Pour Le Bebe, Inc. v. Guess? Inc.

• Decision Date: 15 October 2003
• Docket Number: No. B146867.,No. B146876.,B146867.,B146876.
• Citation: 5 Cal.Rptr.3d 442,112 Cal.App.4th 810
• Court: California Court of Appeals Court of Appeals
• Parties: POUR LE BEBE, INC., Plaintiff and Appellant, v. GUESS? INC., Defendant and Respondent.

5 Cal.Rptr.3d 442

112 Cal.App.4th 810

POUR LE BEBE, INC., Plaintiff and Appellant, v. GUESS? INC., Defendant and Respondent.

No. B146867.

No. B146876.

Court of Appeal, Second District, Division 4.

October 15, 2003.

Certified for Partial Publication.^*

Review Denied Jan. 14, 2004.

Fagelbaum & Heller, Philip Heller and Jerold Fagelbaum, Los Angeles, for Plaintiff and Appellant.

O'Melveny & Myers, Daniel M. Petrocelli, Robert C. Welsh, and David J. Marroso, Los Angeles, for Defendant and Respondent.

CURRY, J.

Appellant Pour Le Bebe (PLB) seeks reversal of trial court orders confirming an arbitration award and denying PLB's petition to vacate the award. The parties' dispute revolved around a series of "license agreements" under which PLB was granted the right to utilize the trademarks of respondent Guess?, Inc. (Guess), at first in the manufacture and sale of infant's and children's clothing and accessories, and later in the manufacture and sale of home furnishings. Guess claimed that PLB had failed to pay royalties required under the agreements. PLB asserted a number of counterclaims in the arbitration, including a claim that the licenses had been wrongly terminated by Guess and that the licenses represented illegal franchises. In addition, PLB sought to disqualify Guess's counsel, Daniel Petrocelli and the law firm of Mitchell, Silberberg & Knupp (MSK) from representing Guess in the arbitration. The panel rejected these claims.

On appeal, PLB contends: (1) Guess attained the award by undue means as a result of its representation by conflicted counsel; (2) the arbitrators exceeded their authority by deciding a statute of limitations issue exempted from arbitration by the parties' agreements; and (3) the award cannot be enforced because the contracts from which it arose were illegal and void ab initio. For the reasons set forth herein, we affirm.

FACTUAL AND PROCEDURAL BACKGROUND

The Parties' Agreements

1. License Agreement

PLB entered into a "License Agreement" with Guess in 1992. Under the agreement, Guess granted PLB "the exclusive right to use the Guess Marks and related Design Rights solely in connection with the manufacture and sale of the Products [defined elsewhere in the agreement essentially as clothing and accessories for babies, boys, and girls] in the Territory [also defined in the agreement] in accordance with the provisions of this Agreement." Guess retained the right to manufacture and sell "the Products" under the marks "in any area of the world other than the Territory" and to manufacture and sell products of any and all types and descriptions other than "the Products."

Section 19.1 of the agreement stated: "Except as provided, all disputes, controversies or claims arising out of or relating to this Agreement (including any extensions or modifications) or its interpretation, or concerning the respective rights or obligations of the parties ... shall be settled and determined by arbitration only in Los Angeles, California in accordance with the Commercial Arbitration Rules of the American Arbitration Association...." Section 19.6 provided: "Any claim is barred and waived unless the claimant institutes arbitration proceedings prior to the date when any action in court would be barred by the statute of limitations. The failure to institute arbitration proceedings prior to the expiration of the applicable statute of limitations constitutes an absolute bar to the institution of any arbitration or other proceeding by either party. All issues relating to the statute of limitations barring or preventing the commencement of proceedings shall be determined in court proceedings as described in Section 19.4, and the Arbitrators shall not have power or jurisdiction to determine such issues."

The "initial term" of the agreement was from November 1, 1992, to October 31, 2002, with an option to renew granted to PLB for a second 10-year term. Paragraph 13 permitted termination for material breach, with a right to cure for the defaulting party under certain circumstances, and for failure of PLB to reach minimum net sales as set forth elsewhere in the agreement, among other things.

2. Store License Agreement

In August 1993, Guess and PLB entered into an agreement entitled "Store License Agreement." The 1993 agreement contained a nearly identical arbitration provision, including the provision relating to statute of limitations, and also stated somewhat redundantly: "Any controversy or claim arising out of or relating to this Agreement, or the interpretation or breach of it, including any modification or extension, shall be settled by arbitration in Los Angeles County, California in accordance with the Commercial Arbitration Rules of the American Arbitration Association and California Code of Civil Procedure." There were also provisions similar to those in the 1992 License Agreement with respect to term, termination, and renewability.

