Verinata Health, Inc. v. Ariosa Diagnostics, Inc. , 830 F.3d 1335 ( 2016 )


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  •   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.