Summary
In ConWest Resources, Inc. v. Playtime Novelties, Inc., No. C06–5304 SBA, 2007 WL 1288349, at *1–2, 2007 U.S. Dist. LEXIS 35585, at *5 (N.D.Cal. May 1, 2007), the court considered an arbitration demand that came 11 days after the court denied the plaintiff's preliminary injunction motion.
Summary of this case from Riverside Publishing Co. v. Mercer Publishing LLCOpinion
No. C 06-5304 SBA.
May 1, 2007
ORDER [Docket Nos. 58, 63]
Before the Court is plaintiff ConWest Resources, Inc.'s (ConWest) motion to dismiss and to compel arbitration [Docket No. 58], and defendants Playtime Novelties, Inc. and Thomas Sherwood's (Playtime) motion for a stay of arbitration proceedings [Docket No. 63]. For the reasons that follow, ConWest's motion to dismiss and compel arbitration is DENIED, and Playtime's motion for a stay of arbitration is DENIED as moot.
The relief Playtime seeks is essentially granted by the denial of the motion to compel arbitration. While Playtime states that it believes that an arbitration complaint has been filed by ConWest against Playtime, it is not clear that arbitration has in fact begun or that there are any arbitration proceedings to stay. See Docket No. 63 (Allayee Decl. at ¶ 6).
BACKGROUND
Plaintiff ConWest Resources, Inc. is primarily in the business of producing adult entertainment, including adult novelty items. ConWest owns copyrights on twelve "sculptures" made from molds of male genitalia. ConWest also owns two trademarks for "FALCON Plus Design" novelty items.In May 2001, ConWest entered into a Master Licensing Agreement with Mayday LLC, which gave Mayday the exclusive right to manufacture, market, distribute and sell the sculptures, and certain other adult novelty items for five years. The agreement included a provision entitled "Arbitration and Attorney's Fees," which states:
Any controversy or claim arising out of or relating to the terms of this Agreement, or breach thereof, shall be submitted to binding Arbitration in San Francisco, California in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and entered in any Court having jurisdiction thereof.
Docket No. 63, Ex. 4 (Agreement at ¶ 45).
In 2003, Mayday LLC assigned the agreement to defendant Playtime Novelties, Inc., doing business as Erostar Erotic Novelties. Defendant Thomas Sherwood is the President of Playtime.
ConWest filed a complaint on August 29, 2006 and an amended complaint about two months later. Both allege copyright infringement, trademark infringement, false designation of origin, unfair trade practices under California Business and Professional Code section 17200, and common law unfair competition. On October 19, 2006, Playtime filed a motion to dismiss on the grounds that "all of plaintiff's claims against Playtime are subject to a binding arbitration clause." Playtime filed another motion to dismiss ConWest's first amended complaint and to compel arbitration in November. ConWest did not file oppositions to either motion, but it also refused to agree to Playtime's requests to arbitrate rather than litigate in this forum.
On September 8, 2006, ConWest filed a motion for a preliminary injunction, seeking to enjoin Playtime from further using its copyrights and registered marks. Playtime filed its opposition to ConWest's motion for preliminary injunction on October 24, 2006. ConWest claims from Playtime's opposition it learned "for the first time that during the term of the contract Playtime had sold its `entire inventory' of Falcon® products to its affiliated company, Anything Distributors Incorporated ("ADI"), and that the sale extinguished ConWest's copyright and trademark rights pursuant to the `first sale' doctrine." Docket No. 60, at 3:13-17. ConWest further alleges that only when Playtime asserted those contract-based defenses, did ConWest conclude "that the case could not be comprehensively adjudicated absent its assertion of claims for breach of contract and breach of the implied covenant of good faith and fair dealing, which claims were within the exclusive purview of the arbitration clause in the contract." Id. at 4:5-9.
On November 17, 2006, the Court denied plaintiff's motion for preliminary injunction. See Docket No. 53. On November 27, 2006, Playtime withdrew its motions to dismiss and filed answers and counterclaims. The next day, ConWest notified Playtime that ConWest would file a complaint in arbitration. ConWest sought Playtime's stipulation to dismissal of this action and provided Playtime with a copy of its arbitration complaint. In its arbitration complaint, ConWest alleges breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, and its previously asserted copyright, trademark, and unfair business practices claims. Playtime informed ConWest that Playtime would not stipulate to dismissal of this action.
