Court: District Court, S.D. New York; March 7, 2017; Federal District Court
The case involves ongoing litigation between Benihana, Inc. (BI) and Benihana of Tokyo, LLC (BOT), with this being the fifth lawsuit in four years. BI operates Benihana restaurants in the U.S. except Hawaii, where BOT holds a contractual license from BI. Previous cases have predominantly favored BI, establishing that BOT breached its licensing agreement through unauthorized menu items, non-approved marketing, and insufficient insurance. Despite these breaches, a 2015 arbitration decision concluded that they did not warrant termination of BOT's license. In the current lawsuit, BOT counters by alleging that BI's previous actions indicate an attempt to coerce BOT into selling its Hawaii license. BOT also claims BI has failed to reasonably approve its proposed menus and advertisements, seeking both monetary damages and termination of the license agreement in favor of BOT, along with rights to operate in Hawaii and related intellectual property.
BOT initially filed the lawsuit in New York State Supreme Court, alleging breach of contract, breach of the covenant of good faith, and tortious interference against Angelo, Gordon & Co. L.P. (AGC), an investment bank that owns BI. The addition of AGC, which shares citizenship with BOT, negates diversity jurisdiction, prompting BI to remove the case to federal court, arguing that AGC’s inclusion was fraudulent and aimed at evading a court that had previously ruled against BOT. BI also claimed that the case involved federal trademark issues. The court ultimately denied BOT’s motion to remand the case to state court and granted BI’s and AGC’s motion to dismiss under Rule 12(b)(6). The background notes that the Benihana concept was founded by Hiraoki "Rocky" Aoki in 1964, introducing teppanyaki cooking in the U.S.
Benihana restaurants incorporate entertainment into the dining experience, with chefs cooking at tableside. The Benihana System, created by Rocky, standardizes recipes, advertising, service methods, and ingredients across all locations. Rocky established two separate companies: Benihana of Tokyo (BOT) and Benihana America (BI), which he initially controlled before BI attracted outside investors, including AGC, which gained control in 2012. BOT remains under the Aoki family's control and trust after Rocky's death in 2008.
In 1995, BI and BOT entered two significant agreements. The first, the Amended and Restated Agreement and Plan of Reorganization (ARA), defined the territorial rights for operating Benihana restaurants. BI was granted rights in the U.S., Central America, South America, and the Caribbean, while BOT could operate outside these areas, with Hawaii being the only exception where BI would license BOT to continue operations. The ARA did not establish a regulatory framework for their working relationship or dispute resolution mechanisms.
The second agreement, the License Agreement dated May 15, 1995, provided BOT a perpetual, royalty-free license to operate Benihana in Hawaii, specifically for the Honolulu restaurant created from a traditional Japanese farmhouse, which held sentimental value for Rocky. The License Agreement outlines operational terms, including menu composition, trademark use, advertising, insurance, BI's termination rights, and dispute resolution under New York law. Key provisions include Article 5, which requires BI's approval for any use of the Benihana marks, Article 6, mandating BOT to comply with the Benihana System and obtain BI's approval for products, and Article 8, restricting BOT to sell only BI-approved items.
BOT must maintain comprehensive liability insurance that includes BI as an additional assured. The License Agreement stipulates that any failure to comply with covenants in Articles 5 and 8 constitutes a material event of default. Such defaults may lead to irreparable harm to BI, allowing BI to seek specific performance or injunctive relief without proving actual damage. BOT is also responsible for BI's enforcement costs, including reasonable attorneys' fees, if deemed the breaching party. Article 12 outlines BI's right to terminate the License Agreement for specified events, including BOT's substantial violations that go uncured within 30 days of written notice. Disputes under the agreement are subject to arbitration, with mandatory arbitration upon termination, while other disputes allow for court relief. Arbitration is to be conducted by the American Arbitration Association (AAA) in New York City.
In the past four years, BI and BOT have been involved in litigation and arbitration regarding BOT's operation of the Hawaii restaurant. On May 6, 2013, BI informed BOT that selling unauthorized "Beni Burgers" violated the License Agreement and demanded their removal from the menu. After multiple notifications and extensions to cure the violations, BOT sought a temporary restraining order in New York State Supreme Court on September 24, 2013, to delay addressing these breaches until after arbitration. The court denied this request on October 1, 2013, ruling that BOT had not demonstrated a likelihood of success and appeared to be in breach of the License Agreement by selling hamburgers.
