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Can a Court Order a Party not to Request in Arbitration a Remedy the Arbitrator may not have the Authority to Grant?

May 10th, 2015 Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Federal Arbitration Act Enforcement Litigation Procedure, Federal Courts, Injunctions in Aid of Arbitration, Practice and Procedure, United States Court of Appeals for the Second Circuit 1 Comment » By Philip J. Loree Jr.

Can a Court Forbid a Party from Requesting in Arbitration a Remedy the Arbitrator may not Have the Authority to Grant?

Benihana Case: Introduction

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In appropriate circumstances, Courts can vacate under Federal Arbitration Act Section 10(a)(4) an award that does not draw its essence from the parties’ agreement but instead was based on the arbitrators’ own notions of economic justice.

In Benihana, Inc. v. Benihana of Tokyo, LLC, ___ F.3d ___, No. 14-841, slip op. (2d Cir. April 28, 2015), the U.S. Court of Appeals for the Second Circuit  was faced with a different issue: whether before an award was made a court can enjoin a party from asking the arbitrators to award it a remedy that the parties’ contract does not authorize them to award.

The Court quite correctly ruled that district  courts do not  have the discretion to grant such an injunction because, among other things, doing so would violate the Federal Arbitration Act by infringing upon the parties’ agreement to arbitrate. In so holding the court was able to clarify a misunderstanding about arbitrability that is all too common among lay persons, a number of lawyers and apparently even the occasional judge.

Benihana Case: Background

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Benihana, Inc. (“Benihana U.S.”) and Beni-Hana of Toky (“Benihana Tokyo”)  were parties to a 1995 licensing agreement, which granted Benihana Tokyo the right to open Benihana restaurants in Hawaii. The agreement contained a New York choice of law clause.

yay-1557903The licensing agreement was designed, among other things, to require Benihana of Tokyo’s Hawaii restaurants to conform with Benihana standards, including those applicable to the menu and the use of Benihana trademarks. The Agreement, for example, required written approval by Benihana U.S. of “products and services” to be sold by Beni-Hana Tokyo, and stipulated that approval would “not be unreasonably withheld.”

The licensing agreement’s termination provisions provided that Benihana U.S. could terminate Benihana Tokyo’s license for good cause in the event of a “violation of ‘any substantial term or condition of th[e] Agrement [that Benihana Tokyo] fails to cure. .  . within thirty days after written notice from [Benihana U.S.].” Three cured defaults within a 12 month period also constituted good cause.

The Agreement contemplated both arbitration and injunctions in aid of arbitration (i.e., to preserve the status quo) as respects “violation of certain articles— including Article 5.2 restricting Benihana of Tokyo’s trademark use and Article 8.1(c) restricting the items Benihana of Tokyo may advertise or sell.  .  .  .” The injunctive-relief provisions specified that violations of those articles “would result in irreparable injury to [Benihana U.S.] for which no adequate remedy at law may be available. . . .”  They also  stipulated that Benihana U.S. “may obtain ‘an injunction against [such] violation . . . without the necessity of showing actual or threatened damage.'”

yay-1916763-digitalArticle 13 of the Agreement provided for arbitration in two types of situations. First, disputes about termination of the Agreement were subject to mandatory arbitration:

If this Agreement shall be terminated by [Benihana U.S.] and [Benihana of Tokyo] shall dispute [Benihana U.S.’s] right of termination, or the reasonableness thereof, the dispute shall be settled by arbitration at the main office of the AmericanArbitration Association in the City of New York in accordance with the rules of said association and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The arbitration panel shall consist of three (3) members, one (1) of whom shall be chosen by [Benihana U.S.], and (1) by [Benihana Tokyo] and the other by the two (2) so chosen.

Slip op. at 7.

Second, the agreement contained a broad, catchall provision that provided for arbitration of “any other dispute” at the election of either party:

In the event that any other dispute arises between the parties hereto in connection with the terms or provisions of this Agreement, either party by written notice to the other party may elect to submit the dispute to binding arbitration in accordance with the foregoing procedure. Such right shall not be exclusive of any other rights which a party may have to pursue a course of legal action in an appropriate forum. Enforcement of any arbitration  award, decision or order may be sought in any court having competent jurisdiction.

