[00:00:00] Speaker 01:
versus Ariosa.

[00:00:03] Speaker 01:
Ariosa Diagnostics.

[00:00:18] Speaker 01:
Mr. Reines, you've reserved a period of 15 minutes, four minutes for rebuttal, is that correct?

[00:00:23] Speaker 01:
That's correct, Your Honor.

[00:00:24] Speaker 01:
All right, you may proceed.

[00:00:25] Speaker 00:
Thank you, Your Honor, and may it please the Court

[00:00:27] Speaker 00:
This is a de novo review of a refusal by the district court to allow arbitration to go forward on contract claims that relate to business harms that are alleged or inflicted by Illumina on Ariosa.

[00:00:47] Speaker 00:
And the supply agreement in provision 31C has an arbitration provision which requires

[00:00:56] Speaker 00:
breach of contract claims to be arbitrated.

[00:00:59] Speaker 00:
So in the first instance, it would be easy.

[00:01:01] Speaker 01:
You're alleging breach of contract my way of infringement, correct, of a patent?

[00:01:08] Speaker 00:
No.

[00:01:09] Speaker 00:
There's two breach of contract claims.

[00:01:11] Speaker 00:
There's the second claim and the third claim.

[00:01:14] Speaker 00:
It's a counterclaim.

[00:01:15] Speaker 00:
One of them is for good faith and fair dealing, which relates a series of alleged acts that Illumina took as the supplier or unfair.

[00:01:26] Speaker 00:
business harms.

[00:01:27] Speaker 00:
The other is a breach of contract, which also alleges the same.

[00:01:33] Speaker 00:
It focuses a little more on the assertion of the complaint for infringement as being the basis for the breach.

[00:01:40] Speaker 00:
So you are asserting infringement?

[00:01:43] Speaker 00:
Oh, yes.

[00:01:44] Speaker 00:
We do have an infringement claim, yes.

[00:01:46] Speaker 02:
Their argument is they have a license, right?

[00:01:49] Speaker 02:
Their argument is we have a license, and we have a license as a complete defense to infringement.

[00:01:54] Speaker 02:
And their argument is that any issues concerning the license, therefore, are connected to the infringement.

[00:02:00] Speaker 02:
And that's why it's related to patents, to a patent issue.

[00:02:04] Speaker 02:
And that's why it's not arbitrable, right?

[00:02:07] Speaker 00:
That's mostly it with two qualifiers that I think need to be considered to have a full picture.

[00:02:12] Speaker 02:
But that's the general, the gist.

[00:02:15] Speaker 00:
That's the high level.

[00:02:18] Speaker 00:
There's two pieces, though, that are important pieces to that that can't be ignored.

[00:02:22] Speaker 00:
One is that

[00:02:24] Speaker 00:
the claim for breach is not dependent on the infringement claim.

[00:02:30] Speaker 00:
So there's IPRs right now.

[00:02:32] Speaker 00:
And for example, if unfortunately and inconsistent with the facts, our patent was invalidated, their claim for breach would go forward because their claim for breach is based on the historical fact that we sued for infringement.

[00:02:51] Speaker 00:
So when you look at the relationship between the infringement claim and the breach claims.

[00:02:57] Speaker 02:
Well, that's related to infringement because, right?

[00:03:01] Speaker 00:
There's a relationship.

[00:03:02] Speaker 02:
Sure, they have a license, and the license protects them from any claim of infringement.

[00:03:08] Speaker 02:
So if you sue them for infringement, you've violated the license.

[00:03:13] Speaker 00:
We're talking about the quality of the relationship, and you're right insofar as you state that, but it's also true

[00:03:21] Speaker 00:
that if we lost on infringement, just on technical grounds, or our patent was invalidated, or we dropped the claim, their breach of contract claim would go forward.

[00:03:33] Speaker 00:
And under this agreement, that should be arbitrated, because that stands alone, and that's the primary arbitration clause.

[00:03:41] Speaker 00:
But there's a second point, which isn't to be neglected.

[00:03:48] Speaker 00:
at a minimum under their good faith and fairness.

[00:03:49] Speaker 02:
Well, what we're dealing with is section 31C, right?

[00:03:52] Speaker 00:
Yes, Your Honor.

[00:03:53] Speaker 02:
31C says, no arbitration shall resolve disputes relating to the issues of scope infringement, validity and or enforceability of any electoral property rights.

[00:04:11] Speaker 02:
And so clearly the license is

[00:04:14] Speaker 02:
related to the issue of enforceability of your patent rights, because if there's a valid license.

[00:04:21] Speaker 00:
They haven't invoked the enforceability car valid.

[00:04:23] Speaker 02:
And that affects the enforceability.

[00:04:26] Speaker 02:
But the point is just to finish up, because I think this is- And I appreciate there's some collateral issues in the breach of duty of good faith and whatnot, some of that that is sort of seems like it's a little distant from infringement, but it's still connected to the existence of the license.

