The case involved a dispute between the owner of the Cabbage Patch Kids brand and related intellectual property (“CPK”), and licensee JAKKS Pacific, Inc., which had an exclusive license to use the brand and intellectual property between 2012 and 2014. Prior to the end of the license agreement, CPK selected a new licensee, Wicked Cool Toys, to manufacture and sell Cabbage Patch Kids dolls and products beginning in 2015. To that end, CPK and Wicked Cool Toys entered into a deal memorandum on May 30, 2014 whereby CPK permitted Wicked Cool Toys to immediately begin the process of creating and promoting a new line of dolls. Shortly thereafter, JAKKS asserted that CPK had breached its exclusive license and stopped paying royalties due under the agreement. CPK responded by filing suit in a federal court in Georgia seeking an order compelling arbitration and confirmation of any arbitration award.
At issue during arbitration was the meaning of a provision in the license agreement reserving to CPK the right to “engage, during the 365-day period prior to the termination or expiration of [the agreements], in the negotiation, with potential licensees (including competitors of Licensee), of one or more license agreements granting licenses with respect to” the products covered by JAKKS’s exclusive license, “to become effective upon the expiration or earlier termination of [the agreements].” JAKKS argued that, under that provision, CPK could only “negotiate” with potential licensees in 2014, and was prohibited from actually reaching an agreement with a new licensee or doing anything else to make it possible for a new licensee to actually launch a new line of Cabbage Patch Kids products in 2015. The arbitrator concluded that this provision, particularly the word “negotiate,” was ambiguous in light of the circumstances, and that “it was the intention of the parties” that CPK and Wicked Cool Toys “could do what they did in order to transition into the manufacture and launch in 2015 of a new seasonal line of [Cabbage Patch Kids] products, without the de facto creation of a ‘gap’ of about one year.” The arbitrator therefore awarded CPK the royalties withheld by JAKKS and the court confirmed the award.
On appeal, JAKKS moved to vacate the award and argued under both Georgia law and the FAA that the arbitrator manifestly disregarded the law and exceeded his authority. The Eleventh Circuit disagreed and affirmed the district court’s confirmation of the award. The court found that the arbitrator did not manifestly disregard the law by considering the commercial context of the relevant market when determining whether the license agreement provision allowing CPK to engage in the negotiation of a new license agreement in 2014 was ambiguous. In addition, the court held that because “the subject of the arbitration proceeding was the parties’ dispute about the construction, meaning, or enforceability of certain terms” of the license agreement, the arbitrator did not overstep his authority by deciding the meaning of the provision at issue. The court also rejected JAKKS’ argument that the arbitrator violated the FAA and held that the arbitrator was interpreting, rather than modifying, the relevant provision because it was ambiguous on its face. , Case No. 17-11513 (11th Cir. Nov. 17, 2017).