Comedy Club, Inc. v. Improv West ( 2007 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
COMEDY CLUB, INC., a Louisiana 
corporation; AL COPELAND
INVESTMENTS, INC., a Louisiana
corporation,
No. 05-55739
Plaintiffs-Appellants,
v.  D.C. No.
CV-03-08134-WMB
IMPROV WEST ASSOCIATES, a
California Limited Partnership;
CALIFORNIA COMEDY, INC., a
California corporation,
Defendants-Appellees.

COMEDY CLUB, INC., a Louisiana 
corporation; AL COPELAND
INVESTMENTS, INC., a Louisiana
corporation,
No. 05-56100
Plaintiffs-Appellants,
v.  D.C. No.
CV-03-08134-WMB
IMPROV WEST ASSOCIATES, a
OPINION
California Limited Partnership;
CALIFORNIA COMEDY, INC., a
California corporation,
Defendants-Appellees.

Appeal from the United States District Court
for the Central District of California
William Matthew Byrne, Senior Judge, Presiding
Argued and Submitted
April 17, 2007—Pasadena, California
11825
11826 COMEDY CLUB v. IMPROV WEST ASSOCIATES
Filed September 7, 2007
Before: Jerome Farris and Ronald M. Gould, Circuit Judges,
and Kevin Thomas Duffy,* District Judge.
Opinion by Judge Gould
*The Honorable Kevin Thomas Duffy, Senior United States District
Judge for the Southern District of New York, sitting by designation.
COMEDY CLUB v. IMPROV WEST ASSOCIATES 11829
COUNSEL
Karina B. Sterman, Ervin, Cohen & Jessup, LLP, Beverly
Hills, California, for appellants Comedy Club, Inc. and Al
Copeland Investments, Inc.
Robert N. Klieger, Irell & Manella LLP, Los Angeles, Cali-
fornia, for appellees Improv West Associates and California
Comedy, Inc.
11830 COMEDY CLUB v. IMPROV WEST ASSOCIATES
OPINION
GOULD, Circuit Judge:
On June 13, 1999, Comedy Club, Inc. and Al Copeland
Investments, Inc. (collectively “CCI”) executed a Trademark
License Agreement (“Trademark Agreement”) with Improv
West Associates (“Improv West”) that granted CCI an exclu-
sive nationwide license to use Improv West’s trademarks. A
few years later, CCI breached the agreement and sought to
protect its interests in the trademarks in federal district court
by filing a declaratory judgment action. After a complex pro-
cedural history, the parties were left with an arbitration award
and two district court orders, one order compelling the parties
to arbitrate, and another order confirming the arbitration
award. CCI appeals both district court orders. We have juris-
diction under 28 U.S.C. § 1291. We lack jurisdiction to
review the district court’s order compelling arbitration. We
affirm in part and vacate in part the district court’s order con-
firming the arbitration award, and we remand to the district
court for further proceedings.
I
Improv West is the founder of the Improv Comedy Club
and the creator and owner of the “Improv” and “Improvisa-
tion” trademarks (“Improv marks”). CCI owns and operates
restaurants and comedy clubs nationwide. On June 13, 1999,
CCI and Improv West entered a Trademark Agreement1 that
provided, inter alia: (1) that Improv West granted CCI an
exclusive nationwide license to use the Improv marks in con-
nection with the opening of new comedy clubs; (2) that,
according to a development schedule, CCI was to open four
Improv clubs a year in 2001 through 2003;2 and (3) that CCI
1
Also on June 13, 1999, in a separate Asset Purchase Agreement, CCI
purchased the Melrose Improv Club from Improv West. The Melrose
Improv Club is located in Los Angeles, California.
2
The original § 12.a. of the Trademark Agreement called for CCI to
open and operate at least three Improv clubs by 2001, and two each year
COMEDY CLUB v. IMPROV WEST ASSOCIATES 11831
was prohibited from opening any non-Improv comedy clubs
during the term of the Trademark Agreement.3 The Trade-
mark Agreement also had an arbitration clause:
All disputes relating to or arising under this Agree-
ment or the Asset Purchase Agreement shall be
resolved by arbitration in Los Angeles, California in
accordance with the commercial arbitration rules of
the American Arbitration Association. In any such
arbitration, the parties shall be entitled to discovery
in the same manner as if the dispute was being liti-
gated in Los Angeles Superior Court. Notwithstand-
ing this agreement to arbitrate, the parties, in
addition to arbitration, shall be entitled to pursue
equitable remedies and agree that the state and fed-
eral courts shall have exclusive jurisdiction for such
purpose and for the purpose of compelling arbitra-
tion and/or enforcing any arbitration award. The par-
ties agree to submit to the jurisdiction of such courts
and agree that service of process in any such action
may be made by certified mail. The prevailing party
in any arbitration or action to enforce this Agreement
or the Asset Purchase Agreement shall be entitled to
its costs, including reasonable attorneys fees.
CCI concedes that it failed to open eight Improv clubs by
2002,4 and that it was in default of amended § 12.a. of the
thereafter so that CCI would own and operate at least seven Improv clubs
by 2003. CCI and Improv West amended § 12.a. on October 19, 1999, cre-
ating the schedule of four Improv clubs a year in 2001 through 2003.
3
Section 9.j. of the Trademark Agreement stated: “Licensee shall not
own or operate, and Licensee shall ensure that none of its Affiliates shall
own or operate any bar, restaurant, nightclub, or other facility which pre-
sents live stand-up or sketch comedy performances or live improvisational
performances, other than the Melrose Improv or a Club, or Second City.”
4
In CCI’s original complaint, CCI claims that it opened or obtained an
interest in at least seven Improv clubs, not including the Melrose Improv
Club.
