The Second Circuit holds that the district court went too far when it enjoined a party from arguing to the arbitral panel for an extended cure period in the event it was determined to have breached a license agreement. Benihana, Inc. v. Benihana of Tokyo, LLC. No. 14-841, (2nd. Cir. April 28, 2015). When a dispute is properly before an arbitral panel, a district court should not interfere with the arbitral process on the ground that, in its view of the merits, a particular remedy would not be warranted.
Benihana alleged that Benihana of Tokyo breached the License Agreement by offering Beniburgers at its Honolulu location. The Agreement between the parties required an approval of new menu items and burgers were not on the approved list. After numerous legal skirmishes, and in spite of its agreement to stop selling burgers, Benihana of Tokyo blatantly continued to do so. When Benihana discovered that Benihana of Tokyo was now selling ‘Tokyo Burgers’, it terminated the Agreement for good cause claiming that Benihana had failed to cure within thirty days, and had received three notices of default within twelve months. Not to be deterred, Benihana of Tokyo continued its quest to ‘wait to cure’ if, as a result of the arbitration, it was found to have breached the license agreement by selling burgers.
Given Benihana of Tokyo’s clear breach of the Agreement, the district court granted Benihana’s request for an injunction in aid of arbitration and enjoined Benihana of Tokyo from selling unauthorized food items, including burgers, using unauthorized trademarks and “from arguing to the arbitral panel that it be permitted to cure any defaults if the arbitrators rule that it breached the License Agreement.” As to the latter, the district court found the Agreement did not provide either a court or an arbitrator with any basis to extend the cure period and that Benihana would be ‘irreparably harmed if Benihana of Tokyo somehow convinced the arbitrators to grant it a further cure period despite its material breach warranting termination.
While the Second Circuit upheld the injunction against selling unauthorized menu items and use of trademarks, it reversed the district court’s order insofar as it enjoined Benihana of Tokyo from arguing at the arbitration that an extended cure period was warranted. First, the Second Circuit reasoned that the arbitration clause in the parties’ Agreement was broad and encompassed ‘any and all’ disputes arising under the Agreement, including the issue of arbitrability regarding Benihana of Tokyo’s argument for an extended cure period. In essence, the court found that Benihana’s argument that the issue of an extended cure period was outside the scope of arbitration was really an argument that the Agreement provided no basis for extending the cure period by either a court or an arbitrator.
After determining that this was really a merits argument masked as a jurisdictional one, the Second Circuit said the actual question before it was, “whether, when the parties have agreed to submit the dispute to arbitration, the 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 answer was a resounding ‘no’.
An agreement to submit claims to arbitration is an agreement to submit all claims, not simply the meritorious claims. Moreover, Benihana cited no precedent (and none was found) for the proposition that a particular remedy may not be awarded by an arbitrator before the arbitrator has actually awarded that remedy. Such a result would be inconsistent with the FAA which contains no provision for a court’s pre-arbitration assessment of whether a particular remedy is supported by the parties’ agreement and, therefore, may be awarded by the arbitrator. The arbitral process would clearly be undermined should a district court enjoin parties from even advancing an argument in arbitration for fear the arbitrators might wrongly accept it. Where the arbitration clause is broad, as it is here, the arbitrators have broad authority to fashion remedies they determine appropriate.