When the U.S. Second Circuit Court of Appeals speaks about arbitration, here at Arbitration Commentaries the ignition key turns, and the engine of this rusty old four-by-four squeals, wheezes, and eventually springs to life. This month’s fuel is judicial provisional relief in aid of arbitration. (Benihana, Inc. v. Benihana of Tokyo, 2015 WL 1903587 (2d Cir. April 28, 2015)).
First, a few facts about the case. It is about restaurants and hamburgers. In simplified form with some innocent liberties taken: Franchisor asserts menu control rights over franchisee, which franchisee allegedly violates by allegedly selling hamburgers in its franchised restaurant in Hawaii. Arbitration ensues, but franchisor seeks and obtains judicial provisional relief of two kinds: first, to enjoin sale of hamburgers in Hawaii during the arbitration, second (more interesting and less caloric than the first), enjoining franchisee from arguing to the Tribunal for any extension of the default cure period in case the Tribunal should determine that the franchisee was in default and that termination of the franchise agreement was justified on that basis.
The Second Circuit affirmed branch one of the injunction and vacated part two. As you would expect. So I will not herald as a terrain-shifting development that a US appellate court rejected the notion that an injunction in aid of arbitration obtained from a federal district court may foreclose a party from making an argument for final relief to an arbitral tribunal (at least absent some very clear language in the arbitration agreement limiting the power of the arbitrators).
I would however suggest that the Court’s eminently sound reasoning in support of this outcome speaks in favor of a broader reconsideration of the standards governing issuance of judicial provisional relief in aid of arbitration — which at this time, whether in a domestic or international case, are in lockstep with the standards for issuance of preliminary injunctions in cases pending before the courts. In particular, the requirement of “likelihood” or “probability” of success on the merits as a criterion for issuance of injunctive relief (sometimes varied slightly in the federal courts to allow in the alternative “serious questions going to the merits” combined with serious hardship) is at odds with US arbitration jurisprudence that in most contexts reserves to the arbitrators unfettered jurisdiction to decide the merits.
The Second Circuit, cutting through the parties’ arguments that the question of whether the tribunal could extend the default cure period was a question of “arbitrability,” rightly determined that this was “a merits argument masked as a jurisdictional one” and that the merits, obviously, were for the arbitrators. Said the Court: “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.” A court has “‘no business weighing the merits of the claims…’” said the Second Circuit quoting a venerable and venerated US Supreme Court arbitration case. And later, in the same line of reasoning, the Second Circuit said: “Prohibiting a court’s assessment of the merits until after the arbitral decision has been rendered is consistent with the structure of the Federal Arbitration Act (“FAA”) and with the ‘strong federal policy favoring arbitration as an alternative means of dispute resolution.’“
In federal and state courts in the US, “probability of success” prevails as a litmus test for a preliminary injunction because our legal tradition expresses reluctance to permit relief resembling what could be obtained in a final judgment when there has been only an accelerated and perhaps partial and perhaps skewed assessment of the facts and law relevant to liability. Lurking in the background is concern that the “preliminary” injunction will have a duration through the final adjudication, which could be quite a long time, and so there is a pressing need to try to get it right.
But the judicial injunction in aid of arbitration serves a different function. The interval to which it is addressed is shorter: up to the time when the Arbitral Tribunal is able to hear and decide the application for provisional relief. That should ordinarily be a matter of a few weeks, and so there should be less concern in the courts about getting it right and a rather singular focus on preventing an alteration of the status quo so irreversible that, in a few weeks time, a provisional measure from the Tribunal would be ineffectual to address it.
It is of course possible to reconcile that traditional judicial injunction standard of “probability of success on the merits” with the Second Circuit’s solemn incantation of the exclusivity of the arbitrators’ power in regard to the merits. The findings of fact and conclusions of law provisionally made by a court for purposes of an injunction in aid of arbitration do not bind the Tribunal. But certainly the Tribunal will be influenced by those findings, often to the point of giving them tacit presumptive validity. Arguably this erodes the arbitral process, and transforms it into a hybrid judicial-arbitral process whenever judicial interim relief is sought. And this dilutes the practical effectiveness of the principles stated by the Second Circuit as quoted earlier in this post.
Perhaps the time has come in the USA for judicial re-thinking of standards for issuance of an injunction in aid of arbitration.