Australia: Peanut butter makers find themselves in a sticky situation

Court 'nut' impressed with duplicate USA/AUS proceedings

On 20 April 2018, the Federal Court of Australia ordered an injunction against United States arbitration proceedings initiated by Kraft Foods Group Brands LLC (Kraft) against Bega Cheese Limited (Bega) in relation to the sale and promotion of Bega peanut butter in what Kraft alleges is misleading or deceptive get-up.1

Justice O'Callaghan restrained the United States arbitration, on the grounds that it could affect proceedings between the parties already underway in Australia.

Sweet agreement turns salty

In 2012, Kraft granted Mondelez International Inc (Mondelez) a licence to use the KRAFT trade mark and related trade dress in connection with certain products in certain territories (Master Agreement). 'Trade dress' is a term used in United States trade mark law that refers to the appearance of product packaging. In this case, the relevant trade dress is comprised of the combination of a yellow-lidded jar with a yellow label, a blue or red peanut device, and a brown appearance when filled.

The Master Agreement contained an arbitration clause in the following terms:

'Step Process: Any controversy or claim arising out of or relating to this Agreement, or the breach thereof (a "Dispute"), shall be resolved: (a) first, by negotiation and then by mediation as provided in Section 7.2; and (b) then, if negotiation and mediation fail, by binding arbitration as provided in Section 7.3. Each party agrees on behalf of itself and each member of its prospective Group that the procedures set forth in this Article VII shall be the exclusive means for resolution of any Dispute. The initiation of mediation or arbitration hereunder will toll the applicable statute of limitations for the duration of any such proceedings.

Further, clause 7.3 provided:

'Arbitration.

  1. If mediation conducted pursuant to Section 7.2 fails to resolve the Dispute within forty five (45) days of the demand for mediation, either party shall have the right to commence arbitration. In that event, the Dispute shall be resolved by final and binding arbitration administered by the International Centre for Dispute Resolution (the "ICDR") in accordance with its International Arbitration Rules. The place of arbitration shall be New York City, New York. Any Dispute concerning the propriety of the commencement of the arbitration shall be finally settled by such arbitration. Judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction thereof or having jurisdiction over the relevant party or its Assets.
  2. The number of arbitrators shall be three. The claimant shall designate an arbitrator in its answer to the request for arbitration. When the two co-arbitrators have been appointed, they shall have 21 days to select the chair of the arbitral tribunal, and if they are unable to do so, the ICDR shall appoint the chair by use of the "list method".'

In 2017, Mondelez sold its Australian and New Zealand business to Bega. Bega began marketing its peanut butter using the Bega label below and aired commercials on TV and radio.

On 27 September 2017, Kraft served a Notice of Dispute under the Master Agreement calling for arbitration and alleging that Bega's advertisements were false, misleading or deceptive. Kraft alleged that several advertisements were likely to mislead consumers into thinking that Kraft peanut butter was being replaced by, or had changed to, Bega peanut butter, when in fact Bega had only been granted a temporary license to use the brand. Among the advertisements in dispute were:

  • a radio advertisement which announced 'Australia's favourite peanut butter has changed its name. Kraft peanut butter is now Bega peanut butter', and
  • a television commercial which showed the Kraft label being peeled off a jar of peanut butter to reveal the Bega label, with the voiceover 'Australia's favourite peanut butter has changed its name to Bega peanut butter.'

Bega responded on 5 October 2017, arguing that it was not an original party to the Master Agreement, and therefore had not agreed to be bound by the dispute resolution provisions of the Master Agreement.

This assertion prompted Kraft to commence proceedings in the New York District Court on 20 October 2017, seeking to compel Bega to submit to mediation and (if necessary) arbitration so that 'Kraft may halt Bega's blatant violation of Kraft's intellectual property rights and prevent further injury to the world-famous KRAFT brand'.

Shortly thereafter, Kraft commenced proceedings in the Federal Court of Australia on 9 November 2017, alleging breaches of section 18 the Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010 (Cth)) which provides that 'A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive'. Mediation was conducted in New York on 12 January 2018, but 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. Relevantly, the Notice of Arbitration provided:

'In 2017, shortly before the license was to expire, Bega acquired Mondelez's limited rights under the license and therefore became bound by Mondelez's obligations. But instead of complying in good faith, Bega deliberately copied Kraft's peanut butter trade dress and made it clear that it intends to use it after the expiration of the license term, and misappropriated to itself the goodwill in the KRAFT brand through a false advertising campaign and other actions.'

On the same day on the other side of the world, Bega applied to the Federal Court of Australia on an ex parte basis for an anti-arbitration injunction, restraining the United States arbitration. On 16 February 2018, O'Callaghan J made an interim order restraining Kraft from taking any step in the arbitration proceedings and from taking any other step to seek to restrain the Australian proceedings, pending the Federal Court determination of Bega's application after hearing submissions from both parties.