LEGAL STANDARDS
The Federal Arbitration Act (FAA) provides that arbitration agreements governed by the Act "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. The FAA was created to "reverse the longstanding judicial hostility to arbitration agreements" and "to place arbitration agreements on the same footing as other contracts." Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991). Section 2 of the FAA evinces "a liberal federal policy favoring arbitration agreements, not withstanding any state substantive or procedural policies to the contrary." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983).
Waiver of a contractual right to arbitration is not favored. Lake Commc'ns., Inc. v. ICC Corp., 738 F.2d 1473, 1477 (9th Cir. 1984), overruled on other grounds, Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 632-35 (1985). The party arguing waiver bears a heavy burden of proof, and must demonstrate: (1) knowledge of an existing right to compel arbitration; (2) acts inconsistent with that existing right; and (3) prejudice to the party opposing arbitration resulting from such inconsistent acts. Hoffman Constr. Co. of Oregon v. Active Erectors Installers, Inc., 969 F.2d 796, 798 (9th Cir. 1992), cert. denied, 507 U.S. 911 (1993); Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691, 694 (9th Cir. 1986). More is required than action inconsistent with an arbitration provision; prejudice to the party opposing arbitration must also be shown. Fisher, 791 F.2d at 694. Any doubts as to waiver are resolved in favor of arbitration. See Moses H. Cone, 469 U.S. at 24-25.
ANALYSIS
The parties now concur that the arbitration agreement applies to the parties' dispute. At issue is whether ConWest has waived its right to compel arbitration under that agreement. Playtime contends that ConWest has waived it right to arbitration under the parties' contract and that it should be estopped from filing an arbitration claim. In order to carry its heavy burden of demonstrating waiver of the arbitration provision, Playtime must establish (1) ConWest knew of its right to compel arbitration; (2) that ConWest acted inconsistently with that right; and (3) that Playtime will be prejudiced as a result of those inconsistent acts.
1. ConWest's Knowledge of its Right to Compel Arbitration
ConWest claims "when it filed this action for copyright and trademark infringement and unfair business practices, [it] did not assert any breach of contract claim or rely on any disputed terms of the contract." Docket No. 60 (Pl.'s Mot. to Dismiss at 9:28-10:1-2). Therefore, ConWest alleges "it had no basis to believe its claims were subject to the arbitration clause in the contract and no knowledge of any right to arbitrate its copyright/trademark/unfair business practices claims, which were premised solely on post-contract termination conduct." Id. at 10:2-5. It was not until Playtime asserted its "first sale" defense in its opposition to plaintiff's motion for preliminary injunction on October 24, 2006, that ConWest had its "first indication" that breach of the Agreement would be a component of the resolution of the disputes. Only then, did ConWest believe the case "had transformed into one that did fall within the scope of the arbitration agreement." Docket No. 67 (Pl.'s Opp'n at 4:22-25).
Playtime asserts ConWest "clearly had knowledge of its right to compel arbitration." Docket No. 63 (Defs.' Mot. for Stay at 8:15-16). ConWest signed the agreement which specifically contained an arbitration clause. Playtime repeatedly attempted to obtain ConWest's consent to arbitrate its claims. ConWest rejected such requests, forcing Playtime to file two motions to dismiss this action and compel arbitration. Playtime suggests because ConWest lost its motion for preliminary injunction, ConWest "now no longer wishes to have its claims heard by this Court." Id. at 5:12-16.
ConWest's claim that it had no knowledge that its copyright and trademark claims were encompassed by the arbitration agreement is less than fully persuasive. The agreement contains a broad arbitration clause: "[a]ny controversy or claim arising out of or relating to the terms of this Agreement, or breach thereof, shall be submitted to binding Arbitration. . . ." Language such as "relating to" indicates an arbitration clause considerably broader in reach than one limited to disputes "arising out of" certain dealings. See Tracer Research Corp. v. National Envt'l. Servs. Co., 42 F.3d 1292, 1295 (9th Cir. 1994). Con West's original claims are certainly "relating to," if not "arising out of" the agreement. The agreement gave rise to the licensing relationship between ConWest and Playtime, and defined the terms of that contractual relationship. Indeed, ConWest admits that "[t]he crux of [its] claims was that defendants violated applicable copyright and trademark laws, and laws prohibiting unfair business practices, by `continuing to reproduce, sell, and distribute the previously licensed sex novelty products in the United States' after the license it granted to defendants expired on January 1, 2006." Docket No. 60 (Pl.'s Mot. to Dismiss at 3:3-8). Clearly, ConWest based its original claims on the termination of the licensing relationship, which was created and defined by the agreement. If there were any doubts as to the arbitrability of ConWest's original claims, Playtime's motions to dismiss put ConWest on ample notice of its existing right to arbitration.
