EDWARD M. CHEN, District Judge.
Plaintiff AbbVie Inc. has filed suit against Defendants Novartis Vaccines and Diagnostics, Inc. and Grifols Worldwide Operations Ltd. AbbVie seeks a declaratory judgment that certain patents owned by Novartis, or co-owned by Novartis and Grifols, are invalid.
Having considered the parties' briefs and accompanying submissions, as well as the oral argument of counsel, the Court hereby
In March 2002, Novartis's and AbbVie's predecessors (Chiron Corporation and Abbott Laboratories, respectively), entered into a license agreement. See Gaede Decl., Ex. A (license agreement). The license agreement is governed by California law. See Lic. Agmt. § 9.7 (providing that the agreement "shall be governed by and shall be construed in accordance with the laws of the State of California without regard to the conflicts of laws provisions thereof").
Under the agreement, Chiron gave Abbott and its affiliates a license to use certain Chiron processes — referred to in the agreement as "Licensed Processes" — in exchange for [REDACTED\] See, e.g., Lic. Agmt. § 2.2 (granting a nonexclusive, [REDACTED\] license "under the Licensed Processes . . . to make, have made, keep, use, offer to sell, and sell any and all Identified Products derived or resulting, indirectly or directly, from the Licensed Processes"). "Licensed Processes" is defined as "any process that involves the use, practice or manufacture of a Licensed Composition and/or Licensed Method." Lic. Agmt. § 1.13. In turn, "Licensed Composition" and "Licensed Method" are defined (in essence) as compositions or methods that are covered by valid patent claims. More specifically:
"Valid Claim" is defined in § 1.25 of the license agreement as "any claim of an issued (or granted) and unexpired patent which has not been held unenforceable, unpatentable or invalid by a decision of a court or governmental agency of competent jurisdiction." Lic. Agmt. § 1.25 (emphasis added).
The license agreement between Chiron and Abbott contains, inter alia, an arbitration clause to cover certain disputes between the companies. The arbitration clause can be found in two different places: § 9.8 of the agreement and Exhibit 9.8 of the agreement.
Based on the broad terms of § 9.8 and Exhibit 9.8, Novartis argues that the dispute between the parties regarding the validity of its patents should be arbitrated. AbbVie disagrees, taking the position that § 1.25 of the agreement effectively carves out patent validity disputes from arbitration.
The parties agree that the Federal Arbitration Act ("FAA") is applicable in the instant case. Under the FAA, "[a] written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction shall be valid, irrevocable and enforceable, save upon such grounds as exist at law or equity for the revocation of any contract." 9 U.S.C. § 2.
In the instant case, AbbVie does not argue that there are grounds to revoke the contract containing the arbitration agreement. Instead, AbbVie argues that there is a gateway issue of arbitrability for the Court to decide — more specifically, "whether an arbitration clause in a concededly binding contract applies to a given controversy." Momot v. Mastro, 652 F.3d 982, 987 (9th Cir. 2011); see also Martin v. Yasuda, 829 F.3d 1118, 1123 (9th Cir. 2016). As noted above, AbbVie contends that, based on the "Valid Claim" provision, the parties agreed to carve out from arbitration disputes related to patent validity.
In response, Novartis argues that, against the backdrop of
Mot. at 17. According to Novartis, the parties would have included an exclusion-from-arbitration clause within the broader arbitration clause itself if that was what was intended. See, e.g., Verinata Health, Inc. v. Ariosa, Inc., 830 F.3d 1335, 1337 (Fed. Cir. 2016) (indicating that the arbitration clause and exclusion-from-arbitration clause were within the same section or generally so). Novartis continues: "Against the backdrop of well-established arbitrability law, the notion that two sophisticated parties like Chiron and Abbott agreed to exclude validity disputes from arbitration obliquely through a definition of Valid Claim is unsustainable." Mot. at 19 (emphasis in original). Novartis reconciles the "Valid Claim" provision by arguing that it "is most naturally read to refer to challenges by third parties which result `in a decision of a court or government agency' that a claim is invalid." Mot. at 20 (emphasis in original). "[V]alidity challenges by AbbVie are [still] to be decided in arbitration," although there could still be "judicial confirmation [of an arbitrator's decision on validity] in any proceeding[] involving Novartis and AbbVie." Mot. at 20 (emphasis in original).
Resolution of the arbitration motion ultimately turns on whether the plain language of the license agreement is clear or ambiguous. If there is ambiguity in the agreement, then Novartis should prevail because, as the Ninth Circuit has explained,
Comedy Club, Inc. v. Improv W. Assocs., 553 F.3d 1277, 1284-85 (9th Cir. 2009) (emphasis added; citing, inter alia, AT&T Techs., Inc. v. Commc's Workers of Am., 475 U.S. 643, 650 (1986)). In short, ambiguity in a contract under California law — i.e., where there are two reasonable interpretations — must be resolved in favor of arbitration under federal law.