11832 COMEDY CLUB v. IMPROV WEST ASSOCIATES
Trademark Agreement. Consistent with Improv West’s sole
remedy, as stated in § 13.b.,5 Improv West sent CCI a letter
asserting that CCI was in default of the Trademark Agree-
ment, withdrawing CCI’s license to use the Improv marks and
rights to open more Improv clubs, and informing CCI that
Improv West intended to begin opening its own Improv clubs.
In response to Improv West’s letter, CCI filed a complaint
in federal district court seeking declaratory relief. CCI’s com-
plaint sought a declaration that the covenant that CCI could
not open any non-Improv comedy clubs was void under Cali-
fornia Business and Professions Code (“CBPC”) § 16600, and
that CCI’s failure to meet the development schedule did not
revoke CCI’s license to the Improv marks or right to open
Improv clubs. Improv West then filed a demand for arbitra-
tion seeking damages.6
On August 2, 2004, the district court ordered the parties to
arbitrate their dispute. CCI did not appeal that order until May
16, 2005.
On February 28, 2005, the arbitrator entered a Partial Final
5
Section 13.b. of the Trademark Agreement provided Improv West’s
sole remedy in the event CCI defaulted on the § 12.a. development sched-
ule. In pertinent part, § 13.b. stated:
Nothwithstanding the above enumerated remedies, in the event
[CCI] fails to fulfill the schedule set forth in section 12.a.,
[Improv West’s] sole remedy shall be as follows. Upon notice to
[CCI], [CCI] shall lose the right, power, and License (i) to use the
Trademarks in connection with any Clubs which are not, as of the
date of such failure, under construction or open for business and
operated by [CCI], an Affiliate of [CCI] or other Operator and (ii)
to sub-license Third Parties use of the Trademarks in connection
with any new Clubs.
6
In a further response, CCI amended its complaint seeking to enjoin
Improv West from opening, or authorizing third parties to open, any
Improv clubs, and asking for disgorgement of Improv West’s profits from
any such action.
COMEDY CLUB v. IMPROV WEST ASSOCIATES 11833
Arbitration Award that stated: (1) that CCI defaulted on the
Trademark Agreement by failing to adhere to the develop-
ment schedule listed in amended § 12.a.; (2) that CCI for-
feited its rights to open Improv clubs and its use of the Improv
marks license in connection with any clubs not open or under
construction as of October 15, 2002; (3) that Improv West
could open or license to third parties new Improv clubs; (4)
that § 9.j. of the Trademark Agreement was “a valid and
enforceable in-term covenant not to compete” and remained
valid “for the remaining term of the Agreement”7; (5) that
CCI and its “Affiliates”8 were enjoined from opening or oper-
ating any other comedy clubs other than those open or under
construction as of October 15, 2002 for the duration of the
Trademark Agreement; (6) that neither CCI nor its Affiliates
could change the name on any of its current clubs; and (7) that
Improv West was entitled to attorneys fees and costs. On
April 14, 2005, the district court confirmed the Partial Award.
CCI timely appealed, tendering to us the issues addressed in
this opinion.9
7
Unless the parties agree to terminate the Trademark Agreement earlier,
by its own terms, the Trademark Agreement does not end until 2019.
8
Section 1 of the Trademark Agreement stated, in relevant part, that “ ‘a
Person’ is “any natural person, or any corporation, partnership, joint ven-
ture, limited liability company, business association, trust . . . or other enti-
ty,” and that the term “Affiliate” means and includes “any members of
such Person’s immediate family, or the member of the immediate family
of any direct or indirect shareholder of such Person. . . . Further, the mem-
bers of the immediate family of any Person shall include all collateral rela-
tives of such Person having a common linear ancestor with such Person,
and the spouse or any former spouse of such Person or any of such collat-
eral relatives of such spouse.”
9
Although all the issues in this appeal concern the arbitrator’s decision
in the Partial Final Arbitration Award entered on February 28, 2005, the
arbitrator issued a second arbitral award, the Final Arbitration Award,
which was decided on May 20, 2005. The district court confirmed that
award on June 21, 2005, and entered judgment on August 29, 2005. CCI
timely appealed the district court’s order confirming the Final Arbitration
Award on July 20, 2005, but raised no issues on appeal concerning that
award. We consolidated the two cases for appeal purposes.
11834 COMEDY CLUB v. IMPROV WEST ASSOCIATES
II
CCI first argues that the district court erred when it issued
its order compelling the parties to arbitrate. Improv West in
turn contends that we lack jurisdiction over this issue because
CCI’s appeal of the district court’s order compelling arbitra-
tion is untimely.
[1] The district court’s order compelling the parties to arbi-
trate dismissed CCI’s claims when it sent the parties to arbi-
tration. Because the district court’s order dismissed CCI’s
claims, it is a final order. See Green Tree Fin. Corp. v. Ran-
dolph, 531 U.S. 79, 86 (2000) (holding that a district court’s
order dismissing the plaintiffs claims and compelling arbitra-
tion was a final decision because the order “end[ed] the litiga-
tion on the merits and le[ft] nothing more for the court to do
but execute the judgment” (internal quotation marks omit-
ted)); see also 9 U.S.C. § 16(a)(3) (2006) (“An appeal may be
taken from . . . a final decision with respect to an arbitration
that is subject to this title.”); 9 U.S.C. § 16(a)(3) prac. cmt.
(instructing that subdivision (a)(3) makes appealable a district
court’s determination compelling arbitration that is a final
decision); Bushley v. Credit Suisse First Boston, 360 F.3d
1149, 1153 n.1 (9th Cir. 2004) (adopting the principle that “a
dismissal renders an order appealable under § 16(a)(3)” (cita-
tion omitted)).
[2] 28 U.S.C. § 2107(a) and Federal Rule of Appellate Pro-
cedure 4(a)(1) require that a notice of appeal be filed in a civil
case “within 30 days after the judgment or order appealed
from is entered.” Fed. R. App. P. 4(a)(1)(A). Because the dis-
trict court did not enter judgment on the order to compel arbi-
tration, CCI had 180 days to appeal the order. See Fed. R.