Moreover, if as alleged, ConWest had its "first indication" of the possible contractual disputes on October 24, 2006, when Playtime filed its opposition to ConWest's motion for preliminary injunction, ConWest could have agreed to Playtime's request for arbitration then.
Finally, ConWest's own admissions are telling when it states that it was surprised and disappointed with the Court's ruling on its motion for preliminary injunction, and that "getting a preliminary injunction from an Article III Judge had been a motivating factor in choosing to file the case in federal court." Docket No. 67 (Pl.'s Opp'n at 7:15-19). This suggests that the filing of the action in this Court was a result of ConWest's deliberate choice, not because of ConWest's alleged ignorance of its right to arbitration.
2. Acts Inconsistent with the Right to Compel Arbitration
ConWest asserts because it believed that its original claims were outside the scope of the arbitration agreement, "the filing of such claims cannot be construed as a waiver of the right to arbitrate." Docket No. 60 (Pl.'s Mot. to Dismiss at 10:14-16). ConWest also points to the fact that it did not file any opposition to Defendants' motions to dismiss. Id. at 10:20-21.
Playtime argues that by filing the original complaint in this Court, resisting Playtime's request for arbitration, and ultimately forcing Playtime to file motions to dismiss, ConWest has "acted inconsistently with its right to arbitration." Docket No. 63 (Defs.' Mot. for Stay at 8:19-25).
While filing a complaint itself does not waive the right to pursue arbitration, intentionally electing a judicial forum rather than an arbitral forum is a factor that may be weighed. See Iowa Grain Co. v. Brown, 171 F.3d 504, 509 (7th Cir. 1999). Here, ConWest declared that "getting a preliminary injunction from an Article III judge had been a motivating factor in choosing to file the case in federal court." This shows ConWest's intention to elect a judicial forum rather than seek relief under the terms of the agreement to arbitrate.
ConWest also refused Playtime's repeated requests for arbitration, which is certainly inconsistent with its right to arbitrate. In an October 11, 2006 letter, ConWest declared that it was alleging copyright and trademark infringement claims which "does not constitute a controversy or claim arising out of or relating to the terms of the Master Licensing Agreement." See Docket No. 63, Ex. 2. Again, the language of the arbitration agreement is very broad and covers "[a]ny controversy or claim arising out of or relating to the terms of this Agreement." Thus, ConWest's refusal to arbitrate was based upon a dubious premise: their copyright and trademark infringement claims do not trigger the arbitration provision of the licensing agreement between the parties, but a breach of contract claim of that same licensing agreement does. Refusing to arbitrate based upon a contrived distinction is acting in a manner inconsistent with ConWest's right to arbitrate.
Moreover, if as alleged, ConWest had its "first indication" of the possible contractual disputes on October 24, 2006, when Playtime filed its opposition to ConWest's motion for preliminary injunction, ConWest could have agreed to Playtime's request for arbitration then, but chose not to do so.
3. Prejudice to Playtime
Playtime alleges prejudice due to: (a) deprivation of Playtime's likely success on the merits of a future summary judgment motion; and (b) duplication of efforts due to litigation of substantially the same issues in another forum.
a. Deprivation of this Court's Finding of a Likelihood of Success
Playtime argues that "[i]n attempting to place its claims before a different tribunal, Plaintiff is in essence seeking to deprive Defendants of their likely success on Plaintiff's claim by virtue of a future summary judgment motion." Docket No. 66 (Defs.' Mot. to Stay at 13:15-17). ConWest counters that a preliminary injunction motion is not an adjudication of the merits of a case. Playtime is reading too much into the Court's denial of the preliminary injunction motion. The Court merely ruled, based on a preliminary assessment of the facts and law, that ConWest did not demonstrate a likelihood of success on its claims. In the course of discovery ConWest may be able to buttress its contentions. It cannot be said that a future summary judgment motion will likely be granted in Playtime's favor and therefore the deprivation of that ruling prejudices Playtime. This is far too speculative to base a finding of prejudice upon.
