By Owen Wolfe, Eddy Salcedo, and Grayson Moronta

Seyfarth Synopsis: In May 2023, music and entertainment mogul Sean “Diddy” Combs, through his company, Combs Wines and Spirits LLC, commenced a lawsuit in New York Supreme Court alleging that Diageo North America, a publicly-traded alcoholic beverage company, engaged in discriminatory conduct against brands owned by Black entrepreneurs, despite touting a commitment to Diversity and Inclusion in its materials.

In the complaint, Combs alleges that Diageo discriminated against him and his company’s alcohol brands, in sharp contrast to other alcohol brands in their portfolio, because he is Black, and further alleges that Diageo leadership specifically told him that race was one of the reasons that it limited distribution of Combs’ brands to “urban” neighborhoods and consumers.

By the lawsuit, Combs’ seeks injunctive relief, specifically enforcement of an “Equal Treatment of Brand” provision in the parties’ joint venture agreement, as well recovery of damages flowing from Diageo’s discriminatory conduct in breach of their agreement. In response, Diageo moved to compel arbitration of this dispute or, in the alternative, for dismissal of the case outright, arguing that Combs is attempting to extort “billions” from Diageo by lodging what it claims are “false and reckless” allegations. Diageo further argued that Combs is in breach of the parties’ agreement by not acting as an “equal partner” by virtue of his company failing to provide funding to help his DeLeón tequila brand grow after its acquisition. Diageo contended that the court should compel arbitration because the agreement contains a broad arbitration clause governing disputes and claims relating to breaches of their DeLeón joint venture agreement, which it claims extends to even to questions of whether specific claims are in fact arbitrable .

In particular, the parties’ agreement provided that, “except for claim for equitable relief in accordance with” a separate subsection of the agreement, the parties would arbitrate “any controversy, claim or dispute arising out of or relating to th[e] Agreement.”  The subsection on “equitable relief” did not refer specifically to court proceedings, but stated that if “irreparable damage would occur,” then the parties “will be entitled to equitable relief . . . in addition to any other remedy to which they are entitled at law or in equity.”  Diageo contended that the contract language meant that all disputes, including claims for equitable relief, would be dealt with in arbitration.  Combs countered that the agreement’s language carved claims for equitable relief out from arbitration.

The New York State Court (Justice Joel M. Cohen) denied Diageo’s motion in all respects, both to compel arbitration or in the alternative to dismiss, agreeing with Combs that claims for equitable relief could proceed in court, rather than in arbitration. Diageo thereafter filed a motion for reconsideration, arguing that the Court overlooked key language in the parties’ joint venture agreement and stating that the Court’s reliance on the 2006 Delaware Supreme Court case James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76 (Del. 2006) was misplaced.  Combs opposed the motion for reargument, and the New York court agreed again with Combs.  In an October 4, 2023 decision and order, the New York court stated that Diageo’s arguments “were presented at length in its [original] motion papers and during oral argument . . . .  The Court did not overlook the contract language upon which Diageo’s motion for leave to reargue is principally based or otherwise misapprehend any facts or law in rendering its decision.”

After this ruling, Diageo quickly appealed to the New York Appellate Division, First Department and filed an emergency application to stay the action pending appeal.  Combs opposed that application.  On October 11, 2023, the appellate court denied the application to stay.  It remains to be seen how the appellate court will rule on the merits, but the case will continue in the trial court in the meantime.

This lawsuit raises important issues relating to diversity and inclusion-related contract clauses, as well as the scope of arbitration clauses.  The trial court’s decisions will be closely watched, as will the appellate court’s decision on the scope of the arbitration provision.  The appellate court’s decisions in particular could impact New York litigants that are seeking to enforce or avoid arbitration clauses.