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Benihana of Tokyo LLC v. Angelo Gordon & Co. L.P.

United States District Court, S.D. New York

March 8, 2017

ANGELO, GORDON & CO., L.P. and BENIHANA INC., Defendants.

          OPINION & ORDER

          Paul A. Engelmayer United States District Judge.

         This case is the latest in a series of lawsuits-the fifth in this Court during the past four years-between two "Benihana" entities. Relevant here, Benihana, Inc. ("BI") has the right to operate the iconic Benihana restaurants within the United States, save in Hawaii, where Benihana of Tokyo, LLC ("BOT") has a contractual license from BI to do so. The past cases have centered on BI's claims that BOT, in operating a Benihana restaurant in Honolulu, has failed to comply with terms of its license agreement. For the most part, although not as to every particular, BI has prevailed in these cases. It has established a range of breaches in proceedings before this Court, before the United States Court of Appeals for the Second Circuit, and in arbitration. These breaches include serving unauthorized menu items, engaging in non-approved marketing, and failing to procure required insurance. BI has won temporary and permanent injunctive relief, and, as prevailing party, has been awarded substantial legal fees from BOT. Despite their animosity, BI and BOT remain joined together, in part as a result of a 2015 decision by a divided arbitral panel that determined BOT's breaches, while material, did not rise to the level required under the parties' licensing agreement to justify BI's termination of BOT's license.

         In this lawsuit, BOT attempts to turn the tables. It claims that to the limited extent that BI has been denied relief in past lawsuits, these overreaches bespeak an attempt by BI to improperly force BOT to sell itself or its Hawaii license to BI. And, BOT claims, since the most recent round of arbitration and litigation, BI has breached its duty under the parties' licensing agreement to reasonably approve menus and advertisements proposed by BOT. As relief, BOT seeks, in addition to money damages, the termination, in its favor, of the parties' license agreement, and the transfer to BOT of the unconditional right to operate Benihana restaurants in Hawaii and all associated intellectual property rights.

         BOT originally filed this lawsuit in New York State Supreme Court in Manhattan. BOT brought two claims against BI, for breach of contract and breach of the covenant of good faith and fair dealing. It brought a third claim, for tortious interference with contract, against a party defendant new to these lawsuits: Angelo, Gordon & Co., L.P. (“AGC”), the investment bank that owns BI. Whereas BI (Delaware and Florida) and BOT (New York) were citizens of different diverse states, BOT's addition of AGC, a Delaware and New York citizen, destroyed diversity. BOT claimed that AGC was properly sued because it had caused-in acts allegedly constituting tortious interference with contract-BI to breach its obligations to BOT. BI, however, removed the case to this District. It asserted that the joinder of AGC was fraudulent, and motivated to avoid a forum-this Court-that had repeatedly found, and upheld arbitral findings of, breaches by BOT, and had awarded prevailing party fees to BI. BI alternatively justified removal on the ground that the relief BOT sought implicated federal questions under trademark law.

         Now pending are the parties' cross motions. BOT moves for remand to state court, arguing that joining AGC was not fraudulent and that the relief it seeks does not implicate a federal question. BI and AGC, in turn, move to dismiss the claims against them under Federal Rule of Civil Procedure 12(b)(6).

         For the following reasons, the Court denies BOT's motion to remand and grants BI's and AGC's motion to dismiss.

         I. Background[1]

         A. The History of, and the Agreements, Between BI and BOT

         The Benihana enterprise is the brainchild of Hiraoki “Rocky” Aoki (“Rocky”). In 1964, Rocky, through BOT's predecessor, opened the first Benihana restaurant on West 56th Street in Manhattan. Complaint ¶ 7. The restaurants were the first in the United States to use teppanyaki cooking, a style of cuisine that uses an iron griddle to cook food. Benihana restaurants seek to make entertainment an element of the meal experience, with the chef preparing the meal at an iron griddle located tableside. Rocky devised the Benihana System, a standardized mode of operation involving similar recipes, advertising, service methods, ingredients and service to govern all Benihana restaurants. Id.

         Rocky founded two distinct “Benihana” companies-first BOT, and, later, in 1994, BI (a/k/a “Benihana America”). Id. ¶ 11. Rocky initially owned and controlled both BOT and BI, although BI came to have outside investors, including AGC, a fund managed by which acquired control of BI in 2012. BOT has remained controlled by the Aoki family and, following Rocky's death in 2008, its trust. Id. ¶¶ 11, 24, 30.

         In 1995, BI and BOT (or their predecessor entities) entered into two agreements relevant here.

