Yusuf Ahmed Alghanim & Sons v. Toys 'R' Us, Inc., 1757

Citation126 F.3d 15
Decision Date10 September 1997
Docket NumberNo. 1757,D,1757
PartiesYUSUF AHMED ALGHANIM & SONS, W.L.L., Petitioner-Appellee, v. TOYS "R" US, INC.; TRU (HK) Limited, Respondents-Appellants. ocket 96-9692.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Michael S. Feldberg, Schulte Roth & Zabel LLP, New York City (Antoinette Passanante, Schulte Roth & Zabel LLP, Dennis J. Block, Stephen A. Radin, Weil, Gotshal & Manges, New York City, of counsel), for Respondents-Appellants.

Joseph D. Pizzurro, Curtis, Mallet-Prevost, Colt & Mosle, New York City (Herbert M. Lord, Michelle A. Rice, Curtis, Mallet-Prevost, Colt & Mosle, New York City, of counsel), for Petitioner-Appellee.

Before: MINER and McLAUGHLIN, Circuit Judges, and SCULLIN, District Judge. *

MINER, Circuit Judge.

Appeal from a judgment entered in the United States District Court for the Southern District of New York (McKenna, J.) denying respondents' cross-motion to vacate or modify an arbitration award and granting the petition to confirm the award. The court found that while the petition for confirmation was brought under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, respondents' cross-motion to vacate or modify the award was properly brought under the Federal Arbitration Act, and thus those claims were governed by the Federal Arbitration Act's implied grounds for vacatur. Nonetheless, the court granted For the reasons that follow, we affirm.

the petition to confirm the award, finding that respondents' allegations of error in the arbitral award were without merit.

BACKGROUND

In November of 1982, respondent-appellant Toys "R" Us, Inc. (collectively with respondent-appellant TRU (HK) Limited, "Toys 'R' Us") and petitioner-appellee Yusuf Ahmed Alghanim & Sons, W.L.L. ("Alghanim"), a privately owned Kuwaiti business, entered into a License and Technical Assistance Agreement (the "agreement") and a Supply Agreement. Through the agreement, Toys "R" Us granted Alghanim a limited right to open Toys "R" Us stores and use its trademarks in Kuwait and 13 other countries located in and around the Middle East (the "territory"). Toys "R" Us further agreed to supply Alghanim with its technology, expertise and assistance in the toy business.

From 1982 to the December 1993 commencement of the arbitration giving rise to this appeal, Alghanim opened four toy stores, all in Kuwait. According to Toys "R" Us, the first such store, opened in 1983, resembled a Toys "R" Us store in the United States, but the other three, two of which were opened in 1985 and one in 1988, were small storefronts with only limited merchandise. It is uncontested that Alghanim's stores lost some $6.65 million over the 11-year period from 1982 to 1993, and turned a profit only in one year of this period.

Following the Gulf War, both Alghanim and Toys "R" Us apparently concluded that their relationship needed to be altered. Representatives of Alghanim and Toys "R" Us's International Division met in September of 1991 and February of 1992. Alghanim expressed a desire for Toys "R" Us to contribute capital toward Alghanim's expansion into other countries. Alghanim advised that it would be willing to proceed in the business only under a new joint venture agreement that would shift a substantial portion of responsibility for capital expenditures to Toys "R" Us. Toys "R" Us was unwilling to take on a greater portion of this responsibility.

On July 20, 1992, Toys "R" Us purported to exercise its right to terminate the agreement, sending Alghanim a notice of non-renewal stating that the agreement would terminate on January 31, 1993. Alghanim responded on July 30, 1992, stating that because its most recently opened toy store had opened on January 16, 1988, the initial term of the agreement ended on January 16, 1993. Alghanim asserted that Toys "R" Us's notice of non-renewal was four days late in providing notice six months before the end of the initial period. According to Alghanim, under the termination provision of the agreement, Toys "R" Us's failure to provide notice more than six months before the fifth year after the opening of the most recent store automatically extended the term of the agreement for an additional two years, until January 16, 1995.

On September 2, 1992, Toys "R" Us sent a second letter. Toys "R" Us explained that, on further inspection of the agreement, it had determined that the initial term of the agreement expired on December 31, 1993, and it again gave notice of non-renewal. In this letter, Toys "R" Us also directed Alghanim not to open any new toy stores and warned that failure to comply with that direction could constitute a breach of the agreement.