App. P. 4(a)(7)(A)(ii); see also Bowles v. Russell, ___ U.S.
___, 127 S. Ct. 2360, 2363 (2007) (stating that “the taking of
an appeal within the prescribed time is mandatory and juris-
dictional” (internal quotation marks omitted)).
COMEDY CLUB v. IMPROV WEST ASSOCIATES 11835
[3] CCI filed its first notice of appeal of the district court’s
order compelling arbitration on May 16, 2005, 287 days after
the order was entered on August 2, 2004. This is well beyond
the 180 days allowed by Federal Rule of Appellate Procedure
4(a)(7)(A)(ii). CCI’s appeal of the district court’s order com-
pelling arbitration is untimely, and we lack jurisdiction to hear
the appeal of that issue.
III
We next consider CCI’s contention that the district court
erred by confirming the arbitration award. We review a dis-
trict court’s confirmation of an arbitration award de novo. See
First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 947-48
(1995). CCI presents four arguments: (1) that the arbitrator
lacked authority to arbitrate the equitable claims; (2) that the
arbitrator exceeded the scope of his authority by issuing two
permanent injunctions; (3) that the arbitrator’s award is irra-
tional; and (4) that the arbitrator’s award violates CBPC
§ 16600. We address each argument in turn.
A
CCI submits that the arbitrator lacked authority to arbitrate
because the arbitration clause in the Trademark Agreement
grants state and federal courts an “exclusive” jurisdiction over
equitable claims. We review the validity and scope of an arbi-
tration clause de novo. See Moore v. Local 569 of Int’l Bhd.
of Elec. Workers, 53 F.3d 1054, 1055-56 (9th Cir. 1995).
[4] It is well established “that where the contract contains
an arbitration clause, there is a presumption of arbitrability.”
AT&T Techs., Inc. v. Commc’ns Workers of Am., 475 U.S.
643, 650 (1986). “[A]n order to arbitrate the particular griev-
ance should not be denied unless it may be said with positive
assurance that the arbitration clause is not susceptible of an
interpretation that covers the asserted dispute. Doubts should
be resolved in favor of coverage.” Id.; see also Three Valleys
11836 COMEDY CLUB v. IMPROV WEST ASSOCIATES
Mun. Water Dist. v. E.F. Hutton & Co., 925 F.2d 1136, 1139
(9th Cir. 1991) (“Under the Federal Arbitration Act . . . any
doubts concerning the scope of arbitrable issues should be
resolved in favor of arbitration . . . .” (internal quotation
marks and citation omitted)).
It is also well established that “[w]hen deciding whether the
parties agreed to arbitrate a certain matter . . . courts generally
. . . should apply ordinary state-law principles that govern the
formation of contracts.” First Options, 514 U.S. at 944. Only
disputes “that the parties have agreed to submit to arbitration”
should be arbitrated. Id. at 943; see also Republic of Nicar. v.
Standard Fruit Co., 937 F.2d 469, 478 (9th Cir. 1991) (stating
that “[t]he scope of the [arbitration] clause must . . . be inter-
preted liberally”).
[5] Under California contract law, “if the language [of a
contract] is clear and explicit, and does not involve an absur-
dity” the language must govern the contract’s interpretation.
Cal. Civ. Code § 1638. Moreover, when a contract is written,
“the intention of the parties is to be ascertained from the writ-
ing alone, if possible.” Cal. Civ. Code § 1639. “[I]f reason-
ably practicable” a contract must be interpreted as a whole,
“so as to give effect to every part, . . . each clause helping to
interpret the other.” Cal. Civ. Code § 1641; see also In re
Affordable Hous. Dev. Corp., 175 B.R. 324, 329 (B.A.P. 9th
Cir. 1994) (“California law provides that one phrase of a con-
tract should not be interpreted so as to render another phrase
of the contract meaningless.”). However, “[i]f a contract is
capable of two different reasonable interpretations, the con-
tract is ambiguous,” Oceanside 84, Ltd. v. Fid. Fed. Bank, 56
Cal. App. 4th 1441, 1448 (1997), and under the federal pre-
sumption in favor of arbitration, an arbitrator would have
jurisdiction to arbitrate claims. See AT&T Techs., 475 U.S. at
650; Three Valleys, 925 F.2d at 1139.
Applying these principles, we conclude that the Trademark
Agreement’s arbitration clause grants the arbitrator authority
COMEDY CLUB v. IMPROV WEST ASSOCIATES 11837
over “all disputes” arising from the Trademark Agreement.
There are three relevant clauses in the arbitration agreement:
(1) “[a]ll disputes relating to or arising under this Agreement
. . . shall be resolved by arbitration”; (2) “[n]otwithstanding
this agreement to arbitrate, the parties, in addition to arbitra-
tion, shall be entitled to pursue equitable remedies and agree
that the state and federal courts shall have exclusive jurisdic-
tion for such purpose and for the purpose of compelling arbi-
tration and/or enforcing any arbitration award”; and (3) “[t]he
prevailing party in any arbitration or action to enforce this
Agreement . . . shall be entitled to its costs, including reason-
able attorneys fees.”
CCI contends that clause two is explicit that only state and
federal courts, and not an arbitrator, have jurisdiction over
equitable claims. Improv West counters that the second clause
only carved out equitable claims “in aid of arbitration” to
maintain the status quo between the parties pending arbitra-
tion, and that the second clause did not “supplant the arbitra-
tor’s authority” to decide all disputes under the Trademark
Agreement.