What may be fairly inferred from the context of ConWest's repeated refusals to arbitrate, and then seeking arbitration after an unfavorable ruling on its preliminary injunction motion, is that ConWest is seeking an alternative forum sensing an adverse ruling in this one. Such use of arbitration as a method of forum shopping would be prejudicial to Playtime. See, e.g., St. Mary's Med. Ctr. of Evansville, Ind., v. Disco Aluminum Prods. Co., 969 F.2d 585, 589 (7th Cir. 1992) ("A party may not normally submit a claim for resolution in one forum and then, when it is disappointed with the result in that forum, seek another forum"); Kramer v. Hammond, 943 F.2d 176, 179 (2d Cir. 1991) ("Prejudice can be substantive, such as when a party loses a motion on the merits and then attempts, in effect, to relitigate the issue by invoking arbitration"); Jones Motor Co. v. Chauffeurs, Teamsters Helpers Local Union, 671 F.2d 38, 43 (1st Cir. 1982), cert. denied, 459 U.S. 943 (1982) ("to require that parties go to arbitration despite their having advanced so far in court proceedings before seeking arbitration would often be unfair, for it would effectively allow a party sensing an adverse court decision a second chance in another forum"); see also J.D. Fegely, Inc. v. Kline Iron Steel Co., 1989 WL 71549, at *3 (E.D. Pa. 1989) (finding prejudice when a plaintiff refused the defendant's repeated demands for arbitration, and then later attempted to invoke the arbitration clause).
b. Duplication of Efforts
Playtime maintains that it would be seriously prejudiced if it is forced to re-litigate the same issues in arbitration. A duplication of efforts and litigation of substantial issues going to the merits may constitute prejudice. See Stifel, Nicolaus Co. v. Freeman, 924 F.2d 157, 159 (8th Cir. 1991).
Courts have also found waiver where the party seeking arbitration allows the opposing party to undergo the types of litigation expenses that arbitration was designed to alleviate, such as by filing substantive motions. See, e.g., PPG Indus., Inc. v. Webster Auto Parts, Inc., 128 F.3d 103, 108-09 (2d Cir. 1997); St. Mary's Med. Ctr., Inc. v. Disco Aluminum Prod. Co., 969 F.2d 585, 589 (7th Cir. 1992) (finding waiver where party moved to dismiss and for summary judgment without mentioning arbitration until after motions were lost); Weight Watchers of Quebec Ltd. v. Weight Watchers Int'l, Inc., 398 F. Supp. 1057, 1060-61 (E.D.N.Y. 1975).
The Court need not decide whether a preliminary injunction motion is a substantive motion in the same sense as a summary judgment motion. By urging its preliminary injunction despite repeated requests to arbitrate, ConWest forced both Playtime and this Court to expend considerable time and resources analyzing its claims, just as would be expended upon a summary judgment motion. And while the Court's ruling on the preliminary injunction motion is in no sense binding or a final finding on the merits, most of the same facts and legal issues are likely to be a part of any future motions. In WorldSource Coil Coating, Inc. v. McGraw Constr. Co., 946 F.2d 473, 478 n. 7 (6th Cir. 1991), the court stated that the plaintiffs would likely suffer prejudice in the form of duplicative expenses incurred when the plaintiffs filed an answer, the court held a hearing on the defendant's request for a preliminary injunction, and the plaintiffs filed counterclaims. Such is the case here. Playtime has filed an answer, the Court has held a hearing on ConWest's request for a preliminary injunction, and Playtime has filed counterclaims. The expenses would likely be duplicated if these matter were to proceed in another forum, which would be prejudicial to Playtime.
Finally, it should be noted that ConWest maintained that it did not agree to arbitration before a ruling on the preliminary injunction motion because "[p]ulling the case from Judge Armstrong at that juncture would have produced substantial delay" and "cost the parties just as much, if not more, in both time and attorneys fees." Docket No. 72 (Pl.'s Reply at 8:16-19). ConWest offers little explanation how this perceived prejudice to it before the preliminary injunction ruling was issued is any less applicable to Playtime afterwards.
ConWest asserts that if it is not allowed to compel arbitration that "[i]t will be denied the benefits of its arbitration agreement: the `simplicity, informality and expedition of arbitration' of its disputes with defendants. . . ." Docket No. 60 (Pl.'s Mot. to Dismiss at 9:1-3). This wound, however, is self-inflicted in light of ConWest's repeated refusals to submit its claims to arbitration. As both parties acknowledge, the arbitration agreement covers this dispute. ConWest knew of its right to compel arbitration and acted inconsistently with that right thereby prejudicing Playtime in the process. ConWest has therefore waived its right to compel arbitration.
CONCLUSION
While it is a heavy burden to demonstrate that a party has waived its right to compel arbitration, Playtime has done so. Accordingly, ConWest Resources, Inc.'s motion to dismiss and to compel arbitration [Docket No. 58] is DENIED, and defendants Playtime Novelties, Inc. and Thomas Sherwood's motion for a stay of arbitration proceedings [Docket No. 63] is DENIED as moot.
IT IS SO ORDERED.