CAFC Emphasizes the Importance of Contract Principles in Arbitrability Determination

On November 12, the United States Court of Appeals for the Federal Circuit (CAFC) affirmed the decision of the U.S. District Court for the Northern District of California that compelled arbitration and dismissed Rohm Semiconductor USA’s declaratory judgment action without prejudice, holding that an arbitrator must determine arbitrability.

In 2007, Rohm Japan and MaxPower Semiconductor entered into a technology licensing agreement (TLA). According to the TLA, Rohm Japan and its subsidiaries were permitted to use certain power-related technologies of MaxPower developed under a Development and Stock Purchase Agreement in exchange for royalties paid to MaxPower. In 2011, the TLA was amended to include an agreement to arbitrate “any dispute, controversy, or claims arising out of or in relation to this Agreement or at law, or the breach, termination, or validity thereof.” Further, the amendments provide that arbitration must be conducted “in accordance with the provisions of the California Code of Civil Procedure (CCCP).”

In 2019, Rohm Japan and MaxPower disputed whether the TLA covered Rohm’s silicon carbide metal oxide semi-conductor field effect transistors products. In September 2020, MaxPower notified Rohm Japan of its intent to initiate arbitration. Soon thereafter, Rohm USA, a subsidiary of Rohm Japan, filed a complaint for declaratory judgment of noninfringement of four MaxPower patents in the Northern District of California and four inter partes review petitions concerning the same patents. MaxPower then filed a motion to compel arbitration in the district court case. The district court granted MaxPower’s motion and dismissed the case without prejudice, reasoning that the TLA “unmistakably delegate[d] the question of arbitrability to the arbitrator.” Rohm appealed.

Clear and Unmistakable Standard

The CAFC, noting they were bound to apply the law of the regional circuit, utilized the Ninth Circuit’s de novo standard of review for court orders compelling arbitration. Citing First Options, the CAFC reasoned that “[w]hen deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally…should apply ordinary state-law principles that govern the formation of contracts,” with “an important qualification, [c]ourts should not assume that the parties agreed to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so.” First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944 (1995). However, absent a “clear and unmistakable delegation,” arbitrability should be decided by the court.

Proposing several theories, Rohm USA argued that MaxPower lacked clear and unmistakable evidence of an agreement to arbitrate arbitrability. First, Rohm USA contended that the CCCP is ambiguous because it contains two conflicting provisions: §1297.161 which provides that an arbitrator “may rule on its own jurisdiction” in an international commercial arbitration; and §1281.2, which states that “the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate exists.” Rohm USA argued that this ambiguity caused the district court to defer to the arbitrator on the question of arbitrability. However, the CAFC noted, citing CCCP §1297.17, that Title 9.3, which contains §1297.161, “supersedes Section 1280 to 1284.2, inclusive with respect to international commercial arbitration.” Therefore, the CAFC concluded that the CCCP cannot be ambiguous because only one of the provisions Rohm USA cited to can be applied to the dispute in this case. The CAFC noted a determination of which of the two provisions shall govern turns on whether the dispute is international.

Next, Rohm USA argued that CCCP §1297.17 and §1297.161 do not apply because this dispute was not international in nature, but purely domestic. The CAFC found that Rohm USA was “quite clearly wrong,” and rejected its insinuation that it was a non-party to the TLA and that this was a matter between two U.S. based companies in the United States. The CAFC noted that, although Rohm USA was not a signatory to the TLA, it was “clearly…covered by and obligated under it,” since the TLA applies to all subsidiaries of Rohm Japan. Additionally, the CAFC recognized that this is a textbook example of an international dispute according to the terms of CCCP §1297.13, which defines international arbitration for the purposes of whether Title 9.3 applies. Neither party disputed that Rohm Japan and MaxPower have their places of business in different “states,” Japan and the U.S., respectively. Therefore, the CAFC concluded that under CCCP §1297.13(a), this is an international dispute.

Rohm USA further contended that, even if this dispute is international in nature, and even if §1297.161 applies, that provision is still not a “clear and unmistakable” delegation of authority to the arbitrator to decide the question of arbitrability because it is permissive. Essentially, Rohm USA argued that because §1297.161 states that “the arbitral tribunal may rule on its own jurisdiction,” it merely allows the parties to agree to waive a court determination, which Rohm USA did not wish to do. The CAFC was unpersuaded by this conclusion. While the CAFC agreed with Rohm USA that “may” is generally permissive, it found that Rohm USA’s interpretation would render §1297.161 meaningless. According to Rohm’s interpretation, §1297.161 would mean that the arbitral tribunal or a court may determine arbitrability. However, the CAFC reasoned, that would be the default absent §1297.161. Therefore, the CAFC concluded, Rohm USA’s interpretation would render §1297.161 “a dead letter.” In support of their conclusion, the CAFC analogized this to an interpretation by its sister circuit in Oracle, of a similar phrase in the United Nations Commission on International Trade Law. Oracle Am., Inc. v. Myriad Grp. A.G., 724 F.3d 1069, 1073 (9^th Cir. 2013).

CAFC Precedent Rules

Rohm USA next argued that the mere incorporation of rules, such as the CCCP rules, is insufficient to satisfy the “clear and unmistakable” delegation of authority standard articulated in First Options. According to the CAFC, Rohm USA was arguing for it to overturn Oracle on this ground. However, noting that Oracle was decided “long after” First Options, that the First Options standard was reiterated in Howsam and their own decision in Qualcomm, the CAFC declined to overrule its precedent. In its reply brief, Rohm USA argued that the Third Circuit had disagreed with this prevailing view and the CAFC’s Qualcomm decision. However, since this argument was not raised before the district court or in Rohm USA’s opening brief on appeal, the CAFC ruled that it had forfeited the argument “twice over.” To leave no doubts, the CAFC discussed the reasons it would reject this argument had it not been forfeited. First, the CAFC reasoned that Rohm improperly interpreted the Third Circuit’s Chesapeake Appalachia decision as contrary to the precedent the CAFC relied upon. The CAFC further noted that Rohm USA only cited one additional case in support of its request to overturn precedent. Citing Doe, the CAFC conceded that a Florida state court decision, currently awaiting review by the Florida Supreme Court, did go against the rule in the CAFC’s precedent. However, the court said this was not convincing enough to compel them to overrule precedent. Accordingly, the CAFC concluded that “[i]n contracts between sophisticated parties, it is fair to hold them to all provisions of their contract, including those incorporated by reference,” like the CCCP.