Slip op. at 7.

yay-10331162-digitalDuring the period 1995 until 2012 the parties enjoyed an amicable contractual relationship, but after a 2012 sale of Benihana U.S. to Angelo Gordon & Co., disputes started to arise. In May 2013 Benihana U.S., now under new ownership, notified Benihana Tokyo that: (a) Benihana U.S. had learned that Benihana Tokyo was selling “BeniBurgers” (a type of hamburger) at its Honolulu restaurant; (b) the licensing agreement required that new menu items be approved by Benihana U.S.; and (c) Benihana U.S. had not approved the sale of “BeniBurgers.” Benihana U.S. demanded that Benihana Tokyo remove BeniBurgers from the menu.

Benihana Tokyo did not remove BeniBurgers from the menu, which prompted Benihana U.S. to declare a breach of contract and notify Benihana Tokyo that it had 30 days to cure. Benihana U.S. extended the cure period twice, and Benihana Tokyo commenced  an action in New York State Supreme Court for an injunction staying the cure period pending arbitration of the parties’ dispute about BeniBurgers.

Benihana U.S. removed the case to the United States District Court for the Southern District of New York. At an October 2013 hearing Benihana Tokyo did not dispute that the Agreement prohibited the sale of BeniBurgers and instead claimed that Benihana America had waived the breach by not monitoring Benihana Tokyo’s Honolulu restaurant for over a decade.

yay-10202678---CopyThe district court rejected the waiver argument based on the agreement’s unambiguous no-waiver provision, and determined that “each of the relevant factors weighed against staying the cure period, and accordingly denied the motion [for injunctive relief].” The district court also denied Benihana’s alternative requests for  “for ‘a very short stub period for the cure,’ explaining that it had ‘applied the standards and determined that they don’t justify extending the cure period.'” Slip op. at 9.

After the hearing Benihana Tokyo gave Benihana America certain financial information required by the Agreement and told it that Benihana Tokyo “will not be selling  hamburgers in Hawaii.”  But approximately two months later Benihana U.S. notified Benihana Tokyo in writing that the financial information was deficient and that Benihana Tokyo was in breach of the Agreement’s advertising restrictions.

On January 13, 2014, the last day of the “latest cure period,” Benihana Tokyo demanded arbitration, requesting “a declaratory judgment that the claimed defaults do not exist, but, if the panel finds that the claimed defaults do exist, then [Benihana Tokyo] requests sufficient time to cure the alleged defaults.”

In the meantime, on January 21, 2014 a Benihana U.S. inspection of the Honolulu restaurant “allegedly revealed that, in place of the BeniBurger, [Benihana Tokyo] was now serving a ‘Tokyo Burger,’ as well as a ‘Beni Panda’ children’s meal consisting of two miniburgers served with rice and arranged to resemble a panda face.” These items “were advertised using the Benihana name and other trademarks in a manner allegedly not
authorized by the Agreement.” Slip op. at 11.

On February 5, 2014 Benihana U.S. notified Benihana Tokyo that, effective February 15, 2015, it was terminating the Agreement. According to the notice the termination was based on (1) “failure to cure within thirty days; and [(2)] three notices of default within twelve months.” The notice further stated that “[Benihana Tokyo’s] ‘attempt to relitigate [before an arbitral panel] the question of whether [Benihana.  .  .  Tokyo] may wait to cure until after the arbitration “panel finds that the claimed defaults do exist,” an argument rejected by [the district court] in October, suggests a level of contempt so extreme that termination of the License Agreement is [Benihana U.S.’s] only option.'” Slip op. at 11.

yay-10202678---No2Also on February 5, 2014, Benihana counterclaimed in the arbitration for an award confirming  the Benihana U.S.’s termination of the Agreement. On February 7, 2014 Benihana U.S. “petitioned the district court for injunctive relief in aid of arbitration pursuant to Federal Rule of Civil Procedure 65, seeking to enjoin [Benihana Tokyo]:”

‘(1)  from selling hamburgers or other unauthorized food items on the premises of the Benihana[] restaurant it operates in Hawaii pursuant to the License Agreement, or using or publishing advertisements, publicity, signs, decorations, furnishings, equipment, or other matter employing in any way whatsoever the words “Benihana,” “Benihana of Tokyo,” or the “flower” symbol that have not been approved in accordance with Article 5.2 of the License Agreement; and (2) from arguing to the arbitration panel that it be permitted to cure any defaults if the arbitrators rule that [Benihana of Tokyo] breached the License Agreement.’

Slip op. at 11-12.

