Commercial arbitration awards possibly subject to increased judicial scrutiny

Pursuant to the Federal Arbitration Act and the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, arbitration awards are reviewed by US courts on only limited grounds. While one such ground is where enforcement of the arbitral award "would be contrary to the public policy" of the United States, several US courts have held that review is available only where an award is contrary to well-established public policy. In a writ of certiorari involving a patent licensing dispute, Dow AgroSciences, LLC is now asking the Supreme Court to reduce the deference that US courts give to arbitration tribunals.

Leemans patents
In 1992 Bayer, through a predecessor, licensed to Dow four US patents directed to a gene that provides herbicide resistance to crops (the ‘Leemans patents’). In 2012 Bayer alleged that Dow had breached the licensing agreement by sublicensing the Leemans patents to a third party and, on that basis, terminated it. Bayer then commenced arbitration against Dow in the International Court of Arbitration pursuant to the terms of the licensing agreement.

USPTO ruling
During the arbitration, Dow filed a request for ex parte re-examination of the Leemans patents at the US Patent and Trademark Office (USPTO). The USPTO ultimately found the Leemans patents invalid on grounds of double patenting over a separate group of patents directed to the same gene that expired in January 2011. Although the separate group of patents was owned by another subsidiary of Bayer's parent company, the USPTO held that "Bayer's common ownership of the patents has resulted in an unjustified time-wise extension of Bayer's right to exclude others from practicing the invention". In other words, the USPTO found that the Leemans patents were invalid because they would allow Bayer to extend its monopoly over the gene at issue beyond the time provided for under US patent law, notwithstanding that the patents were owned by separate subsidiaries of the same parent company.

However, the arbitration tribunal ruled that the Leemans patents were not invalid on double patenting grounds. The tribunal then found that Dow had breached the licensing agreement and infringed the Leemans patents, and awarded Bayer $455 million. Dow and Bayer then filed separate petitions in a district court requesting that the award be vacated and confirmed, respectively.

District court decision
The district court affirmed the award without addressing whether it or the possibility of the patent being invalid due to double patenting was contrary to US public policy. The district court ruled that it "cannot and will not… reopen the record and analyze the case on the merits". The parties then appealed to the US Court of Appeals for the Federal Circuit.

Federal Circuit decision
The Federal Circuit began by noting the limited basis for review of arbitral awards and the formidable burden on the challenger of any such award. The Federal Circuit then held that while extending the term of a patent was contrary to public policy, whether double patenting exists where different subsidiaries of the same parent hold the patents at issue, as in this case, is not settled law. The Federal Circuit concluded that Dow had not shown that the tribunal's award "contravene[d] any well-defined, established law applicable to the situation presented here". By couching the argument in terms of whether the arbitral award was contrary to clearly established public policy as opposed to simply public policy, the Federal Circuit showed great deference to the arbitral tribunal. Dow's petition for a writ of certiorari to the Supreme Court followed.

Should the Supreme Court determine that US courts may review arbitral awards to determine whether they are contrary to public policy, challenges to arbitration awards will likely become more frequent and successful. Because public policy issues are deeply intertwined with IP rights, arbitration of contracts relating to intellectual property will be particularly susceptible to challenges on public policy grounds. Companies licensing intellectual property in the United States should take into consideration public policy issues that frequently arise under US law when drafting such agreements.

This is an Insight article, written by a selected partner as part of IAM's co-published content. Read more on Insight

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