The Other Shoe Drops for Peruvian Distributor After Circuit Court Reinstates Arbitration Award in Favor of New Balance
On April 6, 2023, popular footwear and fitness apparel company, New Balance Athletics (“New Balance”), stepped away with a win as the First Circuit Court of Appeals reversed an earlier Massachusetts district court’s decision to vacate an arbitration award in favor of New Balance arising out of a dispute with its distributor in Peru. (Ribadeneira v. New Balance Athletics Inc., No. 21-1831 (1st Cir. Apr. 6, 2023)). The Court of Appeals found that the respondents were – contrary to their contentions – subject to the arbitrator’s jurisdiction and bound by the original agreement between the parties to arbitrate their disputes. As it turned out, the parties’ journey to the Court of Appeals was more of a marathon than a sprint.
In January 2013, New Balance entered into a distribution agreement with Peruvian Sporting Goods (“PSG”), whereby PSG would serve as the exclusive wholesale distributor of New Balance products in Peru in exchange for paying distribution fees. The agreement, which was signed only by New Balance and PSG, included a choice of law clause mandating Massachusetts law as well as an arbitration clause, which New Balance ultimately invoked in 2018. However, the dispute is no ordinary breach of contract action. Several key events between 2013 and 2018 before multiple tribunals frame the warm-up to the arbitration.
The original 2013 distribution agreement (“Distribution Agreement”) had a one-year term but contained a provision that allowed it to automatically renew year-to-year absent any contrary notice by either party. In 2015, the relationship began to wear thin when PSG fell behind in its payment of distribution fees owed to New Balance, prompting the parties to exchange a draft of a new distribution agreement (“New Agreement”). The New Agreement contained a similar arbitration clause to the original Distribution Agreement. At that time, it was purportedly the parties’ understanding that a new entity would be incorporated that would eventually replace PSG as the distributor of New Balance’s products in Peru.
That new entity, Superdeporte Plus Peru S.A.C (“Superdeporte”) was owned by plaintiff Roderigo Ribadeneira (“Ribadeneira”) who, in 2013, was PSG’s majority shareholder. Despite negotiations, neither party went the extra mile to give notice of their intent to let the Distribution Agreement expire, so it was auto-renewed until December 31, 2016.
In May 2016, Superdeporte laced up and was ready to assume operations in place of PSG. PSG informed New Balance that it was ready to transfer operations to Superdeporte and sought New Balance’s consent to modify their agreement to substitute Superdeporte as New Balance’s Peruvian distributor under the Distribution Agreement. At that point, New Balance denied that it had ever finalized the New Agreement with either PSG or Superdeporte and subsequently informed PSG of its intent to end its relationship with both PSG and Superdeporte and work with another distributor, following the Distribution Agreement’s expiration at the close of 2016.
In November 2016, PSG and Superdeporte executed assignment agreements with Ribadeneira and transferred to him any legal claims they had against New Balance that arose out of the New Agreement and the surrounding negotiations, as well as a transfer of rights to bring legal actions worldwide against New Balance to vindicate such rights.
A few months later, the race was on. Ribadeneira sued New Balance in a Peruvian court asserting claims that New Balance had breached the New Agreement or, in the alternative, breached its duty to negotiate in good faith. Ribadeneira later moved for an injunction to prevent New Balance from using any distributor in Peru other than Superdeporte (according to the court, the injunction was eventually lifted in July 2018 after the Peruvian court determined that New Balance and PSG no longer had any effective distribution agreement).
In response, New Balance brought arbitration proceedings against PSG and Ribadeneira in Boston for unpaid fees under the Distribution Agreement. Ribadeneira objected to the arbitrator’s jurisdiction over him as a non-signatory of the Distribution Agreement and also argued that PSG’s assignment of its claims to Ribadeneira were only made in relation to the New Agreement and was not intended to bind him to the Distribution Agreement. PSG itself asserted a counterclaim that New Balance itself had breached the Distribution Agreement. After Ribadeneira and PSG assigned back rights to Superdeporte, New Balance filed an amended notice of arbitration adding Superdeporte as a respondent and added claims relating to PSG’s injunction, which had interfered with New Balance’s dealings with an alternate distributor.
In August 2020, the arbitrator issued a Partial Final Award, finding for New Balance on its claim that PSG had breached the Distribution Agreement and holding PSG and Superdeporte jointly liable for over $800,000 in damages (on the theory that Superdeporte was PSG's successor-in-interest). Because the arbitrator declined to pierce the corporate veil, Ribadeneira was not found liable for PSG's breach of the Distribution Agreement. However, the arbitrator upheld New Balance’s claim that Ribadeneira had tortiously interfered with its agreement with an alternate Peruvian distributor by seeking and obtaining the Peru court injunction based on alleged misrepresentations (also imposing liability and damages on both PSG and Superdeporte for tortious interference based on the parties’ assignment of rights). The arbitrator rejected PSG and Superdeporte's counterclaim alleging that New Balance had breached the New Agreement, finding that agreement unenforceable. The Final Award was issued in February 2021.
In yet another twist, Ribadeneira and Superdeporte filed a motion in Massachusetts district court to vacate the arbitral award. In September 2021 the district court sided with Ribadneira and Superdeporte, finding that the arbitrator had improperly exercised jurisdiction over those parties, as Ribadeneira and Superdeporte were non-signatories of the Distribution Agreement, and that neither principles of assumption nor of equitable estoppel overcame their non-signatory status. New Balance appealed.
Unfortunately for Ribadeneira and Superdeporte, upon review, the First Circuit reversed, all but putting an end to this six-year litigation. The court explained that while "arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit," “arbitral jurisdiction is ‘not limited to those who have signed an arbitration agreement.’” Under the theories of assumption and equitable estoppel, the Court reversed the earlier decision to vacate the award. As the appeals court explained, the basic notion is that a non-signatory may still be bound to an arbitration agreement if their subsequent conduct indicates that they are assuming the obligation to arbitrate. The court noted that other federal courts had applied the assumption theory in instances where a non-signatory is also the successor-in-interest, in which case they generally assume the predecessor’s obligation to arbitrate. The court also cited precedent where courts applied assumption theory where a non-signatory is assigned rights under a contract with an arbitration clause, thus assuming the obligation to arbitrate under that clause (absent a waiver). Here, the shoe fit. The appeals court concluded that Superdeporte was a “mere continuation” of PSG and that as such, Superdeporte was liable for PSG’s obligations under the Distribution Agreement as its successor-in-interest and thereby became bound by the agreement’s arbitration clause. As to the arbitrator’s jurisdiction over Ribadeneira, the appeals court found that because he sought to enforce the terms of the New Agreement, thereby knowingly receiving a direct benefit from that contract, Ribadeneira was “estopped from avoiding that putative contract’s arbitration clause, despite his non-signatory status.”
Given the serpentine journey of this litigation, it would not be surprising if there were further developments (as of publication, a check of the district court’s docket did not reveal any new filings by either party). At the very least, for now it seems New Balance will be keeping its Peruvian shelves stocked with the help of another distributor.