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Amgen, Inc. v. Ortho Pharmaceutical Corp., No. 1-98-3287 1st District, MARCH 2, 1999 |
SECOND DIVISION
Plaintiff-Appellee, v. ORTHO PHARMACEUTICAL CORPORATION, a
Delaware Corporation, and ORTHO BIOTECH, INC., a New Jersey
Corporation, Defendants-Appellants (Endispute, Inc., a Delaware Corporation;
Judicial Arbitration and Mediation Services, Inc., a Delaware Corporation;
and The American Arbitration Association, a New York
Corporation, Defendants). ) ) ) ) ) ) ) ) ) No. 95-CH-10399 THE HONORABLE AARON JAFFE, JUDGE
PRESIDING JUSTICE COUSINS delivered the
opinion of the court: This is an appeal from an order of
the circuit court granting summary judgment in favor of plaintiff, Amgen, Inc.
(Amgen), and ordering arbitration of Amgen's claim for termination of the
parties' product licensing agreement (PLA) before Endispute, Inc. (Endispute).
On appeal, defendants, Ortho Pharmaceutical Corp. and Ortho Biotech, Inc.
(collectively, Ortho), contend that the circuit court erred: (1) by deferring to
the Endispute arbitrator the jurisdictional question of who should arbitrate
Amgen's termination claim; and (2) by requiring the parties to arbitrate the
termination claim before the Endispute arbitrator where: (a) the arbitration
clause found in the PLA expressly required that "any dispute" concerning the PLA
must be arbitrated before a "panel of three (3) arbitrators" under the auspices
of the American Arbitration Association (AAA); (b) there is no agreement between
the parties to replace the AAA with Endispute for arbitrating all disputes
concerning the PLA or to arbitrate the termination claim before Endispute; and
(c) facts found by the Endispute arbitrator establish that Amgen's termination
claim is outside the scope of Endispute's limited jurisdiction. BACKGROUND The relevant facts are as follows:
plaintiff Amgen is a corporation that is organized under the laws of the State
of Delaware and based in the State of California. It is engaged in manufacturing
and marketing biopharmaceutical products licensed by the United Stated Food and
Drug Administration and similar regulatory bodies for sale and use in the United
States and throughout the world. Among other products, Amgen developed,
manufactures, and sells in the United States a genetically engineered form of
human erythropoietin, called Epoetin alfa (EPO), under the brand name "Epogen®."
EPO is used in the treatment of anemic patients whose bodies do not produce
sufficient quantities of red blood cells. Defendant Ortho Pharmaceutical Corp.
is a corporation organized under the laws of the State of Delaware and based in
the State of New Jersey. And, it is a wholly owned subsidiary of Johnson &
Johnson. Defendant Ortho Biotech, Inc., was formally an incorporated division of
Ortho Pharmaceutical Corp. and is now its wholly owned subsidiary.(1)
Collectively, Ortho is engaged in the sale of pharmaceutical products in the
United States, including, under license by Amgen, the sale of EPO manufactured
by Amgen and sold by Ortho under the brand name "Procrit®." On September 30, 1985, Amgen and
Ortho entered into a product license agreement wherein Amgen licensed Ortho to
market and sell in the United States EPO manufactured and supplied by Amgen for
all therapeutic uses except dialysis, which Amgen reserved for itself. In the
PLA, Ortho agreed to use "reasonable efforts to market and sell Licensed
Products in the Licensed Territory." Further, paragraph 10.07 of the PLA
contains an arbitration clause that provides: The PLA goes on to state, "This
AGREEMENT shall be construed in accordance with the internal laws, and not the
law of conflicts, of the State of California applicable to agreements made and
to be performed in that state." On January 23, 1989, Ortho demanded
arbitration to compel Amgen to perform obligations required by the terms of the
PLA. In this first arbitration, Ortho alleged that Amgen pursued a course of
conduct in violation of the PLA which was designed to deprive Ortho of the
benefits of its exclusive licenses under the PLA and a related technology
license agreement. As a result, Ortho requested an order precluding Amgen from
making, using or selling EPO in Ortho's exclusive market. In its answer, Amgen submitted a
counterclaim alleging that Ortho had repeatedly breached material provisions of
the parties' agreements by: (1) researching two additional drugs developed by
Amgen, Hepatitis B (Hep-B) and Interleukin-2 (IL-2), for use outside the scope
of their licensed field in the United States; and (2) seeking to compete with
Amgen for sale of EPO within Amgen's reserved market in the United States. Amgen
further requested an order declaring the PLA terminated by reason of Ortho's
defaults thereunder. On January 31, 1989, Ortho filed a
separate action in the United States District Court of Delaware, requesting
preliminary injunctive relief to maintain the status quo pending expedited
arbitration. See Ortho Pharmaceutical Corp. v. Amgen, Inc., 709 F.
