Seventh Circuit Refuses to Vacate Arbitration Award Under Public Policy Exception

The Seventh Circuit Court of Appeals recently refused to invalidate an arbitration award in a breach of contract case involving patent royalties based on purported violations of public policy.

Dr. John Insall patented various knee replacement devices and licensed them to medical device company Zimmer Biomet Holdings Inc. Zimmer paid Dr. Insall, and later his estate, royalties in return. Dr. Insall’s last patent expired in 2018, and Zimmer informed his estate it would be ceasing royalty payments because it believed further payments ran “counter to the policy and purpose of patent laws.” The estate claimed that was improper and the parties arbitrated the matter. An arbitration panel concluded that the payments could continue and thus ruled for the estate. Zimmer moved to vacate the award on public policy grounds. The district court confirmed the award.

The Seventh Circuit affirmed. It noted that even if Zimmer’s arguments that there is a “well-defined public policy that a party may not be compensated for patent rights after the patent’s expiration,” the arbitration award still needed to be confirmed because “the panel determined that the royalty payments in question were not grounded in any patent rights” but were instead “untied” to Dr. Insall’s “patents, products, or technology.” Put differently, the panel interpreted the contract as providing for payments for “non-patent rights” that were “closely related” to patents. The court noted that the Federal Arbitration Act does not allow it to question whether the arbitrators erred or even clearly erred in interpreting a contract, but to only determine whether it interpreted the contract.

Zimmer Biomet Holdings, Inc. v. Insall, No. 23-1888 (7th Cir. July 12, 2024).