United States District Court, N.D. Illinois, Eastern Division
September 15, 2004.
JOEL E. BERNSTEIN, M.D., Plaintiff,
MEDICIS PHARMACEUTICAL CORPORATION, a Delaware corporation, Defendant.
The opinion of the court was delivered by: REBECCA PALLMEYER, District Judge
Plaintiff Joel E. Bernstein has brought this action for a
declaratory judgment that Defendant Medicis Pharmaceutical
Corporation is violating Dr. Bernstein's worldwide proprietary
right to market the topical drug, ZOSTRIX®, by marketing ZOSTRIX®
in Canada. Before the court is Medicis' motion to compel
arbitration of the complaint or to dismiss the case for want of
jurisdiction. Medicis claims it obtained the right to distribute
ZOSTRIX® in Canada from a third party, Bioglan Pharma, which held
a worldwide license from Bernstein. According to Medicis, the
sublicense it signed with Bioglan contains an arbitration clause,
and Bernstein is bound by that clause pursuant to an assignment
of the sublicense. Medicis contends, further, that Bernstein's
claims under the Lanham Act must be dismissed, as that statute
does not address conduct occurring outside the United States.
For the reasons explained here, Medicis' motion to dismiss is
granted with respect to Plaintiff's Lanham Act claim only.
Medicis' motion to compel arbitration is denied.
As of 1995, Joel Bernstein, M.D. ("Bernstein" or "Plaintiff"),
a medical doctor, owned the worldwide proprietary rights for the
topical drug, ZOSTRIX®, a medication used to relieve the symptoms
of osteoarthritis and neuralgia. Through acquisition of another
corporation, on December 3, 1997, Defendant Medicis Pharmaceutical Corporation ("Medicis"
or "Defendant') acquired worldwide ZOSTRIX® manufacturing and
marketing license rights. Several months later, in June 1999,
Bernstein consented to allow Medicis to transfer its ZOSTRIX®
rights to Bioglan Pharma Plc ("Bioglan"). The consent document
set forth a schedule of the royalty payments Bernstein would
receive and stated that if Bioglan failed to make those payments,
the manufacturing and marketing rights would automatically revert
to Plaintiff. Bernstein also consented to a sublicense, executed
on June 30, 1999, by which Bioglan transferred back to Medicis
the right to manufacture and distribute ZOSTRIX® in Canada.
In 2001, Bioglan failed to pay Bernstein his minimum expected
royalties in a timely manner. Bernstein contends that, as a
result of Bioglan's default, all worldwide ZOSTRIX®
manufacturing, marketing, and sales rights reverted to him.
Medicis asserts that, although Bioglan failed to pay Bernstein
beginning in 2001, Medicis itself did continue to make royalty
payments to Bernstein under its own sublicense through August 20,
2002 and is now entitled under the terms of its original
agreement with Bernstein to a fully-paid-up license for
distribution of ZOSTRIX® in Canada.
Medicis argues that this court should compel arbitration of
this dispute or, in the alternative, dismiss it for lack of
jurisdiction. This argument requires no lengthy discussion, as
the court unquestionably has jurisdiction over the complaint
pursuant to 28 U.S.C. § 1331: Bernstein is an Illinois resident;
Medicis is incorporated in Delaware and has its principal place
of business in Arizona; and there is no dispute that at least
$75,000 is at stake.
To the extent that Medicis' jurisdictional challenge is aimed
at Plaintiff's Lanham Act claims, however, the court concludes
that the argument has merit. In determining whether the Lanham
Act reaches a defendant's foreign business activities, courts in
this district have adhered to the test that originated with the
Supreme Court's decision in Steele v. Bulova Watch Co.,
344 U.S. 280, 283 (1952), and was more fully developed in the Second
Circuit case of Vanity Fair Mills, Inc. v. T. Eaton Co., 234 F.2d 633, 642 (2d Cir. 1956). Under that test,
the court addresses the following factors: (1) whether the
defendant was a United States citizen; (2) whether the
defendant's actions affected commerce in the United States; and
(3) whether any foreign trademark law conflicted with American
trademark law. See Thomas & Betts Corp. v. Panduit Corp.,
71 F. Supp. 2d 838, 841 (N.D. Ill. 1999). This court agrees that
Bernstein's Lanham Act allegations fail the second prong of this
test, as Medicis's manufacturing and marketing of ZOSTRIX®
products in the Canadian market in no way affect American
commerce. Medicis has presented the affidavits of two witnesses
to show that it deals only in ZOSTRIX® products that are
assembled and labeled exclusively in Canada with Canadian
industrial and human resources and sold only in Canadian markets.
