Description: This case involves a lawsuit filed by Infuturia Global, Ltd. in California state court against Sequus, the Hebrew University and Yechezkel Barenholz. The lawsuit charged Sequus with interfering with a license agreement between Infuturia and the Yissum Research and Development Company. Sequus filed a motion to dismiss, claiming that Yissum was a “necessary” and “indispensable” party. Sequus also requested that the case be dismissed for its failure to identify specific products at issue for failure to state a claim. The Court granted the motion to dismiss on June 1, 2009. Infuturia filed an appeal in the case, charging that that the District Court erred in refusing to remand this case to state court, in granting Sequus’ motion to dismiss order for failure to join an indispensable party, and in granting Sequus’ Motion to Dismiss for failure to state a claim.
|Docket Number 09-16378
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
|INFUTURIA GLOBAL, LTD.
SEQUUS PHARMACEUTICALS, INC.,
|On Appeal from the United States District Court
Northern District of California
Honorable Saundra Brown Armstrong, United States District Judge
USDC No. 4:08-cv-04871-SBA
STATEMENT OF JURISDICTION
This case was originally filed in state court by Appellant. It was removed to federal court by Defendants Hebrew University and Yechezkel Barenholz (who were subsequently dismissed as defendants) under 9 U.S.C. § 205, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention”). Appellant contends that removal was improper and that the District Court lacked jurisdiction because the removal was untimely and because the removing defendants were non-parties to the License Agreement containing the arbitration provision upon which jurisdiction under the Convention was based.
The District Court entered a Final Judgment disposing of all parties and all claims on June 16, 2009. ER 1. The judgment was appealable pursuant to 28 U.S.C. § 1291. Appellant timely filed its Notice of Appeal on July 1, 2009. ER 5.
- Whether the District Court erred in denying Appellant’s Motion to Remand.
- Whether the District Court erred in dismissing the case under Rule 12(b)(7) for failure to join an indispensable party.
- Whether the District Court erred in dismissing the case under Rule 12(b)(6) for failure to state a claim.
STATEMENT OF THE CASE
On October 26, 1998, Appellant filed suit in California state court against Sequus, the Hebrew University and Yechezkel Barenholz. ER 90 at ¶4. The lawsuit charged Sequus with tortiously interfering with a License Agreement between Appellant and non-party Yissum Research and Development Company (“Yissum.”) Id. On May 27, 1999, Yissum, which had not been named as a party by Appellant, filed an Application to Stay the Litigation and Compel Arbitration by virtue of an arbitration clause in the License Agreement mandating arbitration in Israel of certain disputes between Yissum and Appellant. Id. at ¶5. On July 15, 1999, the state court entered an Order compelling arbitration and staying litigation under CCP § 1281.4. Id..
The dispute between Appellant and Yissum was then submitted to arbitration in Israel. On May 21, 2006, the arbitrator, Judge (ret.) Amnon Strashnov, rendered his opinion. ER 90-91 at ¶6; ER 138. The arbitrator affirmed the validity of the License Agreement, ruled that Appellant had not breached the agreement and held that Yissum had wrongly and unlawfully terminated the agreement. ER 148-49 at ¶22; ER 155 at ¶35. Appellant thereafter filed in the state court a Motion to Lift Stay and Motion for Entry of a Scheduling Order on May 7, 2008. ER 90-91 at ¶6. The Motion to Lift Stay was granted and the stay was lifted by Order dated July 29, 2008. Id.
On or about October 24, 2008, Defendants Hebrew University and Barenholz (“Defendants”) filed a Notice of Removal under the Convention, removing this case to federal court. ER 1928. Thereafter, Appellant filed a Motion to Remand. ER 1342. The District Court denied the Motion by Order dated February 23, 2009. ER 5.
On or about October 31, 2008, Sequus filed a 12(b)(6) Motion to Dismiss and in the alternative 12(e) Motion for More Definite Statement alleging that the facts set forth in Appellant’s First Amended Complaint failed state a claim for relief. ER 1861. The Court denied Sequus’ Motion to Dismiss but granted the Motion for More Definite Statement. By Order of the Court, Appellant filed a Second Amended Complaint which identified specific patents and compounds falling within the scope of Appellant’s contractual rights under the License Agreement. ER 91 at ¶7; ER 180-94. Appellant also set forth in greater detail the factual bases for its claims for tortious interference and conversion. Id.
On April 6, 2009, Sequus filed a Motion to Dismiss under Rule 12(b)(7) claiming that Yissum was a “necessary” and “indispensable” party under Fed. R. Civ. P. 19(a). ER 195. Sequus also requested that the Complaint be dismissed under Rule 12(b)(6)for its failure to identify specific products at issue for failure to state a claim. Id. The Court granted the Motion to Dismiss by Order dated June 1, 2009. ER 2. Appellant thereafter filed its Notice of Appeal on or about July 1, 2009. ER 17.
STATEMENT OF FACTS
Liposomes are sub-microscopic bubbles composed primarily of fat droplets. Appellant’s Excerpts of Record (hereinafter “ER”) 138. Due to their unique properties, the inside of the liposome “bubble” is capable of being filled with certain drugs and injected into a patient as an efficient means of drug delivery to targeted regions of the body. Appellant is a corporation in the business of developing and marketing liposome-related pharmaceutical products. ER 181 at ¶1. At all times relevant hereto, Defendant Sequus was an integrated pharmaceutical company that was also engaged in the development, manufacture and marketing of liposome-related pharmaceutical products. ER 181 at ¶2.
Before contracting with Appellant in 1990, Prof. Yechezekel Barenholz of the Hebrew University, and Hebrew University’s subsidiary Yissum, were involved in research related to liposomes. ER 182 at ¶4. From the mid-1980s to the late 1990s, Barenholz worked extensively with Sequus at its facilities in San Mateo County, California. Id. During this time, Barenholz conducted and participated in medical research involving the development and manufacture of pharmaceutical liposomes. ER 182 at ¶5. Barenholz also supervised extensive research regarding the development and manufacture of liposome-based pharmaceuticals. ER 182 at ¶6. The primary purpose of Barenholz’ research was to discover and ultimately market a liposome with anti-aging properties that would, upon injection, circulate in the bloodstream for an extended period of time. ER 138-39 at ¶¶2, 3; ER 182 at ¶6. Based upon this research, Barenholz and Yissum applied for and obtained United States Patent No. 4,812,314 (the “314 Patent”). Id.
In 1989, Yissum was in need of additional funding and financial backing for the liposome project, which included additional research regarding the uses and applications for the 314 Patent. ER 182-83 at ¶7. Yissum had numerous discussions with Seymour Kurtz (“Kurtz”), the principal shareholder of Appellant Infuturia. Id. As a result of these negotiations, on March 19, 1990, Infuturia entered into the written “License Agreement” with Yissum. Id.; ER 243. The License Agreement provided that Yissum would continue its research and testing of the 314 Patent with the purpose of developing the subject liposome and distributing it to the public commercially. ER 89, 94, 243. Appellant was responsible for certain marketing aspects of the project and for paying a scheduled royalty to Yissum based on annual net sales. ER 89-90, 93. In consideration, Yissum granted Appellant “an exclusive worldwide right license to develop, market, use, manufacture, exploit and commercialize the  Patent, Compounds, Products, and Improvements…” ER 93, 18, 246. Over the course of the next few years, Appellant and Yissum executed several “letter agreements” and other addendums to the License Agreement whereby Yissum agreed to continue research and testing in connection with the 314 Liposome and Patent and to submit reports to Appellant regarding the results. For its part, Appellant provided Yissum with additional funds totaling more than $550,000.00. ER 140, 183-84.
