Chiron v. Ortho, No. 99-15064

• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)
• Writing for the Court: McKEOWN
• Citation: 207 F.3d 1126
• Parties: (9th Cir. 2000) CHIRON CORPORATION, a Delaware corporation, Plaintiff-Appellee, v. ORTHO DIAGNOSTIC SYSTEMS, INC., a New Jersey corporation, Defendant-Appellant
• Docket Number: No. 99-15064
• Decision Date: 28 March 2000

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207 F.3d 1126 (9th Cir. 2000) CHIRON CORPORATION, a Delaware corporation, Plaintiff-Appellee,
v.
ORTHO DIAGNOSTIC SYSTEMS, INC., a New Jersey corporation, Defendant-Appellant. No. 99-15064 UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT Argued and Submitted February 7, 2000
Filed March 28, 2000

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Copyrighted Material Omitted

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Samuel R. Miller, Folger Levin & Kahn, San Francisco, California; Harold P. Weinberger and Gregory A. Horowitz, Kramer Levin Naftalis & Frankel, New York, New York, for the defendant-appellant.

Daniel H. Bookin and Patricia Schmiege, O'Melveny & Myers, San Francisco, California, for the plaintiff-appellee.

Appeal from the United States District Court for the Northern District of California; Susan Illston, District Judge, Presiding. D.C. No. CV-98-00639-SI

Before: Procter Hug, Jr., Chief Judge, Dorothy W. Nelson, and M. Margaret McKeown, Circuit Judges.

McKEOWN, Circuit Judge:

This case requires us to decide whether the res judicata effect of a prior arbitration award on a subsequent arbitration is an issue to be determined by an arbitrator or by the court. We are not presented with a disagreement over whether the parties agreed to arbitrate. They clearly did, and the dispute falls squarely within their broad arbitration agreement. Rather, the issue before us is who should adjudicate the preclusive effect of a res judicata defense. Because res judicata is a legal defense that is necessarily intertwined with the merits, we join the Second Circuit in holding that this is a matter for the arbitrator. See National Union Fire Ins. Co. v. Belco Petroleum Corp., 88 F.3d 129 (2d Cir. 1996). Our holding is consistent with the strong federal policy favoring arbitration, see Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213 (1985), and with the Federal Arbitration Act, 9 U.S.C. S 1 et seq. We have jurisdiction under 28 U.S.C. S 1291 and 9 U.S.C. S 16(a)(3), see Cook v. Erbey, 207 F.3d 1104 (9th Cir. March 10, 1999), and we affirm.

BACKGROUND

In the late 1980s, Chiron Corporation, a biotechnology company, successfully developed and patented a blood test used to detect a previously unidentified form of hepatitis, the hepatitis C virus ("HCV"). Chiron also made significant strides in the development of AIDS-related blood tests, obtaining certain patents in that field. In 1989, Chiron and Ortho Diagnostic Systems, a wholly owned subsidiary of Johnson & Johnson, combined forces to undertake a joint business arrangement -a 50 year collaboration -aimed at developing, marketing, and selling Chiron's HCV and AIDS tests.

The parties memorialized the terms of this joint undertaking in a written agreement (the "Agreement"). Under the Agreement, Chiron assumed primary responsibility for research and manufacturing while Ortho assumed an exclusive license to the technology and primary responsibility for product development, distribution, marketing, and sales. The parties agreed to share equally all proceeds from the sale of the tests. All budgetary and strategic decisions were vested in a Supervisory Board comprised of three representatives from each company. In the event of a Board deadlock, the Agreement authorized Ortho to set the budget and strategic plan in its discretion for the succeeding year. Chiron and Ortho agreed to arbitrate "any dispute, controversy or claim arising out of or relating to" the Agreement.

In 1994 a dispute arose, ultimately leading Ortho to invoke the arbitration provision. The dispute stemmed from the parties' decision to expand the venture's marketing and sales efforts to diagnostic testing. The business initially focused its marketing efforts on blood screening, which refers to the series of tests routinely performed at blood banks on every unit of donated blood to protect the integrity of the blood supply. Diagnostic testing, on the other hand, refers to tests ordered by a physician to determine whether an

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individual carries a particular virus. Unlike blood screening, diagnostic testing is usually conducted in laboratories using specialized equipment designed to accept a large number of blood samples and perform specified tests on each sample. Entry into the diagnostic testing market thus required the business to customize its AIDS and HCV tests for use on the diagnostic machines, otherwise known as "random access instruments." Through a series of unrelated transactions, Chiron and Ortho each secured ownership rights to competing random access instruments and, consequently, each company developed a strong interest in customizing the AIDS and HCV tests for use on its respective machine.

