Medtronic Ave, Inc. v. Advanced Cardiovascular Systems, Inc.
Docket: 00-5230
Court: Court of Appeals for the Third Circuit; February 11, 2001; Federal Appellate Court
The case involves an appeal from a district court's denial of Advanced Cardiovascular Systems, Inc. (ACS) motion to stay patent infringement litigation brought by Medtronic/Arterial Vascular Engineering, Inc. (AVE) pending arbitration under 9 U.S.C. § 3. ACS sought the stay to enforce arbitration clauses in agreements with C.R. Bard, Inc. (Bard) after AVE purchased Bard's coronary catheter business in 1998, with Bard assigning the agreements to AVE. Although both parties acknowledged the validity of the arbitration clauses, AVE contended that its patent infringement claims were outside the scope of those agreements.
The district court sided with AVE, ruling that Bard did not own the claims at issue, thus the arbitration provisions did not apply to AVE's claims. The appellate court affirmed this decision, concluding that while AVE assumed obligations from Bard, the separate claims presented by AVE were not covered by the arbitration clauses in the agreements with ACS.
The background notes that ACS and Bard had previously been involved in litigation regarding patent infringements, which resulted in a 1992 settlement agreement that included mutual releases for claims prior to the agreement's date. This settlement allowed for cross-licensing of catheter patents and specified broad releases of claims, but did not encompass the new claims raised by AVE against ACS.
The 1992 Agreement stipulated that disputes regarding its construction, interpretation, or the rights and liabilities of the parties, including patent claims, would be resolved through binding arbitration under the American Arbitration Association's commercial arbitration rules. In 1998, Bard sued ACS for patent infringement related to catheters, leading to a settlement agreement on April 4, 1998, where ACS agreed to pay Bard $100 million and both parties exchanged licenses for certain catheter patents. This settlement included mutual covenants not to sue, specifically preventing Bard and its affiliates from suing ACS regarding all claims related to ACS's past and current angioplasty catheters, except for future modifications. The agreement required ACS to provide Bard with catalogs detailing exempted products, which included specific stent delivery systems involved in the infringement action. The 1998 Agreement also included a provision for arbitration similar to the 1992 Agreement. Concurrently, ACS was involved in litigation with AVE regarding patent infringement related to ACS's coronary stent delivery systems.
AVE has raised several state law claims against ACS, including breach of contract, misappropriation of trade secrets, unfair competition, and wrongful acquisition of property related to stent delivery system developments from 1989 to 1991. In April 1998, ACS initiated a patent infringement lawsuit against AVE in California. On October 1, 1998, while these actions were pending, AVE acquired Bard's coronary catheter business, including its patents, under agreements that permitted assignment of rights. In February 1999, ACS sought to stay AVE's lawsuit pending arbitration regarding the applicability of the 1992 and 1998 agreements to AVE's claims, despite AVE not being a party to those agreements at the time of its action. AVE contested this, asserting that Bard did not own its claims against ACS and that the agreements did not cover those claims or require arbitration. The district court denied ACS's motion on September 30, 1999, stating that Bard’s agreements did not extend to separate claims held by AVE and recognizing the technological distinction between catheters and stents, which AVE developed independently. Subsequently, ACS attempted to reargue the motion and sought to stay proceedings pending appeal but eventually withdrew these motions as the district court had stayed its proceedings. The case has been consolidated with two related proceedings transferred from California to Delaware.
Medtronic, Inc. has initiated two lawsuits against Advanced Cardiovascular Systems (ACS) for infringing its stent patents. ACS sought to stay these proceedings, citing an arbitration clause in a 1998 agreement with Bard. The district court denied this motion, a decision later upheld by the Eighth Circuit Court of Appeals, which determined that Medtronic, as AVE's parent company, was not bound by the 1998 Agreement.
The district court had jurisdiction over the patent infringement case under 28 U.S.C. § 1331 and 1338(a). The appeals court confirmed its jurisdiction over the denial of the stay motion under 9 U.S.C. § 16(a)(1)(A) and 28 U.S.C. § 1294(1), despite initial concerns about jurisdiction due to the district court's reliance on 28 U.S.C. § 1338. The appeals court concluded that section 1295(a) did not grant jurisdiction for the Federal Circuit since the appeal was not from a "final decision," but rather an order that permitted the litigation to proceed in the district court.
The court found that the order was not final under the collateral order doctrine and could be reviewed after a final judgment. Furthermore, the court ruled that section 1292(c) did not apply because the procedures for an interlocutory appeal were not followed, and determined that the order denying the stay was not appealable as an interlocutory injunction under section 1292(a)(1).
