Opposition Brief — Toys "R" Us, Inc. v. Yusuf Ahmed Alghanim & Sons, W. L. L.

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(S) zi Supreme Court, U.S.

No. 97-957

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Supreme Court of the United States

>-

October Term, 1997

TOYS “R” US, INC. and TRU (HK) LIMITED,

Petitioners,

vs.

YUSUF AHMED ALGHANIM & SONS, W.L.L.,

Respondent.

On Petition for Writ of Certiorari to the

United States Court of Appeals for the Second Circuit

RESPONDENT?’S BRIEF IN OPPOSITION

JOSEPH D. PIZZURRO

Counsel of Record

HERBERT M. LORD

MICHELLE A. RICE

CURTIS, MALLET-PREVOST,

COLT & MOSLE

101 Fark Avenue

New York, New York 10178-0061

(212) 696-6000

Atbrneys for Respondent

(800) 274-3321 + (G0) 359-6859 ;

A OFVISION OF COUNSEL PRESS inc. e\

COUNTERSTATEMENT OF

QUESTIONS PRESENTED

1. Whether the Supreme Court should consider an argument

which petitioner never presented in the courts below, i.e., that a

new standard of review, the clearly erroneous standard, should be

applied by courts reviewing international arbitration awards.

2. Whether the Supreme Court should adopt a judicially

intrusive clearly erroneous standard for the review of international

arbitral awards notwithstanding thirty years of judicial authority,

clear statutory provisions and Federal policy favoring international

ii

STATEMENT PURSUANT TO RULE 29.6

The petition accurately lists the parties to the proceedings.

Respondent Yusuf Ahmed Alghanim & Sons, W.L.L.

(hereinafter “YAAS”) is a privately held company. It has no parent

companies or nonwholly owned subsidiaries or affiliates.

TABLE OF CONTENTS

Page

Counterstatement of Questions Presented ........... i

Statement Pursuant to Rule 29.6 ...............5.. ii

I iin oi. ding ove kb secticrecescccccs iii

Table of Cited Authorities ..............-00eeeeeee V

Statement of the Case .........ccccccccsccccccees 1

Bie | AGEs E traded) cess ee ocwcecccces 2

B. The Proceedings Below ................-.: 6

1. The AAA Arbitration ............ oreT 6

2. The District Court Proceedings ......... 7

3. The Court of Appeals Proceedings ...... 7

Reasons for Denying the Writ ...................-. 8

I. TRU Should Not Assert An Argument For The

Pee NN te PE UE, non ccc ccc ceccces 9

II. A Clearly Erroneous Standard Of Review Is At

Odds With The Prior Decisions Of This Court

And The Courts Of Appeals As Well As

Applicable Statutes And Federal Policy Favoring

PA etd b odbc setecsndtasbbesccces 10

iv

Contents

Page

I’. The Arbitral Award Would Be Confirmed Even

Under A Clearly Erroneous Standard Of Review. 17

A. The Arbitrator’s Liability Findings Were Not

eo ee rer ere eer se 18

1. Paragraph 8.01 of the L&T Agreement 18

2. Paragraph 2.07 of the L&T Agreement 19

B. The Arbitrator’s Damages Findings Were Not

ET erry pee 21

RBIS RENEE fp Sestiie Gol pie rgb Meee eae. den Casey 27

Contents

Page

TABLE OF CITED AUTHORITIES

Cases Cited:

Al-Harbi v. Citibank, N.A., 85 F.3d 680 (CADC), cert.

denied, 117 S. Ct. 432 (1996) ...........--e eens 14

Anderson v. Bessemer City, 470 U.S. 564 (1984) .... 18

Ashiand Management v. Janien, 82 N.Y.2d 395, 604

Se eR ioe. eee eee 23, 24

Autowest, Inc. v. Peugeot, Inc., 434 F.2d 556 (CA2 1970) 22

Barnes v. Logan, 122 F.3d 820 (CA9 1997) ........ 13

Concrete Pipe and Products of California, Inc. v.

Construction Laborers Pension Trust for Southern

California, 508 U.S. 602 (1993) .............+-. 17

Davis v. United States, 495 U.S. 472 (1990) ........ 9

Delta Air Lines, Inc. v. August, 450 U.S. 346 (1981) . 10

Denver & Rio Grande Western Railroad Co. v. Union

Pacific Railroad Co., 119 F.3d 847 (CA10 1997) .. 13

Int’! Telepassport Corp. v. USFI, Inc., 89 F.3d 82 (CA2

SE ba Rc huudinddkey Seenrsrwedecednires seks é 23

Kenford Co. v. County of Erie, 67 N.Y.2d 257, 502

De SEED «bcs wove obese seebnsewsese 21, 23

vi

Contents

Page

Lamborn v. Dittmer, 873 F.2d 522 (CA2 1989)...... 22

Lee v. Chica, 983 F.2d 883 (CA8), cert. denied, 510 U.S.

