Verinata Health, Inc. v. Ariosa Diagnostics, Inc.

• Decision Date: 26 July 2016
• Docket Number: 2015-1970
• Citation: 830 F.3d 1335,119 U.S.P.Q.2d 1441
• Parties: 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
• Court: U.S. Court of Appeals — Federal Circuit

830 F.3d 1335

119 U.S.P.Q.2d 1441

Verinata Health, Inc., the Board of Trustees of The Leland Stanford Junior University, PlaintiffsIllumina, Inc., Plaintiff–Appellant

v. Ariosa Diagnostics, Inc., Defendant–AppelleeLaboratory Corporation of America Holdings, Defendant

2015-1970

United States Court of Appeals, Federal Circuit.

Decided: July 26, 2016

Edward R. Reines, Weil, Gotshal & Manges LLP, Redwood Shores, CA, argued for plaintiff-appellant. Also represented by Derek C. Walter.

David Isaac Gindler, Irell & Manella LLP, Los Angeles, CA, argued for defendant-appellee. Also represented by Joshua Gordon, Andrei Iancu.

Before Reyna, Clevenger, and Wallach, Circuit Judges.

Reyna

, Circuit Judge.

Illumina, Inc. (“Illumina”) appeals a district court order 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 counterclaimed 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 integrated systems and tools for analysis of DNA. J.A. 115. Illumina owns U.S. Patent No. 7,955,794 (the “'794 patent”)

, 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 noninvasive 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, 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 Illumina IP Rights in Goods, which are expressly excluded 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 application(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 intended 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, enforcement, interpretation or validity of this Agreement, shall be determined by arbitration .... This Section 31(c) shall not apply to, and no arbitration shall resolve, disputes relating to issues of scope, infringement, validity and/or enforceability of any Intellectual Property Rights.

J.A. 219. Prior to executing the supply agreement, Illumina 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 infringement, 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. Illumina 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 Northern 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 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 Ariosa'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 WL 5117083, at *11, 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 conclusion for clear error. Promega Corp. v. Life Techs. Corp. , 674 F.3d 1352, 1355 (Fed. Cir. 2012)

. We apply our law to substantive and procedural issues unique to and intimately 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 852, 855–56 (Fed. Cir. 1999) ). We apply regional circuit law, which in this case is the Ninth Circuit, when determining whether “non-infringement and invalidity 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 agreements 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 (quoting Preston v. Ferrer , 552 U.S. 346, 349, 128 S.Ct. 978, 169 L.Ed.2d 917 (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, 121 S.Ct. 1302, 149 L.Ed.2d 234 (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, 105 S.Ct. 3346, 87 L.Ed.2d 444 (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, 130 S.Ct. 2847, 177 L.Ed.2d 567 (2010). Thus, “a court may order arbitration of a particular dispute only where the court is satisfied that the parties agreed to arbitrate that dispute .” Id. (emphasis in original). In determining whether an agreement requires arbitration, courts must recognize that the Federal Arbitration Act “establishes a national policy favoring arbitration when the parties contract for that mode of dispute resolution.” Preston , 552 U.S. at 349, 128 S.Ct. 978. “The presumption in favor of arbitrability applies only where the scope of the agreement 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...