Unbeknownst to Appellant, on January 1, 1995, Yissum and Sequus (then Liposome Technology, Inc. (“LTI”)), entered into a “Master Research Services and License Agreement” (the “Sequus Agreement”). ER 90, 122. Under the terms of that agreement, LTI received an irrevocable option to obtain an exclusive license to make, use, sell or offer for sale liposome compositions and related patents that had already been licensed to Appellant under the terms of its License Agreement with Yissum executed in March 1990. ER 90 at ¶3; ER 122. As a result of the Sequus Agreement, Yissum licensed and/or assigned to LTI several liposome-related pharmaceutical patents, including patents related to the administration of liposomes to treat hypertension (Patent No. 6,235,308 (the “308 Patent”)), the administration of liposomes to reduce the level of serum lipoproteins (Patent Nos. 5,914,311 (the “311 Patent”); 5,741,514 (the “514 Patent”); and 5,622,715 (the “715 Patent”)) and the development of liposomes that circulate in the bloodstream for long periods of time (Patent Nos. 6,326,353 (the “353 Patent”); 7,150,882 (the “882 Patent”); 6,586,002 (the “002 Patent”); and 7,160,554 (the “554 Patent”)). ER 91. Yissum also licensed to LTI a patent on a novel method for loading drugs into liposomes utilizing a unique chemical gradient (Patent No. 5,316,771 (the “771 Patent”)). ER 91. At the time of their licensing to LTI, all of the above-referenced patents and related compounds were the property of Appellant by virtue of the 1990 License Agreement. LTI later changed its name to Sequus.
On October 26, 1998, Appellant filed suit in California state court against Sequus and others. ER 90 at ¶4. The lawsuit charged Sequus with tortiously interfering with the License Agreement between Appelant and Yissum. Id. On May 27, 1999, Yissum, which had not been named as a party, filed an Application to Stay the Litigation and Compel Arbitration by virtue of an arbitration clause in the License Agreement mandating arbitration in Israel of certain disputes between Yissum and Appellant. Id. at ¶5. On July 15, 1999, the state court entered an Order compelling arbitration and staying the litigation under CCP § 1281.4. Id..
The dispute between Appellant and Yissum was then submitted to arbitration in Israel. On May 21, 2006, the arbitrator, Judge (ret.) Amnon Strashnov, rendered his opinion. ER 90-91 at ¶6; ER 138. The arbitrator affirmed the validity of the License Agreement, ruled that Appellant had not breached the agreement and held that Yissum had wrongly and unlawfully terminated the agreement:
Because [Yissum] did not have any grounds to cancel the Agreement . . . I reject the [Yissum’s] application to declare the nullification of the Agreement, or to cancel same, as requested I section 84.1 of the written summation.
ER 148-49 at ¶22; ER 155 at ¶35 (the License Agreement’s “unilateral cancellation by YISSUM was made unlawfully”). The arbitrator also ruled that the License Agreement conferred upon Appellant the rights to inventions that included, but were not limited to, the 314 Patent:
[T]he legal situation with regard to the rights in Patent 308—and the same is true with regard to all other patents that were discovered and/or registered following the joint trials conducted by the parties—is as set forth in the Agreements between the parties, and in particular, in the License Agreement that was signed between the parties on March 19, 1990…[E]ven if the patent was registered by Yissum or by Barenholz, the holder of the license in the patent and the right to distribute it for commercial purposes is Infuturia—all as set forth in the License Agreement.
ER155 at ¶35 (emphasis added). The arbitrator’s opinion was later affirmed by a Notification Regarding Confirmation of Arbitration Decision. Appellant filed a Motion to Lift Stay and Motion for Entry of a Scheduling Order on May 7, 2008. ER 90-91 at ¶6. The Motion to Lift Stay was granted and the stay was lifted by Order dated July 29, 2008. Id.
On or about October 24, 2008, Defendants Hebrew University and Barenholz filed a Notice of Removal removing this case to federal court under the Convention. ER 1928. Thereafter, Appellant filed a Motion to Remand, arguing that Defendants lacked standing to invoke the arbitration clause in the License Agreement and that removal was untimely. ER 1342. The District Court denied the Motion by Order dated February 23, 2009. ER 5.
On or about October 31, 2008, Sequus filed a 12(b)(6) Motion to Dismiss and in the alternative 12(e) Motion for More Definite Statement alleging that the facts set forth in Appellant’s First Amended Complaint failed state a claim for relief. ER 1861. The Court denied Sequus’ Motion to Dismiss but granted the Motion for More Definite Statement. By Order of the Court, Appellant filed a Second Amended Complaint which identified specific compounds, compositions and products falling within the scope of Appellant’s contractual rights under the License Agreement. ER 91 at ¶7; ER 180-94. Appellant also set forth in greater detail the factual basis for its claim that Sequus tortiously interfered with the License Agreement and wrongfully converted Appellant’s property. Id.
On April 6, 2009, Sequus filed another Motion to Dismiss under Rule 12(b)(7) on the theory that Yissum was a “necessary” and “indispensable” party under Fed. R. Civ. P. 19(a)-(b). ER 195. Sequus also requested that Appellant’s Second Amended Complaint be dismissed for its failure to identify specific products at issue in the case. Id. Finally, Sequus’ Motion also asked the Court to dismiss Count 1 (alleging tortious interference) and Court 2 (alleging conversion) of the Second Amended Complaint for failure to state a claim. Id. The Court granted the Motion to Dismiss by Order dated June 1, 2009. ER 2. Appellant thereafter filed its Notice of Appeal on or about July 1, 2009. ER 17.
SUMMARY OF THE ARGUMENT
As set forth above, the instant lawsuit was filed by Appellant in 1998 in California state court. After certain issues were arbitrated in Israel, Defendants Hebrew University and Barenholz filed a Notice of Removal removing this case to federal court in October 2008. The sole basis of federal jurisdiction alleged was 9 U.S.C. § 205, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention”).
Following removal, Appellant immediately filed a Motion to remand the case back to state court. As set forth more fully below, Defendants’ removal was untimely. Moreover, Defendants were not entitled to remove this case under the Convention because the Defendants were not parties to the License Agreement containing the arbitration provision. The District Court therefore erred by denying Appellant’s Motion to Remand by Order dated February 23, 2009.
Within a week of removing this case to federal court, Defendant Sequus filed a 12(b)(6) Motion to Dismiss and in the alternative Motion for More Definite Statement under 12(e). The Court denied Sequus’ Motion to Dismiss but granted the Motion for More Definite Statement. By Order of the Court, Appellant filed a Second Amended Complaint which dropped Hebrew University and Barenholz as Defendants, identified specific patents within the scope of Appellant’s contractual rights under the License Agreement and set forth in greater detail the factual bases of its claims.
On April 6, 2009, Sequus filed its second Motion to Dismiss under Rule 12(b)(7) on the theory that Yissum was a “necessary” and “indispensable” party under Fed. R. Civ. P. 19(a)-(b). Sequus also requested that the Second Amended Complaint be dismissed under Rule 12(b)(6) for its failure to identify specific products at issue and that certain claims be dismissed for failure to state a claim.
Sequus’ Motion to Dismiss should have been denied. First, Yissum was not a “necessary” party to this case under Rule 19(a). Complete relief could be accorded between the existing parties and proceeding in Yissum’s absence would not have impaired Yissum’s rights or subjected Sequus to inconsistent obligations. Second, even if Yissum were a “necessary” party, an analysis of the relevant factors shows that Yissum was not “indispensable” under Rule 19(b). A judgment in Yissum’s absence would be adequate and would not prejudice any party or non-party. Third, Appellant had no adequate alternative remedy once this case was dismissed. For these reasons, Yissum was neither “necessary” or “indispensable” under Rule 19 and Sequus’ 12(b)(7) Motion to Dismiss should have been be denied. The District Court erred in granting the Motion.
Sequus’ 12(b)(6) Motion to Dismiss was also without merit. Appellant identified specific property and otherwise pled facts sufficient to support every element of its claims for tortious interference and conversion. Appellant was not required to identify products utilizing its patents to state a claim for tortious interference or conversion. It was enough to show that the same patents that had been exclusively licensed to Appellant under the 1990 License Agreement with Yissum were subsequently licensed to Sequus. For these reasons, the District Court erred in granting Defendants’ Motion to Dismiss by Order dated June 1, 2009.
