May 1, 2017
By Oliver Herzfeld
It all started with an unauthorized hamburger. Well, actually, it all started in 1964 when Hiroaki “Rocky” Aoki opened a chain of iconic Benihana restaurants. The restaurants feature teppanyaki cooking, a dinner entertainment style of cuisine where chefs theatrically prepare meals at an iron griddle located tableside. Sometime after Aoki’s death in 2008, his family sold Benihana Inc. (BI) to an investment firm. BI holds the rights to Benihana in the U.S., Central America, South America and the Caribbean and Aoki’s family retains ownership of Benihana of Tokyo (BOT) with rights to Benihana everywhere else worldwide. As an exception to this territorial division, the parties entered into a license agreement where BI granted BOT the right to continue operating a restaurant in Honolulu, Hawaii. The license agreement contains usual and customary provisions, including an obligation for BOT to solicit and secure BI’s approval prior to making any additions to the Benihana standard menu.
In 2013, BOT started serving hamburgers, called “Beni Burgers,” at its Honolulu restaurant located in the Hilton Hawaiian Village Waikiki Beach Resort. The Beni Burgers, which were not part of Benihana’s standard menu and not approved by BI, set off a sizzling series of legal proceedings between the parties.
Following several written communications from BI claiming breach of the license agreement and demanding that BOT remove the Beni Burgers from its menu, in September 2013, BOT initiated litigation seeking a temporary restraining order to extend its time to cure its alleged breach pending arbitration of the parties’ dispute. The federal district court denied BOT’s application for a restraining order because BOT appeared to be in breach of the license agreement and not likely to prevail on the case’s merits.
Undeterred, BOT continued to sell hamburgers at its Hawaii restaurant. BI again notified BOT of its breach of the license agreement. In response, in January 2014, BOT commenced an arbitration proceeding against BI. BI then sent BOT a notice of termination of the license agreement. In February 2014, BI filed a federal district court petition for a preliminary injunction to enjoin BOT from selling hamburgers pending conclusion of the arbitration. At the injunction hearing, BOT sought to justify its sale of hamburgers by arguing that they were not serving any hamburgers inside the restaurant but solely outside in its patio area. The federal district court again rejected BOT’s arguments, held that BI was likely to succeed on its claims and granted BI a preliminary injunction prohibiting BOT from selling hamburgers anywhere in or around its restaurant.
BOT appealed the federal district court’s decision to the Second Circuit Court of Appeals. The Second Circuit rejected BOT’s appeal holding 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.’”
In June 2015, the arbitration proceedings commenced. BOT sought a declaration from the arbitrators that it did not breach the license agreement and BI asked the arbitrators to confirm BI’s termination of the license agreement. The arbitrators unanimously found that BOT materially breached the license agreement. However, two of the three arbitrators ruled by majority that termination of the license agreement was not reasonable. The third arbitrator contested such ruling stating that it was improper for the majority to subjectively reject termination based on reasonableness when, under established New York law, which governs the license agreement, a party has an indisputable right to terminate a license agreement with the other party’s commission of a material breach. As its final award, the panel issued a permanent injunction against BOT and awarded BI attorneys’ fees and costs of $1,130,643.80.
In September 2015, BI appealed to the federal district court the arbitration panel’s decision to reject BI’s termination of the license agreement. The court agreed with the dissenting arbitrator’s statement of applicable law and stated the issue “presented a genuinely close question.” However, based on a long-standing doctrine that prohibits judicial review of arbitral awards absent “manifest disregard” of the law (which term is not defined in the Federal Arbitration Act, but is understood to mean something more than plain legal error), and the preference not to interfere with the efficiency and finality of arbitration, the court ultimately decided not to vacate the arbitrators’ majority decision that BI’s termination of BOT was not justified under the license agreement.
In the latest lawsuit between the parties that was just recently decided, BOT claimed BI was actually the breaching party. It argued that BI’s refusal to approve the Beni Burger, and the prior legal proceedings, were all part of a plan to force the sale of BOT to BI. According to BOT’s complaint, if BOT were forced to “relinquish its most valuable asset—the Honolulu Benihana of Tokyo” and to “spend substantial sums of money on legal fees,” these would “drive BOT’s price down.” In a tactical maneuver, BOT brought its claims under the original agreement that created the main territorial divide between BI and BOT, and not the license agreement granting limited rights from BI to BOT for Hawaii. Once again, the federal district court rejected BOT’s argument. In particular, the court noted that by not bringing its claim under the license agreement, there was no basis for BOT’s suit, as the license agreement is the only agreement that covers the refusal to approve menu items.
This ongoing dispute is very perplexing. Aoki’s widow, who is CEO of BOT, firmly believes everything that has transpired so far is part of a sinister plot to devalue BOT and force a low-cost sale of BOT to BI. Of course, it was BOT’s decision to offer hamburgers without BI’s approval. It was BOT’s decision to ignore BI’s demand letters that it stop selling the unauthorized burgers. It was BOT’s decision to circumvent the injunction. And most of the legal proceedings described above were initiated by BOT – not BI. At the same time, a Benihana hamburger, offered on a restaurant patio, alongside a Hawaiian beach, actually seems like a reasonable and intuitive brand extension. According to Bryan Graham, Managing Director of RCO Licensing, Beanstalk's auditing partner, “Unauthorized activities by a licensee are sometimes the most contentious and unsatisfactory aspect of a license agreement audit when there is inadequate language in the agreement to provide the licensor with options, remedies and recourse beyond claims of breach leading to termination. Accordingly, parties entering into a license agreement would be well advised to engage competent counsel to include enhanced royalties, liquidated damages and other relevant provisions to provide a "middle ground" between unauthorized activity and breach/termination. " Notwithstanding the fact that Benihana restaurants are upscale and BI has a responsibility to maintain the integrity of its brand name in its territory, it is highly unusual to see disputes involving multiple legal proceedings, in different forums, extending for years and leading to over one million dollar attorney-fee and cost awards, all emanating from an unauthorized menu item under a restaurant license agreement. So it still remains to be seen how/when the parties will ultimately resolve their beef.