Court Opinion

ID: 4018853
Source: CourtListenerOpinion
Date Created: 2016-07-26 16:01:06.934024+00
Date Added: 2024-06-11T14:06:50.749593
License: Public Domain

United States Court of Appeals
      for the Federal Circuit
                ______________________

  VERINATA HEALTH, INC., THE BOARD OF
TRUSTEES OF THE LELAND STANFORD JUNIOR
              UNIVERSITY,
                 Plaintiffs

                   ILLUMINA, INC.,
                   Plaintiff-Appellant

                           v.

            ARIOSA DIAGNOSTICS, INC.,
                 Defendant-Appellee

   LABORATORY CORPORATION OF AMERICA
                HOLDINGS,
                 Defendant
           ______________________

                      2015-1970
                ______________________

    Appeal from the United States District Court for the
Northern District of California in Nos. 3:12-cv-05501-SI,
3:14-cv-01921-SI, Judge Susan Y. Illston.
                 ______________________

                Decided: July 26, 2016
                ______________________

    EDWARD R. REINES, Weil, Gotshal & Manges LLP,
Redwood Shores, CA, argued for plaintiff-appellant. Also
represented by DEREK C. WALTER.
2          VERINATA HEALTH, INC.   v. ARIOSA DIAGNOSTICS, INC.

    DAVID ISAAC GINDLER, Irell & Manella LLP, Los
Angeles, CA, argued for defendant-appellee. Also repre-
sented by JOSHUA GORDON, ANDREI IANCU.
                ______________________

      Before REYNA, CLEVENGER, and WALLACH, Circuit
                       Judges.
REYNA, Circuit Judge.
    Illumina, Inc. (“Illumina”) appeals a district court or-
der denying Illumina’s motion to compel arbitration.
Illumina and Ariosa Diagnostics, Inc. (“Ariosa”) entered
into a supply agreement in which the parties agreed that
certain disputes will be subject to compulsory arbitration.
The arbitration clause came into dispute when Illumina
sued Ariosa for patent infringement, and Ariosa counter-
claimed for breach of contract on grounds that, under the
terms of the supply agreement, Ariosa had a license to the
patent-in-suit. Illumina invoked the arbitration clause of
the supply agreement and moved to compel arbitration.
The district court concluded that Ariosa’s counterclaims
are not subject to arbitration. We affirm the district
court’s order denying compulsory arbitration.
                        BACKGROUND
    Illumina develops, manufactures, and markets inte-
grated systems and tools for analysis of DNA. J.A. 115.
Illumina owns U.S. Patent No. 7,955,794 (the “’794 pa-
tent”), which covers DNA assay optimization techniques.
The ’794 patent was filed in 2002 and issued in 2011.
    In late 2009, Ariosa endeavored to develop a non-
invasive prenatal diagnostic test for the detection of fetal
aneuploidies, which can lead to conditions such as Down
syndrome. J.A. 157. Between 2010 and 2011, Ariosa
provided Illumina, as a prospective investor in Ariosa,
VERINATA HEALTH, INC.   v. ARIOSA DIAGNOSTICS, INC.      3

technical information about its product proposals under
development. J.A. 232.
    In January 2012, seven months after the ’794 patent
issued, Ariosa entered into a three-year supply agreement
with Illumina, under which Illumina agreed to exclusively
supply specific consumables, hardware, and software to
Ariosa. J.A. 204–05. The agreement provided Ariosa
with a non-exclusive license to Illumina’s “Core IP Rights
in Goods,” while excluding from the scope of the license
Illumina’s “Secondary IP Rights in Goods.” J.A. 205. The
agreement defines “Core IP Rights in Goods” as follows:
   Illumina Intellectual Property Rights that pertain
   to the Goods (and use thereof in accordance with
   their Documentation) other than Secondary Illu-
   mina IP Rights in Goods, which are expressly ex-
   cluded from Core IP Rights in Goods.
J.A. 202. The agreement defines “Secondary IP Rights in
Goods” as follows:
   the secondary Illumina Intellectual Property
   Rights that pertain to the Goods (and use thereof)
   only with regard to particular field(s) or applica-
   tion(s), and are not common to the Goods in all
   applications and fields.
J.A. 204. Under the agreement, Ariosa was required to
“identify and ensure that it has all rights from third
parties and, with respect to Secondary IP Rights in Goods,
all rights from Illumina that are necessary for its intend-
ed use of Goods.” J.A. 205.
    The supply agreement also provided an arbitration
clause and an exclusion-from-arbitration clause:
   Subject to the terms and conditions of this Section
   31(c), any dispute, claim or controversy arising
   out of or relating to the breach, termination, en-
   forcement, interpretation or validity of this
4          VERINATA HEALTH, INC.   v. ARIOSA DIAGNOSTICS, INC.

