Arbitration Rules Decide Issue Of Arbitrability

Maisel v. McDougal Littell (S.D.N.Y. May 22, 2006)

In 1998, Jay Maisel licensed a photograph "Mosque rays" for use in a high school textbook "The Language of Literature" published by McDougal Littell. The license was limited to only 40,000 copies and stated that "[a]ny additional usage must be negotiated separately." Further, it included an arbitration clause:

Any dispute regarding this invoice, including its validity, interpretation, performance, or breach shall be arbitrated in New York, N.Y. under the rules of the American Arbitration Association and the laws of New York. Judgment on the Arbitration Award may be entered in the highest federal or state court having jurisdiction. Any dispute involving $1,000.00 or less may be submitted, without arbitration, to any court having jurisdiction thereof. User shall pay all arbitration and court costs, reasonable attorney fees plus legal interest on any award of judgment.

Unfortunately, this agreement was not sufficient to avoid a dispute between the two parties:

In late 2005 plaintiff, while conducting an audit of his licenses, inquired of defendant whether it was still reproducing his image. Defendant, without revealing its unauthorized uses, told plaintiff that it was still using his photograph, and requested a new license for 40,000 additional copies. When plaintiff refused to provide a new license until an exact accounting was made of past uses, defendant advised plaintiff in writing that defendant had actually reproduced his image 523,900 times in The Language of Literature between 2000 and 2005. A short time later, in-house counsel for Houghton Mifflin, into which McDougal Littell merge[d], further modified its use count in a letter to plaintiff's attorneys dated October 19, 2005, when she stated that the number of copies of plaintiff's photograph either made, or to be made, was closer to 1.4 million. None of the uses beyond the license parameters granted in 1998 were made with plaintiff's permission, knowledge or authority.

After some attempts at negotiation, the defendant moved for arbitration of the agreement by the American Arbitration Association ("AAA"). The plaintiff, in return, sought a stay of arbitration by arguing that the defendant's actions were outside the scope of the contract:

once defendant ··· exceeded its authorized printing of 40,000 copies of plaintiff's image, it assumed the legal status of a ‘stranger’ identical to one who takes the copyrights of others never having obtained a license in the first place. Here, defendant's status changed as soon as it exceeded the clear limits of plaintiff's license. At that moment defendant became a copyright infringer, identical to one who pirates wholesale the work of a copyright holder, never having had a contractual relationship with him in the first place.

The parties did not dispute that the Federal Arbitration Act ("FAA") applied. Thus, the court first noted that "[u]nder the FAA, there is a general presumption that the issue of arbitrability should be resolved by the courts." Nonetheless, where "there is clear and unmistakable evidence from the arbitration agreement, as construed by the relevant state law, that the parties intended that the question of arbitrability shall be decided by the arbitrator," the issue of arbitrability is referred to the arbitrator.

Based on the license clause's selection of the AAA for arbitration, the court found that, pursuant to the AAA's Commercial Arbitration Rules, that such "clear and unmistakable" evidence existed, thereby requiring that the arbitrator determine the issue of arbitrability. Further, the court found that this rule was not in conflict with the laws of New York and was consistent with Second Circuit jurisprudence.

Holding: "The argument that the 40,000 limit in the 1998 license is a condition and not a covenant is plainly a question of the interpretation of the contract as regards the merits, and is for the arbitrator." Plaintiff's stay of arbitration was denied. Defendant's motion for an order compelling arbitration was granted.