The Court of Appeals for the Federal Circuit would not have had jurisdiction to hear ACS's appeal, and this lack of jurisdiction applies to the current court as well under 28 U.S.C. § 1291, which only allows appeals from "final decisions." The court also cannot assert jurisdiction under section 1292(a)(1) concerning the order denying a stay, as neither could the Federal Circuit under section 1292(c)(1). The appeal instead falls under 28 U.S.C. § 1294(1), which confirms jurisdiction based on the appeal being taken from the United States District Court for the District of Delaware, located within this circuit.
The opinion also references In re BBC International, Ltd., where the Seventh Circuit determined it lacked jurisdiction to issue a writ of mandamus because any appeal would need to go to the Federal Circuit. Unlike that case, this court's analysis focuses on current jurisdiction rather than potential future appeals, allowing it to confirm jurisdiction here despite the Federal Circuit's exclusive jurisdiction over final decisions in the case.
Regarding the standard of review, the court exercises plenary review over legal questions related to arbitration agreements, as established in Harris v. Green Tree Fin. Corp. If the district court's decision is based on factual findings, the review standard shifts to whether those findings were clearly erroneous, according to Kaplan v. First Options of Chicago, Inc.
The Federal Arbitration Act (FAA) establishes a uniform federal law governing arbitration agreements, which applies even in diversity jurisdiction cases. Federal law, including general contract principles, determines the validity of arbitration clauses. Under 9 U.S.C. § 4, a district court can order arbitration if it confirms that an arbitration agreement exists and compliance is not disputed. If a party refuses to arbitrate, the court must resolve whether the dispute falls within the agreement's scope, since arbitration is based on mutual consent. Courts cannot compel arbitration without evidence of such consent in an express agreement. When deciding on a stay pending arbitration, the court must assess the validity of the arbitration agreement and whether the dispute is covered by it, but its role is limited if the parties have delegated interpretation issues to the arbitrator. The focus is on the factual basis of the claim rather than the legal theory presented in the complaint. If an agreement exists and the issue is within its scope, the court must refer the matter to arbitration without addressing the case's merits.
Federal policy strongly favors arbitration, directing courts to resolve ambiguities regarding arbitration agreements in favor of their applicability, as established in several cases, including Moses H. Cone and PaineWebber. There is a presumption of arbitrability, meaning that courts should assume disputes fall within the scope of arbitration unless there is clear evidence to the contrary. Courts should not deny arbitration unless it is certain that the arbitration clause does not cover the dispute at hand.
In the context of the 1992 Settlement Agreement and Release, AVE acknowledges its obligation under the agreements between ACS and Bard, including the arbitration clauses. The agreement releases parties from claims based on prior actions and provides for arbitration of disputes regarding its interpretation and effect. However, since Bard did not own the property interests AVE claims, Bard could not release ACS or agree to arbitrate those claims.
AVE's acceptance of the 1992 agreement as an assignee does not extend the arbitration agreement to claims related to interests that Bard never owned. While ACS cites Svedala Industries to argue that releases from an assignor can bar an assignee's claims, the specifics of that case do not apply here, as Bard lacked rights to the relevant interests at the time of the release. Thus, the legal resolution hinges on the straightforward principle that Bard's inability to release claims related to interests it never owned limits the arbitration agreement's application to AVE.
Tidco and Svedala Industries, Inc. were sister companies under Svedala Industries, AB. In 1993, they, along with Svedala AB, entered into a settlement agreement with Kemper Equipment Inc., releasing each other from all claims related to their crushing and screening equipment business. In 1994, Tidco acquired Barmac, which owned the '571 patent, and in 1996, Tidco assigned this patent to Svedala Inc. Svedala Inc. subsequently sued Kemper and Rock Engineered for patent infringement. The defendants sought to stay the proceedings and compel arbitration, arguing that Svedala could not claim infringement as it had no rights in the patent at the time of the 1993 release. The court rejected this, stating that Barmac had rights to the patent at the time of the release and Tidco, as Barmac's successor and Svedala Inc.'s sister company, was bound by the release.
The case's key distinction from another case cited (AVE vs. ACS) lies in party relationships to the release agreements. Svedala Inc. was a party to the 1993 release, while AVE was not part of the 1992 release between Bard and ACS. Although Bard was a party to the release, it did not own the patents involved in the AVE and ACS suit at the time of the release, unlike Barmac in Svedala. The court highlighted that AVE's situation differed significantly because the patents in question were not acquired from a party to the arbitration agreement. The excerpt also references Universal Studios Inc. v. Viacom Inc., where a non-compete clause was upheld against a party that acquired interests from a participant in a joint venture, illustrating the complexities of contractual relationships and obligations in legal disputes.