Following the Court's ruling, BOT continued selling hamburgers at its Hawaii restaurant despite counsel's assurance to cease such sales. The hamburgers were marketed under various names, including 'Beni Burger' and 'Classic Burger,' alongside the 'Beni Panda,' a children's dish featuring fried rice and mini hamburger patties. On December 13, 2013, BI notified BOT of multiple breaches of their License Agreement, including violations related to advertising and insurance. In response, BOT initiated arbitration on January 13, 2014, claiming it was not in default. However, on February 5, 2014, BI terminated the License Agreement effective February 15, citing BOT's failure to remedy breaches within 30 days and having issued three notices of default within the year. BI subsequently sought a preliminary injunction to prevent BOT from selling hamburgers and using unauthorized advertisements while arbitration was pending. BOT defended its actions by arguing that selling hamburgers outside the restaurant and classifying the Beni Panda as a rice dish did not constitute a breach. The Court rejected BOT's defenses, ruling that BI was likely to succeed in proving material breaches based on BOT's actions. A preliminary injunction was granted, prohibiting BOT from selling unauthorized food items and advertising without BI's approval. The Second Circuit upheld this ruling, emphasizing BOT's blatant violations of the License Agreement. Arbitration proceeded, with BOT seeking a declaration of no default and BI counterclaiming for affirmation of the termination and damages. The arbitration panel, after hearings in June 2015, unanimously found that BOT had materially breached the License Agreement on three counts, specifically concerning the sale and advertisement of hamburgers and failure to name BI as an additional assured.
The panel majority, in a 2-1 decision, concluded that Article 13.1 of the License Agreement allowed termination only if BI had a right to terminate and if such termination was reasonable. Although BOT's material breaches provided BI with termination rights, the majority deemed the termination unreasonable, emphasizing that the parties intended for BOT to maintain a license for the Honolulu restaurant. The term "reasonable" was interpreted to mean fair and sensible under the circumstances. A dissenting arbitrator strongly disagreed, asserting that under New York contract law, BI was entitled to terminate the agreement due to the material breach without needing to assess reasonableness. Instead of termination, the panel issued a permanent injunction against BOT and awarded BI $1,130,643.80 in attorneys' fees and costs, recognizing BOT as the breaching party. Following this, BI sought partial confirmation and vacatur of the award in court, aiming to affirm the fee award but challenge the panel's termination ruling. On July 15, 2016, the court confirmed the fee award and the injunction, but upheld the panel's decision regarding termination, although it found the dissenting arbitrator's perspective more compelling. The court denied BOT's motion for Rule 11 sanctions against BI, suggesting BOT's motion was less justified than BI's request for vacatur. Subsequently, on April 13, 2016, BOT filed a lawsuit in New York State Supreme Court, alleging that BI and AGC conspired to terminate the License Agreement to facilitate a forced sale of BOT, claiming BI's actions aimed to diminish BOT's value and alleging wrongful conduct related to previous legal disputes. BOT argued it had not intended to breach the agreement but acted based on incorrect legal advice from a lawyer it subsequently sued for malpractice.
BOT claims that it was caught off guard when BI exercised its right under the License Agreement to review new menu items and advertisements. The Complaint highlights a 2015 arbitration initiated by BOT, which was under judicial review at the time of the Complaint's filing, alleging BI's wrongful conduct during that process. BOT asserts that BI unreasonably refused to make a fair settlement offer, arguing that arbitration would escalate costs. Specific grievances include BI’s assertion that BOT needed permission for a dance performance at its Honolulu restaurant and BI's refusal to approve BOT's proposed menus and advertisements while BOT continued operations pending arbitration. BOT also criticizes AGC and BI representatives for not meeting with Rocky Aoki's widow during the arbitration.
The arbitration panel concluded that despite BOT's material breaches, BI's termination of the License Agreement was unreasonable and invalid. BOT contends that it was unfairly compelled to pay over $1 million in BI's legal fees due to BI's enforcement of the License Agreement. Post-arbitration, BOT alleges that BI and AGC conspired to deny BOT reasonable approval of menu and advertisement items, breaching the License Agreement. Despite BOT’s compliance with the arbitration award and ongoing obligations, BI allegedly refused to approve submitted ads, including a denial of approval for ads submitted on November 24, 2015.