ARGUMENT AND AUTHORITIES
I. The District Court erred in refusing to remand this case to state court.
Federal courts strictly construe removal statutes against removal jurisdiction. Boggs v. Lewis, 863 F.2d 662, 663 (9th Cir. 1988); Takeda v. Northwestern Nat’l Life Ins. Co., 765 F.2d 815, 818 (9th Cir. 1985). Federal jurisdiction must be rejected if there is any doubt as to the right of removal in the first instance. Libhart v. Santa Monica Dairy Co., 592 F.2d 1062, 1064 (9th Cir. 1979). The “strong presumption” against removal jurisdiction means that the defendant always has the burden of establishing that removal is proper. Nishimoto v. Federman-Bachrach & Assocs., 903 F.2d 709, 712 n.3 (9th Cir. 1990); Emrich v. Touche Ross & Co., 846 F.2d 1190, 1195 (9th Cir. 1988). An appellate court reviews a District Court’s denial of a motion to remand de novo. See, e.g., Hamilton Materials, Inc. v. Dow Chemical Corp., 494 F.3d 1203, 1206 (9th Cir. 2007).
B. Defendants’ removal was untimely under 9 U.S.C. § 205.
Defendants Hebrew University and Barenholz based their removal solely on 9 U.S.C. § 205. The statute states in relevant part:
§ 205. Removal of cases from State courts
Where the subject matter of an action or proceeding pending in a State court relates to an arbitration agreement or award falling under the Convention, the Defendant or the Defendants may, at any time before the trial thereof, remove such action or proceeding to the district court of the United States for the district and division embracing the place where the action or proceeding is pending.
9 U.S.C. § 205 (emphasis added). Defendants asserted in their Notice of Removal that it was “timely, as it is filed at a time before the trial of the action.” ER 1929 at ¶2. As set forth below, however, “trial” under Section 205 is not limited to a traditional trial on the merits in the state court. Rather, it includes any proceeding by which the merits of the plaintiff’s claims are decided. At the time of removal, Defendants’ own pleadings contended that all of Appellant’s claims had already been resolved by the arbitration ordered by the state court below. The arbitration therefore constituted a “trial” as used in Section 205. Under these facts, Defendants’ removal was untimely.
Courts interpreting the phrase “before the trial thereof,” have interpreted it to mean “that removal may occur at any time before an adjudication on the merits.” Acosta v. Master Maintenance & Constr., Inc., 52 F. Supp.2d 699, 705 (M.D. La. 1999), aff’d, 452 F.3d 373 (5th Cir. 2006); see also LaFarge Coppee v. Venezolana De Cementos, S.A.C.A., C.A., 31 F.3d 70, 72 (2d Cir. 1994) (removal was untimely under 9 U.S.C. § 205 because “[t]hough the proceedings in the State Court were brief, they resulted in an adjudication of the entirety of the claim that the plaintiffs tendered for decision.”); Certain Underwriters at Lloyd’s v. Bristol-Myers Squibb Co., 51 F. Supp. 2d 756, 759 (E.D. Tex. 1999) (concluding that the defendant had not removed the case “before the trial” when the defendant had engaged in extensive discovery and had participated in the first phase of a “trifurcated” proceeding).
An adjudication on the merits need to occur as a result of a trial in the original court. See, e.g., Cascianai v. LaCruise, Inc., No. 9601249-CIV-J-21-A, 1998 U.S. Dist. LEXIS 12933 at *22 (M.D. Fla. Jan. 22, 1998) (removal was untimely under 9 U.S.C. § 205 where “although there was no trial per se in the state court, the state court action had been completely resolved – i.e., brought to the same state where it would have been had there been a trial therein.”). In fact, it may occur when a state court has referred a matter to arbitration. Pan Atlantic Group v. Republic Ins. Co., 878 F. Supp. 630, 642 (S.D. N. Y. 1995) (removal was untimely where arbitration ordered by trial court was “equivalent to a trial” and removing party “chose not to remove the action before arbitration.”); Traffic Sports USA, Inc. v. Federacion Nacional Autonoma de Futbol de Honduras, Case No. 08-20228-CIV, 2008 U.S. Dist. LEXIS 110637 at *17 (S.D. Fla. Oct. 31, 2008) (“Section 205’s timeliness language does not per se require a bench or jury trial. Instead, the language of the statute is directed at a final adjudication of a state court proceeding. Because, after all, not every case that is pursued in state courts across the country actually require a physical trial. Arbitration proceedings are such examples of cases where a party seeks to obtain a particular court order to compel arbitration, which of course does not normally require a trial.”).
Here, Defendants repeatedly alleged prior to removal that the entire dispute had already been adjudicated by the arbitration in Israel. According to Defendants, following the conclusion of the prior arbitration in Israel, they “believed that the arbitral award was the end of Infuturia’s claims.” ER 1270 at p. 6. In their opposition to Appellant’s Motion to Lift Stay, Defendants stated that “[s]ince that arbitration has been completed and the arbitration award has been confirmed by an Israeli court, nothing remains to be done here except to dismiss the existing litigation.” ER 639 at p. 2. They also emphatically protested that “[t]he claims at issue in this litigation have been arbitrated and decided” and “[n]othing is left to litigate.” ER 641 at p. 4. Defendants clearly took the position that the Israeli arbitration constituted an adjudication on the merits of Appellant’s claims.
Based on their assertion that Appellant’s claims had already been adjudicated, removing Defendants Hebrew University and Barenholz both pled collateral estoppel as an affirmative defense in their Answers. ER 1629 at ¶144 (“Defendant alleges that, as a result of determinations made in Israeli arbitration proceedings, Plaintiff is barred by collateral estoppel from asserting its claims against Defendant.”); ER 1648 at ¶144 (same). In their opposition to Appellant’s Motion to Remand, Hebrew University and Barenholz stated that “if the case is not ordered to arbitration in Israel, the Israeli defendants will assert that plaintiff’s complaint is barred by the doctrines of res judicata and collateral estoppel.” ER 1085 at p. 22. Sequus similarly stated that it “expects to assert a collateral estoppel defense once Infuturia provides a more definite statement of its claims” and that “if the Court considers the arbitration award, the Court would find that the doctrine of issue preclusion or collateral estoppel bars Infuturia’s claims.” ER 815; ER 806.
Courts in this circuit have recognized that the doctrine of collateral estoppel applies when an issue is “actually litigated and necessarily decided, after a full and fair opportunity for litigation, in a prior proceeding.” Shaw v. Hahn, 56 F.3d 1128, 1131 (9th Cir. 1995) (emphasis added); Larson v. Speetjens, No. C 05-3176 SBA, 2006 U.S. Dist. LEXIS 66459 at *29 (N.D. Cal. Sept. 5, 2006) (“Collateral estoppel bars relitigation of issues adjudicated in an earlier proceeding if three requirements are met: (1) the issue necessarily decided at the previous proceeding is identical to the one which is sought to be relitigated; (2) the first proceeding ended with a final judgment on the merits; and (3) the party against whom collateral estoppel is asserted was a party or in privity with a party at the first proceeding.”). By invoking the doctrine of collateral estoppel, Defendants and Sequus admitted that the issues raised below had already been litigated well before the case was removed to federal court.
Defendants own allegations mandated the remand of this case. They judicially admitted in pleadings filed both in state court and in the District Court that whatever issues exist between the parties were actually litigated and decided by the Israeli arbitration. That arbitration was ordered by the state court below. At no time prior to the conclusion of the arbitration did Defendants ever seek to remove the dispute to federal court. Rather, they persuaded the state court to send the case to arbitration where, according to Defendants, there was a “trial” of all of the parties’ claims as that term is used in Section 205. Because their removal was untimely under the 9 U.S.C. § 205, this case should have been remanded. See, e.g., Pan Atlantic Group, 878 F. Supp. at, 642 (removal was untimely under 9 U.S.C. § 205 because “Pan Atlantic chose not to remove the action before the arbitration.”). The District Court, whose Order is entirely silent on the issue of whether Defendants timely removed the case (ER 2-4), clearly erred in refusing to remand the case.
C. Removal was improper under 9 U.S.C. § 205 because Defendants and Sequus were not parties to the arbitration agreement at issue.