[00:04:44] Speaker 00:
See yes, you're just saying connected to and and and let me let me address the connected to in a minute But the point I really want to get to before we move to the connected to is Under their good faith just looking at the contract is relating that means relating directly or indirectly Typically relating means relating directly or indirectly I don't think so I

[00:05:08] Speaker 00:
because it's a carve-out from a broad arbitration provision and with all the principles.

[00:05:12] Speaker 02:
Do you have a case that says that relating doesn't generally mean specific relating as opposed to indirectly?

[00:05:22] Speaker 00:
No, just arbitration exceptions are construed narrowly.

[00:05:24] Speaker 00:
That's the case I have.

[00:05:25] Speaker 02:
I appreciate it as a principle that you're supposed to favor arbitration when you can.

[00:05:32] Speaker 00:
Your Honor, there is a factor that I think will be important to you that I just want to explain about the nature of the good faith and fair dealing claim.

[00:05:40] Speaker 00:
It is about unfairness under the contract.

[00:05:43] Speaker 00:
It is not by any means all focused on the patent infringement claim.

[00:05:48] Speaker 00:
That is the major one because it's also in the breach of contract claim and it's also in the license defense.

[00:05:53] Speaker 00:
So that's clearly

[00:05:54] Speaker 00:
I understand why the court thinks that's the gist of this to some extent, but there's an argument that they have that's set forth in their counters claim and it's clearly there at J 247 where the allegation is that when we gave notice of breach, they call it pretextual notice of breach because they were not in their field of use.

[00:06:25] Speaker 00:
because their test involved gender, male or female, in terms of the fetus, that that was a pretextual allegation of breach that was unfairness and was a breach of the good faith and fair doing.

[00:06:42] Speaker 02:
If this case went over to arbitration, nothing in the arbitration would prevent you from saying, guess what, there's no license here.

[00:06:52] Speaker 02:
There was a failure of consideration.

[00:06:54] Speaker 02:
And there's no license.

[00:06:55] Speaker 02:
Nothing would stop your side from mounting that argument.

[00:06:59] Speaker 00:
That would respond to their argument that I just expressed.

[00:07:02] Speaker 02:
That's what I'm trying to get at, Mr. Reines.

[00:07:04] Speaker 02:
What I'm saying is that if this case were set over to arbitration, then the question of whether or not there was, in fact, a defense to infringement, i.e.

[00:07:15] Speaker 02:
did a license exist,

[00:07:17] Speaker 02:
would be adjudicated over in that other case as opposed to adjudicated in the heart of the infringement.

[00:07:23] Speaker 00:
That would be one of the issues.

[00:07:24] Speaker 00:
There would be other issues which would have nothing to do with the infringement claim.

[00:07:27] Speaker 02:
But doesn't that tell us that the relationship between the contract issue and the infringement issue is really tight?

[00:07:37] Speaker 00:
No.

[00:07:38] Speaker 00:
Why not?

[00:07:40] Speaker 00:
First of all, that assumes we're ignoring the fact that there's aspects of their breach claim.

[00:07:47] Speaker 02:
You can totally eliminate their defense to infringement in the arbitration.

[00:07:54] Speaker 02:
You can neuter entirely their defense.

[00:07:59] Speaker 02:
Let's assume hypothetically they say, yes, it would be infringement, but for the license.

[00:08:08] Speaker 02:
And so they would like to keep the determination of whether there's a license of LNAN plus collateral issues surrounding that issue.

[00:08:16] Speaker 02:
in the patent case because they've got a contract that says if you've got an issue that's related to infringement, you don't arbitrate it.

[00:08:25] Speaker 00:
Okay, so as long as we understand that part of their breach claim has nothing to do with patent infringement, and we all agree to that.

[00:08:31] Speaker 00:
It has nothing to do with license and nothing to do with patent infringement.

[00:08:34] Speaker 00:
I'm ready to move.

[00:08:34] Speaker 02:
Well, there may be a piece of that.

[00:08:35] Speaker 02:
I'm not sure.

[00:08:36] Speaker 00:
That's at paragraph 68 and 69 about the pretextual breach notice we gave concerning the customer field of use.

[00:08:44] Speaker 00:
So it definitely exists.

[00:08:46] Speaker 00:
I think the way, Your Honor, just the mode of thought you have there is upside down.

[00:08:52] Speaker 00:
And I'm ready to go with that.

[00:08:53] Speaker 00:
I want to make sure we can't leave this hearing not understanding there's a piece of their breach of claim which has nothing to do with license or infringement.

[00:09:00] Speaker 00:
And I just identified it at 68 and 69.

[00:09:04] Speaker 02:
But will we do your... That's what I think.

[00:09:05] Speaker 02:
See, I think that the district court judge was agreeing with me and disagreeing with you when I'm reading in her opinion that this is on the second time around, not the appeal of the letter before.

[00:09:16] Speaker 02:
At JA6, page 6 of her opinion is from lines 14 to 18, Illumina argues that counterclaims were solid by looking at the term supply agreement, the fact that the dispute can be resolved in examination agreement, that it doesn't change the fact that the dispute is related to the determination.

[00:09:37] Speaker 02:
Yes.

[00:09:39] Speaker 00:
If you're envisioning this as an affirmance, then you would agree with the district court judge, and I disagree that I'm an appellate.