(Def.'s Memo, at 4; Depede Aff. ¶¶ 4-12, Ex. C to Def.'s Memo.;
Galise Aff. ¶¶ 5-9, Ex. B to Def.'s Memo.) Bernstein offers no
rebuttal; indeed, in a motion he has since withdrawn, Bernstein
sought leave to amend his complaint to substitute a claim of
trademark infringement under Canadian law for his Lanham Act
count. The court agrees it has no jurisdiction under the Lanham
Act and therefore dismisses Count II of the complaint without
Analysis of Medicis' motion to compel arbitration is more
complicated and requires consideration of three separate
agreements. Dr. Bernstein himself originally developed and
patented ZOSTRIX® In 1995, he granted an exclusive worldwide
license to manufacture and distribute ZOSTRIX® to GenDerm
Corporation ("License Agreement"). In December 1997, Medicis
acquired GenDerm's assets, including its rights under the
ZOSTRIX® License Agreement. That Agreement provides, in ¶ 3.2,
that on timely payment of royalties, Medicis would earn a fully
paid-up exclusive license to market and distribute ZOSTRIX® in
Canada. It also provides, in ¶¶ 8.1(c) (ii) and 8.1(e), that in
the event of termination of the Agreement due to a material
breach, Medicis' rights terminate and "all rights and sublicenses
granted by [Medicis] . . . shall be assigned to Bernstein." In
1999, Medicis sought consent to transfer its rights under the
License Agreement to a UK company, Bioglan Pharma Plc. Bernstein executed a consent to
this transfer ("Consent and Modification"), which restructured
the royalty schedule set out in the earlier License Agreement and
included a reversion clause as follows:
If any portion of the guaranteed minimum royalties or
any other royalties due under the License Agreement
are not paid in a timely fashion by Bioglan, then all
rights to manufacture, market and sell products (the
"Rights"), under the License Agreements will
automatically revert to [Bernstein] without contest
by Medicis or Bioglan.
The final document relevant to Defendant's motion to compel is an
agreement between Bioglan Pharma, Inc.*fn1
and Medicis. That
agreement (hereinafter, "Canadian License Agreement" or "Canadian
sublicense"), was executed on June 30, 1999 and provides that
although Medicis had transferred its worldwide ZOSTRIX® rights to
Bioglan the previous day, Bioglan, in the Canadian License
Agreement, transferred back to Medicis an exclusive sublicense to
market ZOSTRIX® in Canada. Article VI of that Canadian sublicense
contains arbitration provisions. It is those provisions that
Medicis seeks to enforce in this motion.
There is no dispute about Bernstein's awareness of the Canadian
sublicense. On page 2 of the Consent and Assignment, Dr.
Bernstein "acknowledge[d] the sublicense by Bioglan to Medicis of
the rights granted under the License Agreements in
Canada."*fn2 Medicis contends that acknowledgment renders
Dr. Bernstein bound by the arbitration clause in the Canadian
License Agreement. Medicis reasons as follows:
The original License Agreement provides that, in
the event of termination for a material breach, (1)
all of the rights Bernstein had granted would
terminate except for any paid up exclusive license
acquired before that date; and(2) any sublicense that Medicis had granted would be assigned to
Bernstein. (License Agreement, ¶¶ 3.1, 8.1(e).)
Medicis conveyed its rights under the License
Agreement to Bioglan in 1999, and Bioglan in turn
issued the Canadian sublicense to Medicis.
Bioglan's default in 2001 results in assignment of
the Canadian sublicense to Bernstein.
Hence, Bernstein becomes the sublicensor and is
bound by the terms of the Canadian sublicense to
arbitrate this dispute.
Dr. Bernstein objects to Medicis' assertion that he is bound to
arbitrate on several grounds. He contends, first, that the
Canadian License Agreement could not convey "arbitration rights"
against him because the original License contained no arbitration
clause. Further, Bernstein contends that Medicis ignores the
language of the Consent and Modification, under which, when
Bioglan defaulted on its royalty payments, all rights in ZOSTRIX®
reverted to him. Thus, in Bernstein's view, the Canadian License
Agreement was never assigned to him. Finally, he contends that
the dispute before this court arises from the original 1995
License Agreement and his 1999 Consent and Modification, not from
the Canadian sublicense.