BOT claims communications between executives reflected BI's intent to obstruct compliance with the License Agreement. In February 2016, a BI executive provided a Brand Style Guide, which did not meet BOT's requests for a marketing plan or advertising template. Additionally, BI criticized BOT's menu for unspecified issues and insisted that any take-out menu must mirror the dining room menu, without clarifying this requirement, while also rejecting BOT's terrace menu.
BI aims to standardize menus across its Benihana restaurants, but BOT claims that BI often allows franchisees to offer significantly different menus. The Complaint alleges that BI collaborated with AGC to obstruct BOT's compliance with the License Agreement, acting in bad faith to make compliance impossible. BOT contends that AGC intended to acquire both BI and BOT, and after failing to purchase BOT, BI retaliated by alleging violations linked to the Hawaii restaurant's operations. BOT claims that AGC instigated arbitration and litigation to pressure BOT into a sale.
BOT asserts a breach of contract against BI under the ARA, arguing that BI's refusal to approve menus constitutes a failure to use its best efforts as required by the ARA, which also relies on the License Agreement. BOT further claims that AGC tortiously interfered by encouraging BI to breach the ARA.
Procedurally, BI filed for removal to federal court, and both BI and AGC moved to dismiss the case. BOT subsequently sought to remand the case to New York State Supreme Court, asserting that AGC's joinder was legitimate and that no federal question existed. The Court found AGC had been fraudulently joined, denying BOT's remand motion, and proceeded to evaluate the dismissal motions. BOT brings three claims: breach of the ARA against BI, breach of the implied covenant of good faith and fair dealing against BI, and tortious interference against AGC. BI's motions argue that BOT's claims lack sufficient allegations and that the tortious interference claim is protected by the economic interest defense.
The Court determines that AGC was fraudulently joined, establishing diversity jurisdiction, and does not consider BI's federal question jurisdiction argument. For removal to federal court, a civil action must fall within the original jurisdiction of district courts, which includes cases between citizens of different states with an amount in controversy exceeding $75,000. Complete diversity is necessary to maintain diversity jurisdiction, and the defendant bears the burden of proof for removal.
In this case, BOT is a citizen of New York, AGC is a citizen of Delaware and New York, and BI is a citizen of Delaware and Florida. Joinder of AGC could destroy diversity, but a plaintiff cannot defeat diversity jurisdiction by joining parties with no real connection to the controversy. To demonstrate fraudulent joinder, the defendant must show either outright fraud in the pleadings or that there is no possibility of stating a claim against the non-diverse defendant. The burden of proving fraudulent joinder is significant, requiring that there be no possible recovery under state law for the alleged cause.
BI and AGC do not claim outright fraud in BOT's pleadings but argue that BOT's claim for tortious interference is legally impossible under New York law. The Court evaluates if BI and AGC have shown by clear and convincing evidence that BOT cannot state a claim against AGC. BOT alleges AGC encouraged BI to breach a License Agreement, intending to harm BOT's market value. BI and AGC contend that BOT's claim is precluded by the economic interest defense, which applies when a defendant acts to protect its own interests in a breaching party's business. Under New York law, tortious interference requires evidence of an existing contract, knowledge of that contract by the defendant, intentional breach procurement without justification, actual breach, and resulting damages. The economic interest defense bars such claims unless malice or illegality is proven.
A complaint alleging tortious interference requires more than just the basic elements if the defendant has an economic interest in the breaching party's business; it must also demonstrate that the defendant acted with malice, fraud, or illegality. Under New York law, specifically the case of White Plains, a defendant can assert an economic interest defense if it can show it acted to protect its own financial stake in the breaching party's business. This defense is not applicable when the third party involved is a competitor of the plaintiff, as they lack a legitimate stake in the breaching party’s business.
In this case, AGC is alleged to have a significant economic interest in BI, which could negate a tortious interference claim unless malice, fraud, or illegality is proven. AGC, a private investment advisor managing $26.5 billion, acquired BI in 2012 with the intention of also acquiring BOT, which was communicated to BOT's CEO. AGC's managing director indicated that the acquisition of BOT was crucial for AGC to meet its obligations to investors and for its business strategy. Following the acquisition of BI, AGC expressed a desire to purchase BOT, emphasizing the necessity of this acquisition for AGC’s profitability and future plans, including potentially taking Benihana public.
Ms. Aoki, BOT's CEO, ultimately declined AGC's offer, stating that while she understood AGC's interest in BI, BOT had no reason to sell. The allegations presented in the complaint indicate that AGC's ownership of BI created a vested interest in BI's interactions with BOT, including contractual agreements and potential future collaborations, thereby supporting AGC's economic interest defense.