         The first, the Amended and Restated Agreement and Plan of Reorganization, see Bonner Decl., Ex. C (“ARA”), was executed on December 29, 1994 and amended on March 17, 1995. It divided, between BI and BOT, the worldwide rights to operate Benihana restaurants. The ARA gave BI the right to operate Benihana restaurants and use the Benihana trademarks in the United States, Central America, South America, and the Caribbean, which the ARA refers to collectively as the “Territory.” The ARA gave BOT the right to operate Benihana restaurants and to use the Benihana trademarks outside of the Territory. ARA § 1.01(d). The sole exception to this territorial division is Hawaii. The ARA contemplated that BI would grant BOT a license to continue operating in Hawaii. Id. § 8.02(d).

         The ARA provides that each party will “use its best efforts to take, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement.” Id. § 7.05. Otherwise, however, the ARA does not regulate the working relationship between BI and BOT. Nor does it provide for a mechanism for the resolution of disputes, e.g., through an arbitration clause or a choice of law clause.

         The second agreement is the License Agreement, see Bonner Decl., Ex. B (“License Agreement”). Dated May 15, 1995, it granted BOT a perpetual, royalty-free license, subject to its terms, to operate Benihana restaurants in Hawaii. There is currently only one such restaurant, established in 1971 and located in the Hilton Hawaiian Village in Honolulu. BOT alleges that the Honolulu restaurant had sentimental value to Rocky, who realized there his vision of building a restaurant as a “gassho zukuri, ” a traditional Japanese farmhouse with a distinctive roof and robust wooden beams; Rocky built the restaurant from a 200-year-old farmhouse transported to Honolulu from Japan. Complaint ¶ 8-9. This restaurant was designed to appeal to Japanese tourists visiting Hawaii. Id. ¶ 9.

         The License Agreement sets out the terms governing BOT's operation of the Honolulu restaurant. The terms govern such matters as the composition of the menu, the use of Benihana trademarks in Hawaii, advertising, food sales, insurance coverage, BI's right to terminate the agreement, dispute resolution, and choice of law (New York). License Agreement, Arts. 5-8, 12-13, 17.7.

         Several provisions are central here.

         Article 5 governs BOT's use of the Benihana service marks and trade names. It provides that “[a]ny and all advertising, publicity, signs, decorations, furnishings, equipment or other matter employing in any way whatsoever the words ‘Benihana', ‘Benihana of Tokyo' or the ‘flower' symbol shall be submitted to [BI] for its approval prior to publication or use. [BI] shall not unreasonably withhold approval for any such publication or use.” License Agreement, Art. 5.2.

         Article 6 governs BOT's duty “to diligently operate the Restaurants in strict compliance” with the Benihana “System, ” including “menu selection.” Id., Art. 6.2. Article 6.3 states that BOT “shall sell or offer for sale only such products and services as have been expressly approved for sale in writing by [BI] (such approval shall not be unreasonably withheld).” Id., Art. 6.3.

         Article 8 provides that BOT covenants and agrees “[t]o advertise, sell or offer for sale only those items which are sold by [BI] in its company-owned restaurants or such other products as are approved by [BI] in writing, which shall not be unreasonably withheld, prior to offering the same for sale.” Id., Art. 8.1(c). BOT is required to carry comprehensive liability insurance, which names BI as an additional assured. Id., Art. 8(e)(i).

         As to defaults, the License Agreement provides that “any failure to comply with the covenants and agreements in this Article 8, or with covenants and agreements in Article 5 hereof with respect to the Marks . . . shall constitute a material event of default under this Agreement.” Id., Art. 8.4 (emphasis added). It further provides that any failure to comply with Articles 5 and 8 “would result in irreparable injury to [BI] for which no adequate remedy at law may be available, and, therefore, [BI] shall be entitled, in addition to any other remedies which it may have hereunder, at law or in equity, to obtain specific performance of, or an injunction against the violation of, the requirements of [Articles 5 and 8], without the necessity of showing actual or threatened damage.” Id. In addition, “[BOT] agrees to pay all costs and expenses (including, without limitation, reasonable attorneys' fees) incurred by [BI] in connection with enforcement of this Article 8 or of Article 5 provided that [BOT] is determined to be the breaching party.” Id., Art. 8.5.

