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The Ninth Circuit held that an arbitrator had broad authority to arbitrate equitable claims, but further held that the arbitrator exceeded the scope of his authority by ordering a permanent injunction against non-signatories to the contract who were not directly involved with the signatory parties.
In Comedy Club, Inc. v. Improv West Associates, Nos. 05-55739, 05-56100, 2007 WL 2556702 (9th Cir. Sept. 07, 2007), CCI and Improv West had a licensing contract granting CCI exclusive nationwide trademark rights. After CCI breached the agreement, it filed for declaratory judgment to protect its rights.
The result, after a protracted procedural history, was an arbitration award and two orders, one which compelled arbitration and the other confirming the award.
Among its many claims, CCI asserted that the district court erred in its confirmation of the arbitration award. In support of its assertion, CCI argued that the arbitrator lacked the authority to arbitrate the equitable claims and that the arbitrator exceeded his authority by issuing permanent injunctions.
First, the Court disagreed with CCI’s contention that the agreement gave state and federal courts exclusive jurisdiction over equitable claims. The arbitration provision granted authority to the arbitrator “over ‘all disputes’ arising from the Trademark Agreement.” The second clause gave the parties the right to seek equitable remedies in addition to arbitration, with federal and state courts having exclusive jurisdiction over such remedies.
Improv West argued that “the language ‘in addition to arbitration’ in the second clause suggested that arbitration still applies to all disputes, but that in addition, the parties are ‘entitled to pursue equitable remedies’ before courts.” However, the Court noted the language was also consistent with CCI’s interpretation. The Court concluded that the provision was ambiguous, meaning it could reasonably be read to support either interpretation.
The Court concluded that, because of “the federal presumption in favor of arbitration … it should be interpreted as granting arbitration coverage over ‘all disputes’ arising from the Trademark Agreement.” Accordingly, the arbitrator had authority to arbitrate the claims for equitable relief.
Second, the Court agreed with CCI that the arbitrator’s issuance of permanent injunctions exceeded the scope of his authority. The arbitrator issued orders enjoining CCI and its affiliates from opening any new clubs and also from changing the names of any of the clubs. ‘Affiliates’ was defined by the Trademark Agreement to “include ‘family members, family members of shareholders, all collateral relatives, former spouses, and all collateral relatives of former spouses.’”
Non-signatories must have an “extraordinary relationship” such as that of an agent or assignee to be bound by an arbitration agreement. No such relationship existed here.
The Court rejected Improv West’s argument that Federal Rule of Civil Procedure 65(d) was applicable in this case. Rule 65 states that an injunction may bind “officers, agents, servants, employees, and attorneys, and [upon] those person persons in active concert or participation with them.”
Here, the injunction went well beyond persons in active concert or participation with CCI. Further, the injunction was in violation of CBPC § 16600, which provides that a covenant not to compete in a lawful profession is void under California law.
Accordingly, the Court concluded that the arbitrator exceeded “his authority as a matter of California law in attempting to bind all of CCI’s Affiliates,” as defined by the Trademark Agreement.
The Court determined that the district court should vacate the arbitration award to the extent that it enjoined CCI affiliates that are not connected as defined by Rule 65(d).
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