BOT's Complaint details AGC's detrimental business decisions impacting BI, which AGC owns, and asserts that these decisions have harmed the Benihana brand and restaurant operations. The Complaint claims that under AGC's management, BI implemented cost-cutting measures that led to the termination of experienced personnel and subsequent franchise discontinuations. AGC's focus on financial gain, rather than the integrity of the Benihana System established by Mr. Aoki, allegedly resulted in widespread damage to the brand and failure to meet business forecasts. The Complaint further asserts that AGC controlled BI's strategy and operations, including personnel decisions, and aimed to unify the Benihana entities through an acquisition of BOT to enhance its investment. While the Complaint suggests AGC encouraged BI to breach its License Agreement, it lacks evidence of malicious or illegal actions by AGC. Consequently, the court finds that the economic interest defense applies, blocking BOT's tortious interference claim, which is crucial for establishing diversity jurisdiction. BOT's argument that the economic interest defense is limited to specific ownership structures is unconvincing, as the New York Court of Appeals has not imposed such restrictions. Instead, the defense applies broadly to actions taken to protect one's financial stake in a business, which AGC's conduct reflects.
The economic interest doctrine shields AGC from BOT's tortious interference claim, as AGC acted to protect its own economic interests rather than those of the breaching party. The court concludes that AGC was fraudulently joined, affirming BI's proper removal of the case and denying BOT's remand motion. Additionally, BOT's claim against AGC for tortious interference is dismissed for failure to state a claim. BI's motion to dismiss is based on two points: BOT's breach of contract claim inadequately alleges breach, damages, or its own performance, and the claim for breach of the covenant of good faith and fair dealing duplicates the breach of contract claim. Under Rule 12(b)(6), to survive a motion to dismiss, a complaint must present enough factual content to render a claim plausible, as established in Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal. Legal conclusions without factual support do not suffice, and merely consistent allegations do not meet the plausibility threshold. A breach of contract claim under New York law requires an agreement's existence, the plaintiff's adequate performance, the defendant's breach, and resulting damages, with specific contract provisions necessary for establishing liability.
In Sud v. Sud, the New York appellate court emphasizes that contract interpretation is grounded in the parties' expressed intent as outlined in their written agreements. The case revolves around BOT's breach of contract claim against BI, specifically under the March 1995 Agreement (ARA), which delineates the territorial allocation of restaurants and intellectual property rights between the parties. The complaint identifies a breach of ARA Section 7.05, which mandates both parties to use their best efforts to fulfill the agreement's objectives. BOT asserts that BI's failure to reasonably approve BOT's menus and advertisements, as required by the License Agreement, constitutes a breach of the ARA's best efforts clause.
However, the court finds that BOT's claim does not hold because the provision in question requires best efforts specifically to consummate the transactions anticipated by the ARA, which were the initial transfer of assets and rights between the parties. The ARA's language clarifies that the transactions referred to are those associated with the 1995 asset transfer, not ongoing obligations under the License Agreement. Consequently, the court concludes that BI's alleged breaches of the License Agreement do not equate to a violation of the best efforts provision in the ARA, as those breaches do not impact the consummation of the transactions initially contemplated by the ARA.
The ARA, described as an "Agreement and Plan of Reorganization," outlines the acquisition of BOT's business and assets by BI. Its provisions include details on asset transfer, merger terms, share conversion and exchange, party representations and warranties, conditions for consummation, and termination rights. Section 7.05 of the ARA, which refers to BI’s obligation to use "best efforts," is specifically related to the transactions necessary for the reorganization and does not imply a perpetual commitment for future dealings. BOT's breach of contract claim is weakened because it does not assert a violation of the commitment in the second sentence of Section 7.05, which pertains to post-closing actions. Furthermore, BOT's argument that the ARA and the License Agreement are interchangeable contradicts established case law, which holds that multiple writings must be evaluated based on the parties' intent and the context of their execution. Separate agreements can be considered a single contract if they relate to the same subject matter and were executed simultaneously or are part of the same transaction. However, the ARA and License Agreement do not meet this criterion, as the ARA only references the License Agreement once and requires its execution as a condition for the ARA's effectiveness.
