March 03, 2016 Practice Points

Waiver Is for the Court; Fraudulent Inducement Is for the Arbitrator

In September 2014, a New York district court dismissed a complaint for breach of contract and fraudulent inducement and compelled the parties to arbitrate.

By Rebecca Smart

In September 2014, a New York district court dismissed a complaint for breach of contract and fraudulent inducement and compelled the parties to arbitrate. Ralph Lauren Corp. v. U.S. Polo Ass'n, No. 13 Civ. 7147, 2014 WL 4377852 (S.D.N.Y. Sept. 04, 2014). The case stands for the proposition that the courts generally decide whether a party has waived its right to arbitrate and that arbitrators generally decide claims of fraudulent inducement.

For many years, Ralph Lauren Corporation (RLC) and certain of its affiliates were involved in trademark litigation in the Southern District of New York with the United States Polo Association (USPA), which is the governing party in charge of the sport of polo. In 2003, two of RLC’s subsidiaries, PRL USA Holdings, Inc. (PRL) and Polo/Lauren Company, L.P. (PLC) entered into a settlement agreement (Settlement Agreement) with USPA, which also bound USPA’s licensees in different international locations. The agreement provided USPA and its licensees with the right to use certain “Settlement Marks” so long as they: (1) displayed a prominent hangtag that said “not affiliated with Polo Ralph Lauren”; and (2) adhered to certain restrictions concerning the manner in which the apparel using the settlement marks was promoted, advertised and sold.

The Settlement Agreement contained a broad arbitration clause that provided that any controversy between PRL and USPA or any of USPA’s affiliates or licensees would be resolved through arbitration administered by the American Arbitration Association’s International Centre for Dispute Resolution (ICDR) and would take place in the city that was the principal place of business of the USPA licensee involved in the dispute. It also bound the parties to bring any litigation concerning the Settlement Agreement in New York.

In September 2007, Arvind Brands (Brands), a division of Arvind Limited, entered into a licensing agreement with USPA that permitted Brands to use the Settlement Marks on apparel and other products in India. In connection with this, Brands signed a separate agreement agreeing to be bound by the terms of the Settlement Agreement. Thereafter, USPA and Brands developed a substantial business in India selling apparel and other items that used the Settlement Marks.

In 2009, Arvind Limited demerged Brands and turned it into a subsidiary named Arvind Lifestyle Brands Limited (ALBL). Under Indian law, all of Brands’ duties and liabilities were transferred to ALBL and Arvin Limited was relieved of those duties and liabilities. Apparently, neither RLC nor its subsidiaries knew that Arvind Limited had created this subsidiary.

In December 2012, RLC notified both USPA and Arvind Limited that Arvind Limited had manufactured and sold products in India with hangtags that violated RLC’s trademarks and rights under the Settlement Agreement. RLC then initiated arbitration against USPA and Arvind Limited in India. RLC did not include its subsidiaries PRL and PLC in the arbitration nor did it name ALBL as a respondent. Arvind and ALBL responded by filing suit against RLC in India, arguing that RLC had no right to enforce its subsidiaries’ rights under the Settlement Agreement and that ALBL, and not Arvind Limited, was the proper party to the Settlement Agreement and the arbitration.

On August 27, 2013, the India court entered an interim injunction tentatively holding that RLC was not the proper party to initiate suit to enforce rights under the Settlement Agreement. This injunction was to remain in force for a few days until RLC filed its objections and the court could consider them. RLC did not respond to the injunction nor did it add PRL and PLC as parties to the arbitration. Instead, it withdrew from the arbitration and, along with PRL and PLC (collectively, RLC Parties) filed suit in the Southern District of New York where it raised a variety of contract and other claims. Not long thereafter, ICDR stayed the arbitration proceedings, and Arvind Limited and ALBL voluntarily dismissed their lawsuit in the India court.

USPA and Arvind responded to the RLC Parties’ lawsuit by moving to compel arbitration. The RLC Parties objected, claiming that USPA and Arvind had fraudulently induced them to enter into the Settlement Agreement and then engaged in an “international shell game” by demerging Brands into a separate corporate entity. They also asserted that USPA and Arvind had waived their right to arbitration by filing suit in India.

The district court ruled that the issue of waiver was for the court, not the arbitrator, to decide. It then denied the RLC Parties’ waiver defense because the RLC Parties could not show that the India lawsuit prejudiced them in any meaningful way. The court noted that USPA and Arvind were not trying to relitigate any issue by invoking arbitration, the India court had not decided any dispositive motions, and there had been no excessive delay on the part of USPA and Arvind. Instead, any delay and any expense that the India lawsuit had imposed on the RLC Parties was the result of the RLC Parties’ attempt to avoid arbitration in favor or litigation in New York.

Turning to the issue of fraudulent inducement, the district court noted that although the RLC Parties made general challenges to the Settlement Agreement and the Consent Agreement, they did not attack the validity of the arbitration clause included in those agreements. Accordingly, pursuant to Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 71, the court held that it was for the arbitrator to decide the RLC Parties’ fraudulent inducement claims, and it granted USPA and Arvind’s motion to compel arbitration.

Practice Pointers: This case illustrates two points about arbitral jurisdiction. First, it holds that, at least in the Second Circuit, the assertion that a party has waived its right to arbitration is an issue for the court to decide. Second, it reinforces the principle, increasingly well-supported, that fraudulent inducement claims are for the arbitrator to decide unless the party opposing arbitration alleges that it was fraudulently induced into the actual agreement to arbitrate.

Keywords: litigation, alternative dispute resolution, adr, prejudice, excessive delay, waiver, fraudulent inducement

Rebecca Smart is a 2017 J.D. candidate at DePaul University College of Law in Chicago, Illinois.

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