On February 16, 2015 the district court granted Benihana U.S.’s  petition and enjoined Benihana Tokyo from:

  1. Selling hamburgers or other unauthorized food items on the premises of, or in any manner in connection with, the Benihana restaurant it operates in Hawaii pursuant to a license from[Benihana U.S.].

  2. Using or publishing, in connection with the Benihana restaurant it operates in Hawaii pursuant to a license from [Benihana U.S.], advertisements, publicity, signs, decorations, furnishings,equipment, or other matter employing in any way whatsoever the words ‘Benihana,’ ‘Benihana of Tokyo,’ or the ‘flower’ symbol that have not been approved in accordance with Article 5.2 of the License Agreement.

  3. Arguing to the arbitration panel, in the event the panel rules that it breached the License Agreement so as to justify its termination, that it should be permitted to cure any defaults.

Slip op. at 13-14.

yay-510878-digitalAn appeal followed and the Second Circuit affirmed as respects the first two paragraphs of the injunction, but reversed as respects the third. Given time and space limitations, we’ll limit our discussion to the Court’s reversal of the injunction to the extent that it purported to enjoin Benihana Tokyo from  arguing to the arbitration panel that “it should be permitted to cure any defaults.”

 

Second Circuit’s Reversal of the Order Enjoining Benihana Tokyo from Arguing to the Arbitration Panel that it was Entitled to Cure Defaults

Benihana Tokyo argued that the district court exceeded its authority to grant injunctive relief for purposes of maintaining the status quo because the issue whether it is entitled to an extended cure period is for the arbitrators, not the court, and, in any event, whatever remedy an arbitrator might award is subject to judicial challenge only in the event the arbitrator makes an award granting the remedy.

Benihana U.S. argued that “it is for the court to determine in the first instance what issues and corresponding remedies properly may be considered by the arbitrators.” Benihana America asserted that “because the Agreement provides no basis for an extended cure period once termination has
been found warranted, the court was within its discretion in enjoining Benihana of Tokyo from arguing for a remedy to which it had no arguable
right.” Slip op. at 23.

yay-10343058ArbitrabilityBenihana U.S. thus effectively took the position that the question of whether the arbitrator could award the remedy was, for all intents and purposes, a “gateway question of arbitrability” that could be decided by the court prior to the arbitrators making an award. The Court believed it presented a “question of arbitrability,” albeit not a gateway question of arbitrability that could be decided on a motion to stay or compel arbitration or, as here, in the context of an injunction in aid of arbitration.

The Court therefore began its analysis by considering whether the parties clearly and unmistakably agreed to submit the question to arbitration. Quoting from Shaw Group Inc. v. Triplefine Int’l Corp., 322 F.3d 115, 121 (2d Cir. 2003), the Court explained that “[E]ven absent an express contractual commitment of the issue of arbitrability to arbitration, a referral of ‘any and all’ controversies reflects such a ‘broad grant of power to the arbitrators’ as to evidence the parties’ clear ‘inten[t] to arbitrate issues of arbitrability.'” Slip op. at 24 (quoting Shaw Group, 322 F.3d at 121 (quoting PaineWebber Inc. v. Bybyk, 81 F.3d 1193, 1199-120 (2d Cir. 1996))).

yay-12120236-digitalThe Court concluded that the arbitration agreement, construed in isolation from the other surrounding circumstances, demonstrated that the parties clearly and unmistakably agreed to submit arbitrability questions to the arbitrators. The first part of the arbitration agreement provided for mandatory arbitration if Benihana Tokyo disputed Benihana U.S.’s termination and the second part said “either party may elect to submit” to arbitration “any other dispute” “between the parties” “in connection with the terms or provisions of this Agreement.  .  .  .”  The Court concluded that, provided a party elects to submit such a dispute to arbitration, the “two clauses taken together grant to the arbitrators jurisdiction over disputes concerning the Agreement that is ‘inclusive, categorical, unconditional and unlimited.'” Slip op. at 25 (quoting PaineWebber, 81 F.3d at 1199).

