License Arbitration Clause Ineffective Because it Excluded Issues of Patent Scope

Illumina v. Ariosa (Fed. Cir. 2016)

Under the Federal Arbitration Act arbitration agreements are binding.  However, arbitration agreements are typically limited in scope, and a court will only order arbitration of disputes covered by the agreement.

Here, the Federal Circui has affirmed a lower court finding that the arbitration agreement does not cover the Ariosa’s breach-of-contract counterclaim despite the contract language mandating arbitration of claim “arising out of or relating to the breach . . . of this Agreement.”  The problem, according to the court, is that the contract includes a major exception – that  “no arbitration shall resolve, disputes relating to issues of scope, infringement, validity and/or enforceability of any Intellectual Property Rights.”  And, the breach-of-contract claim arose from (and will be resolved by) Illumina’s original allegations of patent infringement.

The essence of the conflict is whether Illumina’s U.S. Patent No. 7,955,794 is covered by the “Core IP Rights” licensed as part of a 2012 supply agreement.  Illumina argues that ‘794 patent was not licensed and, when Ariosa refused to pay a license fee, sued Ariosa for patent infringement.  Ariosa’s counterclaim of breach of contract and other covenants stem directly from the infringement allegations.

Although it took a few steps to get there, the walked though how the breach-of-conflict claim relates to issues of patent “scope [and] infringement” and is therefore not arbitrable.  The question of “does the license cover the patent” would normally be thought of as one of license interpretation – and thus arbitrable under the contract.  Here, however, the license scope is defined as IP rights “that pertain to the Goods” being supplied. As such, the courts found that in this case an interpretation of patent scope is necessary to discover the answer.

The lesson here relates to patent license agreements — if licensed patents are defined by their scope or technology coverage (rather than by a listing of patent numbers for example), then a determination of that scope will almost necessarily be a part of any dispute over which patents are licensed.  Excluding patent scope questions from the arbitration clause will end up excluding those licensing questions as well.