Comedy Club is an instructive example of how ambiguity in a contract, as determined under applicable state law (California), must be resolved in favor of arbitration under the FAA. The plaintiff in Comedy Club had entered into a trademark license agreement with the defendant (e.g., to use the "Improv" mark). Under the agreement, the plaintiff had an exclusive nationwide license to use the defendant's trademarks in connection with the opening of new comedy clubs. See id. at 1281. The agreement contained an arbitration clause which provided in relevant part as follows:
Id. at 1181-82.
After the plaintiff breached the agreement (by failing to open new comedy clubs), the defendant sent the plaintiff a letter stating that the plaintiff was in default and that the defendant was withdrawing the license to use the defendant's trademarks. In response to the letter, the plaintiff filed an action for declaratory relief only. The defendant responded by filing a demand for arbitration, seeking damages. See id. at 1282.
The district court issued an order compelling the parties to arbitrate. On appeal, the plaintiff's first argument was that the district court had erred in compelling arbitration. The Ninth Circuit held that it lacked jurisdiction to hear that part of the plaintiff's appeal because it was not timely made. See id. at 1284. Confronted with this problem, the plaintiff argued next that the district court had erred in later confirming the arbitration award. According to the plaintiff, the arbitrator lacked authority to arbitrate the equitable claims. See id. In support of this position, the plaintiff pointed to the provision in the parties' agreement that, "`[n]otwithstanding this agreement to arbitrate, the parties, in addition to arbitration, shall be entitled to pursue equitable remedies and agree that the state and federal courts shall have exclusive jurisdiction for such purpose and for the purpose of compelling arbitration and/or enforcing any arbitration award.'" Id. at 1281-82 (emphasis added). The plaintiff asserted that this provision "is explicit that only state and federal courts, and not an arbitrator, have jurisdiction over equitable claims." Id. at 1285.
The defendant argued in response that the provision "only carved out equitable claims `in aid of arbitration' to maintain the status quo between the parties pending arbitration." Id. In other words, the authority of the arbitrator to decide all disputes under the parties' agreement was not "`supplant[ed].'" Id.
Applying California law on interpretation of contracts, the Ninth Circuit held that the defendant's interpretation of the provision was plausible. It began by noting that
Id. The court continued:
Id. at 1285-86 (emphasis added); see also NetJets Ass'n of Shared Aircraft Pilots v. NetJets Aviation, Inc., 601 Fed. Appx. 408, 411 (6th Cir. 2015) (stating that, "[a]lthough the arbitration provision in the [collective bargaining agreement] by its terms applies only to crewmembers, and the CBA defines crewmembers as non-management pilots, several other provisions of the CBA unambiguously treat management pilots as crewmembers, making it plausible that management pilots are crewmembers for purposes of the arbitration provision as well[;] [t]herefore, the arbitration provision is susceptible of an interpretation that covers [the employee's] grievance").
The instant case, like Comedy Club, involves contract interpretation under California law. Under California law, whether there is an ambiguity in a contract (i.e., whether an ambiguity exists) is a question of law for a court to decide. See Wolf v. Superior Court, 114 Cal.App.4th 1343, 1351 (2004). Here, the parties' license agreement is reasonably susceptible to the interpretation advanced by Novartis, and thus the agreement is ambiguous.
As noted above, the wording of § 9.8 and Exhibit 9.8 is broad. There is no exception to adjudication of validity as opposed to infringement — § 9.8 of the agreement covers "any dispute regarding this Agreement" and Exhibit 9.8 "a bona fide dispute . . . which relates to either party's rights and/or obligations." Neither § 9.8 nor Exhibit 9.8 refers to or adopts § 1.25's definition of "Valid Claim." As Novartis argues, based on the backdrop of arbitration law favoring arbitration, it would be odd for the parties to bury an exclusion-from-arbitration provision in the introductory definitions section of the license agreement and not refer to it in the arbitration clause if an exclusion from arbitration were so intended. While cross referencing could have accomplished such result — e.g., where the arbitration provision states that certain "Disputes" will be arbitrated and "Disputes" is then defined in a different section on definition — the arbitration provisions of § 9.8 and Exhibit 9.8 do not incorporate the definition of "Valid Claim" in § 1.25 of the agreement.
AbbVie criticizes Novartis's position because (1) Novartis does not offer any extrinsic evidence (other than the general backdrop of arbitration law) to support its interpretation, (2) nothing requires an exclusion-from-arbitration provision to be in any specific location, and (3) Novartis does not adequately explain how the "Valid Claim" provision can be reconciled. None of these arguments is persuasive. While, under California law, a party may offer extrinsic evidence to establish ambiguity, a party is not required to do so. See Wolf, 114 Cal. App. 4th at 1350. Notably, AbbVie did not proffer any extrinsic evidence supporting its position either. And even though an exclusion-from-arbitration provision need not be in any specific place (e.g., a part of the arbitration provision), the fact that the placement was in the definitions section and not in the arbitration clause here nevertheless favors Novartis's interpretation of the agreement. "If the parties [had] intended to carve out an exception to arbitration for all [patent disputes], they could have done so" more clearly, certainly without embedding the alleged exclusion within a definitional provision. Comedy Club, 553 F.3d at 1285.