[6] A natural reading of clause two lends plausibility to
Improv West’s theory. The language “in addition to arbitra-
tion” in clause two suggests that arbitration still applies to all
disputes, but that in addition, the parties are “entitled to pur-
sue equitable remedies” before courts. If the parties intended
to carve out an exception to arbitration for all equitable
claims, they could have done so without the language “in
addition to arbitration.” Because the parties included this lan-
guage, it is plausible and a permissible contract interpretation
that the equitable claims exception in clause two was intended
to apply only to claims designed to maintain the status quo
between the parties. Stated another way, it was a rational
interpretation of the agreement to say that the arbitrator could
decide both equitable and legal claims and that the provision
for court jurisdiction on equitable matters was ancillary to the
arbitration. Moreover, the Federal Arbitration Act, 9 U.S.C.
11838 COMEDY CLUB v. IMPROV WEST ASSOCIATES
§ 3, provides a court with the ability to stay “trial of [an]
action until such arbitration has been had,” but it does not
give a court the authority to issue equitable remedies, such as
a temporary injunction, to maintain the status quo between the
parties. Thus, it makes sense that if the parties wanted to give
themselves the ability to seek temporary equitable remedies in
courts while arbitration was ongoing, they would add such a
clause to the arbitration agreement.
To support its interpretation, CCI cites language in clause
three that awards costs and attorneys fees to “the prevailing
party in any arbitration or action to enforce this Agreement,”
and phrasing in clause two that grants exclusive jurisdiction
to courts for the “purpose” of “equitable remedies.” These
phrases, although consistent with CCI’s reading of the arbitra-
tion agreement, are equally consistent with Improv West’s
interpretation. These phrases can support that the arbitration
agreement lets the parties pursue equitable remedies in courts
in aid of the arbitration, and gives those courts exclusive juris-
diction over, and awards costs and attorneys fees to the pre-
vailing party in, those actions.
[7] We conclude that the arbitration agreement is “capable
of two different reasonable interpretations.” Oceanside 84, 56
Cal. App. 4th at 1448. Under the federal presumption in favor
of arbitration, because the arbitration agreement is ambigu-
ous, it should be interpreted as granting arbitration coverage
over “all disputes” arising from the Trademark Agreement.
See AT&T Techs., 475 U.S. at 650; Three Valleys, 925 F.2d
at 1139. We hold that the arbitration agreement gave the arbi-
trator authority over all disputes, equitable and legal, and that
he did not exceed his authority by arbitrating equitable claims.
B
We next address CCI’s argument that the arbitrator
exceeded the scope of his authority in issuing two permanent
injunctions, which would provide grounds to vacate the arbi-
COMEDY CLUB v. IMPROV WEST ASSOCIATES 11839
tration award. See Coutee v. Barington Capital Group, L.P.,
336 F.3d 1128, 1134 (9th Cir. 2003); 9 U.S.C. § 10(a)(4).
In his partial arbitration award, the arbitrator (1) enjoined
CCI and its Affiliates from opening or operating any other
comedy clubs other than those open or under construction as
of October 15, 2002 for the duration of the Trademark Agree-
ment and (2) enjoined CCI and its Affiliates from changing
the name on any of their current clubs until the Trademark
Agreement ended. CCI argues that because the Trademark
Agreement defines Affiliates to include “family members,
family members of shareholders, all collateral relatives,10 for-
mer spouses, and all collateral relatives of former spouses,”
the permanent injunctions attempt to bind persons beyond the
scope of the arbitrator’s authority.11 We agree.
[8] A contract may bind non-parties such as an intended
third party beneficiary, an agent, or an assignee. See Benasra
v. Marciano, 92 Cal. App. 4th 987, 991 (2001). But generally
arbitration clauses and contracts do not bind non-parties in the
absence of such extraordinary relationships. As explained in
Buckner v. Tamarin, 98 Cal. App. 4th 140 (2002): “The
strong public policy in favor of arbitration does not extend to
those who are not parties to an arbitration agreement . . . .”
10
Black’s Law Dictionary defines “collateral relative” as “[a] relative
who is not in the direct line of descent, such as a cousin.” Black’s Law
Dictionary 1315 (8th ed. 2004).
11
CCI raises this issue for the first time on appeal. Although we gener-
ally do “not consider an issue raised for the first time on appeal,” we rec-
ognize three exceptions to that rule, by which we may invoke our
discretion and review the issue: (1) where “review is necessary to prevent
a miscarriage of justice or to preserve the integrity of the judicial process”;
(2) where there is a change in the law creating a new issue; or (3) “when
the issue presented is purely one of law and either does not depend on the
factual record developed below, or the pertinent record has been fully
developed.” Cold Mountain v. Garber, 375 F.3d 884, 891 (9th Cir. 2004)
(internal quotation marks and citation omitted). Here, we exercise our dis-
cretion and review CCI’s argument under exceptions one and three.
11840 COMEDY CLUB v. IMPROV WEST ASSOCIATES
Id. at 142 (internal quotation marks omitted); see also NOR-
CAL Mut. Ins. Co. v. Newton, 84 Cal. App. 4th 64, 76 (2000)
(“The common thread . . . is the existence of an agency or
similar relationship between the nonsignatory and one of the
parties to the arbitration agreement. In the absence of such a
relationship, courts have refused to hold nonsignatories to
arbitration agreements.”).
[9] Here, the arbitrator’s injunctions, relying on the Trade-
mark Agreement’s definition of Affiliate, seek to prevent peo-
ple such as cousins of former spouses of CCI partners from
opening or operating any comedy club within the United
States until 2019. These collateral relatives are not in privity
with the Trademark Agreement signatories, or with CCI
shareholders, partners, or “persons.” As an example, it is not
reasonable to preclude from gainful competition in the com-
edy club sphere relatives of ex-spouses of the CCI principals
who were not in an agency relationship with those principals.
Similarly, the arbitrator did not have authority to enjoin a
non-party grandmother of a CCI partner from opening a res-
taurant with live stand up comedy performance until the year
2019. Under California law, the arbitrator lacked the authority
to enjoin these non-parties from owning or operating comedy-
related businesses or restaurants.
