Mactec, Inc. v. Gorelick, No. 03-1290.
| Decision Date | 26 October 2005 |
| Docket Number | No. 03-1290.,No. 03-1378. |
| Citation | 427 F.3d 821 |
| Parties | MACTEC, INC., Plaintiff-Appellant, v. Steven GORELICK, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Tenth Circuit |
F.T. Davis, Jr., McKenna Long & Aldridge LLP, Washington, DC (Philip D. Bartz, Donna M. Donlon, McKenna Long & Aldridge LLP, Washington, DC, Russell O. Stewart, Patrick Madigan, Faegre & Benson LLP, Denver, CO, with him on the briefs), for Plaintiff-Appellant.
Seth P. Waxman, Wilmer Cutler Pickering LLP, Washington, DC (Johnathan E. Nuechterlein and Todd Zubler with him on the briefs), for Defendant-Appellee.
Before EBEL and HENRY, Circuit Judges, and WHITE, District Judge.*
This case involves a contract dispute over payment of royalties for a patented invention. The parties to the contract differed as to the meaning of a contractual term and, pursuant to the agreement, arbitrated their dispute. After a hearing, the arbitrator found for Defendant Gorelick and awarded $4.5 million. Plaintiff MACTEC, Inc. filed an application in district court to vacate the arbitration award pursuant to the Federal Arbitration Act, 9 U.S.C. § 10 (2000) ("FAA"). Along with that application, MACTEC filed a declaratory judgment action on the grounds that the arbitrator's interpretation of the disputed contractual term constituted illegal patent misuse. In separate orders, the district court denied the application to vacate and dismissed the declaratory judgment action. MACTEC appealed both decisions to this court, and we consolidated the appeals for a hearing before a single panel.
As a matter of first impression in this circuit, we conclude that a non-appealability clause in an arbitration agreement that forecloses judicial review of an arbitration award beyond the district court level is enforceable. Due to the presence of such a clause in the instant arbitration agreement, we hold that we lack jurisdiction over MACTEC's appeal from the district court's denial of the application to vacate the arbitration award and DISMISS the case.
Regarding MACTEC's appeal from the dismissal of its declaratory judgment action, we conclude that the doctrine of res judicata bars the suit and we AFFIRM the district court's dismissal.
While a professor at Stanford University, Defendant-Appellee Steven Gorelick ("Gorelick") and one of his colleagues, Haim Gvritzman ("Gvritzman"), developed a new method for removing volatile organic contaminants from groundwater ("the NoVOCs technology"). What was unique about this technology is that it was designed to remove the contaminants in situ, or while the water was still underground, by using processes known as vapor stripping and gas pumping.
In 1991, Gorelick and Gvritzman assigned "any right, title, and interest," in the NoVOCs technology to Stanford, including the right to seek a patent. In return for their assignment, Gorelick and Grivtzman each received a one-sixth share of net royalty income, with the remaining two-thirds royalty going to the university. Stanford subsequently applied for, and received, a patent for the NoVOCs technology and has owned that patent ever since.
In 1992, Gorelick formed a company called NoVOCs, Inc., ("NoVOCs") with the intention of developing profitable wells that used the NoVOCs technology. To that end, NoVOCs obtained an exclusive license from Stanford to use the patented technology in exchange for a series of annual royalties. Gorelick was the sole shareholder and manager of NoVOCs.
In 1994, Gorelick sold all of his shares in NoVOCs to a company called EG & G, pursuant to a stock purchase agreement. In return for the stock, EG & G agreed to pay Gorelick an up-front payment of just under $3.3 million. In addition, EG & G agreed to give Gorelick installment payments of (1) twenty-five percent of future revenue derived from licenses or sub-licenses of the NoVOCs technology; and (2) $3000 for each well EG & G drilled using the NoVOCs technology. By acquiring all of Gorelick's stock, EG & G became the exclusive license holder of Stanford's patent and thereby assumed NoVOCs' obligations to pay royalties to the university. The stock purchase agreement provided that all disputes arising under the agreement would be governed by California law and would be subject to arbitration. Two aspects of the stock purchase agreement are particularly relevant to this appeal: First, the agreement specifically excluded from the scope of arbitrable issues any disputes relating to patent invalidity or infringement. Second, the agreement provided that any judgment upon the award rendered by the arbitrator would be final and nonappealable.
