Telectronics Pacing v. Guidant Corporation , 143 F.3d 428 ( 1998 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
Nos. 97-1785/2016
___________
Telectronics Pacing Systems, Inc.; *
Telectronics Holding, Ltd.; Telectronics*
Pty., Ltd.; Medical Telectronics Holding*
and Finance Co., (BV); Telectronics, *
NV; TPLC, Inc.; Telectronics, SA; *
Pacesetter, Inc., *
*
Appellants/Cross-Appellees, *
* Appeals from the United States
v. * District Court for the
* District of Minnesota.
Guidant Corporation; Cardiac *
Pacemakers, Inc.; Guidant Sales Corp.; *
Eli Lilly and Co., *
*
Appellees/Cross-Appellants. *
___________
Submitted: February 12, 1998
Filed: May 4, 1998
___________
Before FAGG, JOHN R. GIBSON, and MURPHY, Circuit Judges.
___________
MURPHY, Circuit Judge.
This case involves an attempted transfer of rights under a patent licensing
agreement. It was brought by certain companies involved in designing, manufacturing,
and distributing cardiac stimulation devices (collectively the Telectronics Group and
Pacesetter) against several competitors in the medical device business (collectively the
Lilly Group) who had filed a state declaratory judgment action seeking a declaration
that the attempted transfer was void. The Telectronics Group and Pacesetter sued in
federal court to compel arbitration and to enjoin the state proceedings. The district
court declined to grant the relief they sought and dismissed their complaint. The
Telectronics Group and Pacesetter appeal, and we reverse.
The Telectronics Group consists of Telectronics Pacing Systems, Inc. (TPSI);
Telectronics Holding, Ltd. (THL); Telectronics Pty., Ltd. (TPL); Medical Telectronics
Holding and Finance Co. (MTHF); Telectronics, NV (TNV); TPLC, Inc.; and
Telectronics, SA. That group and Pacesetter, Inc. joined to sue the Lilly Group or
Guidant Corporation; Cardiac Pacemakers, Inc. (CPI) (a wholly owned subsidiary of
Guidant Corporation); Guidant Sales Corporation, Inc. (GSC) (a wholly owned
subsidiary of CPI); and Eli Lilly and Co. (Lilly) (the former parent corporation of CPI).
The Telectronics Group and the Lilly Group had previously entered into a patent
cross-licensing agreement on March 8, 1994,1 by which they provided each other with
nonexclusive licenses and sublicenses under their respective patent holdings covering
cardiac stimulation devices. The agreement constituted a settlement of all then pending
patent infringement litigation between the two groups. Later Pacesetter purchased
substantially all of the assets of TPSI and TPLC on November 29, 1996. The
transaction involved an assignment to Pacesetter from its affiliate, O Acquisition, Inc.,
of an agreement it had worked out with TPSI and TPLC.
1
The “Lilly Group” was defined in the 1994 licensing agreement as “Lilly and
CPI and Affiliates.” § 1.07. The “Telectronics Group” was defined as “Telectronics
and Affiliates, including but not limited to TPL, MTHF, TNV, TPSI, TPLC and
Telectronics, SA.” § 1.08. According to the complaint in this action, Guidant
Corporation is the successor in interest to Lilly under the licensing agreement, and CPI
changed from a wholly owned subsidiary of Lilly to a wholly owned subsidiary of
Guidant sometime in 1994.
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Section 12.03 of the 1994 patent cross-licensing agreement permitted the
Telectronics Group to transfer its licensing rights under the agreement without the
consent of the Lilly Group if there were a “sale of substantially all of the assets of the
Telectronics Group.” The Telectronics Group and Pacesetter contend that the licensing
rights of the Telectronics Group under the agreement were automatically transferred
to Pacesetter under § 12.03 when the 1996 purchase was consummated.
