By Nicole D. Prysby, J.D.
An arbitration decision denying franchisor Benihana attorney fees and costs despite being the prevailing party was upheld by a New York district court based on a reasonable, although questionable, justification for the decision. The remainder of the findings, that Benihana’s termination of a franchise agreement was reasonable, was also upheld.The federal district court in New York City upheld an arbitration panel’s denial of attorney fees to the winning party in an arbitration involving the breach of a restaurant franchise agreement. An arbitration panel denied all of the franchisee’s claims and held that the franchisor’s termination of the agreement was reasonable. However, the panel denied the franchisor its requested attorney fees and costs that were due under the agreement for "enforcement" of its provision. The panel construed "enforcement" and concluded that the franchisor sought to terminate the agreement, not enforce it, and therefore the franchisee did not owe the fees and costs. While the court found that to be a questionable interpretation, the panel had articulated at least a barely colorable justification for its interpretation and therefore, the court was required to uphold it. In addition, the agreement provided that only "reasonable" attorney fees would be awarded. The panel’s assessment that terminating the franchise agreement would result in a financial windfall to the franchisor could have informed its evaluation of reasonableness (Benihana Inc. v. Benihana of Tokyo, LLC, January 17, 2019, Engelmayer, P.).
Background. The case is the latest in a series of related lawsuits between Benihana, Inc. (BI) and Benihana of Tokyo, LLC (BOT), concerning a Benihana restaurant in Hawaii that BOT has long operated pursuant to a franchise agreement with BI. BI has the exclusive right to the Benihana trademark in the Americas and Caribbean, with the exception of Hawaii. In 2015, an arbitration panel held that BOT had committed multiple material breaches of the agreement, but that BI’s subsequent termination of the agreement was not reasonable. The panel put in place an injunction against future breaches by BOT. The panel decision was upheld by a court in July 2016.
BOT initiated the arbitration at issue here, alleging that BI breached the franchise agreement by unreasonably withholding approval of menus and advertisements using the trademarks governed by the agreement. BI brought a counterclaim, alleging that BOT materially breached the agreement by refusing to comply with brand standards. BI asked the arbitration panel to uphold BI’s February 2017 termination of the franchise agreement, based on BOT’s noncompliance, including violating the July 2016 injunction. BI also requested attorney fees ($1.5 million) and costs ($300,000) incurred in conjunction with the arbitration. In an August 2018 award, the panel denied all of BOT’s claims and concluded that given BOT’s repeated material violations of the agreement, and refusal to comply with the permanent injunction, BI’s termination of the agreement was reasonable. However, the panel did not award BI attorney fees and costs, even though the franchise agreement specifies that BOT will pay fees and costs incurred by BI in conjunction with enforcing the agreement if BOT is determined to be the breaching party. Specifically, Article 8.5 of the agreement states that BOT "agrees to pay all costs and expenses (including, without limitation, reasonable attorneys’ fees) incurred by [BI] in connection with the enforcement of this Article 8 or of Article 5 provided that [BOT] is determined to be the breaching party." The panel majority concluded that the arbitration was commenced by BOT, not by BI seeking to enforce the agreement. BI’s counterclaim was to terminate the agreement, not to enforce it. The panel also noted the cost to BOT of the termination and the financial benefit to BI of taking back the Benihana trademark in Hawaii.
BI sought to vacate the portion of the award denying attorney fees and costs.
Denial of fees and costs upheld. The court noted that arbitral awards turning on construction of a contract must be confirmed even if a reviewing court has serious reservations about the arbitrator’s reading of the contract. The court then pointed out its reservations. BI’s counterclaims were for breaches of the licensing agreement provisions regarding service marks and advertising (Articles 5 and 8). The licensing agreement stated that BOT agreed to pay attorney fees and costs incurred by BI in connection with the enforcement of Articles 5 and 8. BI established the breaches in the arbitration and obtained a ruling upholding termination as a contractual remedy. Had the court been considering the issue de novo, it would "assuredly" have ruled for BI.
However, the question before the court was whether the panel’s construction had at least an anchor in the terms of the licensing agreement. The panel construed "enforcement" in Article 8.5 and concluded that BI sought to terminate the agreement, not enforce it, and that the arbitration was commenced by BOT, not by BI seeking to enforce the agreement. The panel essentially distinguished between enforcing a provision and evaluating a termination of the agreement based on breaches of the provision. While the court found that to be a questionable interpretation, the panel had articulated at least a barely colorable justification for its interpretation and therefore, the court was required to uphold it.
The panel also justified its decision because of the cost to BOT of the termination and benefit to BI of regaining the Benihana trademark in Hawaii. BI argued that this justification was not based on language in the licensing agreement and should therefore be vacated. But the court found that the panel’s cost/benefit justification was merely an alternative basis for its fee denial, and was not necessary to its decision. In addition, there was at least an arguable contractual basis for the justification. The agreement provided that only "reasonable" attorney fees would be awarded. The panel’s assessment that terminating the franchise agreement would result in a financial windfall to BI could have informed its evaluation of reasonableness.
This case is No. 1:18-cv-07506-PAE.
Attorneys: Nicole L. Gueron (Clarick Gueron Reisbaum LLP) for Benihana Inc. Jeremy Wyeth Schulman (Schulman Bhattacharya, LLC) for Benihana of Tokyo, LLC.
Companies: Benihana Inc.; Benihana of Tokyo, LLC
MainStory: TopStory FranchisingDistribution NewYorkNews
Interested in submitting an article?
Submit your information to us today!Learn More
Antitrust Law Daily: Breaking legal news at your fingertips
Sign up today for your free trial to this daily reporting service created by attorneys, for attorneys. Stay up to date on antitrust legal matters with same-day coverage of breaking news, court decisions, legislation, and regulatory activity with easy access through email or mobile app.