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Altela Inc. v. Arizona Science & Technology Enterprises LLC

United States District Court, D. Arizona

August 31, 2016

Altela Incorporated, Plaintiff,
Arizona Science and Technology Enterprises LLC, et al., Defendants.


          David G. Campbell United States District Judge.

         Defendant Arizona Science and Technology Enterprises (“AzTE”) moves to compel compliance with the alternative dispute resolution (“ADR”) provisions set forth in its License Agreement with Plaintiff Altela, Inc. Doc. 22. Defendant Arizona State University Foundation for a New American University (“Foundation”), which is not a party to the License Agreement, files a separate motion to compel ADR with respect to the claims against it. Doc. 23. The motions have been fully briefed (Docs. 26, 27, 28, 30), and the Court concludes that oral argument will not aid in its decision.[1] The Court will grant the motions in part and deny them in part.

         I. Background.

         A. This Dispute.

         The allegations in the complaint are taken as true, unless contradicted by an evidentiary submission. In the 1990s, Professor James Beckman of Arizona State University (“ASU”) developed a water purification process that uses air to evaporate dirty water, forming pure condensate. Doc. 1, ¶ 8. Professor Beckman invented a device known as a “dewvaporation tower” to facilitate this process. ¶ 9. The Arizona Board of Regents obtained a patent for this technology, and together with the Foundation, it later founded AzTE to manage all of ASU's intellectual property. ¶¶ 10, 14. Thus, AzTE is the entity currently charged with managing the dewvaporation patent.

         Following a complicated series of transactions that are not relevant here, Altela was assigned the right to develop, use, and sell the dewvaporation technology in 2006, pursuant to a License Agreement (“Agreement”) with AzTE. ¶¶ 12, 15-20. In exchange, Altela promised to pay royalties to AzTE on the sale of any “Licensed Product” - “any product or part thereof which incorporates or has been developed or made using” the dewvaporation technology, and “any services offered in connection with or related to the use of” such a product. ¶ 24.

         This provision proved insufficiently precise to avert controversy. Beginning in 2007, the parties began to have disputes over the meaning of “Licensed Product.” ¶ 27. This, in turn, led to disputes over how much Altela owed AzTE in royalties. Between 2007 and 2015, the parties exchanged proposals and counterproposals for revising the definition. ¶ 28. In November 2010, AzTE threatened to terminate the Agreement based on its allegation that Altela had not paid royalties. ¶ 30. Altela made a payment under protest to avoid termination. Id.

         In July 2013, AzTE performed an audit of Altela. ¶ 31. Based on the results of this audit, AzTE claimed that Altela had improperly withheld royalties. ¶ 32. AzTE demanded that Altela pay the amount in dispute and the cost of the audit. Id. Altela disputed AzTE's interpretation of the audit results, and refused to pay either sum. Id.

         On March 26, 2014, AzTE sent a letter to Altela, alleging that Altela had materially breached the Agreement by failing to pay certain royalties due in 2011, failing to pay for the audit, and failing to provide certain annual reports. Doc. 26-1 at 2. AzTE indicated that it intended to terminate the Agreement and pursue all available legal remedies if Altela did not cure these breaches within the time period specified by the Agreement. Id. Altela responded by invoking the Agreement's ADR Addendum. Id. at 5. AzTE agreed to submit the dispute to ADR, and attended a negotiation session, as required by the ADR Addendum. Doc. 1, ¶ 37.

         During late 2014 and early 2015, the parties continued to negotiate, ultimately producing a draft second amendment to the Agreement. ¶ 38; see Doc. 26-1 at 10-11. On May 19, 2015, AzTE informed Altela that it needed to provide certain information, and pay “the amount that it concedes is owed” pursuant to the audit report, before the second amendment could be finalized. Doc. 26-1 at 13. The letter stated that AzTE would “continue to separately address through our discussions or, if necessary, a dispute resolution procedure, the additional payments and interests that AzTE is owed for 2011 and subsequent years.” Id.

         On June 29, 2015, AzTE informed Altela that it was in material breach of the Agreement, based on its failure to pay certain royalties due in 2011, its failure to pay for the audit, and its failure to provide certain requested information. Doc. 26-1 at 16. AzTE indicated that it would terminate the agreement within 30 days if Altela failed to cure these breaches. Id. at 17. In addition, AzTE requested an in-person meeting “to begin the process for initiating an arbitration for recovery of all amounts due to AzTE.” Id. Altela responded by denying any material breach, but indicating its willingness to proceed via ADR. Doc. 1-3 at 2. It requested that the parties proceed directly to mediation. Id. AzTE presents no evidence that it responded to this request. On July 30, AzTE terminated the Agreement. Doc. 26-1 at 27.