    Agreement, shall be determined by arbitra-
    tion . . . . This Section 31(c) shall not apply to, and
    no arbitration shall resolve, disputes relating to
    issues of scope, infringement, validity and/or en-
    forceability of any Intellectual Property Rights.
J.A. 219. Prior to executing the supply agreement, Illu-
mina never suggested to Ariosa that Ariosa needed to
license the ’794 patent or any other intellectual property
to operate Ariosa’s test.
    In March 2012, Ariosa launched a DNA-sequencing
test called the Harmony Prenatal Test. J.A. 232. The
test consisted of materials supplied by Illumina. Id.
    In October 2012, Verinata Health, Inc. (“Verinata”)
and Stanford University sued Ariosa for patent infringe-
ment, alleging that the Harmony Prenatal Test infringed
certain claims of two patents not at issue in this appeal.
In January 2013, Illumina acquired Verinata, making it a
wholly owned subsidiary of Illumina.
     On January 10, 2014, Illumina sent a letter to Ariosa,
accusing Ariosa of breaching the supply agreement by
failing to license Secondary IP Rights in Goods, as defined
and required by the supply agreement. J.A. 406. Illumi-
na demanded that Ariosa license “Secondary IP Rights
that [then Verinata, now Illumina] has set out in the
pending patent litigation against Ariosa.” Id. Illumina
did not mention the ’794 patent, and Ariosa denied
breaching the agreement. J.A. 145.
    On April 25, 2014, Illumina sued Ariosa in the North-
ern District of California, alleging that the Harmony
Prenatal Test infringed certain of the claims of the ’794
patent. J.A. 116. On June 11, 2014, Ariosa filed an
amended answer with counterclaims for (1) declaratory
judgment of invalidity and non-infringement; (2) breach of
contract; and (3) breach of the covenant of good faith and
fair dealing. J.A. 125, 149–51. Ariosa raised license and
VERINATA HEALTH, INC.   v. ARIOSA DIAGNOSTICS, INC.       5

estoppel as affirmative defenses. J.A. 134. Ariosa’s
counterclaims alleged that Illumina breached the supply
agreement by “bringing a lawsuit against Ariosa for
infringement of the ’794 patent” and “by asserting pre-
textual claims of ‘breach’ of the [supply agreement].” J.A.
150–51; see also J.A. 245, 247 (same for second amended
answer and counterclaims).
    In June 2014, Illumina filed a motion to dismiss Ari-
osa’s counterclaims in view of the arbitration clause in the
supply agreement. On August 7, 2014, the district court
denied the motion to dismiss, concluding that Ariosa’s
counterclaims for breach of contract and the covenant of
good faith and fair dealing were not subject to compulsory
arbitration.
    On September 15, 2014, Illumina appealed to this
Court. See Illumina, Inc. v. Ariosa Diagnostics, Inc., No.
2014-1815 (Fed. Cir. filed Sept. 15, 2014). On June 23,
2015, we remanded the case to the district court so that
Illumina could resubmit its motion as a motion to compel
arbitration.
    On July 20, 2015, Illumina refiled in the district court
a motion to compel arbitration. J.A. 249. On August 31,
2015, the district court denied the motion on grounds that
Ariosa’s defense that it possessed an express or implied
license was “directly related to whether a patent has been
infringed.” Verinata Health, Inc. v. Ariosa Diagnostics,
Inc., No. 12-cv-05501-SI, 2015 U.S. Dist. LEXIS 115701,
at *10–12 (N.D. Cal. Aug. 31, 2015).
   Illumina appeals. We have jurisdiction under 9
U.S.C. § 16; 28 U.S.C. § 1292(a)(1), (c).
                   STANDARD OF REVIEW
    We review de novo a district court’s conclusion as to
whether the parties have bound themselves to arbitrate.
We review any factual findings in support of that conclu-
sion for clear error. Promega Corp. v. Life Techs. Corp.,
6          VERINATA HEALTH, INC.   v. ARIOSA DIAGNOSTICS, INC.

