9/2/2014 9:09:00 AM,
Jeff D. Gorman
(CN) - A company that resisted arbitration with the Baby Phat clothing company over a royalties dispute cannot now compel that process, a New York appeals court ruled.
Baby Phat, an urban fashion brand for women and girls, alleged that it bought trademarks, copyrights and contractual rights from Phat Fashions, a wholly owned subsidiary of Kellwood Co, at a price of $5.35 million.
It said Kellwood's royalty schedule said a license with a company called Intimateco would guarantee Baby Phat at least $1.5 million over three years. Claiming that the correct amount of royalties from the Intimateco license was only $75,000, Baby Phat sought to arbitrate Kellwood's alleged misrepresentation.
After BabyPhat filed suit in New York, Kellwood moved to dismiss or stay the action in favor of arbitration. Justice Charles Ramos rejected that motion, however, and the Appellate Division's First Department affirmed on Aug. 21, noting that Kellwood "resisted plaintiff's original demand for arbitration."
"Even if defendant were correct that PFLLC, its now defunct subsidiary, stands to be inequitably affected by any judgment rendered in plaintiff's favor in this action, dismissal is not warranted," the unsigned decision states, abbreviating Phat Fashions LLC. "Were the complaint dismissed, plaintiff would have no other effective forum in which to have its claims against defendant resolved."
Kellwood can defend itself without the involvement of Phat Fashions, the court found.
"The allegations that defendant, through its domination of PFLLC, misrepresented the value of the assets sold and then caused PFLLC to become judgment proof, are also sufficient to support claims that defendant perpetrated a wrong or injustice against plaintiff, thus warranting intervention by a court of equity," the five-justice panel found.
Kellwood did, however, obtain dismissal of Baby Phat's negligent misrepresentation claim since the appellate court found that the parties lack a special relationship.