Amgen, Inc. v. Ortho Pharmaceutical Corp.

• Decision Date: 02 March 1999
• Docket Number: No. 1-98-3287,1-98-3287
• Citation: 303 Ill.App.3d 370,236 Ill. Dec. 799,708 N.E.2d 385
• Parties: , 236 Ill.Dec. 799 AMGEN, INC., Plaintiff-Appellee, v. ORTHO PHARMACEUTICAL CORPORATION, a Delaware Corporation, and Ortho Biotech, Inc., a New Jersey Corporation, Defendants-Appellants (Endispute, Inc., a Delaware Corporation; Judicial Arbitration and Mediation Services, Inc., a Delaware Corporation; and The American Arbitration Association, a New York Corporation, Defendants).
• Court: United States Appellate Court of Illinois

Page 385

708 N.E.2d 385

303 Ill.App.3d 370, 236 Ill.Dec. 799

AMGEN, INC., Plaintiff-Appellee, v. ORTHO PHARMACEUTICAL CORPORATION, a Delaware Corporation and Ortho Biotech, Inc., a New Jersey Corporation Defendants-Appellants (Endispute, Inc., a Delaware Corporation; Judicial Arbitration and Mediation Services Inc., a Delaware Corporation; and The American Arbitration Association, a New York Corporation, Defendants).

No. 1-98-3287.

Appellate Court of Illinois First District, Second Division.

March 2, 1999.

Latham & Watkins, William J. Harte, Ltd., Chicago (William J. Harte and James G. Hunter, Jr., of counsel), for Appellant.

Reuben L. Hedlund, Marion B. Adler, Hedlund, Hanley & John, Chicago, for Appellee.

Justice COUSINS delivered the opinion of the court:

This is an appeal from an order of the circuit court granting summary judgment in favor of plaintiff, Amgen, Inc. (Amgen), and ordering arbitration of Amgen's claim for termination of the parties' product licensing agreement (PLA) before Endispute, Inc. (Endispute). On appeal, defendants, Ortho Pharmaceutical Corp. and Ortho Biotech, Inc. (collectively, Ortho), contend that the circuit court erred: (1) by deferring to the Endispute arbitrator the jurisdictional question of who should arbitrate Amgen's termination claim; and (2) by requiring the parties to arbitrate the termination claim before the Endispute arbitrator where: (a) the arbitration clause found in the PLA expressly required that "any dispute" concerning the PLA must be arbitrated before a "panel of three (3) arbitrators" under the auspices of the American Arbitration Association (AAA); (b) there is no agreement between the parties to replace the AAA with Endispute for arbitrating all disputes concerning the PLA or to arbitrate the termination claim before Endispute; and (c) facts found by the Endispute arbitrator establish that Amgen's termination claim is outside the scope of Endispute's limited jurisdiction.

BACKGROUND

The relevant facts are as follows: plaintiff Amgen is a corporation that is organized under the laws of the State of Delaware and based in the State of California. It is engaged in manufacturing and marketing biopharmaceutical products licensed by the United Stated Food and Drug Administration and similar regulatory bodies for sale and use in the United States and throughout the world. Among other products, Amgen developed, manufactures, and sells in the United States a genetically engineered form of human erythropoietin, called Epoetin alfa (EPO), under the brand name "Epogen TM." EPO is used in the treatment of anemic patients whose bodies do not produce sufficient quantities of red blood cells.

Defendant Ortho Pharmaceutical Corp. is a corporation organized under the laws of the State of Delaware and based in the State of New Jersey. And, it is a wholly owned subsidiary of Johnson & Johnson. Defendant Ortho Biotech, Inc., was formally an incorporated division of Ortho Pharmaceutical Corp. and is now its wholly owned subsidiary. ¹ Collectively, Ortho is engaged in the sale of pharmaceutical products in the United States, including, under license by Amgen, the sale of EPO manufactured by Amgen and sold by Ortho under the brand name "Procrit TM."

On September 30, 1985, Amgen and Ortho entered into a product license agreement wherein Amgen licensed Ortho to market and sell in the United States EPO manufactured and supplied by Amgen for all therapeutic uses except dialysis, which Amgen reserved for itself. In the PLA, Ortho agreed to use "reasonable efforts to market and sell Licensed Products in the Licensed Territory." Further, paragraph 10.07 of the PLA contains an arbitration clause that provides:

"In the event any dispute should arise between the parties hereto as to the validity, construction, enforceability or performance of this AGREEMENT or any of its provisions, such dispute shall be settled by arbitration. Said arbitration shall be conducted at Chicago, Illinois, in accordance with the rules then obtaining of the [AAA] with a panel of three (3) arbitrators."

The PLA goes on to state, "This AGREEMENT shall be construed in accordance with the internal laws, and not the law of conflicts, of the State of California applicable to agreements made and to be performed in that state."

