Telectronics Pacing Systems, Inc. v. Guidant Corp.
| Decision Date | 04 May 1998 |
| Docket Number | 97-2016,Nos. 97-1785,s. 97-1785 |
| Citation | 143 F.3d 428 |
| Court | U.S. Court of Appeals — Eighth Circuit |
| Parties | 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, v. GUIDANT CORPORATION; Cardiac Pacemakers, Inc.; Guidant Sales Corp.; Eli Lilly and Co., Appellees/Cross-Appellants. |
George F. McGunnigle, Minneapolis, MN, argued (Michael A.G. Korengold, Minneapolis, MN, on the brief), for Appellants.
Robert K. Stanley, Indianapolis, IN, argued (John R. Schaibley, III, Indianapolis, IN, Winthrop A. Rockwell and Eric E. Jorstad, Minneapolis, MN, on the brief), for Appellees
Before FAGG, JOHN R. GIBSON, and MURPHY, Circuit Judges.
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.
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 Indiana 2 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
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.
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, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (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 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, 115 S.Ct. 1920, 1924, 131 L.Ed.2d 985 (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 iss...
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