Breathe Technologies, Inc. v. New Aera, Inc.

Background

Breathe Technologies, Inc. alleged that a “daisy nozzle” used in wearable ventilator systems was jointly conceived, developed, and reduced to practice by Breathe employee Todd W. Allum and Breathe consultant Dr. Richard Lyon. Allum later worked for New Aera, Inc. and Silverbow Development LLC. Patents related to a later ventilator system listed Allum, alone or with Gregory Kapust, as an inventor, and Silverbow as the assignee. Inogen, Inc. later acquired rights to the patents after New Aera and Silverbow merged with Inogen.

Breathe asserted eight claims. Claims 1 through 3, called the “Lyon Claims,” generally rested on the theory that Lyon contributed to the invention and that Breathe obtained patent rights through Lyon’s consulting agreement. Claims 4 through 8, called the “Allum Claims,” generally rested on the theory that Allum invented the design while working for Breathe, that the Allum agreement automatically assigned the invention to Breathe, and that Allum breached that agreement.

The Allum Agreement and Lyon Agreement each contained an arbitration clause covering disputes arising out of or relating to the employment or consulting relationship. The agreements also incorporated California arbitration rules and were governed by California law.

Inogen and Allum moved to dismiss, compel arbitration, and stay the case. New Aera joined that motion, and Silverbow filed a separate motion to dismiss for lack of subject-matter jurisdiction. Breathe argued primarily that Inogen, New Aera, and Silverbow could not compel arbitration because they had not signed the agreements. The parties did not dispute that the arbitration clauses were valid and enforceable or that Inogen and Silverbow were not signatories.

Arbitrability of the claims

The court applied California law. Under the doctrine of equitable estoppel, a nonsignatory may enforce an arbitration agreement in limited circumstances when a signatory relies on the agreement to assert claims against the nonsignatory or when the claims are closely connected to the agreement’s obligations. The court rejected Breathe’s argument that equitable estoppel applies only when a claim alleges a violation of the agreement itself. The court explained that reliance on the agreement’s terms can be enough.

Claim 1: correction of inventorship

Claim 1 sought correction of inventorship under 35 U.S.C. § 256. Breathe alleged that Lyon should have been named as an inventor on certain patents. The court held that deciding who invented the daisy nozzle and determining Allum’s and Lyon’s relative contributions would not require consideration of the Lyon Agreement or its obligations. Although Breathe may have acquired the ability to bring the claim through that agreement, that connection alone did not make the claim intertwined with the agreement. The court therefore held that Defendants could not compel arbitration of Claim 1.

Claims 2 and 3: Lyon-related claims

Claim 2 sought a declaration that Breathe owned the patents based on Lyon’s assignment of inventions. The court held that this claim necessarily depended on the Lyon Agreement because Breathe would have no ownership claim without it. The court therefore held that the nonsignatory Defendants could invoke equitable estoppel and enforce the arbitration clause for Claim 2.

Claim 3 alleged unfair competition based on Defendants’ alleged misrepresentations about ownership and inventorship. The court held that Breathe would have to rely on the Lyon Agreement to establish that it owned the relevant patent rights. The court therefore held that Claim 3 also relied on and was intertwined with the Lyon Agreement and could be arbitrated.

Claims 4 through 8: Allum-related claims

Breathe essentially conceded, and the court agreed, that Claims 4 through 8 substantially relied on the Allum Agreement. Claim 4 sought a declaration of ownership based on the agreement’s automatic-assignment provision. Claims 5 through 8 alleged breach of contract, inducing breach of contract, tortious interference with contract, and unfair competition based on Allum’s alleged breach. Because these claims depended on whether Allum breached the agreement, the court held that Defendants could invoke equitable estoppel and compel arbitration of Claims 4 through 8.

Third-party litigation exception and stay

Because Claim 1 could not be arbitrated while Claims 2 through 8 could, the court considered California Code of Civil Procedure section 1281.2(c). That provision gives a court discretion to stay arbitration or court proceedings when a party to an arbitration agreement is also involved in related litigation with a third party and simultaneous proceedings could produce conflicting decisions.

The court held that Defendants were third parties for purposes of Claim 1 because they could not enforce the arbitration agreement as to that claim. The court also found that litigation and arbitration at the same time would be inefficient and could risk contradictory rulings about who invented the daisy nozzle. Because seven of the eight claims would proceed to arbitration and California law strongly favors arbitration, the court chose to stay the court case pending completion of arbitration.

Disposition

The court granted Defendants’ Motion to Compel Arbitration and ordered that the case be stayed pending the outcome of arbitration. The court did not decide the merits of the patent inventorship, patent ownership, contract, or unfair-competition disputes. It denied as moot Silverbow’s separate Motion to Dismiss because all claims against Silverbow would be arbitrated. The parties were ordered to file a joint status report within thirty days after the arbitration proceedings were resolved.