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BERNSTEIN v. MEDICIS PHARMACEUTICAL CORPORATION

United States District Court, N.D. Illinois, Eastern Division


September 15, 2004.

JOEL E. BERNSTEIN, M.D., Plaintiff,
v.
MEDICIS PHARMACEUTICAL CORPORATION, a Delaware corporation, Defendant.

The opinion of the court was delivered by: REBECCA PALLMEYER, District Judge

ORDER

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.

  DISCUSSION

  Background Facts

  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.

  Jurisdiction

  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 prejudice.

  Arbitration

  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 [1999] 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 Canadian sublicense.

  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).

  CONCLUSION

  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.


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