Supp. 504 (D. Del. 1989), vacated in part and remanded, 882 F.2d 806
(3d Cir. 1989). Accordingly, by letter agreement dated April 14, 1989, the
parties agreed: (1) to substitute Endispute for the AAA as the administrator of
the parties' binding arbitration initiated by Ortho on January 23, 1989, under
the parties' September 30, 1985, agreements; (2) to appoint a former United
States District Court or Court of Appeals judge as the sole arbitrator in place
of the three arbitrators proposed by the AAA; and (3) to attempt to agree on all
procedural, discovery and scheduling matters arising throughout the proceeding.
If the parties were unable to reach agreement on any such matter, they were to
submit the matter to the arbitrator, who would determine all procedural
questions under the commercial arbitration rules of the AAA, "as interpreted by
the arbitrator in his sole discretion." As a result of the agreement, the
District Court of Delaware dismissed Ortho's suit on November 22, 1989, and
the current arbitrator was selected to preside over the
arbitration. Since April 1989, the parties have
been engaged in ongoing arbitration proceedings before the arbitrator which have
proceeded in four separate phases. On April 14, 1990, following the first phase
of proceedings, the arbitrator issued a written decision resolving issues
regarding the parties' respective rights and obligations to make, supply, and
sell biopharmaceutical products, specifically EPO, in the United States. After
finding that Amgen had breached the parties' agreements by preventing Ortho from
entering the market, the arbitrator entered a mandatory injunction and awarded
Ortho $164 million in damages. The decision affirmed Amgen's exclusivity in its
contractually reserved dialysis market and ordered that the parties were not to
promote or sell the product into each other's exclusive markets. However, it
recognized that unintended sales of EPO by one party into the other party's
exclusively reserved market would be made, referring to such sales as
"spillover." The parties were ordered to cooperate in the development and
implementation of an appropriate mechanism to measure spillover sales or, in the
absence of agreement, to submit the issue for a hearing and resolution by the
arbitrator. In 1990 and 1991, pursuant to the
arbitrator's order, the parties negotiated toward the implementation of a
spillover audit mechanism but were unable to reach an agreement. Consequently,
in March 1996, the arbitrator began the third(2)
phase of proceedings to address the parties' respective claims relative to the
determination of the spillover audit methodology for past and future activity by
the parties in the market. On September 12, 1997, the arbitrator entered an
opinion adopting Amgen's audit methodology with some modification. As such,
Amgen was directed to prepare an order calculating past liability and a
description of the ongoing audit as to future liability. While negotiations for and
arbitration of the spillover audit mechanism were ongoing, each party made
allegations to the arbitrator that sales by the other party into the complaining
party's exclusive market were not solely inadvertent but, rather, were, in part,
the result of intentional promotion and marketing in violation of the
exclusivity provisions of the PLA. Amgen then sought relief from the arbitrator,
requesting that he modify the parties' EPO supply contract so as to create a
limit on Ortho's purchases of EPO to obviate the perceived abuse. On January 6, 1992, the arbitrator
ruled on Amgen's request, noting that the matter had been argued, but that there
were conflicting factual assertions which, in the normal course, would require a
fourth phase of proceedings for resolution. The arbitrator denied Amgen's
request to modify the parties' supply agreement and instead found that the
attempts already underway to develop mechanisms to monitor spillover were the
best way to address Amgen's concerns. On August 31, 1995, Amgen filed its
"Demand For Termination Of The [PLA], Accounting Of Ortho's Spillover Sales, And
Damages" before the Endispute arbitrator, seeking damages and a determination of
Amgen's right to terminate the PLA for material breach. On September 12, 1995,
Ortho challenged the arbitrator's jurisdiction to decide Amgen's claims, relying
on the United States Supreme Court holding in First Options of Chicago, Inc.
v. Kaplan, 514 U.S. 938, 131 L. Ed. 2d 985, 115 S. Ct. 1920 (1995).