Improv West contends that Federal Rule of Civil Procedure
65(d) (“Rule 65(d)”) establishes that an injunction may bind
not only parties to the action but also “their officers, agents,
servants, employees, and attorneys, and [upon] those persons
in active concert or participation with them.” Fed. R. Civ. P.
65(d). However, the wholesale inclusion of relatives as Affili-
ates in the Trademark Agreement’s covenant not to compete,
and the injunctions in the arbitrator’s partial award, go well
beyond binding CCI’s agents, employees, or people in active
concert or participation with it as Rule 65(d) permits. Indeed,
as mentioned above, § 9.j., by its own terms, reaches beyond
persons with an agency or assignee relationship with CCI
partners, and literally purports to bind a CCI “person’s” ex-
COMEDY CLUB v. IMPROV WEST ASSOCIATES 11841
wife and his ex-wife’s cousins, nephews, uncles, and aunts.
The text of Rule 65(d) is exclusive, stating that an injunction
can permissibly bind “only” those persons listed in Rule
65(d). Rule 65(d) does not list collateral relatives of former
spouses, or even grandparents, as potential non-parties who
may be bound by a contract or an arbitration award. And we
do not think it is a proper use of equitable power to restrain
all such persons.
Moreover, precluding non-party relatives or ex-spouses
from opening or operating improv-comedy-related businesses
or restaurants violates CBPC § 16600. CBPC § 16600 pro-
vides, in relevant part, that “every contract by which anyone
is restrained from engaging in a lawful profession, trade, or
business of any kind is to that extent void.” Id. This is a codi-
fication of “the general rule in California [that] covenants not
to compete are void.” Hill Med. Corp. v. Wycoff, 86 Cal.
App.4th 895, 901 (2001). By restricting non-party relatives
and ex-spouses from engaging in a lawful business, the
injunctions, with respect to those persons, exceed the arbitra-
tor’s authority.
[10] We conclude that the arbitrator acted beyond the scope
of his authority as a matter of California law in attempting to
bind all of CCI’s Affiliates, including relatives who were not
parties to the Trademark Agreement, and thus could not be
bound by its provisions. If an arbitrator exceeded the scope of
his authority in issuing an award, and that award is divisible,
we may vacate part of the award and leave the remainder in
force. See Lyle v. Rodgers, 18 U.S. (5 Wheat.) 394, 409
(1820) (Marshall, C.J.) (stating that “an award may be void in
part, and good for the residue”); Barington Capital, 336 F.3d
at 1134 (“A federal court may vacate an arbitration award, or
a portion thereof, if the arbitrators acted beyond their authori-
ty.”). We therefore conclude that the district court should
vacate the arbitration award insofar as it enjoins any of CCI’s
Affiliates who are not connected to the principals of CCI as,
by analogy to Rule 65(d), “their officers, agents, servants,
11842 COMEDY CLUB v. IMPROV WEST ASSOCIATES
employees, and attorneys, and [upon] those persons in active
concert or participation with them.” We hold that a narrowing
of the restrictive covenant on Affiliates is required by CBPC
§ 16600 and the principle that non-parties generally are not
bound in arbitration. Such non-parties can only be restrained
to the extent permitted by Rule 65(d).
C
CCI next contends that the partial arbitration award is irra-
tional because it simultaneously revokes CCI’s license to
open Improv clubs and prevents CCI from opening or operat-
ing any other comedy clubs anywhere in the United States
until 2019 or the termination of the Trademark Agreement.
[11] Review of an arbitration award is “ ‘both limited and
highly deferential’ ” and the arbitration award “may be
vacated only if it is ‘completely irrational’ or ‘constitutes
manifest disregard of the law.’ ” Poweragent Inc. v. Elec.
Data Sys. Corp., 358 F.3d 1187, 1193 (9th Cir. 2004) (quot-
ing Barington Capital, 336 F.3d at 1132-33). We have not
elaborated on what “completely irrational” means, but the
Eighth Circuit has persuasively indicated that the “completely
irrational” standard is extremely narrow and is satisfied only
“where [the arbitration decision” fails to draw its essence
from the agreement.” Hoffman v. Cargill Inc., 236 F.3d 458,
461-62 (8th Cir. 2001). This is a view that we adopt.
Under the partial arbitration award, CCI lost its exclusive
right to open and operate any new Improv clubs using Improv
West’s license. And because the arbitrator found the § 9.j.
covenant not to compete of the Trademark Agreement valid,
CCI also lost the right to open and operate any other new
comedy clubs or restaurants under any other license or name
anywhere in the contiguous United States as long as the
Trademark Agreement remained in effect. Thus, apart from
allowing CCI to continue to operate the handful of Improv
clubs that it had already opened or purchased, see supra note
COMEDY CLUB v. IMPROV WEST ASSOCIATES 11843
4, the arbitrator’s ruling put CCI out of the comedy club busi-
ness.
CCI argues that if it has lost all licensing rights, then there
is no longer any licensing agreement. Both parties agree that
if the Trademark Agreement is no longer in effect then the
§ 9.j. covenant not to compete similarly would no longer be
in effect, and the arbitrator’s award would be considered irra-
tional.
However, as Improv West correctly asserts, Improv West
did not cancel the Trademark Agreement, neither party sought
to terminate the Trademark Agreement as part of the underly-
ing actions, and nothing in the parties’ submissions, the arbi-
trator’s rulings, or the district court’s orders suggest that the
Trademark Agreement was cancelled. Instead, CCI was still
bound under other sections of the Trademark Agreement to
pay Improv West royalties on the seven Improv clubs it still
operated at the conclusion of the arbitration.
A breach by a party to a contract does not in itself cancel
the contract.12 Cancellation of a contract occurs when “either
party puts an end to the contract for breach by the other.”13
See Bernard E. Witkin, Summary of California Law § 925
(10th ed. 2005) (internal quotation marks omitted); see also
Restatement (Second) of Contracts § 274 (1979); 13 Arthur
Linton Corbin, Corbin on Contracts § 67.2 (Rev. ed. 2003).