1. Remand was required by the holding in Atgames.
Defendants attempted to base their removal on the Convention, 9 U.S.C. § 205. As non-parties to the License Agreement containing the arbitration provision under which arbitration was already held in Israel, however, Defendants were not entitled to remove this case to federal court. In the case of Atgames Holdings Ltd. v. Radica Games, Ltd., 394 F. Supp.2d 1252 (C.D. Cal. 2005), plaintiff Atgames was a Bermuda company involved in developing, manufacturing and distributing electronic games and entertainment systems. Atgames had a contract with Sega Corporation that gave Atgames certain exclusive distribution and licensing rights for products developed by Sega. Atgames later entered into a sublicensing agreement with a company called JAKKS. Atgames alleged that when Defendant Radica, its competitor, learned of the agreement between Sega and Atgames and the sublicense agreement between Atgames and JAKKS, Radica threatened Sega to the point that Sega told Atgames that it would not approve its sublicense agreement with JAKKS. In April 2005, Atgames commenced arbitration against Sega pursuant to an arbitration provision found in their contract. In June 2005, Atgames filed suit against Radica in California state court alleging intentional interference with the Atgames/Sega contract. Shortly thereafter, Radica removed the case to federal court under the Convention.
In addressing Atgames’ motion to remand, the federal court agreed that the arbitration would potentially impact the lawsuit: “[t]he Court agrees that the claims against Radica in this lawsuit will, in part, depend upon the arbitrator’s ruling on whether AtGames has a right to enter into sublicense agreements.” Id. at 1255. Nevertheless, the court rejected Radica’ argument that “the Sega-Atgames Arbitration ‘relates to’ the present lawsuit because the outcome of that arbitration will substantially affect the claims in this lawsuit.” Id. The court held that the Convention only allowed removal if the parties to the state court litigation were also parties to an arbitration agreement governed by the Convention. Because Radica was not a party to the Atgames/Sega agreement, the court held, removal was improper under the Convention:
The plain meaning of § 205 is clear that a state court action is removable if (1) the parties to the action have entered into an arbitration agreement, and (2) the action relates to that agreement. The Supreme Court has stated that “arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” There is no arbitration agreement between AtGames and Radica. Therefore, this matter was not properly removed.
Id. at 1255; see also Id. at 1256 (“neither party contends that Radica is a party to any arbitration agreement with AtGames. Therefore, § 205 does not provide a basis for jurisdiction.”).
This case is on all fours with Atgames. In this case, as in Atgames, the license agreement is between a party, Appellant, and a non-party, Yissum. See Defendants’ Notice of Removal at ¶22 (“The two parties to the arbitration agreement and the arbitral award are Plaintiff Infuturia and Yissum.”). As did the plaintiff in Atgames, Appellant alleged that a non-party, Defendants and Sequus, interfered with the license agreement at issue. Id. at ¶27 (“Infuturia alleges that the Defendants engaged in tortious interference with Infuturia’s rights under the agreement”). As did the Defendant in Atgames, Defendants alleged that this dispute “relates to” an arbitration agreement and award because “each of [Appellant’s] causes of action is based on an alleged interference with contractual rights that Infuturia allegedly obtained through the License Agreement and its amendments.” Id. at ¶16. Accepting as true all of the allegations in Defendants’ Notice of Removal, this case was improperly removed. As the court in Atgames held, where the arbitration agreement at issue is between a plaintiff and a non-party, a Defendant is not entitled to invoke the Convention in order to support removal.
Defendants attempted to distinguish Atgames by noting that “this case involves a motion to compel arbitration on both agency grounds and equitable estoppel grounds, neither of which were reached or discussed by the Atgames case.” ER 1079. But this argument confused the issue of a defendant’s ability to compel arbitration with the issue of whether a court even has removal jurisdiction in the first place:
Defendants insist that DB AG, although not a signatory to the Account Agreements, is a third-party beneficiary and has enforcement rights with respect to the arbitration provision. Defendants cite language in the Account Agreements to support that position and may well be correct that DB AG can enforce the arbitration provision. However, the limited issue presently before this court is not whether DB AG or any other party may enforce the arbitration provision, but whether the arbitration provision and the legal relationship out of which it arises gives subject matter jurisdiction to this court under the Convention.
Maletis v. Perkins & Co., P.C., No. CV-05-820-ST, 96 A.F.T.R.2d 6514, 2005 U.S. Dist. LEXIS 21444 at *13-14 (D. Ore. Sept. 13, 2005).
Sequus attempted to distinguish the holding in Atgames by noting that in Atgames there was an ongoing arbitration proceeding whereas here, there has already been an arbitration award. Sequus’ argues that this distinction is important because “the removal statute provides that the subject matter of the removed action must relate to an arbitration award falling under the New York Convention, not an ongoing arbitration proceeding.” ER 819. But the removal statute actually applies when “the subject matter of an action or proceeding pending in a State court relates to an arbitration agreement or award falling under the Convention.” 9 U.S.C. § 205 (emphasis added). Clearly there was an arbitration agreement at issue in Atgames. Thus the distinction cited by Sequus is immaterial and wholly failed to distinguish Atgames from the present case.
Finally, Defendants attempted to distinguish Atgames by relying extensively on the holding in Beiser that the phrase “relates to” in Section 205 is to be broadly construed. But the court in Atgames considered the Beiser holding and its application:
The parties both cite Beiser v. Weyler, 284 F.3d 665 (5th Cir. 2002). This Court’s ruling is consistent with the Fifth Circuit’s holding in Beiser. In Beiser, the plaintiff was the sole director and employee of a corporation. The plaintiff brought suit in his personal capacity against the defendant. The defendant sought to remove the action pursuant to an arbitration agreement between the corporation and the defendant. The plaintiff then sought to remand, claiming that he personally was not a party to the arbitration agreement and therefore § 205 did not apply.
Pursuant to § 205, the court could only exercise jurisdiction over the action if the plaintiff was a party to the agreement. In Beiser, the court could not initially determine whether the plaintiff was a party to the agreement because the plaintiff was arguably the alter ego of the corporation. Therefore, the court retained jurisdiction but deferred deciding whether the plaintiff was in fact a party to the arbitration agreement.
Atgames, 394 F. Supp.2d at 1256; see also GlobalSantaFe Drilling Co. v. Ins. Co. of the State of Pa., No. C 05-4411 CW, 2006 U.S. Dist. LEXIS 2174 at *13-14 (N.D. Cal. Jan. 3, 2006) (“the AtGames court further noted that its decision was consistent with Beiser, because in Beiser the plaintiff, who was the sole director and employee of a corporation, had signed the arbitration agreement on behalf of the company and, as the Fifth Circuit recognized, was arguably the alter ego of the corporation.”). Defendants and Sequus failed to distinguish this case from Atgames. Thus, the District Court erred by failing to apply the holding in Atgames and grant Appellant’s Motion to Remand.
2. Beiser is distinguishable.
In Beiser v. Weyler, 284 F.3d 665 (5th Cir. 2002), the case on which Defendants primarily relied, the only issue was whether a defendant who was a party to an agreement containing an arbitration provision that was signed by the plaintiff as the president and sole employee of a corporation could remove the case under Section 205. The court held that the removing defendant could invoke Section 205 because “the plain meaning of the phrase ‘relates to’ sweeps broadly enough to encompass the relationship between the arbitration agreements and Beiser’s suit.” Beiser, 284 F.3d at 669. Although the court went on to broadly interpret the phrase “relate to,” other courts have cautioned that such a reading must be understood in the factual context of the dispute in Beiser:
Defendants place reliance on the language in Beiser v. Weyler that indicates that the words “relates to” as used in § 205 should be given an exceptionally broad meaning. However, defendants’ arguments fail to give effect to the narrow scope of the issue presented to the Fifth Circuit for decision in Beiser. The issue was whether the federal court had jurisdiction under § 205 based on a contention in the notice of removal that the plaintiff was bound to arbitrate the dispute between him and a removing defendant by reason of an arbitration agreement between that defendant and Horizon Energy Limited, of which the plaintiff was a director and the only employee.
Certain Underwriters at Lloyds, London v. Warrentech, No. 4:04-CV-208-A, 2004 U.S. Dist. LEXIS 29953 at 5 (N.D. Tex. Sept. 23, 2004). And courts in this Circuit have rejected Beiser’s purported refusal to examine the merits of a parties’ claim to be entitled to invoke an arbitration provision:
According to defendants, this language in Beiser indicates that at the point of asserting jurisdiction the court need not consider whether defendants have a right to enforce the arbitration clause in the Warrant.
The jurisdiction/merits distinction made in Beiser is both misleading and analytically unhelpful in resolving the parties’ dispute in this case. The Fifth Circuit’s statement is misleading because federal courts often are required to make factual inquiries in order to evaluate subject matter jurisdiction.