[00:09:47] Speaker 00:
So in that sense, that's so.

[00:09:49] Speaker 00:
But let me state this.

[00:09:51] Speaker 00:
I think your analytical framework is upside down.

[00:09:54] Speaker 02:
The way you're looking at it... You're saying you think hers is good.

[00:09:57] Speaker 00:
Yeah, absolutely.

[00:09:58] Speaker 00:
And let me explain why.

[00:09:59] Speaker 00:
First of all, I think there's the independent ground to reject this argument because there's aspects of the breach claim which have nothing to do with infringement or license.

[00:10:07] Speaker 00:
But holding that aside, and that's been argued by us below and here, and I can give sight to that, and I'll do that as needed.

[00:10:15] Speaker 00:
But on your train of thought, you're saying, well, there might be something in arbitration that's relevant later on to the litigation, so we can't let the arbitration intrude.

[00:10:24] Speaker 02:
It's not relevant here.

[00:10:25] Speaker 02:
It would take away from it.

[00:10:27] Speaker 02:
You have a patent infringement suit going against Ariosa.

[00:10:32] Speaker 02:
Ariosa says, we have only one thing to say in respect to that suit.

[00:10:35] Speaker 02:
We only have one defense.

[00:10:38] Speaker 02:
Only one, no claim construction arguments, nothing.

[00:10:40] Speaker 02:
We have one defense.

[00:10:41] Speaker 02:
We have a license.

[00:10:42] Speaker 00:
I mean, that's hypothetical.

[00:10:43] Speaker 02:
Yes, that's what... You can look at their case that way.

[00:10:47] Speaker 02:
No, because, I mean, they have a declaratory... I understand that, but they don't need anything else.

[00:10:52] Speaker 00:
If they have a license... It would be a defense, yeah.

[00:10:55] Speaker 02:
Now, let me just address the reasons why I think that's... If they were smart and they wanted to save money on counsel fees, it would be the very first issue they would want litigated.

[00:11:05] Speaker 02:
Do we or do we not have a license that covers this stuff?

[00:11:08] Speaker 02:
Because if we do, it's over.

[00:11:10] Speaker 00:
No.

[00:11:11] Speaker 00:
I mean, the case in chief is not the affirmative defense.

[00:11:13] Speaker 00:
The affirmative defense, we go second.

[00:11:14] Speaker 00:
So I disagree with that.

[00:11:15] Speaker 02:
I understand that.

[00:11:15] Speaker 02:
But just in a practical point of view of where your dollars go in litigation, if you've got a defense that's kind of totally like a 101 argument, you want to do it up front and get it over with.

[00:11:26] Speaker 02:
What I'm saying is, in this hypothetical, the first thing they would like to do in litigation, you're taking away from them and putting it over in arbitration.

[00:11:35] Speaker 02:
even though it is their complete defense to charge of infringement.

[00:11:41] Speaker 02:
So you've heard what I have to say.

[00:11:45] Speaker 02:
I'm sorry, I'm using up too much.

[00:11:46] Speaker 00:
No, that's it.

[00:11:47] Speaker 00:
I mean, you're important to this.

[00:11:49] Speaker 00:
But I do want to address the mode of thought, which is we need to protect the right to litigate, and we can't have things, even if they fall within arbitration, encroach on that.

[00:11:59] Speaker 00:
And I think that's backwards, given all the rules about

[00:12:03] Speaker 00:
the importance of arbitration and the fact that breach of contract is arbitrable.

[00:12:07] Speaker 00:
Now, in the text, I think the fact that the exception, this carve out, is limited to issues as compared to claims shows how narrow it is.

[00:12:17] Speaker 00:
Claims is a broad concept.

[00:12:20] Speaker 00:
Issues is a very narrow concept.

[00:12:22] Speaker 00:
When I think it says issues of infringement are carved out, okay?

[00:12:27] Speaker 00:
I think that's saying we don't want people to do these particular issues.

[00:12:30] Speaker 00:
It's not at the claim level, which is very unusual in my experience.

[00:12:34] Speaker 00:
The disputes relating to issues of infringement mean like an infringement claim, you couldn't just have disputes for infringement.

[00:12:42] Speaker 01:
What are you referring to?

[00:12:43] Speaker 01:
Are you referring to the bottom of sub-progress C?

[00:12:46] Speaker 01:
Yeah.

[00:12:47] Speaker 01:
The very last sentence?

[00:12:48] Speaker 01:
Yes, Your Honor.

[00:12:50] Speaker 00:
Okay.

[00:12:50] Speaker 00:
And it says, disputes relating to issues of scope of infringement

[00:12:53] Speaker 00:
Scope is like a sub-issue, right?

[00:12:56] Speaker 00:
I mean, that's not a claim.

[00:12:57] Speaker 02:
What about issues, okay, of enforceability?

[00:13:02] Speaker 00:
That's not argued by them.

[00:13:03] Speaker 00:
That wasn't addressed by the district court.

[00:13:05] Speaker 00:
I assume that that to me would be inequitable.