Three days before the closing of the 1996 transaction, the Lilly Group brought
an action in state court in Indiana2 to obtain a declaratory judgment that the transaction
could not effect a transfer of the Telectronics Group’s rights under the cross-licensing
agreement because it would not amount to a sale of substantially all of its assets as
required for a valid transfer under § 12.03. It also sought to enjoin the Telectronics
Group, Pacesetter, and Pacesetter’s parent corporation, St. Jude Medical, Inc. (St.
Jude), from acting as if the licensing rights had been effectively transferred. In its
complaint, the Lilly Group alleged that the sole purpose of the sale was to allow
Pacesetter to obtain the Telectronics Group’s licensing rights to Lilly Group patents.
These licensing rights were identical to those owned by another medical device
company, Ventritex, Inc., which were scheduled to expire upon Ventritex’ merger into
Pacesetter under an October 23, 1996 agreement entered into by Pacesetter, Ventritex,
and St. Jude.3 The Lilly Group claimed that the attempted transfer of the Telectronics
Group’s rights violated the 1994 licensing agreement, as well as other licensing and
common law rights.4
2
Three members of the Lilly Group (Guidant Corporation, GSC, and Lilly) are
Indiana corporations.
3
A cross-licensing agreement between the Lilly Group and Ventritex provided
that the licenses granted to Ventritex would terminate immediately upon a change in
control of Ventritex. Ventritex merged into Pacesetter in May 1997.
4
The Indiana action was initially removed to federal court but was later
remanded. At the time the appeals in this case were submitted, the state court had not
ruled on all pending motions, discovery was ongoing, and a trial date had been set for
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On December 17, 1996 the Telectronics Group and Pacesetter served the Lilly
Group with a notice of demand for binding arbitration of the dispute about the validity
of the licensing rights transfer. The letter accompanying the notice indicated that the
demand was made under § 11.02 of the 1994 licensing agreement. Section 11.02
provides:
Any dispute that arises in connection with The Agreement including
whether royalty payments are due under any sublicense, shall be resolved
by binding Alternative Dispute Resolution (“ADR”) in accordance with
35 U.S.C. § 294 and in the manner described in Exhibit B and judgment
upon the award made by the Arbitrator may be entered by any Court
having jurisdiction thereof. No punitive damages shall be recoverable by
any party in such a proceeding. If the arbitrators determine that a third
party licensor or other third party is a necessary party to any such dispute,
such dispute shall not be governed by this paragraph.
The Lilly Group responded that the dispute was not arbitrable under this section
because one or more third parties were necessary for its resolution. It insisted on its
right to proceed with the Indiana litigation.
The Telectronics Group and Pacesetter then brought this action in federal court
under section 4 of the Federal Arbitration Act (FAA), 9 U.S.C. § 4, seeking injunctive
and declaratory relief to enforce the arbitration provisions of the 1994 licensing
agreement. Their complaint sought (1) a declaratory judgment that the Lilly Group’s
claims in the Indiana case arose out of the 1994 licensing agreement and were therefore
subject to binding arbitration under § 11.02 of the agreement, (2) an injunction against
litigation of the dispute in any other forum, and (3) an order compelling arbitration of
the dispute in Minnesota pursuant to the procedures adopted in Exhibit B of the
agreement. With the complaint they filed a motion to compel arbitration and for a
preliminary injunction against other litigation.
late 1998 or early 1999.
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The district court denied the motion to compel arbitration and for a preliminary
injunction and dismissed the complaint. It believed that the 1994 agreement did not
give the arbitrator the exclusive authority to determine whether the existence of a
necessary third party rendered a dispute inarbitrable under § 11.02. It decided that the
licensing transfer dispute necessarily involved a third party, either the Telectronics
Group or Pacesetter,5 depending upon the validity of the transfer, and that it was
therefore not arbitrable. It denied the motion for a preliminary injunction after rejecting
the motion to compel arbitration because its decision meant that the Telectronics Group
and Pacesetter could not show a likelihood of success on the merits or that an
injunction would be in the public interest and because it weighed the balance of harms
in favor of the Lilly Group. It also dismissed the complaint.
The denial of a motion to compel arbitration is reviewed de novo, see Storey v.