         Finally, Article 12 provides for BI's right to terminate the License Agreement. It lists nine events “the occurrence of [which] shall constitute good cause for [BI], at its option and without prejudice to any other rights or remedies provided for hereunder or by law or equity, to terminate [the License] Agreement.” Id., Art. 12.1. For example, Article 12.1(g) provides, “If [BOT] violates any [] substantial term or condition of this Agreement and [BOT] fails to cure such violation within thirty (30) days after written notice from [BI] to cure same, ” then that violation shall constitute “good cause” to terminate the agreement. Id., Art. 12.1.

         The License Agreement provides for the resolution of disputes by arbitration. Arbitration is mandatory in the event of termination of the License Agreement. Id., Art. 13.1. For all other disputes, either party can elect arbitration, but arbitration is not mandatory-the parties may instead seek relief in court. Id., Art. 13.2. “Enforcement of any arbitration award, decision or order may be sought in any court of competent jurisdiction.” Id. All arbitrations between the parties are to be settled by the American Arbitration Association (“AAA”) in New York City in accordance with the AAA's rules. Id., Arts. 13.1-13.2.

         B. Prior Litigation and Arbitration About the Hawaii Restaurant

         During the past four years, BI and BOT have engaged in a series of lawsuits and an arbitration arising out of BOT's stewardship of the Hawaii restaurant and BI's claims that BOT was breaching various terms of the License Agreement.

         On May 6, 2013, BI notified BOT in writing that BI had learned that BOT was serving hamburgers-called “Beni Burgers”-at the Honolulu restaurant. BI noted that hamburgers were not an authorized menu item and that BOT was required to obtain approval before selling new menu items. BI demanded that BOT remove the Beni Burgers from the menu. On July 30, 2013, BI again notified BOT that it was in violation of certain terms of the License Agreement, including through its unauthorized sale of hamburgers, and that BOT had 30 days to cure the violations. Following two extensions of the cure period, on September 24, 2013, BOT initiated an action in New York State Supreme Court, seeking a temporary restraining order to extend its time to cure its alleged breaches until after the conclusion of an arbitration proceeding, which had not yet commenced. BI removed that action to this Court. See Benihana of Tokyo, LLC v. Benihana, Inc., No. 13 Civ. 6766 (PAE) (S.D.N.Y. 2013) (“Benihana I”), Dkt. 1.

         On October 1, 2013, after an oral argument during which BOT conceded that its continued sale of hamburgers at the Hawaii restaurant was not permitted by the Licensing Agreement, this Court, in a lengthy bench ruling, denied BOT's application for a restraining order extending its time to cure the breaches. The Court found that BOT, far from showing a likelihood of success on the merits, was not likely to prevail on the merits, and appeared in breach of multiple provisions of the License Agreement, including by selling hamburgers at the Hawaii restaurant. Benihana I, 13 Civ. 6766, Dkt. 10, at 26-36.

         Following the Court's decision, despite its counsel's representation that BOT would no longer sell hamburgers at the Hawaii restaurant, BOT continued to sell hamburgers there. These were sold under various names, such as the “Beni Burger, ” “Classic Burger, ” “Tempura Burger, ” and the “Tokyo Burger.” BOT also continued to sell the “Beni Panda, ” a children's dish containing a molded circle of vegetable fried rice, ingredients atop the rice resembling a smiley face, and two mini hamburger patties positioned around the rice circle in an evocation of the ears of a panda bear. On December 13, 2013, BI again notified BOT of these and other asserted breaches of License Agreement terms, including terms regarding advertising and insurance. BOT, in turn, on January 13, 2014, commenced the arbitration proceeding, seeking a declaration that it was not in default under the License Agreement.

         On February 5, 2014, BI, having discovered that BOT was continuing to sell hamburgers from the Honolulu restaurant, sent BOT a notice of termination of the License Agreement, effective February 15, 2014. BI asserted good cause for the termination under Article 12.1 of the License Agreement based on both (1) BOT's failure to cure within 30 days and (2) three notices of default within 12 months.[2]

         On February 7, 2014, BI filed in this Court a petition for a preliminary injunction in aid of the arbitration that BOT had initiated. BI sought to enjoin BOT-pending conclusion of the arbitration-from (1) selling hamburgers at the Honolulu restaurant and (2) using unauthorized advertisements there, in violation of the License Agreement. See Benihana Inc. v. Benihana of Tokyo, LLC, No. 14 Civ. 792 (PAE) (S.D.N.Y. 2014) (“Benihana II”). This time, BOT sought to justify its sale of hamburgers, arguing that these sales of hamburgers did not breach the License Agreement because (1) although the hamburgers were cooked in the restaurant's kitchen, they were served to customers immediately outside the restaurant in its patio area, and (2) the Beni Panda was not actually a burger per se but, notwithstanding its inclusion of two unadorned burger patties, was instead a fried rice dish.