[00:13:07] Speaker 02:
You told me it's de novo review, Mr. Warriness, and I'm reading a contract, and typically we have de novo review of what contracts say.

[00:13:14] Speaker 00:
I'm just saying the appellee isn't arguing this.

[00:13:16] Speaker 00:
Well, fine, but let me jury it.

[00:13:20] Speaker 00:
Well, noting that it's a threshold matter, now I'm happy to address it on its substance.

[00:13:25] Speaker 00:
I take that infringement validity and or enforceability, maybe I'm wearing my patent geek hat as meaning inequitable conduct and the typical unenforceability.

[00:13:33] Speaker 00:
Those are the three categories of patent is infringement validity and unenforceability.

[00:13:37] Speaker 03:
It's not limited in that fashion at all, though.

[00:13:40] Speaker 00:
No.

[00:13:42] Speaker 00:
No.

[00:13:43] Speaker 00:
But I don't think that

[00:13:44] Speaker 02:
I think there's good, I think Mr. Gindler and his team... But you think a defense to infringement is not an issue relating to infringement?

[00:13:53] Speaker 02:
I think that when it says relating to... That's where your case hinges on that?

[00:13:57] Speaker 00:
I think relating, well, my case hinges on the fact that they've got contract claims that have nothing to do with license or infringement.

[00:14:04] Speaker 00:
So one would think at the first impression that I would win because

[00:14:09] Speaker 00:
The emotion of good faith and fair dealing is that we made an allegation of breach, which they call, in the counterclaim, pretextual breach.

[00:14:17] Speaker 01:
Maybe if he had a contract claim, he's trying to establish a pure contract claim.

[00:14:25] Speaker 01:
But that's not an issue here, because everything here involves IP rights.

[00:14:31] Speaker 01:
Even your pure contract claim,

[00:14:35] Speaker 01:
where you're maybe disputing terms or money.

[00:14:39] Speaker 00:
It's not a patented issue in this case.

[00:14:42] Speaker 00:
I mean, yes, in some general sense, everything relates to intellectual property.

[00:14:45] Speaker 00:
I mean, what this all goes to, at least for me from a common sense perspective, is license is so obvious.

[00:14:52] Speaker 00:
It's so obviously a defense.

[00:14:53] Speaker 00:
It's so obviously the subject of this agreement.

[00:14:55] Speaker 00:
As you say, the supply agreement, it's all about intellectual property.

[00:14:58] Speaker 00:
If they wanted license to be carved out of the broad arbitration agreement, they would have set it.

[00:15:05] Speaker 00:
It would have been that simple.

[00:15:06] Speaker 00:
In the case of this pretextual breach regarding the field of use, there's no patent that's been identified by anybody that would be infringed.

[00:15:13] Speaker 00:
It's a breach claim.

[00:15:14] Speaker 00:
They said, you breached your good faith in covenant of fair dealing because you alleged that we breached the field of use.

[00:15:23] Speaker 00:
No one said anything about patents.

[00:15:26] Speaker 00:
You can look up and down, and I don't know what Mr. Gindler is going to say, but he's not going to have an answer for you if you look at the actual counterclaim and what's there.

[00:15:34] Speaker 00:
And so that's what I'm basing my argument on.

[00:15:37] Speaker 00:
But moving to the piece where they do say, you knew what our product was, so you must have licensed us to everything, because that's the gist of it, is you knew that you did.

[00:15:48] Speaker 00:
So whether it's express, implied, or anything else, you couldn't license us to use your equipment and then sue us for it as a business harm argument.

[00:15:56] Speaker 01:
Let me ask you this question.

[00:15:57] Speaker 01:
You're into your rebuttal time, or you've used up all your rebuttal time.

[00:16:04] Speaker 01:
Don't all these claims rise and fall as to the issue of whether there's a license or not?

[00:16:11] Speaker 00:
They don't.

[00:16:13] Speaker 00:
They don't.

[00:16:13] Speaker 00:
And I've been ineffectual in conveying that, and I apologize for that.

[00:16:17] Speaker 00:
OK.

[00:16:18] Speaker 00:
In their counterclaim, their third counterclaim relating to good faith and fair dealing, and there's pages of explanation before that at 239,

[00:16:33] Speaker 00:
it starts notice and breach.

[00:16:34] Speaker 00:
They have pages five, seven paragraphs on that question.

[00:16:39] Speaker 00:
And then in the counterclaim itself, they refer to this at 247 in paragraphs 2076 and 78.

[00:16:49] Speaker 00:
The customer field of use is defined.

[00:16:53] Speaker 00:
And then at line 13 and 14, breach the covenant in good faith and fear dealing by asserting protectual claims of breach of the agreement.

[00:17:02] Speaker 00:
Not you sued breach of the agreement, which relates to this customer field of use in paragraph 76.

[00:17:09] Speaker 00:
These are right under third counter plan.

[00:17:13] Speaker 00:
It's unmistakable.

[00:17:14] Speaker 00:
There is no good response.

[00:17:15] Speaker 00:
So at least part of it is based on something that has nothing to do with license or patent.