Shearson Lehman Hutton, Inc., 949 F.2d 1039, 1040 (8th Cir. 1991), and any doubts
raised in construing contract language on arbitrability “should be resolved in favor of
arbitration.” Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1,
24-25 (1983).
The Telectronics Group and Pacesetter claim that the district court erred by
proceeding to decide the question whether a third party is necessary to resolve the
dispute about the validity of the transfer because this particular question was reserved
for the arbitrator under § 11.02 of the 1994 agreement. They claim the parties agreed
in 1994 that this issue of arbitrability would be submitted to the arbitrator. The Lilly
Group responds that the parties did not agree to submit this type of issue to arbitration
and that the district court properly decided the transfer issue. The Lilly Group argues
that both the Telectronics Group and Pacesetter are necessary parties to the dispute and
that one of them must be a third party because resolution of a transfer dispute inherently
5
The Lilly Group also contended that St. Jude and Ventritex were necessary third
parties to the dispute, but the district court did not reach that argument.
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involves a third party, either the purported assignor or the purported assignee,
depending on the validity of the assignment. The Telectronics Group and Pacesetter
respond that neither of them is a third party because the former, as an original signatory
to the licensing agreement, retained the right to arbitrate disputes arising in connection
with it and Pacesetter became substituted for the Telectronics Group as a party to the
agreement by the 1996 purchase.
The key question before us is whether a court or an arbitrator is to decide if there
is a necessary third party for resolution of the license transfer dispute. While federal
policy favors referrals to arbitration, there must be clear and unmistakable evidence that
the parties agreed to submit to arbitration a particular question concerning the
arbitrability of their dispute. See First Options of Chicago, Inc. v. Kaplan, 514 U.S.
938, 944 (1995). The 1994 licensing agreement provides that “[a]ny dispute . . . shall
be resolved” by binding arbitration but it provides for one type of exception and that
is when “the arbitrators determine that a third party . . . is a necessary party.” § 11.02.
The agreement thus speaks to the question of arbitrability with respect to necessary
third parties and specifically mentions arbitration in connection with determination of
any necessary third party issue. Cf. McLaughlin Gormley King Co. v. Terminix Int’l
Co., 105 F.3d 1192, 1194 (8th Cir. 1997) (court properly decided arbitrability where
arbitration clause “made no mention of a ‘controversy’ over arbitrability”). Section
11.02 provides for arbitration of disputes among the parties unless “the arbitrators
determine that a third party licensor or other third party is a necessary party to any such
dispute” (emphasis added). In other words, the parties agreed both that an underlying
dispute cannot be arbitrated if a third party is necessary to its resolution and that the
issue of whether a third party is necessary is for the arbitrator. The wording of § 11.02
thus offers “clear and unmistakable evidence” that the parties agreed to arbitrate
whether the condition that triggers the exception to arbitration applies.
The Lilly Group argues, nevertheless, that special significance should be read
into the use of the word “if” at the beginning of the sentence setting out the exception
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to arbitration. It says that this use of a conditional term makes the provision too
ambiguous to satisfy the standard in First Options. The language of § 11.02 is not
ambiguous, however. The final sentence in fact uses a mandatory “shall” when it
speaks of the consequences of the arbitrator’s determination that a third party is
necessary (“such dispute shall not be governed by this paragraph”). One of the reasons
for use of the First Options “clear and unmistakable evidence” standard is that parties
to agreements often may not “focus on the significance of having arbitrators decide the
scope of their own powers.” 514 U.S. at 945. In this case the parties clearly did focus
on this issue by choosing to provide that the exception applies “[i]f the arbitrators
determine . . .” rather than just stating an exception to the otherwise broad category of
arbitrable disputes. The wording of the section shows they considered who would
decide whether the exception applies. The agreement’s provision for a specific result
upon an arbitrator’s determination, without a provision for a result upon such a
determination by a court, constitutes clear and unmistakable evidence that the parties
intended for the arbitrator to decide arbitrability with respect to whether there are any
third parties necessary to resolve the underlying dispute.
