A-List Celebrity No. 2: The JAY-Z case

This article is part of the series A-List: The Celebrities of Arbitration Cases. A series delving into the most renowned cases that have shaped the landscape of international arbitration.

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Parties: Iconix Brand Group Inc. and Icon De Holdings LLC v. Shawn C. Carter, S. Carter Enterprises, Marcy Media Holdings LLC and Marcy Media LLC

Case: AAA Case No. 01-18-0003-6487

Commencement Date: 1 October 2018

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Why is this case famous?

This case is famous because it was responsible for raising discussions about arbitration in the showbiz world. Because of this case, Jay-Z got really vocal about the representativeness of arbitrators, which led people not at all connected to the legal world to hear about arbitration. Negative publicity for arbitration because Jay-Z was complaining about the lack of diversity? Absolutely. But then again, some might say 'There's no such thing as bad publicity'.

What is this case about?

For those leaving under a rock, Shawn C. Carter is the famous rapper Jay-Z, married to the iconic-diva-forever-incredible Beyonce (can you tell I am a fan?). The case itself was about alleged intellectual property infringements, but the real discussion revolved around the fact that Jay-Z complained about the lack of African-American arbitrators in the roster he was required to consider for the composition of the arbitral tribunal. Can you blame him?

Background

Back in 1999, Jay-Z figured among the founders of Rocawear, a very famous American clothing brand. In 2007, Jay-Z sold some of his rights in the Rocawear brand to the Iconix Brand Group for (I kid you not) USD 204 million. Apparently, however, Jay-Z retained his stake in the company and continued to oversee the marketing, licensing, and product development.

Marcy Holdings, another one of Jay-Z's companies, was also object of a Membership Interest Purchase Agreement (“MIPA”), pursuant to which Jay-Z sold a minority membership interest in Marcy Holdings to Iconix. In 2015, after certain disputes arose between Jay-Z and Iconix, the parties also entered into a Master Settlement Agreement (“MSA”).

Both MIPA and MSA provided for arbitration as a dispute resolution mechanism. According to the available information, what we know is:

"The arbitration provisions require that the arbitration shall be administered by AAA in accordance with the Commercial Arbitration Rules of AAA. Any arbitration shall take place in New York, New York, and is governed by New York law. (...) There shall be three arbitrators, unless the Parties are able to agree on a single arbitrator.”

In 2018, and according to Jay-Z's lawyer so pardon the bias, Iconix was facing serious financial distress, with its stock trading at pennies on the dollar, reason for which it would have engaged in a series of desperate litigation gambits.

On the 1st October 2018, alleging breaches of certain obligations under the MSA and the Marcy Holdings operating agreement, Iconix started an arbitration against Jay-Z.

The AAA arbitration and the constitution of the arbitral tribunal

The core of this story lies in the constitution of the arbitral tribunal. In the case at hand, following a suggestion from the AAA, it was decided that:

→ Each party would submit four names from the AAA’s “Large and Complex Cases” roster of arbitrators

→ The AAA would add four names to that list

→ Each party would have the right to strike out four names from the list created

→ A single arbitrator would have to be chosen among the remaining names

The problems arose already in the first step of that process.

According to Jay-Z's lawyer, after using the AAA's search tool and reviewing more than 200 potential candidates in the New York area, the counsel could not find any African-American arbitrator in the “Large and Complex Cases” roster.

The situation got worse after the issue was raised with AAA and, in response to a request for names of "neutrals of color", the AAA would have indicated 6 names, out of which one was apparently Asian-American, another South-Asian and a third Latino. From the remaining three names, who were actually African-American, one happened to be a partner in the law firm representing Iconix in the arbitration (!).

The issue was raised once again with AAA who, again in the word of Jay-Z' lawyers, said that either they selected arbitrators from the available options or the AAA would select for them. SAID AND DONE. On the following day the AAA apparently circulated a list containing 12 suggestions of arbitration out of which only only 2 were African-Americans.

You can imagine Jay-Z was not having it.

The injunction to stay the arbitration

On 28 November 2018, meaning 2 days before the deadline given by the AAA for the parties to indicate their choice of arbitrator from the list provided, Jay-Z's lawyer filed a suit before the NY Courts asking for:

A. Temporary order restraining Respondents from proceeding with their claims in the Arbitration, pursuant to § 7503 of the of the Civil Practice Law and Rules;

B. Preliminary injunction staying the Arbitration for a period of ninety days so that the parties may work with the AAA to include sufficient African-American candidates who are qualified to adjudicate complex commercial cases;

C. Permanently staying the Arbitration; and

D. Granting such other and further relief as this Court deems just and proper.

The grounds for the request were set as follows:

Because of the AAA’s failure to represent Petitioners by providing African-American neutrals with experience in large and complex cases, the AAA violates:

(1) the Equal Protection Clause of the New York State Constitution, article 1, § 11 because it discriminates against litigants based on their race by failing to provide diverse and representative arbitrators;

(2) the New York State Human Rights Law § 296(2)(a), the New York State Civil Rights Law §40, and the New York City Human Rights Law pursuant to N.Y.C. Admin. Code §8-107 because the AAA is a place of public accommodation that fails to provide equal access to litigants of color; and

(3) the New York Deceptive Practices Act, N.Y. G.B.L. § 349 because the AAA misleads prospective litigants into believing that it engages with a critical mass of diverse arbitrators, when in reality, Mr. Carter was presented with only three African-American arbitrators to preside over his arbitration.

By then, the suit (and discussion) became the centre of several headlines, including:

"Jay-Z logo lawsuit halted over racial bias in arbitration"

"Jay-Z's $204 million arbitration case halted over lack of racially-diverse arbitrators"

"Jay-Z Criticizes Lack of Black Arbitrators in a Battle Over a Logo"

"Jay-Z Has 99 Problems, and...Lack of Diversity Is One" (a personal favourite of mine)

The AAA must have felt pressured by the attention because eventually it agreed for the dispute to be heard by a three-arbitrator panel instead of a single arbitrator, and offered five African-American candidates. It was also said that the AAA agreed to consider Jay-Z's list of 11 African-American candidates to handle big arbitrations. On that basis, Jay-Z was seemingly "content to proceed with the arbitration".

Curious about what happened in the case?

Settlement! Shocking, I know. Rumour has it that Iconix agreed to sell back intellectual property assets to Jay-Z's company as well as membership interests in Marcy Holdings in exchange for USD 15 million. The sale would have required both sides to agree to drop all claims against each other, without admitting wrongdoing or unlawful conduct.