Hawkins v. KPMG, LLP, 423 F. Supp. 2d 1038, 1045 (N.D. Cal. 2006). As evidenced by the holding in Atgames, courts in this Circuit have recognized that a jurisdictional inquiry under Section 205 often mandates consideration of whether a particular defendant has standing to invoke an arbitration provision and have rejected Beiser’s more narrow approach. For the reasons set forth above, the case should have been remanded and the District Court erred in refusing to do so.
II. The District Court erred in granting Sequus’ Motion to Dismiss under Rule 12(b)(7).
Sequus urged the District Court to dismiss Appellant’s Second Amended Complaint under Fed.R.Civ.P. 12(b)(7) because non-party Yissum was a “necessary” and “indispensable” party to the suit under Rule 19. Such a motion requires a three-step analysis. The first step is to determine under Rule 19(a) whether the party is “necessary” to the action. If the court determines that the absent party is necessary, it must next determine whether the party can be joined. If the court determines that the necessary party cannot be joined, then the court must decide whether the party is “indispensable” under Rule 19(b). If this question is answered in the affirmative, the court must dismiss the Complaint. Fed. R. Civ. P. 19. The District Court’s ruling is reviewed for an abuse of discretion. See, e.g., Dawavendewa v. Salt River Project, 276 F.3d 1150, 1154 (9th Cir. 2002). “A district court abuses its discretion if it does not apply the correct law or if it rests its decision on a clearly erroneous finding of material fact.” SEC v. Coldicutt, 258 F.3d 939, 941 (9th Cir. 2001).
A. Under Fed. R. Civ. P. 19(a), Yissum was not a necessary party.
Rule 19(a)(1) provides that a person shall be joined as a “necessary” party if: (A) in the person’s absence complete relief cannot be accorded among those already parties; or (B) the person claims an interest relating to the subject matter of the action and is so situated that the disposition of the action in the person’s interest may (i) as a practical matter impair or impede the person’s ability to protect that interest; or (ii) leave an existing party subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations because of the interest.” Fed.R.Civ.P. 19(a). Sequus did not satisfy either prong of this rule.
1. Yissum was not a necessary party under Rule 19(a)(1)(A).
An inquiry under 19(a)(1) “is limited to whether the district court can grant complete relief to the persons already parties to the action. The effect a decision may have on the absent party is not material.” Janney Montgomery Scott, Inc. v. Shepard Niles, Inc., 11 F.3d 399, 405 (3d Cir. 1993) (internal citations omitted). In the case at bar, Appellant only sought monetary damages from Sequus. Appellant did not seek to enforce the provisions or terms of the License Agreement. Nor did Appellant seek to revive its relationship with Yissum or to interfere with Yissum’s relationship with Sequus. As such, there was no basis on which Sequus could show that complete relief could not be afforded among Appellant and Sequus on the claims as alleged. See NGV Gaming, Ltd. v. Upstream Point Molate, LLC, 355 F. Supp. 2d 1061, 1068-69 (N.D. Cal. 2005) (holding that in a tortious interference case where the plaintiff seeks monetary damages against the interfering non-signatory, “complete relief” is available despite absence of the contracting party.); Raven Industries, Inc. v. Topcon Positioning Systems, Civ. 07-4154, 2009 U.S. Dist. LEXIS 85727 (D. S.D. Sept. 18, 2009) (contracting non-party not a necessary party even though claims required court to determine what assets were sold to plaintiff by the non-party under their contract). In fact, it does not appear that Sequus even made this argument below. ER 47.
2. Yissum was not a necessary party under Rule 19(a)(1)(B)(i).
Sequus contended, and the District Court agreed, that because “the determination of Yissum’s rights and obligations under the Infuturia License and the Sequus License are integral to the resolution of Infuturia’s claims against Sequus,” Yissum was a necessary party. ER 3; ER 208. But Sequus failed to show that disposition of this action in Yissum’s absence could “impair” or “impede” Yissum’s ability to protect its rights, the showing required under Rule 19(a)(1)(B)(i). The District Court’s Order failed to include a finding to this effect. ER 3.
In truth, the facts demonstrate that Yissum’s rights and interests would not be impaired by the disposition of this case in its absence because Yissum’s rights and responsibilities under the License Agreement had already been determined by the Israeli arbitration order, which was confirmed by the District Court by agreement of the parties. Thus, the underlying litigation would not involve “the determination of Yissum’s rights and obligations under the Infuturia License and the Sequus License.” As for the Sequus Agreement, Appellant’s claims in no way raised the issue of whether Yissum performed under its agreement with Sequus. The only fact issue was which patents were assigned to Sequus under that agreement. As for the License Agreement between Appellant and Yissum, Yissum’s “rights and obligations” were already determined by the Israeli arbitration order as confirmed by the District Court. As set forth in the Judgment confirming the arbitration award, the specific patents licensed to Appellant under the License Agreement were already defined and were not subject to redetermination in the underlying proceeding. Specifically, the arbitrator held, and the District Court confirmed, the following:
- “On March 19, 1990, the parties signed a contract, whereby [Yissum] would handle the scientific aspect of the development of patent 314 . . . .”
- “[Infuturia] was to deal with the commercial aspect of the project, and to care about its marketing and commercialization. In consideration therefore, [Yissum] granted [Infuturia] exclusive license rights for the commercialization and distribution of the patent.”
- “Following the conclusion of the License Agreement on March 19, 1990, Yissum began with the performance of various trials,” concluding with the third phase of trials in December 1992.
- “[T]he legal situation with regard to the rights in Patent 308—and the same is true with regard to all other patents that were discovered and/or registered following the joint trials conducted by the parties—is as set forth in the Agreements between the parties . . . . [E]ven if the patent was registered by Yissum or by Barenholz, the holder of the license in the patent and the right to distribute it for commercial purposes is Infuturia—all as set forth in the License Agreement.”
ER 139-141, ER 155; July 14, 2009 Agreed Final Judgment Confirming Arbitration Award, Case No. C09-02219, Northern District of California. Thus, Yissum’s obligations under the License Agreement were already determined by the Israeli arbitration award.
As set forth above, following the Israeli arbitration, there was simply nothing left to be determined as between Yissum and Appellant as Defendants stated repeatedly in their pleadings below. See, e.g., ER 639 (“[s]ince that arbitration has been completed and the arbitration award has been confirmed by an Israeli court, nothing remains to be done here except to dismiss the existing litigation.”); ER 641 (“[t]he claims at issue in this litigation have been arbitrated and decided” and “[n]othing is left to litigate.”). It was for this reason that the state court previously denied Yissum’s attempt to intervene in this case. ER 91 at ¶6. As that court properly and succinctly stated to counsel for Yissum:
I’m still not seeing how it affects you. Whatever the plaintiff’s claim is against other people, I don’t see — I’m not understanding how that would affect you, since you already have an adjudication.
ER 162 (emphasis added).
Given the procedural posture of this case, Sequus could not possibly show that resolution of this case without Yissum would impair Yissum’s rights. Simply put, any determination in this case of the scope and meaning of the License Agreement would not be binding on Yissum, a non-party, under principles of res judicata. See, e.g., Clemmer v. Hartford Insurance Co., 22 Cal.3d 865, 874 (1978) (“[A] party will be collaterally estopped from relitigating an issue only if (1) the issue decided in a prior adjudication is identical with that presented in the action in question; and (2) there was a final judgment on the merits; and (3) the party against whom the plea is asserted was a party or in privity with a party to the prior adjudication.”). Sequus admitted as much when it stated that “any judgment entered in Yissum’s absence in this proceeding will not have res judicata or collateral estoppels effect as to Yissum.” ER 54. Where, as here, a judgment will not be binding on a non-party, the non-party’s rights will not be impaired by an adverse judgment and the party is not a necessary party under Rule 19(a)(1)(B)(i).