On October 9, 1995, the
arbitrator issued a written decision finding that paragraph 10.07 of the PLA was
broad enough to encompass an allegation by Amgen that the conduct of Ortho was
grounds for the determination that Ortho had breached the PLA and that Amgen was
no longer bound by it. However, he rejected Amgen's request to address the issue
of "intentional" spillover sales during the third phase of proceedings scheduled
to begin in March 1996. After considering Ortho's argument that the referral of
the parties did not contemplate any dispute other than that originally framed by
the filings with the AAA and further acknowledging that, in 1989, Amgen was not
in a position to allege that Ortho was deliberately selling into the dialysis
market as Ortho did not have and was not selling EPO when the first arbitration
commenced, the arbitrator stated: Following the arbitrator's ruling,
Ortho filed a separate arbitration with the AAA pursuant to the arbitration
clause in paragraph 10.07 of the PLA on October 2, 1995. On October 25, 1995,
Ortho also filed with the AAA a motion seeking to stay portions of the
arbitration proceedings arising out of Ortho's October 2, 1995,
demand. Thereupon, on October 27, 1995,
Amgen filed its complaint to compel arbitration in the circuit court of Cook
County. In its pleadings, Amgen requested the court to stay the separate
arbitration filed by Ortho and a declaration that its termination claim was
within the scope of the pending Endispute arbitration proceedings, as the
arbitrator so found. On October 30, 1995, one business
day later, Ortho filed an action in the United States District Court of
Delaware, seeking a preliminary and permanent injunction staying the
arbitration of Amgen's termination claim before Endispute. The district
court dismissed Ortho's action, with prejudice, pursuant to the first-filed
rule, as Amgen "won the race" to the courthouse when it filed suit on October
27, 1995. Immediately thereafter, on November
1, 1995, Ortho filed its notice of removal of the present case to the United
States District Court for the Northern District of Illinois. On October 2, 1996,
following factual determinations regarding the parties' states of incorporation,
Amgen filed a motion to remand for lack of diversity of citizenship pursuant to
section 1447 of the United States Code (28 U.S.C. §1447(c) (1994)). On May 1, 1997, the district court
in Illinois found that there was no subject matter jurisdiction to hear the
merits of the case and remanded the case to the circuit court upon Amgen's
motion. See Amgen, Inc. v. Ortho Pharmaceutical Corp., No. 95--6310,
slip op. at 5 (N.D. Ill. May 2, 1997). Upon remand, on August 1, 1997, Ortho
answered Amgen's complaint and filed its own counterclaim seeking an order
compelling arbitration of Amgen's termination claim before the AAA and staying
arbitration of Amgen's termination claim before Endispute. On August 22, 1997, Amgen moved for
summary judgment, seeking a judgment declaring that Endispute had jurisdiction
to arbitrate its termination claim. On November 7, 1997, Ortho opposed that
motion and filed a cross-motion for summary judgment, seeking a judgment
declaring that the AAA had jurisdiction to arbitrate Amgen's termination
claim. On August 10, 1998, the circuit
court granted summary judgment in Amgen's favor and against Ortho. Ortho
appeals. We affirm. DISCUSSION Both parties agree that this court
reviews the grant or denial of summary judgment de novo. Delaney v.
McDonald's Corp., 158 Ill. 2d 465, 467, 634 N.E.2d 749, 750 (1994).
Consequently, resolution of the issue at bar turns on the proper standard of
review to be applied to the arbitrator's decision that Endispute has
jurisdiction over the arbitration of Amgen's termination claim. Initially, we
note that when deciding whether the parties agreed to arbitrate a certain
matter, courts generally apply ordinary state-law principles governing the
formation of contracts. First Options of Chicago, Inc. v. Kaplan, 514
U.S. 938, 945, 131 L. Ed. 2d 985, 993, 115 S. Ct. 1920, 1925 (1995); see also
PaineWebber, Inc. v. Hartmann, 921 F.2d 507, 510 (3d Cir. 1990).
