First Circuit vacates grant of motion to compel arbitration, finding that the parties’ disagreement over which conflicting agreement applied required the district court to resolve the gateway question of arbitrability. McKenzie v. Brannan, No. 20-2170 (1st Cir. Nov. 22, 2021)[1]
Factual Background
American Pop Art artist Robert Indiana (“Indiana”) was famous for his distinctive “LOVE” image (with the L and titled O sitting atop the V and E). In 2008, Indiana entered into a publishing agreement with Plaintiff Michael McKenzie (“McKenzie”), an art publisher (the “2008 Agreement”). McKenzie collaborated with Indiana to create variations of Indiana’s image, like the word “HOPE” laid out in the same format as Indiana’s “LOVE” artwork.
The 2008 Agreement, which governed the “HOPE” collaboration, included an arbitration provision that provided for arbitration of disputes through the American Arbitration Association. Indiana and McKenzie operated under the 2008 Agreement until Indiana died, at which point the rights to Indiana’s work passed onward to his estate (the “Estate”). Indiana bequeathed the bulk of his estate to the Maine Star of Hope, a nonprofit that aims to promote visual-arts education.
In 2018, around the time of Indiana’s death, various disagreements arose between McKenzie and the Estate. In a suit brought against both McKenzie and the Estate for breach of contract, McKenzie cross-claimed against the Estate, alleging that the 2008 Agreement authorized it to produce and sell Indiana’s work. The Estate sought to compel arbitration of these cross-claims. Its motion was granted and led to the “New York Arbitration.” At that point, the Attorney General for Maine intervened on behalf of the Star of Hope, which led to McKenzie and the Estate agreeing to bring their dispute before a mediator.
The Mediation
In late November 2019, McKenzie and the Estate engaged in a mediation that culminated in a signed document entitled “Confidential and Binding Term Sheet” (the “2019 Term Sheet”). The 2019 Term Sheet provided, inter alia, that (1) the parties would enter into a new agreement giving McKenzie the exclusive right to publish and sell authorized HOPE prints and sculptures; (2) the 2008 Agreement was terminated; (3) the parties would dismiss the New York Arbitration with prejudice; and (4) the term sheet was intended to be binding, and would be replaced by a more formal Settlement Agreement and Production Agreement. The Estate notified the New York Arbitration panel of the settlement and asked to adjourn the arbitration while the parties prepared the settlement agreement and related documentation.
The New York Arbitration
The parties’ attempts to arrive at the contemplated “more formal” agreement were unsuccessful, however, which led the Estate to recommence the New York Arbitration. McKenzie then filed suit in Maine, seeking declaratory and injunctive relief to confirm its view that the 2019 Term Sheet was binding and enforceable. In response, the Estate moved to compel arbitration on the basis that the 2019 Term Sheet was not binding because it was subject to further negotiation, and as such, the former 2008 Agreement still applied.
The District Court Decision
The district court determined that the 2008 Agreement’s arbitration clause contained “direct and broad delegation language,” which showed a “clear and unmistakable intent” to empower an arbitrator to decide arbitrability, rather than the court. Thus, without deciding whether the 2019 Term Sheet was enforceable or not, the district court granted the Estate’s motion to compel arbitration. McKenzie appealed.
The First Circuit Decision
The First Circuit, engaging in a de novo review under the Federal Arbitration Act, applied the presumption that courts (not arbitrators) must resolve gateway disputes about whether a particular arbitration clause binds parties in a particular case. The court noted that, while parties can agree for an arbitrator to decide issues of arbitrability, there must be clear and unmistakable evidence of such delegation, because arbitration is a matter of consent. The 2008 Agreement could not provide such clear and unmistakable evidence if the 2019 Term Sheet was binding.
With arbitrability in dispute because of a possibly superseding contract, and no clear evidence that the parties agreed to let an arbitrator decide the gateway question of arbitrability, the court remanded to the district court to determine whether the parties had agreed to arbitrate.
This article was originally published in the North America Newsletter.