12
The general rule is that if the breach is a material breach, it may give
grounds for the non-breaching party to cancel the contract, see Rano v.
Sipa Press, Inc., 987 F.2d 580, 586 (9th Cir. 1993), but if the breach is a
partial breach, the non-breaching party’s remedy is for damages. See
Postal Instant Press, Inc. v. Sealy, 43 Cal. App. 4th 1704, 1708-09 (1996).
13
“ ‘Termination occurs when either party pursuant to a power created
by agreement or law puts an end to the contract otherwise than for its
breach.’ ” See Witkin, Summary of California Law § 925 (internal quota-
tion marks omitted).
11844 COMEDY CLUB v. IMPROV WEST ASSOCIATES
At the time of arbitration, Improv West had not cancelled,
nor had the parties terminated, the contract. In the arbitration
Improv West did not seek to terminate the contract. By the
arbitrator’s own award, the arbitrator did not modify the
party’s contractual relationship, including the required pay-
ment of royalties, on the seven Improv clubs that CCI had
opened or bought and was running. Further, per the arbitra-
tor’s award, the covenant not to compete ends when the
Trademark Agreement ends. CCI will then be able to open up
other non-Improv clubs.
CCI entered into the Trademark Agreement with knowl-
edge that there would be consequences if it defaulted on the
development schedule in § 12.a. of the Trademark Agree-
ment. An arbitrator could rationally decide that the § 9.j. cov-
enant not to compete was valid to some degree, while at the
same time upholding Improv West’s remedy to end CCI’s
exclusive license rights to open other Improv clubs.
[12] The basic outline of what the arbitrator did, terminat-
ing an exclusive right to open Improv clubs nationwide,
because of contractually inadequate performance contrary to
the agreed schedule, while keeping in force the restrictive
covenant makes sense in so far as CCI should not have an
exclusive license on Improv clubs absent complying with des-
ignated performance. And so long as CCI was running some
Improv clubs, a restrictive covenant to some degree could
protect Improv West from damage caused by improper com-
petition. Because we cannot say that there is no basis in the
record for the arbitrator’s decision, we hold that the arbitra-
tor’s award is not completely irrational. See NF&M, 524 F.2d
at 760.
D
Finally, we address CCI’s claim that the partial arbitration
award should be vacated because it is in violation of CBPC
§ 16600. CCI argues that the arbitrator’s validation of § 9.j. is
COMEDY CLUB v. IMPROV WEST ASSOCIATES 11845
in manifest disregard of the law. We have stated that for an
arbitrator’s award to be in manifest disregard of the law, “[i]t
must be clear from the record that the arbitrator[ ] recognized
the applicable law and then ignored it.” Mich. Mut. Ins. Co.
v. Unigard Sec. Ins. Co., 44 F.3d 826, 832 (9th Cir. 1995).
[13] Under CBPC § 16600, it is well established that broad
covenants not to compete are void unless they involve a situa-
tion where “a person sells the goodwill of a business [or]
where a partner agrees not to compete in anticipation of disso-
lution of a partnership,” see Kelton v. Stravinski, 138 Cal.
App. 4th 941, 946 (2006), CBPC §§ 16601, 16602, or “they
are necessary to protect trade secrets.” Alliance Payment Sys.
v. Walczer, ___ Cal. Rptr. 3d ___ , No. A111425, 2007 WL
1805066, at *9 (Cal. Ct. App. June 25, 2007). Neither party
alleges any of the above exceptions apply in this case.
The majority of cases interpreting CBPC § 16600 under
California law deal with post-contract or post-employment
covenants not to compete. See e.g., Alliance Payment Sys.,
2007 WL 1805066, at *5; Thompson v. Impaxx, Inc., 113 Cal.
App. 4th 1425, 1427-29 (2003). In this case, the Trademark
Agreement has not been terminated or canceled; rather the
contractual relationship between CCI and Improv West is
ongoing and § 9.j. can be viewed as an in-term covenant not
to compete.14
14
Because Improv West revoked CCI’s rights to the Improv marks for
almost the entire contiguous United States, the Improv West-CCI licensing
relationship has ended except as to the existing Improv clubs. Bearing this
in mind, it might be possible to view § 9.j., with respect to the majority
of the United States, functionally as if it were a post-term covenant not to
compete, and with respect to the Improv clubs that CCI continues to oper-
ate, as an in-term covenant not to compete. However, because the contract
relationship has not been canceled, and continues for the existing Improv
clubs operated by CCI, we think it more appropriate conceptually to ana-
lyze § 9.j. nationwide as an in-term covenant not to compete, while con-
sidering CCI’s limited continuing use of the Improv marks as pertinent to
the scope of § 9.j.
11846 COMEDY CLUB v. IMPROV WEST ASSOCIATES
[14] We have not found, and the parties do not cite, any
Ninth Circuit or California cases holding that in-term cove-
nants not to compete of any scope are necessarily valid. There
are, however, cases addressing in-term covenants not to com-
pete, and we discuss several of those cases here because of the
limitations that we believe they impose under § 16600, even
in the context of a continuing covenant not to compete.
Most significant to our analysis is Dayton Time Lock Ser-
vice, Inc. v. Silent Watchman Corp., 52 Cal. App. 3d 1 (1975),
in which the California Court of Appeal, addressed an in-term
“exclusive dealing clause” in a franchise agreement. Id. at 6.
The exclusive dealing clause provided in part that “during the
life of this contract, . . . [Dayton Time Lock Service, Inc.