[00:17:21] Speaker 00:
It would be easier if that wasn't true.

[00:17:23] Speaker 00:
Let's see it from the other side.

[00:17:24] Speaker 00:
Thank you.

[00:17:31] Speaker 03:
Councillor Gendler.

[00:17:34] Speaker 03:
Good morning.

[00:17:36] Speaker 03:
In the district court, Illumina took a different position.

[00:17:41] Speaker 03:
And this position is pointed out in the district court's order.

[00:17:44] Speaker 03:
This is on page JA0005, starting at line 21.

[00:17:49] Speaker 03:
And the district court quotes from Illumina's reply brief, its original reply brief, on the motion to dismiss.

[00:17:56] Speaker 03:
And there, Illumina said, quote, in a nutshell,

[00:18:00] Speaker 03:
Ariosa's breach counterclaims boil down to the contention that section 4A of the supply agreement grants Ariosa a license either expressed or implied to every single patent Illumina owns.

[00:18:13] Speaker 03:
Ariosa thus contends that Illumina breach the supply agreement by merely suing Ariosa for patent infringement.

[00:18:20] Speaker 03:
That is exactly how Illumina characterized our complaint because that's exactly what the complaint alleges.

[00:18:26] Speaker 03:
We have a license

[00:18:27] Speaker 03:
to the Illumina portfolio that falls into two buckets.

[00:18:31] Speaker 03:
One is defined as core IP in goods and one is called secondary IP rights in goods.

[00:18:38] Speaker 03:
Secondary IP rights are carved out except for a representation, a very important representation that they made in the supply agreement, which is they were not aware of any secondary IP rights in goods that they owned that we needed to license

[00:18:55] Speaker 03:
as of the date of the supply agreement.

[00:18:58] Speaker 03:
The 794 patent had been around for eight months as of the date of that agreement, and two years would pass after that agreement was signed before we got sued.

[00:19:10] Speaker 03:
What changed, of course, was that Illumina, instead of being our supplier, became our competitor when they bought Verinada, and everything changed.

[00:19:19] Speaker 03:
Now, it is true there is more alleged

[00:19:22] Speaker 03:
in our contract counterclaims, because in addition to showing breach, we also have to show damages.

[00:19:29] Speaker 03:
And we have to show causation.

[00:19:32] Speaker 03:
So there is more that's in there to link the breach to the damage that we're going to show.

[00:19:39] Speaker 03:
That's how we have to prove damages, because we do believe we were harmed.

[00:19:44] Speaker 03:
And this is a case that involves business harms, but at its core.

[00:19:48] Speaker 03:
Ariosa will establish a breach of contract claim

[00:19:53] Speaker 03:
by showing its license defense works.

[00:19:57] Speaker 03:
They are equivalent in showing the breach.

[00:19:59] Speaker 02:
If the license protected you from being sued, they sued you, they breached the license, then you have collateral issues of damages.

[00:20:05] Speaker 03:
That's correct.

[00:20:06] Speaker 03:
And that's the only, quote, collateral issue.

[00:20:08] Speaker 03:
It's an important issue.

[00:20:09] Speaker 03:
We have to show damage.

[00:20:11] Speaker 03:
We have to show causation.

[00:20:12] Speaker 03:
But at its core, the breach counterclaim is about, you sued us when you gave us a license.

[00:20:20] Speaker 02:
And if we move the dispute

[00:20:24] Speaker 02:
Mr. Reines makes an argument here that he made when he came up the first time in his reply brief up here.

[00:20:31] Speaker 02:
He went back for jurisdictional reasons, which is that we can sever, we can somehow sever a piece of this off and send it to arbitration.

[00:20:41] Speaker 02:
Do you understand that argument?

[00:20:43] Speaker 03:
I do understand the argument.

[00:20:44] Speaker 03:
I don't think it's right.

[00:20:46] Speaker 03:
I don't think it's right for at least two reasons.

[00:20:49] Speaker 03:
One is contractual.

[00:20:49] Speaker 02:
What do you understand him to propose to leave behind in the district court?

[00:20:54] Speaker 03:
It's, here's what I think I understand it to mean.

[00:20:56] Speaker 03:
I think what he would say is that the licensed defense, which would be the, which is equivalent, at least according to Illumina district court, which would also establish reads, but the licensed defense, we have a license, gets litigated.

[00:21:10] Speaker 03:
in the district court, but then the other issues, which essentially would be causation and damages, would get litigated in arbitration.

[00:21:20] Speaker 02:
This is why I asked Mr. Reines whether if the case went over to arbitration, wouldn't he be able, if he wanted to, to mount an argument that there had never been a license?

[00:21:32] Speaker 03:
If the entire matter was, as Illumina has asked, sent to arbitration,

[00:21:38] Speaker 03:
And, for example, if Illumina won that arbitration, he would have the ability to argue in district court, they've already lost that issue.

[00:21:47] Speaker 03:
They don't have a licensed defense anymore.

[00:21:50] Speaker 02:
That's what I was trying to get at.

[00:21:53] Speaker 02:
I didn't make it explicit to him that I was concerned about his severance argument.