Universal Studios differs from the current case because it involved a joint venture with a non-compete and exclusivity agreement, which created specific fiduciary and contractual obligations among the parties, unlike a release or covenant not to sue that pertains to the obligations of the parties involved rather than third-party claims. In the relevant case of Reid v. Contel Cellular of Louisville, Inc., Contel’s acquisition of part of McCaw Cellular did not extend its assignee status to all claims against McCaw, as the court ruled that such an extension was illogical and would allow Contel to benefit from releases beyond what the parties had intended. This precedent supports the outcome in the current case, as a release typically does not bar claims that had not yet accrued or were unknown at the time of execution. While some cited cases indicate that releases can bar unknown claims, they are only applicable if the claims being pursued were owned by Bard, which is not the case here. Therefore, it is conclusively determined that the claims AVE asserts against ACS are not covered by the release in the 1992 Agreement, and AVE is not required to arbitrate these disputes.
The 1998 Settlement and Covenant Not to Sue stipulates that Bard and its affiliates will not pursue any legal action against ACS and its affiliates concerning any debts, claims, demands, or liabilities related to ACS's past and current angioplasty catheters, including stent delivery catheters. This provision excludes any future modifications of these products. However, the covenant does not extend to AVE's separate claims that Bard did not own.
The document references case law to illustrate the principles of licensing and covenants not to sue. In *Spindelfabrik Suessen-Schurr Stahlecker Grill v. Schubert Salzer Maschinenfabrik Aktiengesellschaft*, the court rejected Schubert's defense of an implied license, emphasizing that the licensor (Suessen) had not promised not to sue under its separate patents. Similarly, in *Zapata Industries Inc. v. W.R. Grace Co.*, after settling disputes through a license agreement, the courts reaffirmed the parties’ rights regarding patent ownership and the non-infringement of third-party patents as of the license agreement date.
In 1991 and 1992, W.R. Grace & Co. independently secured two patents that were not owned by AOTI. In 1995, Grace purchased AOTI's oxygen scavenging technology and its associated patents, under which ZapatA was licensed by AOTI. The purchase agreement did not exempt ZapatA or any third parties from liability for infringing Grace's patents. ZapatA asserted that it held an "implied license" under Grace's patents, claiming that Grace inherited AOTI's warranty of non-infringement from the AOTI-ZapatA settlement agreement. In response, ZapatA sought a declaration that Grace could not enforce its patents against it based on implied license and estoppel. Grace moved for summary judgment, arguing that AOTI had no rights to the Grace patents, thus could not grant any rights to ZapatA. The court ruled that ZapatA only received a promise from AOTI not to be sued on AOTI's patents, which did not extend to Grace's patents. Moreover, Grace's commitment to ZapatA did not include a promise not to sue under its own patents.
The legal principles relevant to this case include that an assignment of a contract does not alter the terms of the underlying contract, only transferring the assignor's rights. In this context, when AVE stepped into Bard's position following the 1998 Agreement, it was bound by the existing covenant not to sue but did not acquire additional rights beyond what Bard held. An assignment merely shifts obligations without modifying them, meaning AVE's rights under the patents involved in the action were not limited by the assignment from Bard. ACS argued that if Bard obtained a new patent after the 1998 Agreement, the covenant's terms would prevent Bard from asserting that patent against ACS products, emphasizing that the covenant is product-based rather than patent-based.
The "stepping into the shoes" assignment stipulates that AVE cannot sue ACS based on any new patent Bard might have obtained after the execution of the Agreement, provided the covenant not to sue is interpreted to include such patents. However, if AVE acquired a new patent post-execution, it could still bring a lawsuit because Bard would not have owned that patent, thereby excluding it from the agreement's scope. The district court's order denying ACS's motion to stay proceedings pending arbitration is affirmed.
Key points include:
1. Medtronic, Inc. acquired AVE in January 1999, leading to a name change to Medtronic AVE, Inc.
2. The standard for reviewing contract language interpretation by the district court is "clearly erroneous," while contract construction is reviewed plenarily.
3. The Federal Arbitration Act does not create independent federal-question jurisdiction; federal courts can only compel arbitration if there's an existing suit with jurisdiction.
4. A release indicates the abandonment of a known right, while a covenant not to sue covers both present and future claims.
5. The district court concluded that catheters and stents involve different technologies, making the current litigation regarding stent technology non-arbitrable under the 1998 Agreement.
6. The interpretation of the covenant's applicability to patents obtained after its signing remains uncertain, as it could potentially include patents based on past or current catheters or exclude them as future modifications.