3. Home Furnishings License Agreement

In March 1994, Guess and PLB entered into a "License Agreement ... for Home Furnishings." This had a three-year term with an option to renew for an additional seven years. The termination provision was similar to the one in the 1992 License Agreement, as was the arbitration provision. For purposes of this agreement, products were defined as home furnishings, including bath and table linens, bath and table accessories, and bath robes.

4. Retail Store License Agreement

In July 1994, Guess and PLB entered into a "Retail Store License Agreement ... for Home Furnishings." This agreement was also for a three-year term with a seven-year option to renew. It, too, contained termination and arbitration provisions similar to those set forth in the other agreements.

Arbitration Claim and Counterclaim

In 1998, a dispute arose between the parties. On May 21, 1999, Guess filed a demand for arbitration. The demand stated that PLB had defaulted on its obligation to pay royalties and that Guess had given notice to PLB on May 14, 17, and 19, 1999, that the licenses had terminated. Guess was represented by Petrocelli and MSK.

In July 1999, PLB filed a counterdemand claiming that although the asserted basis for the termination and dispute was arrearages in royalty payments, Guess had accepted late payments in the past. PLB alleged that Guess wanted to take control of PLB's business by destroying PLB's financial viability. PLB further charged that the agreements were illegal franchises. Also included in the counterdemand were counterclaims for intentional interference with contractual relations, intentional interference with prospective economic advantage, unlawful business practices, unfair competition, and fraud. PLB sought, among other things, disgorgement of all royalties, fees, and other payments made to Guess since 1984.

Attempts to Disqualify MSK

1. Motion to Disqualify Presented to Panel

In June 1999, Guess successfully obtained withdrawal of PLB's counsel (the firm of Alschuler, Grossman, Stein & Kahan) due to an alleged conflict of interest.

In December 1999, PLB's newly retained counsel filed a motion to disqualify MSK from representing Guess. PLB claimed that MSK was concurrently representing PLB in other matters and/or that MSK's past representation of PLB resulted in disclosure of confidential information substantially related to the issues raised in the arbitration. With respect to former matters, PLB pointed to: (1) the case of Ready v. Benasra, et al. (L.A.Super.Ct. case No. BC169021), a sexual harassment claim against Benasra, PLB, and others; (2) In re Guess?, Inc. and Jet Tech, Inc., an arbitration in which MSK jointly represented Guess and PLB; and (3) immigration matters in which MSK had represented key PLB employees, including its CEO Michel Benasra, its president Denys Goulin, and members of their families. With respect to current matters, PLB pointed to the fact that just days before the arbitration commenced, on May 6, 1999, an MSK attorney had sent a letter to the Immigration and Naturalization Service (INS) on Benasra's behalf.

PLB further pointed to the fact that in May 1997, MSK through Petrocelli had requested a conflict waiver acknowledging that MSK could "represent Guess (or any of its affiliated persons or entities) against [PLB] even if [it had] acquired confidential information from [PLB] relating to the subject matter of the dispute(s) between Guess and [PLB]." PLB refused to sign the waiver.

PLB expressed concern that MSK would use confidential information disclosed during the course of its representation of PLB. PLB noted that in a related arbitration, "[MSK] has asked a series of inflammatory questions ... about whether there were girlfriends on the [PLB] payroll, the use of the corporate jet and inferences about the way in which PLB principals spent their money." For example, Petrocelli asked about a trip Benasra took on the corporate jet to Russia. MSK had represented Benasra in applying for a visa to visit Russia. Witnesses were also asked about Benasra's purchase of expensive automobiles and real estate, and placing girlfriends on PLB's payroll. PLB's cause for concern was further supported by the fact that MSK had just made a demand in the underlying arbitration for documents relating to use of corporate funds to cover personal expenses because such information was "necessary for claimant to defend itself against PLB's counterclaims and defenses."

According to the motion for disqualification, PLB had requested the immediate transfer of all of PLB's files in October 1999. Files were turned over in late November, but PLB believed that MSK had withheld important documents, including copies of bills, internal billing files, and conflict checks.

In opposition to the motion to disqualify, MSK claimed to have advised PLB that it was ceasing further work on its behalf in mid-1997 due to PLB's failure to sign the conflict waiver form, and to have ceased representing PLB a year later, in mid-1998....