[00:21:57] Speaker 03:
Well, I'm concerned about it for that reason, too, because if you sever the entire part, well, then one of our principal defenses to patent litigation has just really been taken into a different form and got to litigated before an arbitrator instead of before the district court.

[00:22:12] Speaker 03:
The essence of patent infringement is taking actions, quote, without authority, which is in 35 USC 271.

[00:22:20] Speaker 03:
It's our right to be able to show that we, in fact, acted with authority because we got these rights from Illumina when we agreed to buy equipment exclusively from Illumina and consumables exclusively from Illumina.

[00:22:35] Speaker 03:
That's why we entered into this agreement.

[00:22:37] Speaker 03:
We had to have protection in doing that, that in using

[00:22:42] Speaker 03:
The very equipment and consumables that we were buying from Illumina, we weren't going to get sued for infringement for using those within our field of use.

[00:22:51] Speaker 03:
And in fact, that's exactly what's happened.

[00:22:53] Speaker 03:
They've sued us because we became a competitor to them when they bought Verinada.

[00:23:00] Speaker 03:
At the end of the day, the case doesn't really turn on whether you look at relating to in a broad way or a narrow way.

[00:23:09] Speaker 03:
because I don't think there is any way of reading relating to, to eliminate the fact that a license is a defense to a patent infringement case, and under any reading of relating to, it relates.

[00:23:24] Speaker 03:
In fact, it relates directly.

[00:23:26] Speaker 03:
It was not a difficult analysis for the district courts.

[00:23:29] Speaker 03:
And in fact, as I pointed out when I first began to speak, it is the essence of our contract counterclaims.

[00:23:39] Speaker 03:
Council for Illumina points out that the breach of the implied covenant claim involves a little more.

[00:23:44] Speaker 03:
And I don't dispute that.

[00:23:46] Speaker 03:
It does involve a little more.

[00:23:48] Speaker 03:
Essentially, and while the requirements are a little fuzzy, essentially, the breach of the implied covenant also involves showing that you were deprived of the benefit of the bargain, and in fact, in a calculated way.

[00:24:02] Speaker 03:
And so we do have additional facts to show that we were in fact being deprived

[00:24:07] Speaker 03:
in a calculated way of the benefit of the bargain.

[00:24:10] Speaker 03:
But that still comes right back to the essence of the case.

[00:24:13] Speaker 03:
That's because you argue as a direct and proximate result of... That's correct.

[00:24:18] Speaker 03:
Because the essence of the case is we cannot win either claim... I'm sorry, assert.

[00:24:26] Speaker 03:
I said argue, but actually you asserted.

[00:24:29] Speaker 03:
We cannot win either of our contract counterclaims without showing that we have a license

[00:24:35] Speaker 03:
we show we have a license, then we have shown breach.

[00:24:38] Speaker 03:
That is how we win both cases, both of our breach of contract counterclaims.

[00:24:44] Speaker 03:
I don't think you can engage, I want to get back to Judge Clevenger's question, I'm not sure that I answered, which is if there's a way of sort of carving up the breach of contract counterclaims and having some of it

[00:24:59] Speaker 03:
in arbitration?

[00:25:00] Speaker 02:
Well, I mean, in all fairness, I mean, Mr. Reynolds has case law that says, you know, where you can, where issues are severable.

[00:25:09] Speaker 02:
I mean, you can't forget that there's a principle at hovering omnipresence here, which is whether you probably don't like it in this case, which is you keep the thumb on the scale in favor of arbitrability.

[00:25:23] Speaker 02:
And once the parties say we have a contract, we want to arbitrate our disputes.

[00:25:28] Speaker 02:
And Mr. Reines has that going for him, that principle.

[00:25:32] Speaker 02:
And what he's trying to say is, well, if there's some aspect, let's assume that there was a thrown into your lawsuit, oh, a tort claim of some sort, that they claimed that you'd committed some type of a tort or vice versa.

[00:25:50] Speaker 02:
You could pull that out and send it to arbitration.

[00:25:52] Speaker 03:
So if there were claims which were not subject to the exception,

[00:25:58] Speaker 03:
Well, sure.

[00:25:59] Speaker 03:
But there aren't claims that aren't subject to the exception.

[00:26:02] Speaker 03:
In other words, he has case law that says if you have, let's say, three causes of action in a... Well, that's what I asked about directly or indirectly.

[00:26:11] Speaker 02:
It seemed to me that, and that's what Judge Rana was saying, something that's... Pardon me.

[00:26:16] Speaker 02:
Judge Wallach's direct and proximate result of suggests that indirect relationship is what we're talking about here.

[00:26:23] Speaker 02:
What I think Mr. Reines is saying is some of these issues you're talking about

[00:26:27] Speaker 02:
he believes are so collateral to the infringement defense that they can be carved up and sent over to arbitration.

[00:26:37] Speaker 03:
And what I'm saying is I think the only things that fall into that category are causation and damages.

[00:26:45] Speaker 03:
I don't see how you could carve those out because how do you connect

[00:26:49] Speaker 03:
the damages to the breach.