(“DTLS”)] will not sell or lease any locks, devices or service
of any kind in competition with the business of [Silent Watch-
man Corp. (“SW”)], or use any time recording lock not sup-
plied by [SW] under this agreement.” Id. DTLS argued that
this anti-competitive provision, along with a separate post-
franchise covenant not to compete, violated state and federal
antitrust laws. Id. The California Court of Appeal first noted
that SW conceded that the post-term covenant not to compete
violated the state antitrust law CBPC § 16600. Id. Next, the
court specifically addressed whether the in-term covenant not
to compete was valid. In this context, the court held that
“[e]xclusive-dealing contracts are not necessarily invalid,” but
“[t]hey are proscribed when it is probable that performance of
the contract will foreclose competition in a substantial share
of the affected line of commerce.” Id. In doing so, Dayton
Time Lock imposed the standards analogous unto federal anti-
trust law when interpreting § 16600. See id. (citing Standard
Oil Co. v. United States, 337 U.S. 293, 314 (1949)).15
15
Similar to Dayton Time Lock, the District Court for the Northern Dis-
trict of Illinois in Great Frame Up Systems, Inc. v. Jazayeri Enterprises,
789 F. Supp. 253 (N. D. Ill. 1992), stated, while interpreting California law
on CBPC § 16600, that California courts support the position “that pre-
venting defendants from competing only during the term of [an] existing
COMEDY CLUB v. IMPROV WEST ASSOCIATES 11847
In Kelton v. Stravinski, the California Court of Appeal
addressed another in-term covenant not to compete, this time
in a partnership context. 138 Cal. App. 4th at 945.16 The court
held that even though the Kelton-Stravinski covenant not to
compete was during an ongoing business relationship, it vio-
lated CBPC § 16600 and was unenforceable. Kelton, 138 Cal.
App. 4th at 947. The court in Kelton limited Dayton Time
Lock to franchise agreements. However, in stressing CBPC
§ 16600’s strong policy against anti-competition agreements,
the court reaffirmed that in the franchise context, § 16600
prohibits an in-term covenant not to compete that “will fore-
close competition in a substantial share of the affected line of
commerce.” Kelton, 138 Cal. App. 4th at 947-48.
[15] Dayton Time Lock and Kelton make evident that
under CBPC § 16600 an in-term covenant not to compete in
franchise agreement, would not be void.” Id. at 255. The court reasoned,
however, that the in-term contractual provisions still cannot prevent a
party from engaging in an entire profession, business or trade. See id. at
256.
Finally, in General Commercial Packaging, Inc. v. TPS Package Engi-
neering, Inc., 126 F.3d 1131 (9th Cir. 1997) (per curiam), we addressed
a covenant not to compete in a general contractor-subcontractor context.
General Commercial Packaging (“GCP”), a packing and crating service,
subcontracted with TPS for TPS to provide packing and crating services
for Walt Disney Company, one of GCP’s major customers. Id. at 1132.
TPS and GCP signed an in-term and post-term covenant not to compete,
which provided that TPS would not work directly for, or solicit business
from, Disney or any other company GCP introduced to TPS. Id. Although
from the opinion it is unclear whether TPS and GCP’s business relation-
ship dissolved, we nonetheless upheld the covenant not to compete
because it only limited the sub-contractor’s “access to a narrow segment
of the packing and shipping market.” Id. at 1134. Because the covenant
not to compete left a substantial portion of the packing and shipping mar-
ket open to TPS, we held that the covenant not to compete was enforce-
able. Id.
16
The covenant not to compete provided that Kelton agreed not to oper-
ate any warehouses and Stravinski agreed not to design or build any ware-
houses. Kelton, 138 Cal. App. 4th at 945.
11848 COMEDY CLUB v. IMPROV WEST ASSOCIATES
a franchise-like agreement will be void if it “foreclose[s]
competition in a substantial share” of a business, trade, or
market. Dayton Time Lock, 52 Cal. App. 3d at 6; Kelton, 138
Cal. App. 4th at 948. Also, California courts are less willing
to approve in-term covenants not to compete outside a fran-
chise context because there is not a need “to protect and main-
tain [the franchisor’s] trademark, trade name and goodwill.”
Kelton, 138 Cal. App. 4th at 948. Keeping in mind these set-
tled principles of California law that were set forth in Dayton
Time Lock and reaffirmed by Kelton, which principles were
expressly before the arbitrator, we proceed to evaluate
whether the arbitrator’s decision was in manifest disregard of
the law.
CCI’s “business” is operating full-service comedy clubs.
CCI currently operates at least seven Improv clubs. See supra
note 4. As interpreted by the arbitrator, the § 9.j. covenant not
to compete applies geographically to the contiguous United
States, and does not end until 2019. Thus, the covenant not to
compete has dramatic geographic and temporal scope. Com-
bined with the arbitrator’s ruling that CCI forfeited its rights
to use the Improv marks license in any new location, the prac-
tical effect of the arbitrator’s award enforcing § 9.j. is that for
more than fourteen years the entire contiguous United States
comedy club market, except for CCI’s current Improv clubs,
is off limits to CCI. This “foreclose[s] competition in a sub-
stantial share” of the comedy club business. Dayton Time
Lock, 52 Cal. App. 3d at 6; see also Gen. Commercial, 126
F.3d at 1134 (reasoning that a contract can not place “a sub-
stantial segment of the market off limits”).
In ruling on CCI’s motion for reconsideration the arbitrator
reasoned as follows:
Dayton Time Lock . . . is inapplicable. That case
involved an attack on an exclusive dealing contract
under the antitrust laws. The cases cited in the por-
tion of the Dayton opinion . . . involved validity of
COMEDY CLUB v. IMPROV WEST ASSOCIATES 11849
exclusive dealing contracts under the federal Sher-
man Act. The type of “rule of reason” analysis
applied in antitrust cases - involving the determina-
tion whether a particular agreement unreasonably
restricts competition generally in a defined geo-
graphic and product market - is not applicable to a
determination of illegality under Section 16600. Cal-
ifornia’s antitrust statute, the Cartwright Act, is sepa-
rate and distinct from § 16600 of the Business &
Professions Code.