Bega sinks teeth into Kraft

Bega argued the following grounds, relying on the High Court's decision in CSR Ltd v Cigna Insurance Australia Ltd:2

  • firstly, if the American arbitration was allowed to proceed concurrently with the Australian proceeding, it would interfere with (or would have a tendency to interfere with) the Australian proceedings and the Court's processes due to the possibility or probability of inconsistent findings, and
  • secondly, such an injunction should go in the exercise of the Court's equitable jurisdiction, because compelling Bega to defend substantially the same claim in two jurisdictions would be vexatious or oppressive according to the principles of equity.

Kraft finds Bega's claims unsavoury

Kraft's responses to these grounds were:

  • firstly, the causes of action and relief sought in the Australian proceedings ('the Advertising Dispute') were entirely separate from those raised in the American arbitration ('the Trade Dress Dispute') and therefore there is no risk of inconsistent decisions being made
  • secondly, it had not waived any rights to exercise its rights to arbitrate, and
  • thirdly, it simply sought to enforce and to comply with the contractual bargain contained in the Master Agreement, which also binds Bega, as the successor to Mondelez.

Court digests the issues

The Federal Court has the power to issue anti-suit and anti-arbitration injunctions under its implied and equitable powers if the duplication of proceedings will interfere with or have a tendency to interfere with the Federal Court proceedings or would be vexatious or oppressive.

Central to the consideration is whether there was the prospect of inconsistent decisions being issued in the two jurisdictions. Justice O'Callaghan agreed with Bega that the subject matter of both the Australian litigation and American arbitration necessarily deal with the central issue of who owns the goodwill to the peanut butter trade dress. Further, the question of whether that goodwill is derived from the Master Agreement was related to the first question.

Having concluded that there was a substantial degree of overlap in the subject matter of the proceedings, the Court proceeded to investigate whether restraining the taking of any further steps in the arbitration was necessary for the administration of justice to protect the Court's own proceedings or processes.

On this question, it concluded in the affirmative:3

'The question of the ownership of the packaging, get-up (trade dress) is, on the pleadings in this proceeding, central to the question of whether all, or some, of the pleaded representations are false or misleading within the meaning of s 18 of the Australian Consumer Law. That question is also the central issue raised in the notice of arbitration. For those reasons, if both the arbitration and this proceeding run there will, in my view, be a real risk of inconsistent findings on the critical question of who owns the goodwill in the packaging/get-up/trade dress.'

The Federal Court therefore granted the injunction against arbitration proceedings in New York while allowing court proceedings in Victoria to continue.

The judge shot down Kraft's contention that the claims in the Federal Court action were not related to the arbitration, saying the advertisements 'can only be false or misleading (if that is what they are) by virtue of the operation and effect of the relevant terms of that agreement'4 and stating that Kraft should have brought the Australian Consumer Law claims in arbitration since they are related to the Master Agreement.5

Food for thought...

This case may appear to be a smear on the recent record of Australian court decisions preferring arbitration over litigation, however, nutting out the facts assists in distinguishing it from more cut and dry cases. The key difference is that it was Kraft who commenced both the arbitration and Court proceedings, and then proceeded to attempt to concurrently advance both actions.

In fact, Kraft submitted that if Bega wished to avoid duplication of proceedings, it should have sought a stay of the Australian proceedings in favour of the arbitration (rather than seeking to stay the arbitration in favour of litigation).

The Court rejected Kraft's submission that Bega should have sought a stay of the Australian proceedings under section 7(2) of the International Arbitration Act 1974 (Cth), in circumstances where Bega knew that the arbitration in New York was 'imminent'. That section relevantly gives the Court the power to stay proceedings on the application of a party, where such proceedings involve determination of a matter that is capable of settlement by arbitration. The Court observed that Bega was under no obligation to seek a stay under that section or otherwise, and held that the injunction should go in the exercise of the Court's implied power.

Bite size tips

  • The purpose of including a broad arbitration clause in a contract is to have any disputes heard in a single confidential forum.
  • Australian Consumer Law claims can be included in arbitration.6
  • If a party is faced with proceedings in separate forums, careful consideration should be given as to which proceedings it should seek to restrain. In this case, litigation on home soil may have been the appeal for Bega to restrain the foreign arbitration. In other cases, confidentiality may be a reason to seek to restrain litigation proceedings.
  • Parties' best intentions of keeping arbitration confidential may be thwarted if litigious proceedings are initiated in relation to the same, or closely related, issues.

If you have any questions about how this decision applies in practice, or any other queries in relation to arbitration, please contact the authors.

Footnotes

1 Kraft Foods Group Brands LLC v Bega Cheese Ltd (2018) 130 IPR 434.

2 (1997) 189 CLR 345.

3 at [79].

4 at [95].

5 at [96].

6 Comandate Marine Corp v Pan Australia Shipping Pty Ltd (2006) 157 FCR 45.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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