Arbitration Update

Incorporation Agreements/Owner Disputes

The Court of Chancery of Delaware, New Castle, decided that the operating agreement of a limited liability corporation (LLC) didn't require the majority owner to arbitrate his bid to either enforce an alleged promise by the minority stakeholder to guarantee a corporate debt or to have the corporation dissolved. Willie Gary LLC v. James & Jackson LLC, No. 1781.

The parties formed the MBC Gospel Network LLC, which operated the Black Family Channel, under the Delaware Limited Liability Company Act. Willie Gary LLC, 80% owner of MBC, filed suit for injunctive relief and specific performance against 20%-owner James & Jackson LLC. The defendants then moved to have the case dismissed or stayed for arbitration under the arbitration provisions of MBC's LLC agreement.

The chancery court concluded: “Here, the drafters of the LLC Agreement clearly contemplated that the LLC could be dissolved after a 'judicial determination' that it was 'impractical' for MBC to continue. Given the plain words of the LLC Agreement to that effect and the equally specific language of the LLC Agreement permitting a party to seek injunctive relief, prevent breaches, and specifically enforce the LLC Agreement in any 'court of competent jurisdiction,' it is impossible to conclude that Willie Gary has a contractual obligation to arbitrate its claims. … With the contractual freedom granted by the [Delaware] LLC Act comes the duty to scriven with precision. Regrettably for J & J, the drafters of the MBC LLC Agreement crafted an unwieldy dispute resolution scheme that gives parties alleging claims for compulsory relief the right to litigate, rather than arbitrate, their claims.”

The U.S. District for the Northern District of Illinois, Eastern Division, confirmed an arbitration ruling in favor of the surviving members and estate interests of the doo-wop group The Flamingos for use in a commercial without their permission of the recording of their 1950s hit “I Only Have Eyes for You.” Hunt v. Pepsico Inc., 03 C 7151.

The vocal group sued after their recording was used in a Super Bowl commercial. The complaint alleged that an American Federation of Television and Radio Artists (AFTRA) collective bargaining agreement mandated the defendants “separately bargaining with the principal performer and reaching an agreement regarding such use prior to any utilization of such soundtrack.”

Article 28 of the AFTRA agreement stated: “If Producer fails to separately negotiate as provided above, the principal performer shall be entitled to damages for such unauthorized use equivalent to three times the amount originally paid the principal performer for the number of days of work covered by the material used plus the applicable minimum use fees under this Contract but not less than three times the applicable session fee at the rates provided under this Contract plus the applicable minimum use fees under this Contract. However, the principal performer may, in lieu of accepting such damages, elect to bring an individual legal action in a court of appropriate jurisdiction to enjoin such use and recover such damages as the court may fix in such action.”

The district court agreed with the defendants that, because The Flamingos weren't seeking injunctive relief, the AFTRA agreement required the dispute be sent to arbitration, rather than be decided by a court. The arbitrator then awarded the group $250,000 in actual damages.

When The Flamingos asked the district court to confirm the award, the defendants argued that the arbitrator had exceeded his authority by not limiting the award to the liquidated damages cited in the first sentence of Article 28. But the district court responded: “Having determined ' as defendants argued ' that the dispute had to be submitted to arbitration, the Court did not, and could not properly predetermine in any respect the merits of the dispute.”

Upholding the actual-damages award, the district court noted: “First, when Article 28 says that if a producer fails to negotiate with a performer, the performer 'shall be entitled' to liquidated damages as specified, this does not necessarily mean that the performer shall only be entitled to damages in that amount. In other words, the first sentence of Article 28 can be read to set a floor, not a ceiling, on the damages that can be recovered. … The contract does not expressly instruct the arbitrator what to do in the event the performer elects to sue in court for actual damages, but the court refers the case back to arbitration. [However t]he contract does not preclude, under those circumstances, a damage award beyond the liquidated damages provision.”

Incorporation Agreements/Owner Disputes

The Court of Chancery of Delaware, New Castle, decided that the operating agreement of a limited liability corporation (LLC) didn't require the majority owner to arbitrate his bid to either enforce an alleged promise by the minority stakeholder to guarantee a corporate debt or to have the corporation dissolved. Willie Gary LLC v. James & Jackson LLC, No. 1781.

The parties formed the MBC Gospel Network LLC, which operated the Black Family Channel, under the Delaware Limited Liability Company Act. Willie Gary LLC, 80% owner of MBC, filed suit for injunctive relief and specific performance against 20%-owner James & Jackson LLC. The defendants then moved to have the case dismissed or stayed for arbitration under the arbitration provisions of MBC's LLC agreement.

The chancery court concluded: “Here, the drafters of the LLC Agreement clearly contemplated that the LLC could be dissolved after a 'judicial determination' that it was 'impractical' for MBC to continue. Given the plain words of the LLC Agreement to that effect and the equally specific language of the LLC Agreement permitting a party to seek injunctive relief, prevent breaches, and specifically enforce the LLC Agreement in any 'court of competent jurisdiction,' it is impossible to conclude that Willie Gary has a contractual obligation to arbitrate its claims. … With the contractual freedom granted by the [Delaware] LLC Act comes the duty to scriven with precision. Regrettably for J & J, the drafters of the MBC LLC Agreement crafted an unwieldy dispute resolution scheme that gives parties alleging claims for compulsory relief the right to litigate, rather than arbitrate, their claims.”

The U.S. District for the Northern District of Illinois, Eastern Division, confirmed an arbitration ruling in favor of the surviving members and estate interests of the doo-wop group The Flamingos for use in a commercial without their permission of the recording of their 1950s hit “I Only Have Eyes for You.” Hunt v. Pepsico Inc. , 03 C 7151.

The vocal group sued after their recording was used in a Super Bowl commercial. The complaint alleged that an American Federation of Television and Radio Artists (AFTRA) collective bargaining agreement mandated the defendants “separately bargaining with the principal performer and reaching an agreement regarding such use prior to any utilization of such soundtrack.”

Article 28 of the AFTRA agreement stated: “If Producer fails to separately negotiate as provided above, the principal performer shall be entitled to damages for such unauthorized use equivalent to three times the amount originally paid the principal performer for the number of days of work covered by the material used plus the applicable minimum use fees under this Contract but not less than three times the applicable session fee at the rates provided under this Contract plus the applicable minimum use fees under this Contract. However, the principal performer may, in lieu of accepting such damages, elect to bring an individual legal action in a court of appropriate jurisdiction to enjoin such use and recover such damages as the court may fix in such action.”

The district court agreed with the defendants that, because The Flamingos weren't seeking injunctive relief, the AFTRA agreement required the dispute be sent to arbitration, rather than be decided by a court. The arbitrator then awarded the group $250,000 in actual damages.

When The Flamingos asked the district court to confirm the award, the defendants argued that the arbitrator had exceeded his authority by not limiting the award to the liquidated damages cited in the first sentence of Article 28. But the district court responded: “Having determined ' as defendants argued ' that the dispute had to be submitted to arbitration, the Court did not, and could not properly predetermine in any respect the merits of the dispute.”

Upholding the actual-damages award, the district court noted: “First, when Article 28 says that if a producer fails to negotiate with a performer, the performer 'shall be entitled' to liquidated damages as specified, this does not necessarily mean that the performer shall only be entitled to damages in that amount. In other words, the first sentence of Article 28 can be read to set a floor, not a ceiling, on the damages that can be recovered. … The contract does not expressly instruct the arbitrator what to do in the event the performer elects to sue in court for actual damages, but the court refers the case back to arbitration. [However t]he contract does not preclude, under those circumstances, a damage award beyond the liquidated damages provision.”