[16] The arbitrator’s award, while aware of Dayton Time
Lock, interpreted it in a way to render it inapplicable to this
case. However, as we have explained, Dayton Time Lock
established that under CBPC § 16600 in-term covenants not
to compete cannot prevent a party from engaging in its busi-
ness or trade in a substantial section of the market. The arbi-
trator’s award effectively quarantines CCI from engaging in
its business in forty-eight states until 2019 and does not fol-
low well-established California law. See Dayton Time Lock,
52 Cal. App. 3d at 6; Great Frame Up Sys., 789 F. Supp. at
256; see also Gen. Commercial, 126 F.3d at 1134. Even under
the permissive standard with which we view arbitral deci-
sions, the economic restraint of § 9.j. on competition is too
broad to be countenanced in light of the clear prohibition of
§ 16600, as interpreted by the California courts. The grounds
given by the arbitrator for disregarding Dayton Time Lock are
fundamentally incorrect.17 We hold that the arbitrator’s ruling
that § 9.j. is a valid covenant not to compete ignores CBPC
17
First, the arbitrator reasoned that Dayton Time Lock was inapplicable
because it involved an assessment of antitrust laws. However, Dayton
Time Lock made clear that it was assessing the requirements of CBPC
§ 16600, and its plain language applied standards from antitrust cases in
aid of its application of § 16600, which was an issue under review. Sec-
ond, the arbitrator thought § 16600 was inapplicable because California in
the Cartwright Act had a separate antitrust statute distinct from § 16600,
but the arbitrator’s notice of the Cartwright Act does not detract from what
Dayton Time Lock held in assessing an issue under § 16600, which Dayton
Time Lock itself characterized as a state antitrust law. Both § 16600 and
the Cartwright Act deal with antitrust and competition policy and it was
not in the province of the arbitrator to make a “ruling” about § 16600 that
was so at odds with what the California Court of Appeal stated in Dayton
Time Lock.
11850 COMEDY CLUB v. IMPROV WEST ASSOCIATES
§ 16600 and thus is in manifest disregard of the law. To com-
ply with § 16600, the covenant not to compete must be more
narrowly tailored to relate to the areas in which CCI is operat-
ing Improv clubs under the license agreement.
However, we do not void the entire in-term covenant not to
compete. Kelton stressed that the franchisor-franchisee con-
text was different from an employment or partnership context.
CCI’s relationship with Improv West is in essence a franchise
agreement as CCI contracted with Improv West to use Improv
West’s trademarks and open comedy clubs modeled on
Improv West’s clubs. See Kelton, 138 Cal. App. 4th at 947-48
(discussing franchising under California law). Assessing the
requirements of California law, we weigh CCI’s right to oper-
ate its business against Improv West’s interest “to protect and
maintain its trademark, trade name and goodwill.” Id. at 948.
This balance tilts in favor of Improv West with regard to
counties where CCI is operating an Improv club, but under
the restraint of CBPC § 16600 California law does not permit
an arbitrator to foreclose CCI’s competition in opening com-
edy clubs throughout the United States.
[17] Therefore, we hold that the district court should vacate
the arbitrator’s injunctive relief as to any county where CCI
does not currently operate an Improv club, but uphold § 9.j.
in those counties where CCI currently operates Improv clubs.
See Armendariz v. Found. Health Psychcare Servs., Inc., 24
Cal. 4th 83, 123 (2000) (stating that “overbroad covenants not
to compete may be restricted temporally and geographically”
(citing Gen. Paint Corp. v. Seymour, 124 Cal. App. 611, 614-
15 (1932))). Nationwide CCI may open and operate non-
Improv comedy clubs in all those counties where it does not
currently operate an Improv club. However, CCI may not
open or operate any non-Improv clubs in those counties where
it currently owns or operates Improv clubs.
COMEDY CLUB v. IMPROV WEST ASSOCIATES 11851
IV
[18] In sum, we hold that CCI’s appeal of the district
court’s order compelling arbitration is untimely and we lack
jurisdiction to consider that issue. We conclude (1) that the
arbitrator properly arbitrated the equitable claims; (2) that the
arbitrator’s award is not completely irrational; (3) that the
arbitrator exceeded the scope of his authority by enjoining the
non-party Affiliates; and (4) that the arbitrator’s award vio-
lates CBPC § 16600. We vacate the district court’s order con-
firming the arbitration award and remand to the district court
with instructions to vacate the Partial Final Arbitration Award
in so far as it enjoins CCI’s Affiliates, unless they are agents
or otherwise acting for CCI, and to the extent it prevents CCI
from opening or operating non-Improv clubs in counties in
which CCI does not now operate or own an Improv club.18
AFFIRMED IN PART, VACATED IN PART, and
REMANDED to the district court for further proceedings
consistent with this opinion.
18
Improv West contends, without opposition from CCI, that the arbitra-
tion section in the Trademark Agreement entitles it to attorneys’ fees and
costs associated with this appeal and the confirmation proceedings of the
arbitration awards. The arbitration agreement does award “costs, including
reasonable attorneys fees” to “[t]he prevailing party.” And we have upheld
such an award for a party who successfully confirmed an arbitration
award. See A.G. Edwards & Sons, Inc. v. McCollough, 967 F.2d 1401,
1404 (9th Cir. 1992) (per curiam) (ordering the arbitration award con-
firmed, and awarding the prevailing party “attorneys’ fees in accordance
with the agreements between the parties”). However, in this case Improv
West partially confirmed the arbitrator’s award, but we have modified the
scope of that award. We hold that Improv West is entitled to costs and fees
only with regard to its work on the issues on which it prevailed. We
remand the issue of costs and attorneys’ fees to the district court to deter-
mine the amount of reasonable attorneys’ fees and costs that should be
awarded to Improv West insofar as it prevailed.