         On October 12, 2015, Altela proposed that the parties resume the ADR process and skip directly to arbitration. Doc. 29-1 at 2. It requested that AzTE reinstate the Agreement pending the outcome of arbitration. Id. On October 16, AzTE responded that it was open to expedited arbitration, and proposed a schedule for the proceedings. Doc. 26-1 at 21. It indicated that while it was not willing to reinstate the Agreement pending arbitration, it would agree not to grant the rights to the dewvaporation technology to any third party until after the arbitration. Id. On October 29, AzTE reiterated its position, and requested that the parties move forward with the selection of an arbitrator. Doc. 29-2 at 2. Altela produces no evidence that it ever responded to this request; AzTE produces emails and letters that suggest no response was received. See Docs. 29-4 at 3 (counsel for AzTE, informing Altela that she never received response to her October 29 letter, her November 13 email, or her November 19 voicemail); 29-5 at 2 (same); see also 29-3 at 2 (internal AzTE email, dated November 13, 2015, noting that AzTE has not received any response).

         Although AzTE received no response to its October 16, 2015 letter, it made two additional offers to proceed with arbitration. On November 30, AzTE stated: “If after our recent correspondence Altela believes that there remain open questions about the Agreement or its termination . . . it is imperative that Altela immediately proceed to the next step of the Dispute Resolution Procedure to avoid prejudice to AzTE from delay in addressing them. AzTE stands ready to arbitrate now.” Doc. 29-4 at 3. Altela responded by stating only that it was “evaluating its legal and financial options.” Doc. 26-1 at 24-25. On December 15, 2015, AzTE stated: “If Altela wishes to arbitrate any issues under the Agreement, please let us know by December 31, 2015 and we will immediately move forward with the process.” Doc. 29-5 at 4. Altela submits no evidence that it responded to this letter. It filed this action on June 6, 2016, asserting four claims against AzTE for breach of contract, as well as claims for tortious interference with business relations and unjust enrichment. Doc. 1. It also asserted a claim against the Foundation for aiding and abetting. ¶¶ 104-08.

         B. Relevant Contractual Provisions.

         1. The ADR Procedure.

         Section 28.11 of the Agreement provides that “any disputes under or relating to this Agreement . . . shall be . . . resolved pursuant to the dispute resolution procedure set forth in [the ADR Addendum].” Doc. 22-1 at 26. The ADR Addendum provides a procedure for the parties to resolve “any dispute between them arising out of or relating to this Agreement.” Id. at 28. First, representatives of each party are required to meet “to attempt in good faith to negotiate a resolution of the dispute.” Id. If the parties are unable to negotiate a written resolution to the dispute within 30 days, either party may request the appointment of a neutral mediator. Id. “The parties agree to participate in good faith in the Mediation to its conclusion.” Id. If the parties have not resolved the dispute within 120 days, either party may move to terminate the mediation. Id. at 28-29. Following such a motion, the mediator shall recommend a resolution; each party is required to consider this recommendation in good faith. Id. at 29.

         If either party rejects the mediator's recommendation, the dispute will be submitted to binding arbitration. Id. The arbitration tribunal will consist of three arbitrators, one chosen by each party, and the third jointly appointed by the party-selected arbitrators. Id. “The award of the arbitration tribunal shall be final and judgment upon such an award may be entered in any competent court.” Id.

         2. The Termination Procedure.

         Section 16.1 provides that failure of either party to comply with a material obligation imposed by the Agreement shall entitle the other party to give written notice requiring the defaulting party to cure the default. Doc. 22-1 at 20. If the default concerns a payment obligation, the defaulting party has 30 days to cure the breach; if the default concerns something else, the defaulting party has 90 days to cure. Id. If the defaulting party fails to cure within the specified time, the other party is entitled to terminate the Agreement. Id. Such termination shall be “without prejudice to any . . . other rights conferred . . . by this Agreement.” Id.

         Section 17.1 states specifically that termination of the agreement “for any reason” shall be without prejudice to “the rights and obligations provided for in . . . Article 28.” Id. at 21. Article 28 provides, inter alia, that the parties shall resolve “any disputes ...

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