Nutanix, Inc. v. Tessell, Inc.

Background

Nutanix, Inc. alleged that Tessell, Inc. and Tessell’s three founders—Bala Kuchibhotla, Kamaldeep Khanuja, and Bakul Banthia, whom the opinion collectively calls “KKB”—used Nutanix’s Era source code and other intellectual property to develop Tessell’s competing product. Nutanix asserted claims against Tessell for copyright infringement, patent infringement, tortious interference with contractual relations, and declaratory and injunctive relief.

On the same day it filed this lawsuit, Nutanix demanded arbitration against KKB under employment agreements that included Confidential Information and Invention Assignment Agreements and a Dispute Resolution Agreement. Those agreements required broad categories of employment-related disputes to be resolved through binding arbitration. The arbitration demand asserted allegations and sought relief that substantially overlapped with Nutanix’s claims against Tessell.

Nutanix did not dispute the validity of the arbitration provisions. Tessell was not a party to the agreements. Tessell moved to compel arbitration of Claim I, copyright infringement; Claim VI, tortious interference with contractual relations; and Claim VII, declaratory and injunctive relief. Tessell conceded that it could not compel arbitration of Claims II, III, and IV for patent infringement.

Court’s Analysis

The court first held that it—not the arbitrator—had authority to decide whether Nutanix’s claims against Tessell were arbitrable. Although the agreements contained provisions delegating disputes about arbitrability to an arbitrator, Tessell was a nonsignatory. The court found no clear and unmistakable evidence that Nutanix had agreed with nonsignatory Tessell to have an arbitrator decide arbitrability.

The court then applied California contract law. Under the doctrine of equitable estoppel, a nonsignatory may enforce an arbitration agreement when a signatory’s claims depend on the agreement or are closely connected to it, or when the signatory alleges coordinated misconduct by the nonsignatory and a signatory that is connected to the agreement.

The court found both circumstances supported arbitration. First, Claims I, VI, and VII were “intimately founded in and intertwined with” KKB’s Nutanix employment agreements. The copyright claim depended on Nutanix’s allegations that KKB created the relevant code within the scope of their employment and that Nutanix owned the resulting copyrights. The tortious-interference claim depended on the alleged contractual duties to disclose and assign intellectual property. The declaratory and injunctive-relief claim sought a determination of Nutanix’s ownership rights under those agreements.

Second, the court found that Nutanix alleged an interdependent and coordinated course of conduct by Tessell and KKB. The court characterized the lawsuit and the parallel arbitration as involving the same underlying allegations and an alleged single scheme involving Nutanix’s code and intellectual property. The court therefore concluded that Nutanix could not rely on the employment agreements to assert its claims against Tessell while denying that the agreements required arbitration.

The court rejected Nutanix’s argument that Tessell should be barred from invoking equitable estoppel because Tessell allegedly refused to pay its share of arbitration costs. The court explained that the agreements required Nutanix—not KKB or Tessell—to pay the arbitration costs at issue. It therefore found no contractual cost obligation that Tessell had repudiated.

Disposition

The court granted Tessell’s motion to compel arbitration. It compelled Nutanix’s Claim I for copyright infringement, Claim VI for tortious interference with contractual relations, and Claim VII for declaratory and injunctive relief to arbitration. It stayed the remaining claims and terminated the parties’ pending discovery briefs.