BOT has been granted rights to use the "Benihana of Tokyo" trademarks in connection with the restaurant in Honolulu, Hawaii, and holds perpetual, exclusive rights to operate such restaurants in the state, subject to the franchise agreement for the Maui location. BOT's compliance with the License Agreement is acknowledged, but the ARA does not state that a failure to comply with the License Agreement constitutes a breach of the ARA. BOT's claim of breach under provision 7.05 of the ARA is deemed inapplicable, as the ARA and the License Agreement address different topics and periods, with the ARA relating to a one-time corporate reorganization in 1996 and the License Agreement detailing the licensing of the Honolulu restaurant, expected to be perpetual. The agreements also differ in dispute resolution mechanisms; the ARA lacks a specified forum, whereas the License Agreement requires arbitration for disputes.
The Court determines that allowing BOT to sue under the ARA for issues related to the License Agreement would undermine BI's right to arbitration. Consequently, BOT’s breach of contract claim is dismissed for failing to cite a breach of the ARA. The dismissal does not prevent BOT from pursuing a breach of the License Agreement in court or arbitration. Furthermore, BOT's claim against BI for breaching the implied covenant of good faith and fair dealing under New York law is also dismissed, as every contract in New York implies that parties will not intentionally obstruct each other from fulfilling the agreement.
The court references Patterson v. Meyerhofer, establishing that while a covenant may not impose obligations inconsistent with a contract, it includes promises that a reasonable person would expect to be part of the agreement. Specifically, it asserts that neither party should act in a way that undermines the other’s rights to contract benefits and that parties must not act arbitrarily when exercising discretion. The elements for claiming breach of the implied covenant of good faith and fair dealing mirror those of torts, necessitating duty, breach, causation, and damages. Notably, if a plaintiff alleges a breach of the implied covenant based on the same facts as a breach of contract claim and seeks identical damages, the covenant claim is deemed duplicative and thus dismissed.
In this case, BOT’s allegations against BI for unreasonably withholding approval for menus and ads, which breach the “best efforts” obligation under the ARA, are mirrored in BOT's claim of breach of the covenant. Both claims seek the same damages, leading the court to find them duplicative and dismiss the covenant claim. The court denies BOT's motion to remand the case to state court and grants BI’s motion to dismiss the complaint, allowing BOT to pursue a breach of contract claim under the License Agreement, either in court or arbitration. The Clerk of Court is instructed to terminate the pending motions and close the case. The court’s factual summary is based on the complaint and other relevant documents, treating all allegations as true for the purposes of the motions considered.
The document references several legal filings related to a motion to remand and a motion to dismiss, including the Declaration of Patrick D. Bonner, Jr., and various attached exhibits. It emphasizes that these materials are relevant for consideration in both motions, supported by case law. Notably, the License Agreement allows for termination if BOT fails to rectify any substantial violations within 30 days of written notice from BI, and provides a provision for multiple default notices within a 12-month period. The Court previously enjoined BOT from claiming a longer cure period than stipulated in the License Agreement, but the Second Circuit reversed this aspect, affirming that the arbitration panel has the authority to decide on such matters.
The Complaint alleges that BI mismanaged its operations, suggesting that acquiring BOT could be a growth strategy. During a court hearing, the judge indicated that BI's request for vacatur was plausible, while BOT sought attorneys' fees, asserting that BI's bid was frivolous. BOT's claimed damages of $3 million meet the jurisdictional threshold of $75,000 under 18 U.S.C. § 1332. Additionally, it was noted that members of AGC serve as directors of BI, indicating AGC's influence over BI's decisions. However, the Complaint lacks specific factual allegations against AGC, instead asserting that BI acted in concert with AGC to breach the License Agreement. The document concludes with a legal principle that unambiguous contracts are enforced according to their clear terms, with parol evidence only being admissible if the contract is found to be ambiguous.
In the case of Selective Ins. Co. of America v. County of Rensselaer, the court addresses whether a contract's ambiguity is a legal question for judicial determination. It highlights that differing interpretations by parties do not inherently indicate ambiguity. The excerpt explores possible reasons why BOT may have avoided litigation under the License Agreement. These include concerns about proving substantial compliance with the agreement in light of found material breaches, the absence of an arbitration clause in the ARA which may have made BOT prefer litigation, and the potential for unfavorable outcomes in courts where BOT has previously struggled. Additionally, BOT's desired remedy of terminating the License Agreement and transferring operational rights for Benihana restaurants in Hawaii may not be supported by the agreement's language, which specifies termination conditions primarily affecting BOT's rights rather than BI's operational rights. The excerpt concludes by defining the ARA's "Effective Time" in relation to shareholder approval.
