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Non-parties bound by arbitration agreement in trade mark dispute (Life-style Equities v Hornby Street)

  • Legal Development 24 February 2022 24 February 2022
  • Americas, UK & Europe

Arbitration analysis: The Court of Appeal has upheld a stay of trade mark infringement proceedings, pursuant to section 9(1) of the Arbitration Act 1996 (AA 1996). However, it rejected the Intellectual Property Enterprise Court’s reasons for ordering the stay in the first place. In particular, it did not view the claimants as parties to the relevant arbitration agreement, which was governed by Californian law; nor were they restrained by principles of equitable estoppel. Nevertheless, the majority view was that the claimants were bound by the arbitration agreement in accordance with the law of contract of California. Although the trade mark had been assigned to the claimants, who were initially ignorant of the arbitration agreement, the conflict of laws principle that deals with assignment should not determine the scope of the agreement and who was covered by it. 

Lifestyle Equities CV and another v Hornby Street (MCR) Ltd and others [2022] EWCA Civ 51

What are the practical implications of this case?

The Court of Appeal’s split decision illustrates the difficulty of determining which conflict of laws principles apply in complex cases (see below). However, the underlying message of the decision is clear: although arbitration agreements are consensual, they are capable of binding non-parties in certain situations, including where trade marks are assigned multiple times. When deciding the scope of an arbitration agreement, the English courts will generally apply its governing law. This underlines the importance of stating in a commercial agreement that includes an arbitration clause not only the law that applies to the agreement as a whole, but also the law that applies to the arbitration clause itself. Since an arbitration clause is separate from the main agreement, it should not be assumed in every case that the law applicable to the underlying contract should also govern the arbitration clause.

A secondary point highlighted by the decision is that AA 1996, s 9(1) can be invoked by a defendant who is party to the relevant arbitration agreement, regardless of whether the claimant enjoys the same status. In practice, this means that a stay of proceedings may be ordered in a wide variety of circumstances, and so claimants should consider carefully whether to commence court proceedings where there is an arbitration agreement in the background.

What was the background?

The defendants in the English proceedings (respondents in the appeal) were owners of a trade mark logo similar to one that had been assigned to the claimants (appellants). Both logos featured a polo player raising a mallet, and wording of the same shape referring to the Santa Barbara Polo and Racquet Club in the one case, and the Beverly Hills Polo Club in the other.

In the 1990s a dispute arose as to whether each design infringed the other side's trade marks, but this was resolved when the parties entered into a coexistence agreement governed by Californian law (excluding its conflict of laws rules). Among other things, the agreement required future disputes to be resolved by arbitration in Los Angeles under the rules of the American Arbitration Association.

There followed a number of assignments, as a result of which the claimants became owners of the Beverly Hills trade marks. They then applied to register the logo as a trade mark in Mexico, relying on the coexistence agreement.

The parties subsequently fell out and the claimants issued proceedings in the English courts, alleging trade mark infringement and passing off. The defendants applied for a stay of proceedings under AA 1996, s 9, arguing that the court proceedings breached the arbitration clause in the coexistence agreement, which now bound the claimants. In November 2020 the Intellectual Property Enterprise Court (IPEC) ordered a stay of the proceedings on the basis that the claimants were party to the arbitration agreement, or at least were prevented by Californian principles of equitable estoppel from denying that this was the case. The claimants appealed.

What did the court decide?

The Court of Appeal was united in rejecting the IPEC’s reasoning, in particular the finding that the claimants were party to the arbitration agreement or were estopped from denying that because of the use made of the coexistence agreement in Mexico. However, they could not agree whether the claimants were bound by the agreement on a different legal basis. This was because two English conflict of laws principles appeared to be relevant, each indicating that a different system of law should decide the issue.

In the view of Lord Justice Snowden, the principle set out in Dicey & Morris’ Rule 135 was the more relevant one. According to Rule 135(2), the default position is that ‘the validity and effect of an assignment of an intangible may be governed by the law with which the right assigned has its most significant connection’—in this case the laws of the UK or the EU, which governed the trade marks in question.

However, Lord Justice Lewison and Lady Justice Macur disagreed. In their view, Dicey & Morris’ Rule 64 was more relevant, since it was concerned not with the substantive law that should apply to the dispute, but with who should decide it, ie the issue of jurisdiction. Rule 64 provides among other things that ‘the material validity, scope and interpretation of an arbitration agreement are governed by its applicable law’—in this case the law of contract of California. Expert evidence indicated that, under that law, the claimants were bound by the arbitration agreement. Accordingly, the appeal was dismissed, and the stay of infringement proceedings upheld.

This article was first published by Lexis®PSL on 7 February 2022.

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