The Court, however, pointed out that the parties’ “appear to believe” otherwise. Slip op. at 26. Because Benihana U.S. “briefly assert[ed] that the question of arbitrability is for the courts,  .  .  .  and [Benihana Tokyo] nowhere contests that assertion,  .  .  .  . it is  therefore arguable[,]” said the Court, “that the parties have agreed to submit the question of the arbitrability of [Benihana Tokyo’s] extended cure period argument to [the Court] for decision.” See slip op. at 26 (citations omitted).

yay-2302281-digitalBut the Court concluded it “need not decide whether Benihana of Tokyo’s failure to contest this issue waives the broad arbitration clause in the Agreement, since we would in any event conclude that the merits of the extended cure issue are for the arbitrators to decide.” Slip op. at 26. Citing the strong presumption of arbitrability, under which any doubts are resolved in favor of arbitration, the Court explained that “[i]t is arguable, to say the least, that a dispute regarding whether Benihana [Tokyo] may receive an extended cure period in lieu of termination falls within an agreement to arbitrate any and all disputes arising under the Agreement.” Slip op. at 27.

The Court characterized Benihana U.S.’s argument “that the issue of an extended cure period is outside the scope of the agreement to arbitrate” to be “in reality an argument that the Agreement provides no basis for extending the cure period[]”—the argument “is not that an arbitrator cannot
grant the remedy Benihana of Tokyo seeks, but rather that the remedy cannot be granted by either a court or an arbitrator, because the Agreement does not provide for such a remedy.” “The district court,” said the Second Circuit, “saw the issue in these same terms, concluding that the Agreement “does not afford a basis for a court or an arbitrator to extend that period.” Slip op. at 27-28.

yay-1444894-digitalBenihana U.S.’s argument did not, the Court explained, raise a question about who as between court and arbitrator gets to decide a dispute, but how it should be decided. It “is therefore a merits argument masked as a jurisdictional one.” Slip op. at 28. The real issue before the Court was “whether, when the parties have agreed to submit a dispute to arbitration, a court may enjoin a party from seeking a particular remedy in arbitration if, in the court’s assessment, that remedy would have no basis in the parties’ agreement.” The Court “h[e]ld that it may not.” Slip op. at 28.

Once the parties have agreed to arbitrate a dispute, the Court has no authority to determine whether the contract supports the claim or otherwise to weigh its merits. Parties promise to submit disputes or claims to arbitration irrespective of whether they are meritorious.  See slip op. at 28-29.

yay-2034533Far from enforcing the promise to submit disputes to arbitration, an injunction prohibiting a party from arguing to the arbitrators its position on an issue negates that promise. And that is the very antithesis of what the Federal Arbitration Act requires.

Whether there is or isn’t any basis  for granting a particular remedy, the question whether the request for the remedy should be granted is in the first instance for the arbitrators. If the arbitrator determines the remedy is warranted, then the challenging party may seek review of the award under Federal Arbitration Act Section 10(a)(4)’s deferential contract-based outcome-review standard.

The Court  distinguished 187 Concourse Assocs. v. Fishman, 399 F.3d 524 (2d Cir. 2005), which apparently was Benihana U.S.’s principal authority in support of its argument. Fishman held that an arbitrator exceeded his powers by awarding a terminated employee reinstatement with a final warning, even though the arbitrator also determined that the employer “‘had no option but to terminate'” in the circumstances. Slip op. at 29-30 (quoting 399 F.3d at 526).

Two questions were submitted to the arbitrator in Fishman: (a)  “‘[w]as the [employee] discharged for just cause[;]'” and (b) “‘[i]f so, what shall the remedy be?'” Fishman reasoned that “‘the arbitrator’s authority was limited by both the CBA and the questions submitted by the parties for arbitration. . . . Upon a finding of just cause, there was nothing further to be done. The arbitrator had no authority, under either the CBA or the submission, to fashion an alternative remedy.'” Slip op. at 30 (quoting 399 F.3d at 527).

yay-774794-digitalThe problem with Benihana U.S.’s reliance on Fishman was that it “ignore[d] a critical distinction between [Fishman] and this case[,]” namely that Fishman was a post-award challenge, not one “seek[ing] an ex ante” ruling on whether the arbitrators’ hypothetical award of a particular remedy would exceed their powers. Slip op. at 30-31.