In setting the business's plan and budget for 1995, the Supervisory Board deadlocked as to which random access machine or machines the joint arrangement would focus its sales efforts. Per the terms of the Agreement, Ortho adopted a strategic plan and budget that authorized the venture to customize the blood tests for use only on Ortho's Vitros machine, effectively precluding use of the tests on Chiron's Centaur machine. When Chiron announced its intention to market the tests for use on its Centaur machine, Ortho objected, claiming that Chiron was prohibited from independently selling, marketing, or licensing the AIDS and HCV tests outside the joint arrangement.

To arbitrate their dispute, the parties chose former federal district judge Joseph W. Morris, who issued his arbitration decision in April 1997. He determined that in light of the deadlock, the express terms of the Agreement gave Ortho the right to establish the budget and strategic plan for the successive year. He further concluded that Ortho's decision to limit the sale of the tests to the Vitros machine was permitted so long as Ortho continued to share all profits with Chiron. The arbitration award "constitute[d] a full and complete resolution of all claims and counterclaims submitted or urged by either party in this Arbitration," and was "final and binding upon the parties."

Following Judge Morris's decision, Chiron submitted a new proposal to Ortho that involved amending both the thencurrent 1997 and the 1998 strategic plans and budgets to allow the joint business access to the Centaur. Although Chiron maintained that such an amendment would serve the parties' stated intent by maximizing the business's profits, Ortho rejected Chiron's proposal without submitting it to all members of the Supervisory Board. Chiron viewed Ortho's rejection as violating certain sections of the Agreement that address the parties' intent -to maximize both the profits of each company as well as the commercial potential of the AIDS and HCV test technology -and that spell out the Supervisory Board's duty to approve amendments to the plan and budget "from time to time." Chiron sought a second arbitration proceeding to resolve the disagreement. Ortho, however, refused on the ground that the new claims raised by Chiron were the same as the claims presented to Judge Morris and were thus precluded from further arbitration under the doctrine of res judicata.

Chiron filed a declaratory judgment action seeking an order compelling arbitration and later moved for such an order under S 4 of the Federal Arbitration Act ("FAA" or "Act"). Ortho filed a cross-motion for summary judgment on the ground that the earlier arbitration award operated as res judicata to all claims Chiron sought to raise in a second arbitration proceeding. Ortho also sought an order confirming the earlier arbitration award under S 9 of the FAA. Applying federal law, the district court concluded that Ortho's res judicata defense was itself an arbitrable issue within the scope of the parties' agreement to arbitrate. The Court without reaching the merits of Ortho's objection therefore granted Chiron's motion to compel arbitration and denied Ortho's motion for summary judgment. The court also granted Ortho's motion to confirm the arbitration award. This appeal stems from Ortho's timely appeal of

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the district court's grant of Chiron's motion to compel arbitration.

ANALYSIS

We review de novo the district court's decision to compel arbitration. See Quackenbush v. Allstate Ins. Co., 121 F.3d 1372, 1380 (9th Cir. 1997). We begin our analysis by recognizing that an agreement to arbitrate is a matter of contract: "it is a way to resolve those disputes--but only those disputes --that the parties have agreed to submit to arbitration." First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995). As with any other contract dispute, we first look to the express terms which in this case require Chiron and Ortho to arbitrate "[a]ny dispute, controversy or claim arising out of or relating to the validity, construction, enforceability or performance" of the Agreement. The Agreement sets forth specific procedures that govern the initiation of an arbitration proceeding and the manner in which it is conducted, and provides that the resulting decision "shall be final and not appealable." These express terms unambiguously reflect the parties intent both to arbitrate disputes arising from the joint business and to be bound by the arbitration decisions that resolve such disputes. It is against this backdrop that we turn to the governing provisions of the Act.

I. Federal Arbitration Act

Because the Agreement is "a contract evidencing a transaction involving commerce," it is subject to the FAA. 9 U.S.C. S 2. The FAA provides that any arbitration agreement within its scope "shall be valid, irrevocable, and enforceable," id., and permits a party "aggrieved by the alleged . . . refusal of another to arbitrate" to petition any federal district court for an order compelling arbitration in the manner provided for in the agreement. Id. at S 4. By its terms, the Act "leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an...