674 F.3d 1352, 1355 (Fed. Cir. 2012). We apply our law to
substantive and procedural issues unique to and intimate-
ly involved in federal patent law, and we apply regional
circuit law to other substantive and procedural issues.
Flex-Foot, Inc. v. CRP, Inc., 238 F.3d 1362, 1365 (Fed. Cir.
2001) (citing Amana Refrigeration, Inc. v. Quadlux, Inc.,
172 F.3d 8752, 855–56 (Fed. Cir. 1999)). We apply re-
gional circuit law, which in this case is the Ninth Circuit,
when determining whether “non-infringement and inva-
lidity fall within the scope of the arbitration clause of the
parties’ agreement.” Deprenyl Animal Health, Inc. v.
Univ. of Toronto Innovations Found., 297 F.3d 1343, 1349
(Fed. Cir. 2002) (citations omitted). Arbitration agree-
ments are governed by state contract law, except to the
extent state law is displaced by “federal substantive law
regarding arbitration.” Promega, 674 F.3d at 1356 (quot-
ing Preston v. Ferrer, 552 U.S. 346, 349 (2008)).
                        DISCUSSION
    The Federal Arbitration Act mandates enforcement of
valid, written arbitration provisions. See 9 U.S.C. § 2;
Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 111
(2001). When a party moves to compel arbitration of a
dispute, a court must determine whether the parties
agreed to arbitrate that dispute. Mitsubishi Motors Corp.
v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985).
This inquiry requires a court to determine whether the
dispute between the parties falls within the scope of the
arbitration agreement. See Granite Rock Co. v. Int’l Bhd.
of Teamsters, 561 U.S. 287, 297 (2010). Thus, “a court
may order arbitration of a particular dispute only where
the court is satisfied that the parties agreed to arbi-
trate that dispute.” Id. (emphasis in original). In deter-
mining whether an agreement requires arbitration, courts
must recognize that the Federal Arbitration Act “estab-
lishes a national policy favoring arbitration when the
parties contract for that mode of dispute resolution.”
Preston, 552 U.S. at 349. “The presumption in favor of
VERINATA HEALTH, INC.   v. ARIOSA DIAGNOSTICS, INC.        7

arbitrability applies only where the scope of the agree-
ment is ambiguous as to the dispute at hand, and we
adhere to the presumption and order arbitration only
where the presumption is not rebutted.” Goldman, Sachs
& Co. v. City of Reno, 747 F.3d 733, 742 (9th Cir. 2014).
    Illumina argues that the district court should have
compelled arbitration under the supply agreement.
Illumina asserts that the supply agreement’s arbitration
clause is ambiguous. Illumina contends that due to this
ambiguity, it need only demonstrate that the agreement
is susceptible to an interpretation in favor of arbitration
and that that interpretation is reasonable. Illumina
posits three arguments for why the supply agreement is
susceptible to an interpretation compelling arbitration
and why that reading is reasonable.
    First, Illumina contends that Ariosa’s contract coun-
terclaims do not involve evaluating the scope of the patent
or patent infringement because no claim construction or
infringement analysis is needed to resolve Ariosa’s con-
tract counterclaims. Illumina maintains that the text of
the supply agreement shows that the intent of the exclu-
sion-from-arbitration clause is to insulate the arbitrator
from resolving questions of patent infringement (or patent
scope, invalidity, or enforceability), but not whether
license is a defense.
    Second, Illumina contends that the district court in-
terpreted the term “relating to” too broadly because the
interpretation fails to give effect to the federal policy in
favor of arbitration. Illumina explains that under the
district court’s interpretation, general business issues like
indemnification and supply disputes could “relate to”
patent infringement and therefore evade arbitration.
Observing that the supply agreement used the term
“issues” and not “claims,” Illumina also suggests that the
parties wanted to exclude only certain issues from being
arbitrated, not that they intended for anything generally
8          VERINATA HEALTH, INC.   v. ARIOSA DIAGNOSTICS, INC.

connected to patent infringement to be litigated in district
court. Illumina emphasizes that the affirmative defense
of license is not among the issues identified in the supply
agreement.
    Finally, Illumina asserts that, in the event Ariosa’s
counterclaims are determined to fall within the exclusion-
from-arbitration clause, the contract counterclaims not
involving Ariosa’s license defense should be severed and
sent to arbitration. Illumina points out that contract
counterclaims are separate and distinct business harms
from the license defense to patent infringement.
     Ariosa responds that its counterclaims fall within the
terms of the exclusion-from-arbitration clause. Ariosa
maintains that the presumption in favor of arbitration
only applies after a court determines that an ambiguity
exists as to whether a particular dispute is subject to
arbitration and the party favoring district court litigation
fails to rebut that presumption. Ariosa notes that the
district court has twice concluded that Ariosa’s counter-
claims “unambiguously relate to issues of patent in-
fringement” and thus “are outside of the scope of the
arbitration agreement.” J.A. 6. Ariosa argues that Illu-
mina’s claim of patent infringement is tied to the question
of whether Ariosa was granted, and continues to enjoy, an
express or implied license to the ’794 patent. Ariosa
contends that if it has an express license to the ’794
patent as falling within the agreed upon Core IP Rights in
Goods, then Ariosa has a viable counterclaim for breach of
the supply agreement because Ariosa cannot be liable for
infringement of that patent. Ariosa also contends that
the district court correctly interpreted the term “relating
to” as having broad meaning. Ariosa observes that Illu-
mina has failed to present extrinsic evidence to support
its narrow interpretation of “relating to,” relying instead
on attorney argument. Ariosa contends that certain
issues in Ariosa’s counterclaims cannot be severed as
separate claims, and that despite filing two motions in the
VERINATA HEALTH, INC.   v. ARIOSA DIAGNOSTICS, INC.      9