[00:26:51] Speaker 02:
I could carve them out because if he can get those issues back, he can say, well, there's no causation and there's no damages because there was no contract.

[00:27:00] Speaker 02:
It creates an arbitrator to say, well, there was a failure of consideration or something.

[00:27:04] Speaker 02:
And so there was no contract at all.

[00:27:06] Speaker 03:
You're correct.

[00:27:07] Speaker 03:
You could have an arbitrator.

[00:27:08] Speaker 02:
I think that's the trap that that's the scenario that's most beneficial to his client.

[00:27:14] Speaker 03:
It's another reason why I think that it makes no sense to sever it for the practical reason.

[00:27:18] Speaker 03:
which is the arbitrator can do pretty much anything he or she wants to do.

[00:27:22] Speaker 03:
And it's basically very difficult, as the court would know, to get an arbitration award reversed.

[00:27:30] Speaker 03:
The standard of review is quite stringent.

[00:27:36] Speaker 03:
So for that reason,

[00:27:38] Speaker 03:
I think it makes no sense to try to either send the whole part there, a whole thing there, or even part of it there, because you're right.

[00:27:45] Speaker 03:
The arbitrator could decide, well, you know what?

[00:27:47] Speaker 03:
I don't have to reach this complicated question of causation, because I'm just going to find there's no agreement.

[00:27:55] Speaker 03:
And which is going to get done first?

[00:27:58] Speaker 03:
Well, probably the arbitration, because arbitrations happen a lot faster

[00:28:02] Speaker 03:
than do district court litigation typically.

[00:28:07] Speaker 03:
And in fact, right now, this case has stayed pending the resolution of several appeals and IPRs.

[00:28:14] Speaker 03:
So this isn't a theoretical risk.

[00:28:16] Speaker 03:
This is a real possibility.

[00:28:20] Speaker 03:
I wanted to just very briefly address what I'll call the standard here, which is there's a lot of disagreement in the parties about what the rule of law is here.

[00:28:30] Speaker 03:
And it should be pretty clear.

[00:28:32] Speaker 03:
Because the Supreme Court has spoken very definitively in 2010 in the Granite Rock case.

[00:28:39] Speaker 03:
And it tried to bring some order and clarity to what presumption of arbitability actually means and when it applies.

[00:28:48] Speaker 03:
Because there was some confusion in the district court, among the circuits, after the AT&T case.

[00:28:56] Speaker 03:
And Granite Rock made very clear two very important principles about the presumption.

[00:29:02] Speaker 03:
The first is that the presumption applies only when you have an arbitration agreement which is ambiguous about whether it covers the dispute at hand.

[00:29:15] Speaker 03:
If that is true, then the presumption applies.

[00:29:19] Speaker 03:
And then it goes on to say that you adhere to the presumption and ordering arbitration only when the presumption is not rebutted.

[00:29:28] Speaker 03:
There is not some general presumption in favor of arbitration which is used to interpret contracts.

[00:29:35] Speaker 03:
Contracts for arbitration have simply the same standing as every other kind of contract.

[00:29:42] Speaker 03:
In Granite Rock, the court made clear that a first principle of arbitration is the following.

[00:29:47] Speaker 03:
Arbitration is strictly a matter of consent and thus a way to resolve those disputes, but only those disputes.

[00:29:56] Speaker 03:
that the parties have agreed to submit to arbitration.

[00:29:59] Speaker 03:
That's a granite rock decision.

[00:30:01] Speaker 02:
Well, Mr. Ranis disagrees with that.

[00:30:02] Speaker 02:
That's why he says he believes there's ambiguity in the contract.

[00:30:05] Speaker 03:
Well, he also disagrees with the standard because what he would say is that once there is some ambiguity, if he says there's any ambiguity whatsoever, then we're done with the discussion.

[00:30:18] Speaker 03:
And the case goes to arbitration.

[00:30:20] Speaker 03:
And first, it is true that the presumption applies

[00:30:25] Speaker 03:
if there is ambiguity, but he's skipping the second step, which is you first have to ask yourself, okay, I acknowledge there may be some ambiguity here, but can I resolve it?

[00:30:37] Speaker 03:
Can I answer the question, what does the contract provide for?

[00:30:41] Speaker 03:
And here, I think it is clear that even if relating to is a broad term, which you can look at narrowly or broadly, depending upon the context, under any analysis of that term,

[00:30:54] Speaker 03:
This is a case where our license defense to a patent infringement case relates to an issue of patent infringement, and it also relates to a question of scope.

[00:31:04] Speaker 03:
And so the presumption is rebutted, because the agreement here clearly applies.

[00:31:11] Speaker 03:
Thank you.

[00:31:11] Speaker 01:
Thank you.

[00:31:14] Speaker 01:
Mr. Reines, I'll restore your time to three minutes.

[00:31:17] Speaker 00:
Thank you, John.

[00:31:17] Speaker 00:
I appreciate it.

[00:31:18] Speaker 00:
Two points I'd like to make.

[00:31:20] Speaker 00:
First, on the textual argument regarding the interpretation of the exception.