Furthermore, the "Valid Claim" provision may be reconciled with Novartis's interpretation of § 9.8 and Exhibit 9.8. "Valid Claim" is defined in the parties' license agreement as "any claim of an issued (or granted) and unexpired patent which has not been held unenforceable, unpatentable or invalid by a decision of a court or governmental agency of competent jurisdiction." Lic. Agmt. § 1.25. In other words, a patent claim is valid (and therefore a license is required for the patent claim) so long as a court or agency has not previously determined the claim to be invalid. See Chicago Manual of Style Online § 5.126 (stating that "[t]he present perfect tense is formed by using have or has with the principal verb's past participle {have walked} {has drunk}. It denotes an act, state, or condition that is now completed or continues up to the present {I have put away the clothes} {it has been a long day}."), available at http://www.chicagomanualofstyle.org/16/ch05/ch05_sec126.html?sessionId=85221a53-88ff-4a0a-b655-9ecc86b83200 (last visited August 30, 2017). Once a court or agency has determined that a patent claim is invalid, then there is no longer any need for AbbVie to have a license with respect to the claim and [REDACTED\] under the license agreement. Thus, for example, if a third party challenged patent validity in a lawsuit, and a court ruled in the third party's favor finding the patent claim invalid, the patent claim would no longer be a "Valid Claim" under the agreement, [REDACTED\]
Even if validity were adjudicated in arbitration as Novartis suggests, a finding of invalidity still could be given effect consistent with § 1.25. If the arbitrator ruled in AbbVie's favor and found a patent claim invalid, AbbVie could seek confirmation of the arbitrator's invalidity ruling with a court. Section 8.3(a) of the parties' license agreement provides that, "[i]n the event ADR is initiated . . . and the Neutral . . . has rendered a ruling that a party has materially breached this Agreement," then the nonbreaching party has the right to pursue "enforcement of the [Neutral's] Ruling in a court of competent jurisdiction." Lic. Agmt. § 8.3(a)(iii)(1)-(3). Upon judicial confirmation, the patent claim would no longer be a "Valid Claim" under the agreement. Hence, the definition of "Valid Claim" in § 1.25 accommodates not only third-party court challenges to validity, but also the possibility of a direct challenge to validity in arbitration as between the parties. Accordingly, Novartis's interpretation of the arbitration clauses in § 9.8 and Exhibit 9.8 is consistent with § 1.25.
AbbVie protests that, nevertheless, Novartis's position should be rejected because a New York district court has interpreted a similar Abbott contract in the same way that AbbVie proposes here:
Abbott Labs. v. Mathilda & Terence Kennedy Inst. of Rheumatology Tr., No. 11 Civ. 2541 (PAC), 2011 U.S. Dist. LEXIS 158511, at *12 (S.D.N.Y. Oct. 14, 2011). But Abbott is not binding authority on this Court. In any event, it is not clear from the opinion that the parties in the case argued ambiguity. The court did not apply California law in determining whether there was an ambiguity sufficient to invoke the FAA presumption in favor of arbitration as in Comedy Club. In fact, it appears the agreement in Abbott was governed by New York law. See Abbott Labs. v. The Mathilda & Terence Kennedy Inst. of Rheumatology Trust, No. 1:11-cv-2541 (PAC) (S.D.N.Y.) (Docket No. 20-2) (Lic. Agmt. § 9.4).
Finally, AbbVie presents a public policy argument as to why patent validity should be adjudicated by a court, and not an arbitrator: "[P]ublic interest considerations further counsel litigation of patent validity. There is a `strong federal policy favoring the full and free use of ideas in the public domain,' counseling in favor of obtaining judgments that declare patents which should not have issued invalid." Opp'n at 17. An argument can be made that patent validity should not be reserved for private arbitration given the public nature of patents and what would seem to be an inherently sovereign function of determining the validity of patents. But in enacting § 294(a), Congress made clear that patent validity may be determined in arbitration if the parties so choose. See n.2 supra.
AbbVie acknowledges the existence of 35 U.S.C. § 294(a) but argues that, under the statute, "the FAA applies in the patent context only where the underlying agreement `contain[s] a provision requiring arbitration of any dispute relating to patent validity or infringement arising under the contract.' . . . [¶] [H]ere, AbbVie and Novartis did not include `a provision requiring arbitration of any dispute relating to patent validity.'" Opp'n at 17-18 (quoting § 294(a)
Novartis has provided a reasonable interpretation of the license agreement — i.e., that patent validity is an issue to be arbitrated under the broad arbitration provision and there is no exclusion-from-arbitration provision for patent validity. The FAA's presumption in favor of arbitration, embodied in § 294(a), applies. Accordingly, Novartis's motion to compel arbitration is hereby granted. The Court stays proceedings in this case pending the arbitration. See 9 U.S.C. § 3.
This order disposes of Docket No. 48.
35 U.S.C. § 294(a).
35 U.S.C. § 294.