The Franchise Memorandum

A federal court in New York denied the petition of franchisor Benihana, Inc. to vacate an arbitration award, finding that the arbitration panel acted within its broad authority in concluding that even though Benihana had the right to terminate its license agreement with franchisee Benihana of Tokyo, LLC (“BOT”), Benihana’s decision to terminate was unreasonable. Benihana, Inc. v. Benihana of Tokyo, LLC, No. 15-cv-7428 (S.D.N.Y. July 15, 2016). In challenging the arbitration panel’s decision, Benihana conceded that the license agreement language required the panel to make two distinct inquiries: (1) whether it had the “right” to terminate the license agreement, and (2) whether its termination decision was “reasonable,” which the panel interpreted to mean something akin to “fair.” In the award, the arbitration panel concluded that Benihana had the contractual right to terminate the license agreement based on BOT’s material breaches of the agreement, but concluded that its decision to do so was unreasonable.

Benihana’s most fundamental argument in support of vacating the arbitration award was that the panel exceeded its authority in considering two factors in its reasonableness inquiry: (1) what the panel viewed as the “essential purpose” of the license agreement – keeping the Aoki family, who founded the Benihana system, in charge of BOT’s restaurant, and (2) the hardship to BOT if the license agreement were terminated. Benihana argued that considering those factors effectively rewrote the license agreement’s termination provisions. While the court noted that the arbitration panel’s reasoning was suspect and indicated that if presented as a case of original impression the court would have reached a different result, the court held that vacatur of the arbitration award was not justified as the panel did not exceed its authority or rewrite the agreement in finding that Benihana acted unreasonably in terminating the license agreement. Specifically, the court held that because the license agreement failed to define or limit the contours of an arbitrator’s “reasonableness” review, the panel did not exceed its authority in applying a flexible standard of reasonableness and considering what harm would come to BOT if the agreement were terminated.