On January 23, 1989, Ortho demanded arbitration to compel Amgen to perform obligations required by the terms of the PLA. In this first arbitration, Ortho alleged that Amgen pursued a course of conduct in violation of the PLA which was designed to deprive Ortho of the benefits of its exclusive licenses under the PLA and a related technology license agreement. As a result, Ortho requested an order precluding Amgen from making, using or selling EPO in Ortho's exclusive market.

In its answer, Amgen submitted a counterclaim alleging that Ortho had repeatedly breached material provisions of the parties' agreements by: (1) researching two additional drugs developed by Amgen, Hepatitis B (Hep-B) and Interleukin-2 (IL-2), for use outside the scope of their licensed field in the United States; and (2) seeking to compete with Amgen for sale of EPO within Amgen's reserved market in the United States. Amgen further requested an order declaring the PLA terminated by reason of Ortho's defaults thereunder.

On January 31, 1989, Ortho filed a separate action in the United States District Court of Delaware, requesting preliminary injunctive relief to maintain the status quo pending expedited arbitration. See Ortho Pharmaceutical Corp. v. Amgen, Inc., 709 F.Supp. 504 (D.Del.1989), vacated in part and remanded, 882 F.2d 806 (3d Cir.1989). Accordingly, by letter agreement dated April 14, 1989, the parties agreed: (1) to substitute Endispute for the AAA as the administrator of the parties' binding arbitration initiated by Ortho on January 23, 1989, under the parties' September 30, 1985, agreements; (2) to appoint a former United States District Court or Court of Appeals judge as the sole arbitrator in place of the three arbitrators proposed by the AAA; and (3) to attempt to agree on all procedural, discovery and scheduling matters arising throughout the proceeding. If the parties were unable to reach agreement on any such matter, they were to submit the matter to the arbitrator, who would determine all procedural questions under the commercial arbitration rules of the AAA, "as interpreted by the arbitrator in his sole discretion." As a result of the agreement, the District Court of Delaware dismissed Ortho's suit on November 22, 1989, and the current arbitrator was selected to preside over the arbitration.

Since April 1989, the parties have been engaged in ongoing arbitration proceedings before the arbitrator which have proceeded in four separate phases. On April 14, 1990, following the first phase of proceedings, the arbitrator issued a written decision resolving issues regarding the parties' respective rights and obligations to make, supply, and sell biopharmaceutical products, specifically EPO, in the United States. After finding that Amgen had breached the parties' agreements by preventing Ortho from entering the market, the arbitrator entered a mandatory injunction and awarded Ortho $164 million in damages. The decision affirmed Amgen's exclusivity in its contractually reserved dialysis market and ordered that the parties were not to promote or sell the product into each other's exclusive markets. However, it recognized that unintended sales of EPO by one party into the other party's exclusively reserved market would be made, referring to such sales as "spillover." The parties were ordered to cooperate in the development and implementation of an appropriate mechanism to measure spillover sales or, in the absence of agreement, to submit the issue for a hearing and resolution by the arbitrator.

In 1990 and 1991, pursuant to the arbitrator's order, the parties negotiated toward the implementation of a spillover audit mechanism but were unable to reach an agreement. Consequently, in March 1996, the arbitrator began the third ² phase of proceedings to address the parties' respective claims relative to the determination of the spillover audit methodology for past and future activity by the parties in the market. On September 12, 1997, the arbitrator entered an opinion adopting Amgen's audit methodology with some modification. As such, Amgen was directed to prepare an order calculating past liability and a description of the ongoing audit as to future liability.

While negotiations for and arbitration of the spillover audit mechanism were ongoing, each party made allegations to the arbitrator that sales by the other party into the complaining party's exclusive market were not solely inadvertent but, rather, were, in part, the result of intentional promotion and marketing in violation of the exclusivity provisions of the PLA. Amgen then sought relief from the arbitrator, requesting that he modify the parties' EPO supply contract so as to create a limit on Ortho's purchases of EPO to obviate the perceived abuse.

On January 6, 1992, the arbitrator ruled on Amgen's request, noting that the matter had been argued, but that there were conflicting factual assertions which, in the normal course, would require a fourth phase of proceedings for resolution. The arbitrator denied Amgen's request to modify the parties' supply agreement and instead found that the attempts already underway to develop mechanisms to monitor spillover were the best way to address Amgen's concerns.

On August 31, 1995, Amgen filed its "Demand For Termination Of The [PLA], Accounting Of Ortho's Spillover Sales, And Damages" before the Endispute arbitrator, seeking damages and a determination of Amgen's right to terminate the PLA for material breach. On September 12, 1995, Ortho challenged the arbitrator's jurisdiction to decide Amgen's claims, relying on the United States Supreme Court holding in First Options of Chicago,...