The Ninth Circuit’s Comedy Club, Inc. v. Improv West Associates Decision Is No Laughing Matter For Franchisors

After obtaining a sweeping nationwide injunction from an arbitrator that enjoined licensee Comedy Club, Inc. (“CCI”) from opening any new comedy clubs until 2019 pursuant to a trademark license agreement, licensor/competitor Improv West Associates (“Improv”) could not have been in the mood for laughs when the U.S. Court of Appeals for the Ninth Circuit modified the arbitrator’s injunction by significantly narrowing its scope and breadth. The decision is an important one for franchisors because the court indicated that in-term covenants not to compete in franchise like agreements will be void if they foreclose competition in a substantial share of a business, trade, or market.

The Ninth Circuit held in Comedy Club, Inc. v. Improv West Associates that an arbitrator’s injunction based on in-term covenant not to compete in a trademark license agreement, which precluded CCI and its affiliates (including tangential relatives of CCI principals) from competing in the comedy club business (apart from existing licensed “Improv” clubs that CCI continued to operate under the license agreement) until 2019, was not enforceable. Specifically, the court modified the nationwide scope and inclusion of tangential relatives of CCI principles in the arbitrator’s injunction.

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