of several patents directed to bivalirudin, an anticoagulant commonly used during coronary surgery. Generic manufacturer Hospira developed its own bivalirudin product and filed two Abbreviated New Drug Applications intending to sell its drug prior to the expiration of Medicines’ patents. Medicines sued for infringement.

Before the district court, Hospira alleged the patents were invalid under the on-sale bar in Section 102 of the Patent Act, on the basis that Medicines contracted with a supplier to prepare experimental batches of the patented product more than one year before filing for patents covering the product. The district court found that the transaction with the supplier was not a commercial offer for sale because it was a sale of manufacturing services, not the product itself. A three-judge panel of the Federal Circuit reversed, holding that Medicines’ experimental batches constituted commercial exploitation of their invention more than a year before filing for patent.

The en banc Federal Circuit reversed the panel and affirmed the district court, holding that a commercial sale triggering the on-sale bar is one that follows the Uniform Commercial Code’s definition of a sale. Because only manufacturing services were sold and there was no title transfer during the transaction with the supplier, Medicines’ “pre-commercial” activity in preparation for future sale did not trigger the on-sale bar. The Court reasoned that the purpose of the statute is to preclude attempts by the inventor or his assignee to profit from commercial use of an invention for more than a year before an application for patent is filed, not to prevent an inventor from outsourcing manufacturing or stockpiling product in preparation for commercial sales.

Key Takeaway:

A contract for manufacturing services, which does not transfer the title to the product, does not trigger the Patent Act’s on-sale bar. Patent owners should carefully consider the terms of third-party supplier agreements, and file patent applications covering manufactured products as soon as possible to avoid potential on-sale bar issues.

Claims of Patent Reciting Method for Preserving Liver Cells found to be Directed to Patent Eligible Subject Matter

In Cellzdirect, the Federal Circuit held that claims of a patent directed to cryopreservation of liver cells were directed to patent eligible subject matter under 35 U.S.C. § 101, rather than reciting an unpatentable law of nature.

Cellzdirect owns a patent including claims directed to a method of cryopreservation of liver cells. The patented method involves exposing the liver cells to multiple freeze-thaw cycles and to preparing a liver cell culture with cells from multiple donors. The method was not previously believed to be possible. The United States District Court for the Northern District of Illinois found that the claims at issue were directed to a patent-ineligible law of nature – that liver cells are capable of surviving multiple freeze-thaw cycles – and that the patented process lacked an inventive concept.

The Federal Circuit reversed. It found that the claims at issue were not directed to the ability of liver cells to survive multiple freeze-thaw cycles, but were directed to a new and useful laboratory technique for preserving those cells. This method was different from claims previously found to be patent-ineligible because they involved more than simply detecting the presence of a chemical compound, or observing a naturally occurring process. Furthermore, the claims were directed to a method of producing the liver cell cultures, not to the liver cell cultures themselves, and thus were not directed to a product of nature.

Key Takeaway:

A claim directed to an application of a natural law or process may still be patent eligible where the end result of the method is something more than the mere observation or detection of that natural law. A method of producing a product or an outcome may be patentable even if it relies on laws of nature that are not.


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