         On February 26, 2014, the Court rejected BOT's arguments, again in a lengthy bench decision. The Court held that BI was likely to succeed on its claims of material breaches of the License Agreement, based both on BOT's sale of burgers and its unapproved advertisements. See Benihana II, Dkt. 19, at 42-44, 47-50. The Court granted BI a preliminary injunction. It enjoined BOT from selling hamburgers or other unauthorized food items in connection with the Hawaii restaurant, and from advertising in certain ways without BI's approval. See id., Dkt. 17. On BOT's appeal, the Second Circuit upheld this relief, holding, inter alia, that “far from committing merely trivial violations, Benihana of Tokyo was ‘blatantly not complying with the license agreement' . . . Benihana of Tokyo continued to flout the terms of the [License] Agreement, relying on, as the district court aptly put it, ‘justifications utterly and unusually unconvincing' such as that burgers with rice and shaped as ‘panda ears' are not burgers. The menu item and advertising restrictions of the [License] Agreement were clear, and Benihana of Tokyo was clearly violating them.” Benihana, Inc. v. Benihana of Tokyo, LLC, 784 F.3d 887, 895-97 (2d Cir. 2015) (internal citations and modifications omitted).[3]

         The arbitration commenced by BOT then moved forward. Whereas BOT sought a declaration that it was not in default, BI filed a counterclaim asking the arbitrators to affirm as consistent with the License Agreement BI's decision to terminate the License Agreement on account of BOT's defaults. BI sought an award of damages, fees, costs, and other remedies. Pursuant to the arbitration provisions in the License Agreement, BOT and BI each appointed an arbitrator, and the two party-appointed arbitrators selected a third arbitrator to chair the panel. The panel held hearings on June 2-5, 2015, in New York City.

         On September 18, 2015, the panel issued the Award. The panel unanimously found that BOT had committed three material breaches of the License Agreement, two involving the sale an advertisement of hamburgers in breach of Article 8.1(c) of the License Agreement, and the third involving the failure to name BI as an additional assured, as required by Article 8.1(e)(i). Award ¶¶ 59, 68-71. But, the panel majority, 2-1, interpreted Article 13.1 of the License Agreement to authorize termination only when (1) BI had a right a right to terminate and (2) the termination was independently “reasonable.” And, the panel majority found, while BOT's material breaches gave BI a right to terminate, termination of the License Agreement was not reasonable. Award ¶ 85. Specifically, the panel majority found, given that the parties who negotiated the License Agreement anticipated that BOT would hold a license to operate the Honolulu, terminating it for these breaches fell short of being reasonable, which the panel construed to mean “fair proper, or moderate under the circumstances; sensible.” Id. ¶ 88 (quoting Black's Law Dictionary (10th ed. 2014)).

         The dissent, in strong terms, contested the panel majority's construction of the License Agreement. It noted, inter alia, that under established New York contract law, a party had the right to terminate a license agreement upon commission of a material breach, such that the panel majority was wrong to undertake a freestanding and subjective inquiry into the reasonableness of termination. Id., Dissent ¶¶ 1-12. In lieu of termination, the panel issued a permanent injunction against BOT, enjoining it from breaching the practices at issue. Award ¶ 119. The panel also, unanimously, awarded BI attorneys' fees and costs of $1, 130, 643.80, finding that BOT had been the breaching party and that BI was entitled to partial reimbursement of its attorney's fees as the prevailing party. Id. ¶ 120.

         On September 18, 2015, BI filed a petition in this Court, seeking partial confirmation and partial vacatur of the Award. It sought to confirm the panel's fee award to BI, but sought vacatur of the divided panel's determination that BI's termination of the License Agreement had been unauthorized. On July 15, 2016, this Court confirmed the fee award and the injunctive relief put in place by the panel. The Court-relying on the broad latitude given to arbitrators to construe parties' agreements-did not vacate the panel majority's determination that BI's termination of BOT was not justified under the License Agreement. In so ruling, however, the Court found the dissenting arbitrator's construction and application of the provisions relating to termination far the more persuasive. Indeed, the Court stated, whether to vacate this aspect of the arbitral award had given the Court “considerable pause” and “presented a genuinely close question.” Benihana, Inc. v. Benihana of Tokyo, LLC, No. 15 Civ. 7428 (PAE), 2016 WL 3913599, at *24 (S.D.N.Y. July 15, 2016). The Court also upheld the panel's award of fees and costs to BI. And it emphatically denied BOT's motion for Rule 11 sanctions against ...

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