Cota v. Art Brand Studios, LLC

Background

Blend Cota and Redina Tili entered exclusive publishing agreements with Art Brand Studios, LLC in 2017. The agreements gave Art Brand exclusive rights involving artwork produced under the agreements, required the artists to produce at least two images per month, and restricted certain sales, distribution, and creation of artwork in a confusingly similar style. The agreements also contained non-solicitation and other post-termination restrictions, and required disputes to proceed through mediation and then arbitration in New York under American Arbitration Association rules.

The artists alleged that Art Brand did not sufficiently market or sell their artwork, failed to provide quarterly royalty reports, and failed to pay royalties. Art Brand alleged that the artists breached the agreements in several ways, including failing to produce required work and selling or marketing artwork without Art Brand’s consent. Art Brand began arbitration in December 2019. The artists filed defenses and counterclaims, including claims that provisions of the agreements were void as against public policy.

The arbitration panel suspended the proceeding after both sides were in arrears on fees. The panel told Art Brand that it could pay the outstanding amount for both sides and seek repayment if it prevailed. Art Brand declined to do so, and the panel terminated the arbitration on February 24, 2021. The artists filed this federal action shortly before that termination.

Motion to Compel Arbitration

Art Brand moved under the Federal Arbitration Act to compel arbitration and stay the court case. The artists did not dispute that they had entered binding arbitration agreements or that their dispute ordinarily fell within those agreements. They argued instead that Art Brand had defaulted by refusing to pay the fees necessary to keep the arbitration alive, and that the arbitration had already ended.

The court held that Art Brand acted inconsistently with its right to arbitrate when it chose not to advance the fees after the panel made clear that the proceeding would terminate unless the full amount was paid. The court also found prejudice because the termination deprived the artists of an opportunity to have their defenses and counterclaims decided in the agreed arbitration forum. The court therefore concluded that Art Brand had waived its contractual right to arbitrate and was in default under the Federal Arbitration Act.

The court separately held that the arbitration had already been conducted as required by the agreements and the applicable arbitration rules. The panel had suspended and then terminated the proceeding after the required payment was not made. The court stated that it could not force the arbitration organization to reopen a proceeding it had closed under its rules. The court therefore denied Art Brand’s motion to compel arbitration.

Motion to Dismiss

The artists sought a declaration that restraints in the agreements violated Section 16600 of the California Business and Professions Code. That provision generally makes void a contract that restrains someone from engaging in a lawful profession, trade, or business. The court explained that California’s rule requires consideration of whether a restraint is reasonable in the circumstances.

The court held that the artists failed to state a claim concerning paragraph 3(f), which allowed them to sell original artwork rejected by Art Brand but restricted them from giving third parties rights to print, sell, reproduce, distribute, or otherwise use those rejected images. The complaint did not discuss paragraph 3(f) or plead facts showing why the restriction was unreasonable, particularly because the artists could sell the original rejected artwork.

The court also treated claims concerning certain royalty allegations and contract provisions as abandoned because the artists did not brief them. The artists’ allegations about Art Brand’s enforcement of other contract provisions appeared only in their opposition brief, not in the complaint, and could not be added through briefing. The court further noted that those claims had not been asserted as counterclaims in the terminated arbitration. For these reasons, the court granted Art Brand’s motion to dismiss for failure to state a claim.

Leave to Amend and Disposition

The court granted the artists leave to amend. It held that it could not conclude that every possible challenge under Section 16600 would be futile, and allowed amendment to the extent the artists could plead additional supporting facts or assert claims from the terminated arbitration that were not included in the complaint.

The order states that Art Brand’s motion was granted in part and denied in part. The motion to dismiss and compel arbitration was denied; the motion to dismiss for failure to state a claim was granted; and the artists were granted leave to amend. Judge Lewis J. Liman directed the Clerk of Court to close the motion docket entry.