Dispute Resolution Clause Bars Breach of Contract and Fraudulent Inducement Claims

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Posted on: Feb 23 2022

When someone speaks of a dispute resolution clause, lawyers most likely think the speaker is referring to an arbitration clause. But, as discussed in Innovative Concepts & Design, LLC v. AL Infinity, LLC, 2022 N.Y. Slip Op. 01122 (1st Dept. Feb. 22, 2022) (here), a dispute resolution clause can be something completely different. It can place dispute resolution in the hands of one of the parties to a contract. Such clauses are binding and enforced by the courts.¹

Innovative Concepts concerned a licensing dispute between plaintiff Innovative Concepts and Design, LLC and AL Infinity, LLC. Plaintiff manufactures and sells audio equipment, and defendant is the owner of the Altec Lansing brand of audio equipment and associated trademarks. In 2016, defendant entered into a licensing agreement with plaintiff that gave plaintiff the exclusive right to manufacture and sell specified products using the trademarks. The products were described as DJ Pro Audio Speakers and Turntables including, among other products, Trolley & Tailgate Speakers and Bluetooth and Wi-Fi DJ Speakers. The complaint alleged that at the time plaintiff entered into the agreement, it was aware that another company, Sakar, also had a license with defendant to sell certain types of speakers, namely small, hand-held speakers.

Plaintiff’s license agreement included a dispute resolution clause, in which plaintiff acknowledged that “due to the nature of the industry, precise definition of products is sometimes not possible”; provided defendant with the “sole and absolute discretion” to resolve disputes as to whether a particular product fell within the license of one licensee or another; and further provided that defendant’s determination would be “conclusive and binding on all parties.”

According to the complaint, in 2017 and 2018, plaintiff became aware that Sakar was marketing products that plaintiff believed were covered by its exclusive license. Plaintiff raised this issue with defendant, but ultimately defendant, under its contractual authority to resolve licensing disputes, found in all instances that the products did not infringe upon plaintiff’s exclusive license. In resolving the dispute, defendant’s determination set out the minimum dimensions for licensed products permissible for plaintiff’s license and maximum dimensions permissible for the Sakar license.

Plaintiff commenced the action for breach of contract and fraud, alleging that although defendant had granted it an exclusive license to sell certain speakers, it had entered into a conflicting license agreement with Sakar where it also granted Sakar many of the same exclusive rights.

Defendant moved to dismiss the complaint pursuant to CPLR § 3211(a)(1) and (7), arguing that the dispute resolution provision in the parties’ agreement gave it the right to resolve the scope of the license dispute, in its absolute and sole discretion, and that the fraud claim was duplicative of the contract claim. The motion court dismissed both claims, concluding that they were barred by the dispute resolution clause, and noting that plaintiff had not alleged that defendant’s discretion was exercised in bad faith to enrich itself at the expense of plaintiff. Plaintiff moved for renewal based on purported newly discovered evidence and leave to amend the complaint to assert new causes of action for unjust enrichment and breach of the implied covenant of good faith and fair dealing. That motion was denied.

The Appellate Division, First Department agreed with the motion court that plaintiff’s breach of contract claim was barred by the dispute resolution clause in the parties’ licensing agreement. Notwithstanding, the Court addressed the merits of the claim – that defendant issued conflicting exclusive license agreements to plaintiff and Sakar. The Court found that the licenses were not conflicting on their face. The Court noted that the parties’ agreement specifically contemplated the possibility that the precise definition of products was not always possible. For that reason, the agreement provided defendant with the sole responsibility to resolve disputes over such definitions. Consequently, defendant could not have breached the agreement because “defendant simply exercised the authority given to it under the agreement”.²

The Court also held that plaintiff’s fraud claim was precluded by the dispute resolution clause and otherwise duplicative of the contract claim.³ In the complaint, plaintiff essentially alleged that defendant misrepresented that the agreement with Sakar did not compete with the agreement between the parties.

Takeaway

The dispute resolution clause at issue in Innovative Concepts was a bargained-for provision in the license agreement between the parties. That provision provided for an exclusive process for resolving product definition disputes between plaintiff, defendant, and other licensees of defendant. Such a provision is enforceable even when, as in Innovative Concepts, the party authorized to resolve the dispute is itself a party to the dispute. As the courts in Innovative Concepts made clear, albeit tacitly, the courts will enforce clear and unambiguous agreements according to their terms.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

Seeking Valhalla Trust v. Deane, 182 A.D.3d 457 (1st Dept. 2020) (citation omitted). See also Yonkers Contracting Co., Inc. v. Port Auth. Trans-Hudson Corp., 208 A.D.2d 63, 766-67 (2d Dept. 1995) (noting, “public policy is not violated by an alternate dispute resolution provision that authorizes an employee of a party to a contract dispute (even where such employee is personally involved in the dispute) to make conclusive, final, and binding decisions on all questions arising under the contract.”), aff’d, 87 N.Y.2d 927 (1996).
Slip Op. at *2 (citing, Seeking Valhalla Trust, 182 A.D.3d at 458).
Id. (citations omitted).