Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D.N.Y.: Termination of Benihana agreement unreasonable despite material breaches, (Jul 20, 2016)

By Greg Hammond, J.D.

In an action in which a Japanese teppanyaki franchisor terminated a franchisee’s license agreement for committing various breaches, an arbitration panel’s finding that the breaches were material, but did not warrant termination of the license agreement, was upheld by the federal district court in New York City. The court denied the franchisor’s petition to vacate the panel’s ruling that termination was unreasonable, noting that although the court had "no doubt" it would have upheld termination based on the arbitral record, the panel did not exceed its authority in reaching its conclusion (Benihana, Inc. v. Benihana of Tokyo, LLC, July 15, 2016, Engelmayer, P.).

Benihana, Inc., a Japanese teppanyaki franchisor, terminated a license agreement with franchisee Benihana of Tokyo, LLC (BOT), alleging that BOT was serving hamburgers that were not an authorized menu item and continued to do so after Benihana notified BOT it was in breach of the license agreement, and that BOT used various advertising, signs, and decorations without notice or approval by Benihana. Benihana later discovered additional breaches, including that BOT failed to carry adequate liability insurance and name Benihana as an additional assured. An arbitration panel found that BOT committed several material breaches of the license agreement, but that Benihana’s termination of the agreement was not reasonable, rendering termination unjustified. Benihana petitioned the court to vacate the portion of the panel’s ruling finding termination unreasonable.

Essential purpose. Benihana first argued that the panel exceeded its authority by considering, in its inquiry into whether termination was reasonable, what it found was an "essential purpose" of the license agreement—to keep the Honolulu restaurant in the Aoki family. The court rejected this argument, finding that when the award is read in totality, it is clear that the panel majority did not interpret the agreement to assign preclusive importance to keeping the Honolulu restaurant in the Aoki family. Rather, the award stated that it was balancing that factor against those that favored termination, under all of the facts and circumstances. Although keeping the restaurant in the Aoki family was one of the essential purposes of the agreement, the panel never stated that it was "the essential purpose." The conclusion regarding the Aoki family was therefore within the panel’s broad authority to construe the agreement and was beyond the scope of the court’s review.

Potential consequences. Next, Benihana argued that: (1) the factual premise that termination would put BOT’s lease at risk, and were the lease lost, would undoubtedly harm BOT because the Honolulu restaurant is a significant source of its income, was unsupported by the evidence; and (2) the panel manifestly disregarded principles of equity recognized by New York case law by considering the potential harm to BOT, because the termination and the ensuing consequences to BOT would result from BOT’s breaches. The court noted that, although Benihana’s critiques of the panel’s factual findings had force and were persuasive, in the context of a challenge to vacate an arbitral ruling, federal courts cannot review findings of fact even for manifest disregard. Further, the panel’s alleged disregard of New York case law did not rise to the level of manifest disregard of the law to justify vacatur.

Termination provisions. Benihana’s most fundamental argument, according to the court, was that the panel’s consideration of these two factors—keeping the Aoki family in charge of the restaurant and hardship to BOT—effectively rewrote the license agreement, and exceeded its authority, by "neutering" the license agreement’s termination provisions. The court noted that it had no doubt, based on the arbitral record and its familiarity with the controversy, that "given the severity, recurrence, and number of BOT’s breaches, it would have upheld as reasonable BI’s decision to terminate" the license agreement. Nevertheless, because the court’s review of an arbitral award was restricted, it concluded that vacatur was not justified based on the limited weight the panel assigned to BOT’s breaches in its reasonableness analysis.

The court determined that the panel conducted an expansive assessment of fairness invited by, and within the broad scope of, the license agreement’s undefined reasonableness provision. The panel’s decision consequently must stand, according to the court, regardless of the court’s own view of the merits.

Immaterial breaches. Lastly, the court concluded that the panel did not exceed its authority when it ruled that four other breaches were immaterial, notwithstanding the license agreement’s classification of them as material. Although the panel "clearly erred in classifying these four breaches as non-material," according to the court, this error did not justify vacatur of the award. The court reasoned that the license agreement’s reasonableness clause did not preclude the panel’s mode of measuring the significance of violations to evaluate Benihana’s decision to terminate—to consider each breach based on the nature of the conduct amounting to the breach, rather than the formal classification of each breach.

The case is No. 15 Civ. 7428 (PAE).

Attorneys: Joshua A. Munn (Wachtell, Lipton, Rosen & Katz) and Nicole L. Gueron (Clarick Gueron Reisbaum LLP) for Benihana, Inc. Joseph L. Manson, III (Law Offices of Joseph L. Manson III) for Benihana of Tokyo, LLC.

Companies: Benihana, Inc.; Benihana of Tokyo, LLC

Cases: FranchisingDistribution NewYorkNews