Smooth or crunchy? Australian court issues injunction to stop international arbitration in New York concerning intellectual property rights in Kraft peanut butter

Kraft Foods Group Brands LLC v Bega Cheese Limited [2018] FCA 549 (20 April 2018 and 4 May 2018)[i]

In brief

• The Federal Court of Australia has issued an anti-arbitration injunction to restrain a multinational food conglomerate from pursuing arbitration in New York.
• Kraft had pursued litigation in Australia which not only sought to restrain the respondent from certain radio and television advertising, but also sought final relief including damages.

Background

In January 2017, an Australian company, Bega Cheese Limited (Bega), announced that it had agreed to purchase the Australia and New Zealand grocery and cheese business from a member of the Kraft group. However a dispute arose in relation to the Kraft peanut butter brand.

Kraft peanut butter has been sold in Australia for over 50 years. As at March 2017, the Australian peanut butter market was worth AUD 110 million in annual sales, and Kraft peanut butter’s share of that market was around 65%.

Proceedings by Kraft in New York to compel arbitration

On 20 October 2017, Kraft commenced a proceeding in the United States District Court seeking to compel Bega to mediate and arbitrate under the dispute resolution provisions of a Master Agreement for licensing of IP. Bega’s New York attorneys confirmed that Bega had acquired certain rights from Mondelez (a company in the Kraft group), including certain trademark rights that Kraft had licensed to Mondelez pursuant to the Master Agreement.

Proceedings in Australia to prevent advertising

Following the broadcast of television and radio advertisements by Bega for its peanut butter product in Australia, Kraft commenced proceedings against Bega in the Federal Court of Australia (FCA) on 9 November 2017. Kraft pleaded that the advertisements contain a number of false or misleading representations, including that Kraft peanut butter is now Bega peanut butter or is being replaced by Bega peanut butter and that the Kraft brand has changed to or is changing to Bega peanut butter. Kraft initially sought interlocutory injunctions with respect to some Bega advertising, but after Bega agreed to withdraw the advertisements, Kraft continued to pursue its claims for a permanent injunction and damages. In December 2017, Bega filed a cross-claim in the FCA proceedings.

Meanwhile, back in New York…

Bega agreed to mediate with Kraft in New York, as required by the Master Agreement.  That mediation was unsuccessful.  On 13 February 2018, Kraft commenced arbitration proceedings against Bega in New York by filing a Notice of Arbitration with the International Centre for Dispute Resolution.  In the arbitration, Kraft sought declaratory relief, damages for breach of contract and damages for trade dress infringement under the Lanham Act.

On the same day, Kraft also filed in the arbitration a Notice of Application for Emergency Relief, seeking urgent orders to restrain Bega from (1) any further use of the peanut butter trade dress or any confusingly similar trade dress; and (2) any conduct aimed at delaying or impairing Kraft’s ability to re-enter the Australian market for peanut butter, pending the hearing of the arbitration.

Bega seeks to restrain Kraft from pursuing the arbitration

Bega immediately filed an interlocutory application in the FCA proceeding seeking an ex parte interim injunction restraining Kraft from, among other things, taking any step in the New York arbitration. On 16 February 2018, the FCA made an interim order restraining Kraft from taking any step in the arbitration proceedings and from taking any other step to seek to restrain this proceeding until further order. The matter came back before the court on 20 April 2018, for substantive argument by both sides.

Argument before the Federal Court of Australia

Bega contended that the Australian proceedings and the NY arbitral proceedings substantially overlapped.  Kraft contended that they had nothing to do with each other.

O’Callaghan J noted that the inherent or implied power of a court to issue anti-suit injunctions derived from its power to protect its own processes and prevent abuses once those processes are set in motion, and that this was “quite apart” from its power, granted in the exercise of equitable jurisdiction, to grant an injunction to restrain “proceedings in another court, including in a foreign court, which are, according to the principles of equity, vexatious or oppressive”. When the injunction is sought to protect the proceedings or processes of a court, no question arises as to whether the Australian court is an appropriate forum because “it is the only court with any interest in the matter”.[ii]

His Honour also noted the principle that when a given matter becomes the subject of litigation in a court of competent jurisdiction, the court requires the parties to that litigation to bring forward their whole case.[iii]

Decision

O’Callaghan J held that there was “a substantial degree of overlap” between the Australian court proceedings and the New York arbitration proceedings. The pleadings exchanged in the Australian court made it clear that a central issue to be determined at trial would be the ownership of the goodwill in the “packaging and get-up” (in the Australian pleadings) or the “trade dress” (as the packaging and get-up was referred to in the American notice of arbitration).

That question in turn depended upon whether all the goodwill at all times emanated, and continued to emanate, from the Master Agreement, and thus belonged to Kraft, as it contended, or whether, at least since October 2012, by reason of the various matters pleaded by Bega in its defence, Kraft no longer owned any of the goodwill in Australia generated in respect of the sale of peanut butter in Australia since 2012, including “sales made by reference to the packaging and get-up, including the yellow lid, clear container, and predominantly yellow label”.

O’Callaghan J held:

“In my view, for the reasons explained above, Kraft ought to have included the claims made in this proceeding under the Australian Consumer Law in its notice of arbitration because those claims, contrary to Kraft’s submission, do fall within the ambit of the arbitration clause in the master agreement. Instead, Kraft chose to initiate this proceeding, and then to prosecute it, including by filing a statement of claim and a reply to Bega’s defence, participating in procedural directions, seeking discovery, filing a notice to produce, consenting to the filing by Bega of a counterclaim (in which the issue of ownership of the trade dress issue is squarely raised) and then filing a defence to that counterclaim.”

After hearing further argument on 4 May 2018, O’Callaghan J issued orders including the following:

“The first applicant be restrained, pending the determination of this proceeding, from taking any step, directly or indirectly, in arbitration proceedings commenced before the International Centre for Dispute Resolution, New York, on 13 February 2018 …, including any step to obtain emergency relief in that arbitration.”

Implications

• Australian courts are normally very supportive of international arbitration, and will restrain local court proceedings that conflict with an arbitration agreement.
• In this case, Kraft not only sought an injunction in Australia to restrain local radio and television advertising, but also continued the Australian proceedings to seek permanent relief, including damages.
• The obtaining of urgent interim relief from arbitral panels is a vexed and much-discussed topic, as is the likelihood of a foreign court enforcing such interim measures. The New York Convention[iv] is not clear on the matter. However, in a situation where a party feels compelled to seek the urgent assistance of a foreign court to restrain breaches, it should carefully consider how such request should be limited. For example, the party should make clear to the foreign court that an injunction is being sought for the sole purpose of preserving rights pending the hearing of the arbitration overseas.