In the case of NGV Gaming, Ltd. v. Upstream Point Molate, LLC 355 F. Supp. 2d 1061 (N.D. Cal. 2005) the plaintiff (“NGV”) filed suit against rival casino development companies for interfering with NGV’s contract with an Indian Tribe (“Tribe”) to assist in acquiring land in California for a gaming facility which the Tribe would then operate. NGV alleged that the defendants, with knowledge of the subject contract, independently purchased a large tract of land and put such land into trust—also for the purpose of enabling the Tribe to operate a casino. Shortly afterwards, the Tribe sent a letter to NGV (much like Yissum in this case) purporting to “rescind” its contract with NGV. NGV filed suit against the rival developers alleging tortious interference with contract. The Tribe filed an amicus motion to dismiss on the grounds that, as a signatory to the contract upon which NGV’s tortious interference claim was based, it was a “necessary” party under Rule 19. The Court rejected this argument, holding that a finding of the existence (and breach) of a valid contract with NGV did not “impair or impede” the Tribe’s interests because “any judgment rendered against defendants could not serve as a basis for any claim against the Tribe, as it could have no res judicata effect in such an action.” NGV Gaming, 355 F.Supp. 2d at 1069; see also Centerville Alf, Inc. v. Balanced Care Corp., 197 F.Supp.2d 1039 (S.D. Ohio 2002) (Lessee who failed to pay rent is not a “necessary” party in a lawsuit filed against lessee’s guarantor because even if plaintiff established that lessee defaulted on rent payments, lessee is not collaterally estopped from re-litigating that issue); BAB Systems, Inc. v. Pilatus Investment Group, Inc., No. 05-C-3038, 2005 U.S. Dist. LEXIS 25737 (E.D. Ill. 2005) (defendant’s motion to dismiss plaintiff’s tortious interference claim was denied because the signatory to the franchise agreement sued upon was not a “necessary” party under Rule 19(a).); Maine v. Standard & Poors Corp., No. 88-C-4027, 1988 U.S. Dist. LEXIS 14073 at *9 (N.D. Ill. Dec. 13, 1988) (court denied motion to dismiss based on failure to join contracting party in tortious interference case, stating: “Defendant argues that a judicial determination will ‘affect TCC’s rights vis-a-vis plaintiffs.’ While it is true that plaintiff must prove the existence of a valid contract with TCC and a breach thereof, any determination in this regard will not carry preclusive effect against TCC, a nonparty.”). Because any findings below would not bind non-party Yissum, it was not a necessary party under Rule 19.
The cases Sequus cited in support of its argument that Yissum was a necessary party under Rule 19(a)(1)(B)(i) were inapposite. In Corsi v. Eagle Publishing, Inc., No. 1:07-CV-02004-ESH, 2008 U.S. Dist. LEXIS 6257 (D.C. Cir. Jan. 30, 2008), five authors who had a publishing contract containing an arbitration provision sued the publisher’s parent company “in a transparent attempt to avoid mandatory arbitration” when they became dissatisfied with the publisher’s marketing and distribution efforts. There, the court noted that the issue of whether the non-party publisher breached its agreement with the plaintiffs would likely be binding against the publisher if the publisher and its parent company were in privity as the plaintiffs alleged. Id. at *14. Here, by contrast, Sequus has failed to explain how any adverse finding in this case would be binding on Yissum, a non-party who has not been accused of being in privity with Sequus.
Sequus also relied on the case of Knowledgeplex, Inc. v. Placebase, Inc., C-08-4267-JF, 2008 U.S. Dist. LEXIS 103915 (N.D. Cal. Dec. 17, 2008) in arguing that Sequus was a necessary party. That case, however, was not a case involving a motion to dismiss for failure to join an indispensable party. Rather, in that case, the court ordered that the absent party, which had consented to jurisdiction, be joined. There, the plaintiff sued Placebase alleging that it had used plaintiff’s computer code to build a rival database system. The defendant argued that Vinq, which had contracted with plaintiff for the development of a database and had subcontracted work to Placebase, was a necessary party. Despite recognizing that any ruling would not be binding on Vinq, the court nonetheless held that Vinq’s rights might be “practically impaired” by proceeding in its absence because a judgment “might well affect Vinq’s rights and business reputation.” Id. at *14. The court failed to articulate any basis for this conclusion, thus rendering it impossible to apply its holding to the unique facts of this case. See, e.g., CFI of Wis., Inc. v. Hartford Fire Ins. Co., 230 F.R.D. 552, 554 (W.D. Wis. 2005) (“each inquiry under Rule 19 is fact specific and a court must apply its factors in a practical and equitable manner to avoid harsh results of rigid application.”). Finally, in American Greyhound Racing, Inc. v. Hull, 305 F.3d 1015 (9th Cir. 2002), racetrack owners sued the Governor of Arizona to challenge the legality of the governor’s actions in negotiating new gaming compacts with various Indian tribes. The governor argued that the tribes were necessary and indispensable parties because their rights would be impaired absent their joinder, There, however, the litigation did “not incidentally affect the gaming tribes in the course of enforcing some public right,” but instead, the litigation was “aimed at the tribes and their gaming.” Id. at 1026. In fact, the District Court entered an injunction prohibiting the governor from entering into new compacts with the tribes or modifying or renewing their existing contracts. Id. at 1021. More importantly, the court had ordered the governor to give notice of termination on all of the existing compacts with the tribes. Id. at 1024. Under such circumstances, not present here, the court held that the tribe’s rights would be impaired if they were not joined and that they were therefore necessary parties under Rule 19. The cases cited by Sequus were simply inapposite and the District Court erred in relying on them in rendering its decision.
Finally, the District Court erred in granting Sequus Rule 12(b(7) Motion because Sequus’ entire argument rested on the general proposition set forth in Knowledgeplex, Inc. v. Placebase Inc., 2008 U.S. Dist. LEXIS 103915 (N.D. Cal. 2008) that parties to a contract are usually necessary in an action on the contract. Id.; see also Wilbur v. Locke, 423 F.3d 1101 (9th Cir. 2005). This principle, however, tends to apply primarily in actions where the validity or legality of the contract is the subject of the dispute. Id.; Makah Indian Tribe v. Verity, 910 F.2d 555, 558 (9th Cir. 1990); Lomayaktewa v. Hathaway, 520 F.2d 1324, 1325 (9th Cir. 1975). Furthermore, Courts have repeatedly cautioned that the Rule 19 inquiry is a fact specific and practical one, and is not to “be based on formalistic or mechanistic grounds but, rather, on a pragmatic analysis of the effect of a potential party’s absence.” Polargrid LLC v. Videsh Sanchar Nigam Ltd., No. 04-CV-9578, 2006 U.S. Dist. LEXIS 54434 (S.D.N.Y. Aug. 7, 2006) (quoting Southeastern Sheet Metal Joint Apprenticeship Training Fund v. Barsuli, 950 F. Supp. 1406, 1414 (E.D. Wis. 1997)); see also CFI of Wis., Inc., 230 F.R.D. at 554 (“each inquiry under Rule 19 is fact specific and a court must apply its factors in a practical and equitable manner to avoid harsh results of rigid application.”). Here, a fact-specific inquiry clearly distinguishes the holdings of Knowledgeplex, Corsi and American Greyhound Racing and demonstrates that Yissum’s rights would not be impaired by the disposition of this action in its absence. Accordingly, the District Court abused its discretion in granting the Motion to Dismiss.
3. Yissum was not a necessary party under Rule 19(a)(1)(B)(ii).
Sequus also claimed that Yissum was a “necessary” party under Rule 19(a)(1)(B)(ii), theorizing that Yissum’s absence could possibly subject Sequus to multiple and inconsistent judgments. Originally, in its Motion, it argued that it faced the possibility of “multiple and inconsistent judgments” because the District Court could find that Sequus was liable to Infuturia because Yissum improperly entered into the Sequus License while a subsequent court in a contribution or indemnity suit brought by Sequus against Yissum might determine that “Yissum did, in fact, properly enter into the Sequus License . . . .” ER 209. As Appellant pointed out in its Response, the possibility of inconsistent judgments rather than obligations does not justify a finding that a party is necessary under Rule 19. See, e.g., Centerville Alf, Inc. v. Balanced Care Corp., 197 F.Supp.2d 1039, 1046 (S.D. Ohio) (contracting parties were not necessary under Rule 19 because “although BCC faces the risk of inconsistent results, it is not faced with the risk of inconsistent obligations to Plaintiffs.”); Balcom v. Rosenthal & Co., No. 96-C-6310, 1997 U.S. Dist. LEXIS 20842 (N.D. Ill. 1998) (“Rule 19(a) protects against inconsistent obligations, not inconsistent results.”); Bedel v. Thompson, 103 F.R.D. 78, 81 (S.D. Ohio 1984) (“Even though the results of the above scenario may be, to a certain extent, logically inconsistent, Rule 19 does not speak of inconsistent ‘results.’ Rather, it speaks in terms of inconsistent ‘obligations.’”) The possibility of inconsistent judgments simply cannot serve as a basis to claim that Yissum is a “necessary” party under Rule 19.