In 1997, EG & G agreed to sell certain of its assets to Plaintiff-Appellant MACTEC Inc. ("MACTEC") including its stock in NoVOCs (and, by implication, NoVOCs' license to Stanford's patent over the NoVOCs technology). In a separate written instrument, MACTEC became the successor-in-interest to the stock purchase agreement between EG & G and Gorelick, expressly assuming all of EG & G's payment obligations to Stanford and Gorelick.
In 1998, MACTEC, through one of its LLC subsidiaries, began using a different method of in situ groundwater treatment in some of its wells, known as "UBV" technology.1 Because the NoVOCs and UBV technologies overlapped, MACTEC was unsure as to whether the use of the UBV technology would trigger the $3000 per-well royalty obligation to Gorelick it had assumed in the stock purchase agreement. As a result, MACTEC approached Gorelick with the intention of re-negotiating the royalty payments.
The parties eventually agreed in writing to reduce Gorelick's royalty payment to $1500 for each "remediation well" that was installed by the LLC. For remediation wells not installed by the LLC, but rather by another entity under the MACTEC umbrella, Gorelick would continue to receive his original $3000 payment. The term "remediation well" is defined in the document as "any hole that (i) has been dug, drilled, or otherwise installed, or (ii) which existed and has been converted in use, and that is employed or intended for the partial or complete removal treatment of subsurface contaminants." Nowhere in the written agreement did MACTEC condition Gorelick's payment on a given well's use of NoVOCs or UBV technology.
For the next two years, Gorelick received occasional payments from MACTEC, ranging from $1500 to $4500. Gorelick received the final payment on November 15, 2000. One month later, Gorelick learned from Stanford that MACTEC had canceled its licensing agreement for the NoVOCs technology. Gorelick then called executives at MACTEC who stated that since their relationship with Stanford had terminated, they no longer had royalty obligations to Gorelick.
Gorelick responded that his agreement with MACTEC was a separate legal obligation which he expected MACTEC to honor. In addition, Gorelick asked MACTEC for specific information regarding remediation wells for which he was entitled to receive payment because he felt that there had been inadequate reporting throughout the whole process. MACTEC did not provide the requested information, and instead alleged that the NoVOCs technology had caused the company as much as $3 million in damages.
On August 6, 2001, Gorelick filed a demand for arbitration to recover payments under the stock purchase agreement. During discovery, Gorelick became aware of a number of wells that MACTEC drilled but for which it never paid him royalties under the contract. These wells eventually became the central issue in the controversy. MACTEC maintained that these wells were drilled using only public-domain technology, not the NoVOCs or UBV technology. As a result, it argued that it was not required to pay Gorelick the royalty payments. Gorelick responded by pointing to the plain language of the 1998 amendment to the stock purchase agreement, which makes no distinction between NoVOCs wells and other types of wells.
At the arbitration, MACTEC sought to introduce extrinsic evidence of the parties' intent over the meaning of the term "remediation well" to support its position that the royalty payments only applied to wells involving NoVOCs or UBV technology. Both sides briefed and argued the issue before the arbitrator. The arbitrator felt that extrinsic evidence of intent was only relevant if one of the contract terms was ambiguous. Finding no ambiguity in the contract, the arbitrator excluded all extrinsic evidence of the parties' intent.
MACTEC also raised two affirmative defenses in its hearing brief (which was filed only a few days before the actual hearing). First, MACTEC claimed that Gorelick's interpretation of the contract constituted patent misuse under Zenith Radio Corp. v. Hazeltine Research Inc., 395 U.S. 100, 136, 89 S.Ct. 1562, 23 L.Ed.2d 129 (1969). Second, MACTEC argued that Gorelick's patent was effectively invalid because the European Patent Office concluded that the technology was not based on an "inventive step."
Gorelick, in his hearing brief, filed a motion to strike these two defenses. Gorelick argued that the defenses were not timely raised because they were not included in MACTEC's specification of defenses, filed on April 1, 2002 (pursuant to the arbitrator's scheduling order). After hearing argument, the arbitrator issued the following oral ruling:
[T]he motion to strike is granted on several bases. Number one, we had a clear scheduling order. And I believe, if I'm accurate, that all claims and defenses had to be asserted in writing by April 1st of this year. That was not done.
Secondly, even if it weren't an issue of failure to specify on time, you can't bring up new defenses in a case where there's been as much...
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