The Court also found it “hardly coincidental” that “courts that have determined that a remedy exceeded the scope of an arbitrator’s power have done so exclusively after the arbitrator’s ruling.  .  .  .” Rather, that analytic framework is “consistent with the structure of the Federal Arbitration Act (“FAA”)” and with the federal policy in favor of arbitration:

  1. The Federal Arbitration Act does not contain a provision authorizing a pre-award judicial determination of whether the parties’ contract supports a requested remedy;
  2. Section 10(a)(4) provides the only statutory support for determining that an arbitrator’s remedy exceeded his or her authority, and Section 10(a)(4) applies only to a post-award motion or application to vacate an award;
  3. Section 10(a)(4) “furthers the FAA’s ‘principal purpose’ of ‘ensur[ing] that arbitration agreements are enforced according to their terms,’ by seeing that disputes that parties have agreed to arbitrate are indeed decided by an arbitrator[;]
  4. New York law is to the same effect, because the firmly established . . . public policy of New York State favors and encourages arbitration. . . . [and aims] to interfere as little as possible with the freedom of consenting parties’ to achieve that objective.

Slip op. at 32.

yay-2080935The Court also concluded that permitting courts to make determinations about arbitral remedies  would  “undermine[] and discredit[] the arbitral process.  .  .  .” Slip op. at 33. The notion that courts should be allowed to order parties not to advance an argument in arbitration “for fear that the arbitrators might wrongly accept [it]” hardly reflects confidence in a dispute resolution system that federal law is supposed to favor. See slip op. at 33. Were that the case, said the Court, “‘the ostensible purpose for resort to arbitration, i.e., avoidance of litigation, would be frustrated.'” Slip op. at 33 (quoting  Amicizia Societa Navegazione v. Chilean Nitrate & Iodine Sales Corp., 274 F.2d 805, 808 (2d Cir. 1960)).

The Court also observed that “judicial economy and efficient dispute resolution” “considerations” “counsel against” courts making pre-award determinations about arbitral power to grant particular types of relief.  There is, said the Court, “no reason to presume that the arbitrators are likely to grant” “a remedy sought by a party.  .  .[that] indeed finds no support in the parties’ agreement.” Slip op. at 33-34. A district court opinion “on a hypothetical award that likely will never materialize[]” is of little or no value, and judicial “preview” and determination of “issues that a party seeks to present” to arbitration “risks delaying the arbitration process and divides the issues to be resolved between two decision-makers, where the parties selected a unitary dispute resolution process in the hopes that such a procedure would be more expeditious than litigation in court.” Slip op. at 34.

Finally, the Court explained that “[r]efraining from a view on the merits” until the arbitrators make their award “will also aid the district court in applying the proper highly-deferential standard of review to those decisions.” Slip op. at 34. It is “helpful for the court to know (at least in cases in which the arbitrator chooses to give its reasons) exactly what the arbitrator decided and why, rather than anticipating the arguments or reaching its own conclusions.”  Assuming the district court  “is correct that the Agreement provides no basis for an extension of a cure period, a position on which we express no view, the arbitrators pesumably will not grant such relief[,]” and if they do, “they may well explain their reasoning in a manner that will persuade the court that such relief is in fact permissible.” Slip op. at 35-36.

yay-1442588-digital---CopyThat restraint is “particularly important[, ]” the Court said, “given that arbitrators are generally afforded greater flexibility in fashioning remedies than are courts.” Slip op. at 35 (citing Banco de Seguros del Estado v. Mutual Marine Office, Inc., 344 F.3d 255, 262 (2d Cir. 2003) and ReliaStar Life Ins. Co. of N.Y. v. EMC Nat’l Life Co.,
564 F.3d 81, 86 (2d Cir. 2009) That flexibility is reflected not only under in federal, but also New York, law, which “gives arbitrators substantial power to fashion remedies that they believe will do justice between the parties. . . . [and] [u]nder New York law arbitrators have power to fashion relief that a court might not properly grant.” Slip op. at 35 (citing Sperry Int’l Trade, Inc. v. Government of Israel, 689 F.2d 301, 306 (2d Cir. 1982)).

Reversing the district court’s order to the extent that it purported to prohibit Benihana U.S. from requesting in arbitration an extended cure period, the Second Circuit held that “the district court, rather than independently assessing the merits, should have confined itself to preserving the status quo pending arbitration[,]” and by “[r]estricting the relief [Benihana Tokyo] could seek in arbitration[,]” the district court ‘undermined rather than aided the arbitral process.  .  .  .” Slip op. at 36.

 

Photo Acknowledgements:

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One Response to “Can a Court Order a Party not to Request in Arbitration a Remedy the Arbitrator may not have the Authority to Grant?”

  1. […] Court of Appeals for the Second Circuit recently explained in the recent Benihana case (discussed here) that the standard of review for determining whether a contract authorizes or prohibits sanctions […]