Can a Court Forbid a Party from Requesting in Arbitration a Remedy the Arbitrator may not Have the Authority to Grant?
Benihana Case: Introduction
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
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.
The 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.'”
Article 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.
During 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. Continue Reading »