district court arguing that Ariosa’s counterclaims are
subject to arbitration, Illumina has never made this
particular severance argument until this appeal.
     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 predi-
cated 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. J.A. 219.
     The arbitration clause applies to issues identified by
the supply agreement that are not patent-related, such as
failure of performance and defenses against the enforcea-
bility or validity of the supply agreement itself. Illumi-
na’s argument fails to appreciate that the excluded issues
are about disputes over the scope of the licensed intellec-
10         VERINATA HEALTH, INC.   v. ARIOSA DIAGNOSTICS, INC.

tual property—not whether a party lacked capacity to
contract or failed to ship product under agreed upon
terms and conditions.
    The Ninth Circuit and courts interpreting California
law have held that the phrase “relating to” should be
given broad meaning, in contrast to other prefatory
phrases, such as “arising hereunder.” 1 In view of Califor-
nia law and past interpretations of similar clauses, a
disagreement about the scope of licensed rights does not
render the clause ambiguous for purposes of invoking the
presumption in favor of arbitration. To the extent Illumi-
na suggests that the word “issues” narrows the import of
the exclusion-from-arbitration clause, we disagree be-
cause the full phrase links “issues” with the modifier
“relating to”: “disputes relating to issues of.” J.A. 219.

     1
        See, e.g., Cape Flattery Ltd. v. Titan Mar., LLC,
647 F.3d 914, 922 (9th Cir. 2011) (“Because of the absence
of the ‘relating to’ language in the arbitration provision,
we had ‘no difficulty finding that “arising hereunder” is
intended to cover a much narrower scope of disputes, i.e.,
only those relating to the interpretation and performance
of the contract itself.’”) (quoting Mediterranean Enters.,
Inc. v. Ssangyong Corp., 708 F.2d 1458, 1464 (9th Cir.
1983)); Tracer Research Corp. v. Nat’l Envtl. Serv., 42
F.3d 1292, 1295 (9th Cir. 1994) (noting “[t]he omission of
the ‘relating to’ language is ‘significant’,” and finding the
arbitration clause at issue more narrow without that
language); Izzi v. Mesquite Country Club, 231 Cal. Rptr.
315, 317 (Cal. Ct. App. 1986) (“where contracts provide
arbitration for ‘any controversy . . . arising out of or
relating to the contract . . .’ the courts have held such
arbitration agreements sufficiently broad to include torts,
as well as contractual, liabilities so long as the tort claims
‘have their roots in the relationship between the parties
which was created by the contract.’”) (citations omitted).
VERINATA HEALTH, INC.   v. ARIOSA DIAGNOSTICS, INC.      11

Illumina has presented no extrinsic evidence to support
its narrow interpretation, and instead relies on attorney
argument. See Yufa v. Lockheed Martin Corp., 575 F.
App’x 881, 887 (Fed. Cir. 2014) (rejecting attorney argu-
ment as evidence); Enzo Biochem, Inc. v. Gen-Probe, Inc.,
424 F.3d 1276, 1284 (Fed. Cir. 2005) (same).
    The district court was correct not to sever the contract
counterclaims. We do not reach the issue of whether
Illumina waives its argument that Ariosa’s license de-
fense is subject to the arbitration clause of the Agreement.
Even so, Illumina fails to articulate how to separate as
discrete the patent infringement issues involved in the
contract counterclaims. The nucleus of Ariosa’s counter-
claims is the patent infringement lawsuit filed by Illumi-
na. 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.
                         CONCLUSION
    The district court correctly concluded that the parties
did not bind themselves to arbitrate Ariosa’s counter-
claims. The district court’s order denying the motion to
compel arbitration is therefore affirmed.
                        AFFIRMED
                            COSTS
   Each party shall bear its own costs.