Faced with the foregoing, in its Reply, Sequus argued for the first time that it might conceivably face inconsistent judgments if Yissum were not joined in this case. In its Reply, Sequus argued that it could be held liable to Appellant if it was determined that Appellant had the exclusive right to patents licensed to Sequus under the Sequus Agreement and could also be held liable to Yissum in a subsequent suit brought by Yissum to enforce its royalty payment obligations under the Sequus Agreement. ER 52. This argument, however, is nonsensical. If the District Court determined that Infuturia was entitled to ownership of the patents licensed to Sequus under the Sequus Agreement, then Sequus would not have received what it bargained for: exclusive licenses free from competing interests. ER 52. Under such circumstances, it is difficult to envision how Sequus could be held liable for failing to make royalty payments to Yissum. This far-fetched and unlikely scenario did not demonstrate that the non-joinder of Yissum subjected Sequus to a “substantial risk” of incurring double, multiple, or otherwise inconsistent obligations. Fed.R.Civ.P. 19(a).
B. Sequus offered no proof that joinder of Yissum was not feasible.
“If an absentee is a necessary party under Rule 19(a), the second stage is for the court to determine whether it is feasible to order that the absentee be joined.” EEOC v. Peabody W. Coal Co., 400 F.3d 774, 779 (9th Cir. 2005). Rule 19(a) identifies three circumstances in which joinder is not feasible: when venue is improper, when the absentee is not subject to personal jurisdiction, and when joinder would destroy subject matter jurisdiction. See Fed. R. Civ. P. 19(a); see also Tick v. Cohen, 787 F.2d 1490, 1493 (11th Cir. 1986) (listing the three factors that may make joinder unfeasible). None of these circumstances were present in the instant case. Moreover, Sequus failed to show that the arbitration provision in the License Agreement – which applied only to disputes between the parties relating to the agreement’s implementation (ER 262) – made it unfeasible for the District Court to order that Yissum be joined in order to protect Yissum’s own rights and interests. Because Sequus failed to show that Yissum’s joinder was not feasible, the District Court erred in undertaking an analysis under Rule 19(b) regarding whether Yissum was “indispensable” and in dismissing the case. EEOC, 400 F.3d at 780 (“if joinder is not feasible, the court must determine at the third stage whether the case can proceed without the absentee, or whether the absentee is an ‘indispensable party’ such that the action must be dismissed.”)
C. Under Fed. R. Civ. P. 19(b), Yissum was not an indispensable party.
Even if the Court were to conclude that Yissum was a “necessary” party under 19(a), Sequus’ Motion should still have been denied because Yissum was not “indispensable” under 19(b). Rule 19(b) sets forth the following four factors to guide the Court’s inquiry: (1) the extent to which a judgment rendered in the person’s absence might be prejudicial to the person or those already parties; (2) the extent to which, by the shaping of relief or other measures, the prejudice can be lessened or avoided; (3) whether the judgment rendered in the person’s absence will be adequate; (4) whether the plaintiff will have an adequate remedy if the action is dismissed for nonjoinder. As with the analysis under 19(a)(2), the question of whether a party is “indispensable” under Rule 19(b) is grounded in a pragmatic analysis of the effect of a potential party’s absence and is dependent on the specific facts of the case. Bethell v. Peace, 441 F.2d 495, 496 (5th Cir. 1971); Prescription Plan Service Corp. v. Franco, 552 F.2d 493, 496 (2d Cir. 1977). An analysis of these factors conclusively shows that Yissum was not an “indispensable” party under 19(b).
1. A judgment in Yissum’s absence would not be prejudicial to Yissum or Sequus.
As for the first factor, any judgment rendered in Yissum’s absence would not be prejudicial to the parties. Citing to Brosnahan v. Pozgay, Case No. 06-CV-2195, 2007 U.S. Dist. LEXIS 3287 (S.D. Cal. 2007), Sequus claims that any adverse findings against it in this case could subject Yissum to liability to Sequus for breach of contract and contribution and/or indemnity. Yet, Brosnahan is inapposite to the instant case. Brosnahan was a debt-collection case in which the plaintiff sued on two promissory notes which had been executed by a husband and wife. Prior to default, the couple divorced and the wife agreed to assume sole responsibility for the debt in exchange for the community residence. The plaintiff sued the ex-husband, who argued that his ex-wife was “indispensable” under 19(b). The Court agreed, finding that a judgment against the ex-husband would make the ex-wife (who was the sole obligor on the debt) liable to indemnify him for judgment without an opportunity to defend the merits of the suit. Yissum faces no such predicament here. As Sequus admits, “any judgment entered in Yissum’s absence in this proceeding will not have res judicata or collateral estoppels effect as to Yissum.” ER 54. Moreover, the “mere presentation” by Sequus “of an argument that issue preclusion is possible is not enough to trigger Rule 19.” Ass’n Headquarters, Inc. v. Usenix Assoc., Civil Action No. 06-4405, 2008 U.S. Dist. LEXIS 25101 (D.N.J. 2008). And despite Sequus’ claim to the contrary, “[t]he possibility that [the defendant] may have a right of reimbursement, indemnity, or contribution against [the absent party] is not sufficient to make [the absent party] indispensable to the litigation.” Field v. Volkswagenwerk AG, 626 F.2d 293 (3d Cir. 1980).
2. A judgment in Yissum’s absence would be adequate.
As to the third factor, it has already been established that a judgment in Yissum’s absence would be adequate. Appellant only sought monetary damages from Sequus. It did not seek to enforce the provisions or terms of the License Agreement, to revive its relationship with Yissum or to interfere with Yissum’s relationship with Sequus. Since complete relief could be afforded among Appellant and Sequus on the claims as alleged, this factor did not support Sequus’ claim that Yissum was indispensable to the case. See NGV Gaming, 355 F. Supp. 2d at 1068-69 (N.D. Cal. 2005).
3. Appellant has no adequate remedy as a result of the dismissal of its claims.
The last factor, whether the plaintiff will have an adequate remedy if the action is dismissed, also weighed against dismissal. Citing Corsi v. Eagle Publishing, Inc., 2008 U.S. Dist. LEXIS 6257 (N.D. D.C. 2008), Sequus contended that Infuturia had an adequate legal remedy in the form of arbitration against Yissum. Yet in the Corsi case, the plaintiffs “could raise the very claims they have asserted [in court].” Id. at *16. Here, Sequus is not a party to the License Agreement containing an arbitration provision and has not agreed to arbitrate any dispute with Appellant. Thus, there is no alternative forum in which Appellant could pursue its claims against Sequus. Moreover, even if Appellant could force Sequus to arbitration, the statute of limitations may have expired on its claims. Charron v. Meaux, 60 F.R.D. 619 (S.D.N.Y. 1973) (holding that the plaintiff does not have “adequate remedy” under Rule 19(b) where, if suit is dismissed for nonjoinder of party over whom court does not have jurisdiction, only remedy would be to start new suit where recovery on his claim would be barred by statute of limitations.) Since an alternative remedy for Appelant’s claims against Sequus was not available, the fourth 19(b) factor—as the ones before it—failed to show that Yissum was indispensable to this case. As such, Sequus’ Motion should have been denied.
III. The District Court erred in granting Sequus’ Motion to Dismiss under Rule 12(b)(6).
The District Court’s order granting Sequus 12(b)(6) motion is reviewed de novo. See, e.g., Movesian v. Versicherung AG, 578 F.3d 1052, 1054 (9th Cir. 2009). When reaching its ruling, the District Court was required to accept as true all of Appellant’s allegations of material fact and construe them in the light most favorable to Appellant, the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). Rule 8(a)(2) required only “a short and plain statement of the claim showing that the pleader is entitled to relief,” in order to “give the defendant fair notice of what the…claim is and the grounds upon which it rests.” Conley v. Gibson, 355 U.S. 41, 47 (1957). A complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, but a plaintiff must provide the “grounds” of his “entitlement to relief” with more than a formulaic recitation of the elements of a cause of action. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-56 (2007). A complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief. Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000) (en banc).