Medicis correctly notes that the assignee of a contract
containing an arbitration clause may be bound to arbitrate
disputes arising under that contract, but the case it cites
demonstrates that this is true only if there was in fact an
assignment of the contract. Asset Allocation & Mgmt. Co. v.
Western Employers Ins. Co., 892 F.2d 566, 574 (7th Cir. 1989).
Cf. E.I. DuPont de Nemours and Co. v. Rhone Poulenc Fiber and
Resin Intermediates, S.A.S., 269 F.3d 187, 194-95 (3rd Cir.
2001) (non-signatory is not bound to arbitrate unless traditional
principles of contract and agency law render it akin to a
signatory of the agreement calling for arbitration). Bernstein
insists there was no assignment of the Canadian sublicense, and
the court finds there is a dispute of fact on this matter. See
Tinder v. Pinkerton Security, 305 F.3d 728, 735 (7th Cir. 2002)
(party opposing motion to compel arbitration bears burden
analogous to that borne by party opposing summary judgment: to
identify a genuine issue of material fact). According to Bernstein, pursuant to the Consent and
Modification, Bioglan's default of its obligations under the
License Agreement resulted in reversion to Bernstein of all
rights in ZOSTRIX®, not merely an assignment to him of Bioglan's
right as sublicensor. In the court's view, this is a reasonable
interpretation of the Consent and Modification executed by
Bernstein. At least some of the correspondence exchanged between
the parties supports this interpretation, as well. In a letter
dated March 13, 2002, Dr. Bernstein announced, "I am now invoking
the reversion provision of the June  Consent, which states:
`If any portion of the guaranteed minimum royalties . . . are not
paid in a timely fashion by Bioglan, then all rights to
manufacture, market and sell products (the "Rights"), under the
License Agreements will automatically revert to
[Bernstein]. . . .'" (3/13/02 Letter from Bernstein, Exhibit D to
Defendant's Motion to Compel Arbitration.) A year later, in a
March 18, 2003 letter to Mark Prygocki of Medicis, Dr. Bernstein
referred to "the reversion to me of rights to certain products as
a consequence of Bioglan Pharma Plc's insolvency." (3/18/03
Letter to Prygocki, Exhibit F to Defendant's Motion to Compel
Arbitration.) Medicis argues that, by continuing to accept
sublicense royalties from Medicis, Dr. Bernstein ratified the
sublicense, but the March 18, 2003 letter supports Dr.
Bernstein's alternative interpretation: The letter recounts
previous communications between Bernstein and Prygocki concerning
a possible direct license to Medicis, and Prygocki's agreement
"that Medicis would pay me [Bernstein] royalties in lieu of
Bioglan's payment of royalties until we agreed upon a new
arrangement for Canada." (Id.) The court concludes this
correspondence supports Dr. Bernstein's characterization of his
rights under the License Agreement and the Consent and
Modification, and declines to enforce arbitration pursuant to the
Dr. Bernstein has argued, in the alternative, that the dispute
here is not arbitrable for the independent reason that it does
not arise under the terms of the Canadian sublicense. The court
need not reach this issue, but concludes that it has merit.
Plaintiff alleges that Medicis is paying nothing in return for
marketing ZOSTRIX® in Canada. Medicis claims a right to a
fully-paid-up license to distribute ZOSTRIX® in Canada; such a right arises, if
at all, only under the 1995 License Agreement that Medicis
acquired from GenDerm in 1997. That License Agreement contains no
arbitration provision, and the Canadian sublicense, which does
include the arbitration clause that Medicis invokes here, makes
no mention of any paid-up license rights.
The court acknowledges that federal policy favors the
arbitration of license disputes. In this case, however, the court
concludes that Bernstein did not agree to arbitration and is not
bound as an assignee to the Canadian sublicense. The court
therefore declines to "force [an] unwilling part[y] to arbitrate
a matter [he] reasonably would have thought a judge, not an
arbitrator, would decide." First Options of Chicago, Inc. v.
Kaplan, 514 U.S. 938, 945 (1995).
Defendant's objection to jurisdiction is sustained with respect
to Plaintiff's Lanham Act only. That claim is dismissed. The
Defendant's motion to compel arbitration is denied. Defendant is
directed to file its answer to the Complaint within 21 days. Rule
16 conference is set for October 14, 2004 at 9:30 a.m.