The former licensee of Baby Guess and Guess Home Collections, seeking to overturn a $7.7 million arbitration award, filed suit on June 19 in Superior Court charging that Guess? Inc, the Los Angeles-based apparel retailer, has been operating illegal franchises.

Pour le Bebe Inc (PLB), Guess?'s largest licensee for 15 years until its four licenses were suddenly revoked in May 1999 over a controversial royalty dispute, alleges that the agreements between the two companies were in fact illegal franchises, thereby nullifying the recent finding of an arbitration panel.

In addition, the suit alleges that the panel exceeded its authority by ruling on a statute of limitations defense, which was forbidden by provisions of the companies' agreements. The arbitrators conceded that its findings on Guess?'s statute of limitations defense was subject to a new review by the courts.

A court decision favorable to PLB's claims could impact dozens of current Guess? licensing agreements and its ability to collect future royalties.

According to the suit, the petition to vacate the award is also based on violation of ethical duties by law firm Mitchell Silberberg & Knupp LLP (MSK) for concurrently and improperly representing PLB and Guess?. During a six-year period leading to the beginning of the arbitration proceeding last year, MSK and specifically its attorney Daniel Petrocelli represented both companies.

The lawsuit claims that because Petrocelli represented both PLB and Guess? at the same time, there is a conflict of interest and thus Guess? won the award by "undue means."

On June 9 a divided arbitration panel awarded Guess? about $6.4 million in past-due royalties and interest and $1.2 million in attorneys fees and costs. All other damages sought by Guess?, totaling nearly $12 million, were dismissed by the panel.

Los Angeles-based Pour le Bebe, which paid Guess? a total of more than $60 million in royalties during their 15-year association, never disputed the amount of royalty payments due. However, chief executive officer Michel Benasra questioned Guess?'s right to collect royalty payments and strongly objected to the procedures used by Guess? to revoke its licenses.

The suit asserts that the award must be vacated because "all issues relating to the statute of limitations barring or preventing the commencement of proceedings shall be determined in court proceedings." The arbitrators made the award based on a "series of agreements that violated California franchise laws and enforced contracts that violate public policy and are void," it charges.

Of the three-member panel, the only arbitrator to consider the franchise issue on the merits -- and the only one who is a trademark specialist -- concluded that "the Guess?-PLB agreements are clearly franchises under the California Franchise Investment Law." The others instead relied on Guess?'s technical statute of limitations defense.

The dispute originally involved about $1.75 million in late quarterly royalty fees, an amount which grew while negotiations were underway for an outright purchase of Pour le Bebe by Guess?. Guess? had signed two letters of intent in February and March 1999 to purchase Pour le Bebe and agreed that the outstanding royalties would be folded into the purchase price, according to PLB.

Substantial evidence exists, according to the suit, that the license agreements represented illegal franchises because they fulfilled franchise requirements in terms of payment of a franchise fee for the use of a trademark, along with Guess?'s retention of control over PLB's business operations through its marketing plan.

To the extent Guess? violated the California Franchise Law, Pour le Bebe charges in the suit that the arbitration panel "exceeded its powers by issuing an award contrary to public policy and California courts have long recognized that an arbitration award must be vacated if it violates public policy."

On the other major issue, Pour le Bebe's suit claimed that Mitchell Silberberg & Knupp used confidential information related to the companies' dispute against PLB in the arbitration, thereby breaching its ethical duties.

"The award was procured by undue means in that MSK represented Guess? in the arbitration in violation of MSK's ethical and fiduciary duties," and therefore must be vacated, the suit said, adding that Mitchell Silberberg & Knupp sought but never obtained PLB's consent to also represent Guess?.

Benasra has also filed a multi-million dollar libel suit against Paul Marciano, co-CEO and co-chairman of Guess?, and Guess? as a corporation, alleging that Marciano made false accusations and defamatory statements in a series of memoranda during the termination dispute.