The parties also differ on the significance of Exhibit B, an appendix to the
licensing agreement which describes the procedure by which binding arbitration is to
be conducted under § 11.02. Exhibit B begins with a statement that disputes relating
to the licensing agreement which cannot be settled by negotiation must be submitted
to binding arbitration in accordance with the procedures outlined in the exhibit.
Paragraph 1 of the exhibit gives the procedure for providing notice of a demand for
binding arbitration, including form of notice, time limit for serving notice, and on whom
it must be served. Paragraph 2 discusses the commencement and conduct of the
arbitration and provides the method for selection of the arbitrator, the distribution of
costs, location of the arbitration (Minnesota), procedures for pre-hearing discovery, the
procedural requirements for conducting the hearing before the arbitrator, and conduct
of the arbitration consistent with the FAA.
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The parties disagree on the meaning of paragraph 2(G) of the exhibit titled
“Consolidation.” It provides that “[n]o arbitration shall include, by consolidation,
joinder, or in any other manner, any additional person not a party to this Agreement,
except by written consent of both parties containing a specific reference to this
Agreement.” The Lilly Group contends that this provision prohibits the participation
of third parties in arbitration of any dispute and permits a court to decide the necessity
of a third party despite the language in § 11.02 of the agreement about the arbitrator’s
role in making that particular decision. The Telectronics Group and Pacesetter argue
that this provision is not intended to control the issue of whether a dispute is arbitrable
but is merely one of a number of provisions intended to guide the arbitrator and the
parties in how to conduct an arbitration.
Section 11.02 of the licensing agreement states that arbitration shall be
conducted “in the manner described in Exhibit B” (emphasis added). Exhibit B deals
with the procedural requirements for arbitration of a dispute under the agreement and
the manner in which the arbitration should be handled, not with the substantive scope
of arbitrability under the arbitration provision. Unlike § 11.02, paragraph 2(G) of
Exhibit B does not state the conditions under which the arbitrators must conclude that
a dispute is not subject to arbitration and it does not discuss the scope of arbitrable
disputes under the agreement. Once a party serves notice of demand for binding
arbitration, paragraph 2(G) does not come into play until after the dispute is referred
to an arbitrator and proceedings have begun in accordance with paragraph 2(E). At that
point the only way in which a third party may participate in the proceedings is with the
written consent of both parties. Paragraph 2(G) does not control whether a third party
is necessary for resolution of a dispute, and the procedural provisions in Exhibit B do
not govern who decides whether a dispute is arbitrable.
Giving force to § 11.02 of the 1994 licensing agreement is consistent with the
Congressional policy in favor of “rapid and unobstructed enforcement of arbitration
agreements.” Moses H. Cone Memorial Hosp., 460 U.S. at 23. The FAA provides
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both for a stay of litigation raising an arbitrable dispute, 9. U.S.C. § 3, and an
affirmative order to compel arbitration, 9 U.S.C. § 4, to enforce such agreements.
These provisions “call for an expeditious and summary hearing, with only restricted
inquiry into factual issues,” and “questions of arbitrability must be addressed with a
healthy regard for the federal policy favoring arbitration.” Moses H. Cone Memorial
Hosp., 460 U.S. at 22, 24. Submitting this arbitrability question to an arbitrator accords
with the language of the agreement and “with the intent of the Arbitration Act for a
summary and speedy disposition of motions or petitions to enforce arbitration clauses.”
Daisy Mfg. Co. v. NCR Corp., 29 F.3d 389, 396 (8th Cir. 1994) (internal quotation
marks omitted).