Through the balance of 1992 and 1993, the parties unsuccessfully attempted to renegotiate the agreement or devise a new arrangement. In September of 1993, the parties discussed Alghanim's willingness to relinquish its rights under the agreement. In one discussion, Amin Kadrie, Alghanim's chief operating officer and the head of its toy business, offered to "release the business right now" if Toys "R" Us would "give us $2 million for the losses we've incurred [in] trying to develop this business." (J.A. 457.) Toys "R" Us declined, offering instead to buy Alghanim's inventory at Alghanim's cost. The parties could not agree upon a reconciliation.

At the end of 1993, Toys "R" Us contracted with Al-Futtaim Sons Co., LLC ("Al-Futtaim") for the post-Alghanim rights to open Toys "R" Us stores in five of the countries under the agreement, including Kuwait On December 20, 1993, Toys "R" Us invoked the dispute-resolution mechanism in the agreement, initiating an arbitration before the American Arbitration Association. Toys "R" Us sought a declaration that the agreement was terminated on December 31, 1993. Alghanim responded by counterclaiming for breach of contract.

and with ATA Development Co. ("ATA") for the post-Alghanim rights to open Toys "R" Us stores in Saudi Arabia. These two companies initially offered $30 million for the rights, and eventually paid a total of $22.5 million.

On May 4, 1994, the arbitrator denied Toys "R" Us's request for declaratory judgment. The arbitrator found that, under the termination provisions of the agreement, Alghanim had the absolute right to open toy stores, even after being given notice of termination, as long as the last toy store was opened within five years. The parties then engaged in substantial document and expert discovery, motion practice, and a 29-day evidentiary hearing on Alghanim's counterclaims.

On July 11, 1996, the arbitrator awarded Alghanim $46.44 million for lost profits under the agreement, plus 9 percent interest to accrue from December 31, 1994. The arbitrator's findings and legal conclusions were set forth in a 47-page opinion.

Alghanim petitioned the district court to confirm the award under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958 ("Convention"), 21 U.S.T. 2517, 330 U.N.T.S. 38, reprinted at 9 U.S.C. § 201. 1 Toys "R" Us cross-moved to vacate or modify the award under the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq., arguing that the award was clearly irrational, in manifest disregard of the law, and in manifest disregard of the terms of the agreement. The district court concluded that "[t]he Convention and the FAA afford overlapping coverage, and the fact that a petition to confirm is brought under the Convention does not foreclose a cross-motion to vacate under the FAA, and the Court will consider [Toys "R" Us's] cross-motion under the standards of the FAA." (J.A. 569-70 (citation omitted).) By judgment entered December 20, 1996, the district court confirmed the award, finding Toys "R" Us's objections to the award to be without merit. This appeal followed.

DISCUSSION
I. Availability of the FAA's Grounds for Relief in Confirmation Under the Convention

Toys "R" Us argues that the district court correctly determined that the provisions of the FAA apply to its cross-motion to vacate or modify the arbitral award. In particular, Toys "R" Us contends that the FAA and the Convention have overlapping coverage. Thus, Toys "R" Us argues, even though the petition to confirm the arbitral award was brought under the Convention, the FAA's implied grounds for vacatur should apply to Toys "R" Us's cross-motion to vacate or modify because the cross-motion was brought under the FAA. We agree that the FAA governs Toys "R" Us's cross-motion.

A. Applicability of the Convention

Neither party seriously disputes the applicability of the Convention to this case and it is clear to us that the Convention does apply. The Convention provides that it will

apply to the recognition and enforcement of arbitral awards made in the territory of a State other than the State where the recognition and enforcement of such awards are sought, and arising out of differences between persons, whether physical or legal. It shall also apply to arbitral awards not considered as domestic awards in the State where their recognition and enforcement are sought.

Convention art. I(1) (emphasis added). The Convention does not define nondomestic awards. See Bergesen v. Joseph Muller Corp., 710 F.2d 928, 932 (2d Cir.1983). However [a]n agreement or award arising out of such a relationship which is entirely between citizens of the United States shall be deemed not to fall under the Convention unless that relationship involves property located abroad, envisages performance or enforcement abroad, or has some other reasonable relation with one or more foreign states.

9 U.S.C. § 202, one of the provisions implementing the Convention, provides that

In Bergesen, we held "that awards 'not considered as domestic' denotes awards which are subject to the Convention not because made abroad, but because made within the legal framework of another country, e.g., pronounced in accordance with foreign law or involving partie...

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