Pursuant to the PLA, the relevant state law in this case is that of the
State of California to the extent that it is not preempted by the Federal
Arbitration Act (9 U.S.C. §1 et seq. (1994)). Under California law, as under
federal law, the scope of the arbitrator's jurisdiction is decided by the
arbitrator. See Volt Information Sciences, Inc. v. Board of Trustees,
489 U.S. 468, 103 L. Ed. 2d 488, 109 S. Ct. 1248 (1989). California courts
are insistent that the arbitrator's decision be given deferential review in the
courts should that decision be contested. Advanced Micro Devices v. Intel
Corp., 9 Cal. 4th 362, 372, 885 P.2d 994, 999, 36 Cal. Rptr. 2d 581, 586
(1994); Morris v. Zuckerman, 69 Cal. 2d 686, 690, 446 P.2d 1000, 1003,
72 Cal. Rptr. 880, 883 (1968). Ortho, however, contends that because the
"arbitrability" of the termination claim is an issue of judicial determination,
this court should review the arbitrator's decision de novo. See
AT&T Technologies, Inc. v. Communications Workers of America, 475
U.S. 643, 89 L. Ed. 2d 648, 106 S. Ct. 1415 (1986). As illustrated below, we
believe the disposition of this case would be the same regardless of which
standard of review we relied upon. The United States Supreme Court was
presented with a similar dispute regarding arbitrability in First Options of
Chicago, Inc. v. Kaplan, 514 U.S. 938, 131 L. Ed. 2d 985, 115 S. Ct. 1920
(1995). In that case, the options market maker, its principal, and his
wife filed petitions to vacate an arbitration award in favor of the clearing
firm because the arbitrators decided that they had the power to rule on the
merits of the dispute. In finding that the dispute was arbitrable and subject to
independent review by the courts, the Court stated: First Options is
distinguishable from the case sub judice, however, in that the
threshold issue presented here is not whether the arbitrators
or the courts have primary power to decide whether the parties have agreed to
arbitration; there is no dispute that the underlying termination claim
is an arbitrable issue whose final disposition will be determined by an
arbitrator. Moreover, arbitrability is presumed when an arbitration clause is
present. Waverly Mineral Products Co. v. United Steelworkers of America,
Local No. 8290, 633 F.2d 682, 684 (5th Cir. 1980). And, an order to
arbitrate a particular grievance should not be denied " 'unless it may be said
with positive assurance that the arbitration clause is not susceptible of an
interpretation that covers the asserted dispute. Doubts should be resolved in
favor of coverage.' " AT&T Technologies, 475 U.S. at 650, 89 L. Ed.
2d at 656, 106 S. Ct. at 1419, quoting United Steelworkers of America v.
Warrior & Gulf Navigation Co., 363 U.S. 574, 582-83, 4 L. Ed. 2d 1409,
1417-18, 80 S. Ct. 1347, 1353 (1960). As such, the issue here is whether the
parties agreed to transfer jurisdiction to the Endispute arbitrator to determine
the underlying termination claim. Our decision turns on both the language of the
PLA and the April 1989 letter agreement drafted by Ortho and countersigned by
Amgen substituting Endispute for the AAA as the binding administrator of the
arbitration initiated by Ortho in January 1989. Under private contract law, the
court has the duty of interpreting arbitration agreements de novo to
determine whether the parties intended to arbitrate their claims, as
they cannot be forced to arbitrate a particular dispute which they had not
agreed to submit to arbitration. First Options, 514 U.S. at 945, 131 L.
Ed. 2d at 993, 115 S. Ct. at 1925; AT&T Technologies, 475 U.S. at
648, 89 L. Ed. 2d at 656, 106 S. Ct. at 1418. Unless the parties "clearly and
unmistakably" provide in their agreement that the arbitrator is to decide what
issues are arbitrable, that question remains the function of this court.
AT&T Technologies, 475 U.S. at 649, 89 L. Ed. 2d at 656, 106 S. Ct.
at 1418. Ortho contends, however, that Amgen's termination claim was not a part
of the original arbitration and, therefore, there is no agreement to arbitrate
that specific issue before Endispute. Additionally, Ortho argues that there is
no agreement between the parties to replace the AAA with Endispute for the
arbitration of all disputes concerning the PLA, as the language of the
agreement stated that "any dispute" must be arbitrated before a "panel of three
(3) arbitrators" under the auspices of the AAA. We disagree. Here, the
language of the letter agreement fully empowered Endispute to interpret the
PLA and the rights and obligations of the parties. The parties agreed that the
arbitrator would have the discretion to determine all procedural matters and
further agreed to be bound by acceptance of the commercial rules of the AAA, as
interpreted by the arbitrator in his sole discretion. It is the arbitrator's
construction that was bargained for, and so far as his decision concerns the
application of the PLA, "the courts have no business overruling him because
their interpretation of the contract [may be] different from his." Waverly,
633 F.2d at 684. Therefore, if we were to consider the
arbitrator's decision under a de novo standard, based on strict
contract construction, the express language of the letter agreement gives the
arbitrator the discretion to determine the scope of the issues presented to
him. On the other hand, Amgen cites the
applicability of both California and federal law and contends that the
arbitrator's determination must be accorded extreme deference as his power
extends to determining the scope of any issue submitted to him. The
court in Waverly Mineral Products Co. v. United Steelworkers of America,
Local No. 8290, 633 F.2d 682 (5th Cir. 1980), held that, under a collective
bargaining agreement, it was for the arbitrator to decide disputes arising
regarding the interpretation of the contract. Waverly, 633 F.2d at 685.
