Arbitration: Ninth Circuit Backs `Manifest Disregard,' Post-Hall Street Associates, and Vacates an Award (Web)

The Ninth U.S. Circuit Court of Appeals has re-asserted the use of the “manifest disregard of the law” standard for challenging arbitrators’ decisions in a trademark case involving the licensing of comedy clubs.

In Comedy Club Inc., et. al, v. Improv West Associates, Nos. 05-55739, 05-56100 (9th Cir. Jan. 29, 2009) (available here), the parties entered into a licensing agreement granting Comedy Club exclusive permission to use the Improv's trademark to open comedy clubs nationwide.

By 2002, Comedy Club failed to open the agreed-upon eight clubs.  Improv withdrew Comedy Club’s license to use the trademark, and declared its intent to open its own clubs.  In response, Comedy Club filed a federal district court complaint seeking declaratory relief.  Improv made a motion to compel arbitration, which was granted.

The arbitrator entered a final judgment declaring, among other things, that pursuant to a non-compete provision in the agreement, Comedy Club and its affiliates were enjoined from opening or operating any comedy clubs other than those open or under construction at the time. The district court subsequently confirmed the award.

Comedy Club appealed to the Ninth Circuit, which found that the arbitrator's enforcement of the non-compete covenant was a manifest disregard of law.  The U.S. Supreme Court granted a cert petition on the issue, and vacated the appellate court decision.  The Court remanded the case to the Ninth Circuit for reconsideration in light of Hall Street Associates L.L.C. v. Mattel Inc., 128 S. Ct. 1396 (2008),which called into question the validity of the manifest disregard standard.

On remand, the Ninth Circuit found that the circuit’s view of the manifest disregard of law ground for vacatur is still permitted under Hall Street Associates.  The unanimous panel opinion, written by Circuit Judge Ronald M. Gould, backs the circuit’s pre-Hall Street Associates rule that manifest disregard “is shorthand for a statutory ground under the [Federal Arbitration Act], specifically 9 U.S.C. § 10(a)(4), which states that the court may vacate ‘where the arbitrators exceeded their powers,’” citing as still-good law its decision in Kyocera Corp. v. Prudential-Bache Trade Servs., 341 F.3d 987 (9th Cir. 2003) (en banc).

The appeals panel reviewed the arbitrator's findings on manifest disregard of law grounds.  It determined that in California, it is settled law that a non-compete provision will be void if it forecloses competition in a substantial share of a business, trade, or market.  The arbitrator had recognized the line of cases establishing this principle, yet ignored it in making his findings.  Since the arbitrator's injunction effectively prohibited Comedy Club from engaging in the market for 14 years, the Court found the arbitrator in manifest disregard of the law.

The circuit court also found that the arbitrator exceeded his authority in the part of the injunction that prevented the opening or operating of a comedy club within the United States until the termination of the licensing agreement by relatives, ex-spouses and relatives of ex-spouses of Comedy Club partners that were not party to the arbitration agreement.

Both issues were remanded to the district court for proceedings consistent with the Court's findings.

–Jason Frank, CPR Intern