A. Count 1: Appellant specifically identified patents and compunds that supported its claim for tortious interference.
In Count 1 of its First Amended Complaint, Appellant asserted a claim for tortious interference against Sequus. To prove a claim for intentional interference, a plaintiff must prove a valid contract between it and a third party of which the defendant had knowledge, that the defendant engaged in intentional acts designed to induce a breach or disruption of the contract, actual breach or disruption, and resulting damage. Pacific Gas & Electric Co. v. Bear Sterns & Co., 50 Cal. 3d 1118 (1990). The sole basis for Sequus’ motion to dismiss the tortious interference claim was its contention that Appelant “[had] not identified any pharmaceutical compound or product” to which Sequus obtained a license in contravention of Appellant’s contractual rights. ER 213.
Appellant’s Second Amended Complaint alleged that Sequus entered into the Sequus Agreement with Yissum giving Sequus an option to obtain licenses to liposome compositions and related patents that had already been licensed to Appelant under its 1990 License Agreement. As a result of the Sequus Agreement and Sequus’ decision to exercise such options, Yissum licensed and/or assigned to Sequus several liposome-related pharmaceutical patents, including the 308 Patent, 311 Patent, 514 Patent, 715 Patent, 353 Patent, 881 Patent, 002 Patent, 554 Patent and 771 Patent. ER 429 at ¶14; ER 433 at ¶26. Such patents were the property of Appellant by virtue of its March 19, 1990 License Agreement with Yissum. So were any compounds embodied by the patents. ER 18, 93, 246. Sequus exercised dominion, ownership and control over these patents and the pharmaceutical compounds and products embodied by the patents in flagrant contravention of Appellant’s contractual rights. ER 429. These allegations in Appellant’s Second Amended Complaint supported every element of its claim for tortious interference. Appellant was not required to identify by trade name any specific products manufactured by Sequus under the terms of the Sequus Agreement. It was enough to allege that Sequus exercised options to obtain licenses of the same patents that had already been exclusively licenses to Appellant under its License Agreement.
Dismissal under Rule 12(b)(6) was therefore improper.
B. Count 2: Appellant specifically identified patents and compounds that supported its claim for conversion.
California law defines conversion as “any act of dominion wrongfully asserted over another’s personal property in denial of or inconsistent with his rights therein.” In re Bailey, 197 F.3d 997, 1000 (9th Cir. 1999). It is not necessary that there be a manual taking of property; it is only necessary to show an assumption of control or ownership over the property, or that the alleged converter has applied the property to his own use. Igauye v. Howard, 114 Cal.App.2d 122, 126, 249 P.2d 558 (1952). Appellant’s Second Amended Complaint alleged that it had an exclusive proprietary right to several liposome-related pharmaceutical products including, without limitation, “the 308 Patent, 311 Patent, 514 Patent, 715 Patent, 353 Patent, 881 Patent, 002 Patent, 554 Patent and 771 Patent.” ER 189. Appellant also alleged a right to all “compounds,” “products” and “improvements,” mentioned and described in the 314 Patent as specifically defined by the License Agreement. ER 183, 187. The misappropriation of such property through the Sequus License between Sequus and Yissum subjected Sequus to the tort of conversion. The Motion to Dismiss should have been denied. See, e.g., Agilent Techs., Inc. v. Micromuse, Inc., No. 04-CIV-3090, 2004 U.S. Dist. LEXIS 20723 (S.D.N.Y. Oct. 19, 2004) (a pleading need not identify every product where some other limiting parameter has been set forth or at least one purportedly infringing product has been identified.) Because Appellant specifically identified and placed limiting parameters on property wrongfully converted by Sequus, the Motion to Dismiss should have been denied.
C. Sequus improperly treated this case as one for patent infringement.
Sequus’ arguments regarding the pleading standards for Appellant’s tortious interference and conversion claims were premised on the misguided notion that Appellant was required to identify by trade name a product being sold to the public that rightfully belonged to Appellant under its License Agreement with Yissum. But this is not a patent infringement case as were the cases cited by Sequus in its Motion. See, e.g., Bay Indus. v. Tru-Arx Mfg., Case No. 06-C-1010, 2006 U.S. Dist. LEXIS 86757 (E.D. Wis. Nov. 29, 2006); Agilent, 2004 U.S. Dist. LEXIS 20723 at *4; eSoft, Inc. v. Astaro Corp., No. 06-CV-00441, 2006 WL 2164454 at *2 (D. Colo. July 31, 2006).
Appellant did not allege that Sequus was selling products that infringed the various patents Appellant had rights to under its License Agreement. Rather, Appellant alleged that Sequus interfered with the License Agreement by inducing Yissum to enter into the Sequus Agreement that purported to grant Sequus the very same exclusive rights previously granted to Appellant. By inducing Yissum to grant it the same exclusive rights to various patents that were already held by Appellant under its License Agreement, Sequus interfered with that agreement as a matter of law. See, e.g., United States Surgical Corp. v. Origin Medsystems, No. C-92-1892, 1993 U.S. Dist. LEXIS 17180 (N.D. Cal. Jan. 12, 1993) (holding that a claim for tortious interference may be based upon the use of a patent that is already subject to a license agreement); Von Brimer v. Whirlpool Corp., 536 F.2d 838 (9th Cir. 1976) (Intentional interference with contractual relations can be maintained by one who has a proprietary interest in a patented item made, used or sold by another).; Nanodetex Corp. v. Sandia Corp., Civ. No. 05-1041, 2007 U.S. Dist. LEXIS 85962 at *12 (D. N.M. Sept. 5, 2007) (to state claim for tortious interference with license agreement, “Defiant’s actions must have played an active and substantial part in causing Sandia to deny Plaintiff the benefits of its exclusive license agreement with Sandia.”). Those same actions amounted to conversion of Appellant’s property rights under the License Agreement. See, e.g., In re Bailey, 197 F.3d 997 (9th Cir. 1999) (conversion is “any act of dominion wrongfully asserted over another’s personal property in denial of or inconsistent with his rights therein.”).
As stated above, Rule 8 required Appellant merely to provide Sequus “a short and plain statement of the claim” in order to give Sequus “fair notice of what the…claim is and the grounds upon which it rests.” Conley v. Gibson, 355 U.S. 41, 47 (1957). Appellant clearly did just that. In prior pleadings in this case, Sequus stated clearly and succinctly the gravamen of Appellant’s claims against it: “Sequus could be held liable to Infuturia in this proceeding if Infuturia is found to have exclusive rights in patents that Sequus believed were licensed to it under the Sequus License.” ER 52. In other words, Sequus’ liability is based on it receiving a license to the very same patents already licensed to Appellant under its 1990 License Agreement with Yissum.
Given the specific legal theories raised by Appellant, it was not required to identify specific name-brand products being manufactured or sold by Sequus to prevail on its claims for tortious interference and conversion. It was merely required to identify property whose enjoyment was interfered with by Sequus and/or over which Sequus improperly exercised dominion and control. This it did, identifying by patent number nine different patents that belonged to Appellant under the License Agreement but that were subsequently licensed to Sequus under the Sequus Agreement. For this reason, the District Court erred in dismissing the case under Rule 12(b)(6).
CONCLUSION AND PRAYER
WHEREFORE, PREMISES CONSIDERED, Appellant respectfully requests that the Court reverse the judgment of the District Court, remand this case to the state court from which it was removed and grant Appellant such other and further relief to which it may be justly entitled.
DATED: November 2, 2009
Eric D. Pearson
Texas State Bar No. 15690472
Michael E. Heygood
Texas State Bar No. 00784267
HEYGOOD, ORR & PEARSON
2331 W. Northwest Highway, 2nd Floor
Dallas, Texas 75220
(214) 237-9001 Telephone
(214) 237-9002 Facsimile
ATTORNEY FOR APPELLANT