Thereafter, the court in Madison Hotel v. Hotel & Restaurant Employees
Local 25, 144 F.3d 855 (D.C. Cir. 1998), expounded on Waverly,
stating, "[a]n arbitrator's view of the issues submitted to him for
arbitration therefore receives the same judicial deference as an arbitrator's
interpretation of a collective bargaining agreement." Madison Hotel,
144 F.3d at 857-58; see also Pack Concrete, Inc. v. Cunningham,
866 F.2d 283, 285 (9th Cir. 1989). Both of these decisions make clear that
the scope of a submission is a procedural issue over which an arbitrator has
discretion. We do agree with Ortho that Amgen
could not have anticipated the specific marketplace abuses regarding the selling
of EPO by Ortho into Amgen's exclusive market. However, because Amgen alleged in
its counterclaim that Ortho breached the PLA by competing with Amgen in its
reserved EPO market, pursuant to the April 1989 letter agreement and in
accordance with the PLA, the termination claim was implicit in the pleadings
originally filed with the AAA and later transferred to the Endispute arbitrator.
Consequently, pursuant to California law, the arbitrator, rather than the
courts, has the jurisdiction and obligation to decide any issue
necessary for the resolution of the controversy submitted for arbitration. Cal.
Civ. Proc. Code §1283.4 (Deering 1981); Wilson v. Transit Authority,
199 Cal. App. 2d 716, 19 Cal. Rptr. 59 (1962); see also Advanced Micro
Devices, 9 Cal. 4th at 372, 885 P.2d at 999, 36 Cal. Rptr. 2d at 586.
Therefore, extreme deference should be given to the arbitrator's decision. See
Waverly, 633 F.2d at 685; Madison Hotel, 144 F.3d at
857-58. Accordingly, the decision of the
circuit court granting summary judgment in favor of Amgen and against Ortho is
affirmed. Affirmed. RAKOWSKI and McNULTY, JJ.,
concur. Footnotes Defendants Endispute, Judicial
Arbitration and Mediation Services, Incorporated, and the AAA are nominal
parties to the lawsuit. In September 1991, the arbitrator
presided over the second phase of the proceedings regarding Amgen's counterclaim
disputes involving Hep-B and IL-2. Subsequently, Amgen was awarded $90 million
in damages regarding that issue on September 4, 1992.
AMGEN, INC.,
)
APPEAL FROM THE CIRCUIT COURT
OF COOK COUNTY
"In the event any dispute should arise between the parties hereto
as to the validity, construction, enforceability or performance of this
AGREEMENT or any of its provisions, such dispute shall be settled by
arbitration. Said arbitration shall be conducted at Chicago, Illinois, in
accordance with the rules then obtaining of the [AAA] with a panel of three
(3) arbitrators."
"It is the conclusion of the arbitrator that the termination issue
now sought to be raised by Amgen was within the scope of the agreement as to
issues to be arbitrated[,] presented to the AAA[,] and later transferred to
Endispute by the parties, and further that post arbitration activities are
relevant to that determination.
* * *
This being decided[,] it is necessary
to conclude that Amgen's demand for termination of the [PLA] is an additional
issue cognizable in the arbitration submitted by the parties and that Amgen
has a right to the adjudication of that issue."
"We believe the answer to the [narrow question of whether the
arbitrators or the courts have the primary power to decide whether the parties
agreed to arbitrate a dispute's merits] is fairly simple. Just as the
arbitrability of the merits of a dispute depends upon whether the parties
agreed to arbitrate that dispute, [citations], so the question 'who has the
primary power to decide arbitrability' turns upon what the parties agreed
about that matter. Did the parties agree to submit the arbitrability question
itself to arbitration? If so, then the court's standard of reviewing the
arbitrator's decision about that matter should not differ from the standard
courts apply when they review any other matter that parties have agreed to
arbitrate. *** If, on the other hand, the parties did not agree to submit the
arbitrability question itself to arbitration, then the court should decide
that question just as it would decide any other question that the parties did
not submit to arbitration, namely, independently. These two answers flow
inexorably from the fact that arbitration is simply a matter of contract
between the parties; it is a way to resolve those disputes--but only those
disputes--that the parties have agreed to submit to arbitration." (Empasis
omitted.) First Options, 514 U.S. at 943, 131 L. Ed. 2d at 992-93,
115 S. Ct. at 1923-24.