A matter should not be sent to arbitration unless there is a valid agreement to
arbitrate and the underlying dispute falls within the scope of that agreement. See
Houlihan v. Offerman & Co., 31 F.3d 692, 694-95 (8th Cir. 1994). Generally “there
is a presumption of arbitrability in the sense that ‘[a]n order to arbitrate the particular
grievance should not be denied unless it may be said with positive assurance that the
arbitration clause is not susceptible of an interpretation that covers the asserted
dispute.’” AT&T Tech., Inc. v. Communications Workers of Am., 475 U.S. 643, 650
(1986) (quoting Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582-83
(1960)). Section 11.02 provides for the arbitration of any dispute arising “in
connection with” the licensing agreement. The underlying issue between the parties
concerns whether the transfer of the licensing agreement from the Telectronics Group
to Pacesetter complied with the requirements for assignment and transfer under § 12.03
of the agreement. Since this dispute concerns the interpretation of a provision in the
agreement, it falls within the scope of § 11.02.
The Lilly Group claims that Pacesetter cannot be treated as a party to the
arbitration agreement as the assignee of the Telectronics Group until the licensing
transfer is found to be valid but the complaint does not allege that Pacesetter purchased
substantially all of the assets of the Telectronics Group as defined in the agreement.
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Appellants claim that for purposes of arbitrability Pacesetter is a party to the licensing
agreement by virtue of the assignment by the Telectronics Group of its rights and
obligations under the sales agreement with Pacesetter. They argue that Pacesetter has
a prima facie right to arbitrate because the assignment and transfer provision of the
licensing agreement does not require the Lilly Group’s consent. They rely on these
facts to distinguish cases in which the party seeking to compel arbitration had to
demonstrate that it was a valid assignee under the arbitration agreement. See I.S.
Joseph Co. v. Michigan Sugar Co., 803 F.2d 396, 400 (8th Cir. 1986) (where
agreement contains no assignment clause and party resisting arbitration denies
existence of contract with assignee, court must decide whether assignee may enforce
arbitration clause); American Safety Equip. Corp. v. J.P. Maguire & Co., 391 F.2d 821,
823, 828-29 (2d Cir. 1968) (where agreement allowed assignment only with consent
of other party, court must determine whether there was agreement to arbitrate with
assignee before ordering arbitration of dispute). They therefore contend that the
dispute is arbitrable as to Pacesetter because it seeks to arbitrate a claim “which on its
face is governed by the contract.” Merrill Lynch, Pierce, Fenner & Smith v. Hovey,
726 F.2d 1286, 1289 (8th Cir. 1984) (emphasis in original).
Under the circumstances of this case, it is not necessary to decide whether
Pacesetter is a party to the licensing agreement in order to grant the motion to compel
arbitration. In ruling on the arbitrability of a dispute, a court should not decide the
merits of the underlying claims. See AT&T Tech., 475 U.S. at 649. There is an
exception where a court may reach the merits, but only where the parties did not clearly
and unmistakably agree to reserve the arbitrability question for the arbitrator. See
Local 744, Int’l Bhd. of Teamsters v. Hinckley & Schmitt, Inc., 76 F.3d 162, 163-65
(7th Cir. 1996). That exception is not applicable here in light of the 1994 licensing
agreement. The question of whether Pacesetter is a party to the agreement cannot be
decided without reaching the heart of the parties’ dispute -- the validity of the transfer.
Pacesetter’s possible status as either a party to the licensing agreement or a necessary
third party to the dispute is also a question which § 11.02 clearly and unmistakably
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delegates to the arbitrators. For these reasons, the question of Pacesetter’s status
should be submitted to arbitration.
Since the question of whether any third party is needed for resolution of the
dispute was reserved by the parties for determination by an arbitrator, the rulings of the
district court are reversed. The judgment of dismissal is vacated, and the case is
remanded for further proceedings consistent with this opinion. The district court is
instructed to permit arbitration to proceed and to reconsider the motion for a
preliminary injunction.6
A true copy.
ATTEST:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
6
The cross-appeal of the Lilly Group is dismissed without prejudice. Its notice
of appeal indicates that it seeks to appeal the district court’s denial as moot of its
appeal of a magistrate judge’s order declining to extend discovery and of its motions
to strike two affidavits. Neither this court nor the district court have considered the
affidavits, and we need not decide at this time whether the cross-appeal is properly
before the court because its issues will only become relevant if and when the case
returns from arbitration.
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