Second Circuit: pre-arbitration injunction may only preserve status quo

United States of America

In Benihana Inc v Benihana of Tokyo LLC (Case No 14-841, April 28 2015, Lynch J), in the context of a dispute surrounding a breach of a trademark licence agreement that provided for arbitration of certain disputes, the US Court of Appeals for the Second Circuit has concluded that it was inappropriate for a district court to use its injunction in aid of arbitration jurisdiction to issue an injunction that went to issues already properly before the arbitration panel. Rather, the district court’s aid of arbitration jurisdiction only extends to injunctions limited to maintaining the status quo between the parties.

The dispute arises out of a 1994 agreement between plaintiff Benihana America and defendant Benihana of Tokyo - two restaurant chains operating under the Benihana brand. Under the agreement, the plaintiff received rights to use the Benihana trademarks and to operate Benihana restaurants in certain territories, including the United States, while the defendant received the same rights in other territories. However, because the defendant had a pre-existing Benihana restaurant in Honolulu, the plaintiff granted the defendant a licence to continue operating that restaurant in Honolulu provided the defendant abided by certain menu and advertising restrictions. 

In 2013 the plaintiff notified the defendant that it was in breach because it was selling hamburgers, an unauthorised menu item, and using unapproved advertising at its Honolulu location. Although the defendant assured the plaintiff that it would cure the breach, the defendant brought suit seeking an injunction to stay the running of the cure period pending arbitration of the issue of whether selling hamburgers violated the agreement. Notwithstanding its assurance, defendant continued selling hamburgers, prompting the plaintiff to send a notice of termination of the agreement followed by a petition to the district court for injunctive relief that the defendants:

  1. may not sell unauthorised food items in Hawaii;
  2. may not use unapproved advertising; and
  3. may not argue to the arbitration panel that it should be permitted to cure any defaults.

After the district court granted the injunction on all three issues, the defendant appealed.

On appeal, the Second Circuit explained that the district court did not abuse its discretion when it granted injunctive relief as to the first two requests, finding likelihood of success on the merits, irreparable harm vis-à-vis the plaintiff’s reputation and brand, and the licence’s provision that control over menu and advertising using the BENIHANA trademarks in the Honolulu restaurant remains with the licensor.

However, the Second Circuit concluded that the district court did abuse its discretion when it enjoined the defendant from arguing to the arbitral panel for an extended cure period after finding that the plaintiff would be irreparably harmed if the defendant were to “wrongly convince[ ] the arbitrators to grant” the extension, explaining that this was an improper ground for finding irreparable harm or for granting an injunction. If indeed there is no support in the agreement for such a remedy, there is no reason for the district court to presume that the arbitral panel will likely grant that remedy. Furthermore, the plain language of the agreement indicated the parties intended to grant the arbitrator the power to decide questions of arbitrability, including whether a remedy is within the scope of the agreement or whether the defendant’s claim for an extended cure period in lieu of termination is even an arbitrable issue. The Second Circuit reiterated that once arbitrators have jurisdiction over a matter, “any subsequent construction of the contract and of the parties’ rights and obligations under it” is for the arbitrators to decide. 

Finally, the Second Circuit explained that, because the parties’ dispute had been submitted to arbitration, the district court should have confined itself to preserving the status quo pending arbitration rather than independently assessing the merits.

Broadly written arbitration provisions may grant broad authority to an arbitrator removing jurisdiction of issues from the courts, thus altering litigation strategies and expectations. As the Second Circuit noted, there is a “strong federal policy favouring arbitration as an alternative means of dispute resolution”, especially where such provisions are in negotiated contracts. 

Teri HP Nguyen, McDermott Will & Emery LLP, Silicon Valley

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