[00:31:25] Speaker 00:
To apply it the way we've been discussing about it today is to ignore the distinction between referring to the claim level and the issue level.

[00:31:32] Speaker 00:
If we're talking about the issue of infringement or scope, scope is such a subtopic

[00:31:38] Speaker 00:
If any validity claim is relevant to infringement, any infringement claim is relevant to invalidity, why do they have these specific sub-issues?

[00:31:44] Speaker 00:
They didn't want these little issues to be little, but these sub-issues to be addressed.

[00:31:49] Speaker 00:
Relating to means discovery issues, or if you have an infringement claim, the damages that follow.

[00:31:55] Speaker 00:
So there is an ambit around these issues, which is carved out, but I don't think it leaps over to things like license, which were so foreseeable that they're not even included.

[00:32:06] Speaker 01:
What about the language you're speaking about relating to?

[00:32:10] Speaker 01:
Then it gets down to this last sentence we talked about.

[00:32:14] Speaker 01:
It says Section 31C should not apply to, and then it says, and no arbitration shall resolve disputes that are relating to.

[00:32:22] Speaker 01:
So it's more than just bringing in issues.

[00:32:24] Speaker 01:
It's talking about resolving any disputes relating, and it goes on to enforceability of any IP right.

[00:32:32] Speaker 01:
And that seems to me to be a pretty big basket there.

[00:32:35] Speaker 01:
with respect to disputes involving any IP right.

[00:32:39] Speaker 01:
And that's what this whole matter's about.

[00:32:41] Speaker 00:
There's clearly a debatable issue there.

[00:32:46] Speaker 00:
The point I'm making is that using the term issue is compared to claim, which would be the normal language.

[00:32:51] Speaker 00:
A claim would be so much broader.

[00:32:53] Speaker 00:
In other words, the way that that reading, anything relating to a claim of infringement, I guarantee you, Judge Clever, you would think that sweeps in anything about licensing.

[00:33:06] Speaker 00:
So you're basically ignoring the distinction between claim and issue, to my mind, and the fact that this is an exception.

[00:33:15] Speaker 00:
And yes, I understand that's one way to look at it.

[00:33:18] Speaker 00:
I'm saying the way I'm arguing to you is a legitimate way to look at this.

[00:33:22] Speaker 00:
It's legitimate to say, when we draw the circle around infringement, we're not going to draw it to include all affirmative defenses.

[00:33:28] Speaker 00:
because that's what the rationale that I've been hearing today would do.

[00:33:32] Speaker 00:
We're going to look at it just to say, what did we need to do to actually adjudicate infringement itself?

[00:33:37] Speaker 00:
And we need to have something related to that, because otherwise the different language would be used.

[00:33:42] Speaker 01:
You wouldn't just simply say include all claims, but you would look at the claim that's being asserted and say, does it involve an IP right?

[00:33:53] Speaker 00:
I don't think so.

[00:33:53] Speaker 00:
I think you'd say, does it involve the resolution of

[00:33:56] Speaker 00:
An infringement question.

[00:33:58] Speaker 00:
Does it resolve the resolution of the validity question?

[00:34:00] Speaker 01:
Enforcement.

[00:34:03] Speaker 00:
An enforcement question.

[00:34:04] Speaker 00:
I mean, we're bringing that here today.

[00:34:05] Speaker 00:
That's never been argued that that was the assertion of the complaint.

[00:34:12] Speaker 00:
I just think once you take it that way, if this all becomes so broad and it sweeps in license, they would have included license if they wanted to include license.

[00:34:20] Speaker 00:
That's a legitimate point.

[00:34:21] Speaker 00:
And I'm just saying it's a debatable issue in which we know how that ends up.

[00:34:25] Speaker 00:
That ends up for arbitration.

[00:34:26] Speaker 00:
The only other point I want to make, you've been very generous with time today, is the suggestion that we didn't make the point that there's this whole other breach theory they have.

[00:34:36] Speaker 00:
And it's beginning to end.

[00:34:37] Speaker 00:
Doesn't at any point in the process require consideration of patent or license issues that have been presented anyway?

[00:34:45] Speaker 00:
And that's this, we made this pretextual breach notice because they weren't within their field of use, because they were selling this gender.

[00:34:54] Speaker 00:
We made this exact argument.

[00:34:56] Speaker 00:
The statement was made.

[00:34:56] Speaker 00:
We didn't make it in the district court.

[00:34:58] Speaker 00:
At JA 262, we excerpt paragraph 78 of the amendment claim that has the exact protectual notice argument.

[00:35:07] Speaker 00:
And we say that these harms arise out of the supply agreement, and they do not involve issues of scope, invalidity, enforceability, or infringement.

[00:35:16] Speaker 00:
Yes, the gist of what the argument's been about has been about this licensing piece.

[00:35:20] Speaker 00:
That doesn't mean there's not the other piece.

[00:35:23] Speaker 00:
Thank you very much.

[00:35:24] Speaker 00:
Thank you.

[00:35:26] Speaker 01:
That concludes our argument for today.

[00:35:27] Speaker 01:
We'll stand for recess.