SE EE icici hob 62K baked baenaabs de 13

M & C Corp. v. Erwin Behr GmbH & Co., 87 F.3d 844

iid bine Cio iw iene eens oe oi ees 5 13

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,

STS: ED. GEG Ae bas ieee s se kweatewasa ts < 14

Montes +. Shearson Lehman Bros., Inc., 128 F.3d 1456

CR re cb a5 8 oan Hs 850 ei 13, 14

National Wrecking Co. v. International Brotherhood of

Teamsters, Local 731, 990 F.2d 957 (CA7 1993) .. 13

Patrick v. Burget, 486 U.S. 94 (1988) .............. 9

Prudential-Bache Securities, Inc. v. Tanner, 72 F.3d 234

eo i ain en ce etc sa Ae ooh es 12

Remmey v. PaineWebber, Inc., 32 F.3d 143 (CA4 1994),

cove. dommad, STS US. 2412 C1983) oc ce cee cee 13

R.M. Perez & Associates, Inc. v. Welsh, 960 F.2d 534

CAS AG fb ies WEE re 55 a FOR. 14

Shearson'American Express, Inc. v. McMahon, 482 U.S.

i irked nie dieiaee edie ae 1]

United Sates v. Mendenhall, 446 U.S. 544 (1980) ... 10

vii

Contents

Page

United States v. Yellow Cab Co., 338 U.S. 338 (1949) 18

United Transport Union, Local 1589 v. Suburban

Transport Corp., 51 F.3d 376 (CA3 1995) .....-. 12

Upshur Coals Corp. v. United Mineworkers of America,

Dist. 31, 933 F.2d 225 (CA4 1991) .........--:- 13

Wilko v. Swan, 346 U.S. 427 (1953) ......--++++: 11, 12, 16

Willemijn Houdstermaatschappij, BV v. Standard

Microsystems Corp., 103 F.3d 9 (CA2 M097) k:ciwes 12

Wood v. Georgia, 450 U.S. 261 (1981) .........---- 10

Treaties Cited:

United Nations Convention on the Recognition and

Enforcement of Foreign Arbitral Awards, 21 U.S.T.

2517, T.LA.S. 6997, 330 U.N.T.S. 3 ........-05- passim

Statutes Cited:

I i. aie ee bade viacsevedsisses 7

A ig gas Sin Yew ins «axe es K¥048- 14, 15, 16

ia ia Cows win Ch Kheaet am 16

“1 3 SSS RRS Sri apa 16

ee ee on cas avautenths ta>8s 1

DUK, HOE ccc ccc nccccesccccvencessdovsecess 16

vili

Contents

Page

Other Authorities Cited:

Robert L. Stern & Eugene Gressman, Supreme Court

Practice § 6.27: (mh 6. 1978) 6. 10

1

STATEMENT OF THE CASE

This case presents what should be a routine and expeditious

enforcement of an international arbitral award under the terms of

the United Nations Convention on the Recognition and

Enforcement of Foreign Arbitral Awards (the “Convention”), a

treaty ratified and implemented by the United States. 21 U.S.T.

2517, T.1.A.S. 6997, 330 U.N.T.S. 3 (codified at 9 U.S.C.

§§ 201-208). Petitioners, Toys “R” Us, Inc. and TRU (HK) Limited

(collectively “TRU”) initiated the arbitration pursuant to the terms

of an arbitration agreement contained in contracts which TRU

drafted. The arbitration, which lasted two and one-half years from

the time TRU commenced proceedings in December 1993, involved

extensive pre-hearing document discovery, 29 days of evidentiary

hearings resulting in more than 5,000 pages of transcript, 800

documentary exhibits, extensive expert testimony and written

reports on damages, and post-hearing submissions of over 300

pages. The experienced AAA arbitrator, William L.D. Barrett, issued

a thorough and reasoned 47 page memorandum opinion addressing

all of TRU’s evidentiary, contractual and legal arguments. That

memorandum opinion, which would withstand scrutiny under any

standard of review, rejected TRU’s arguments and awarded YAAS

$46.4 million in damages, plus prejudgment interest at the statutory

rate provided under New York law, based principally upon an

analysis of what TRU actually was able to secure for itself when it

sold the contract rights which were found to belong to YAAS (the

“Award’”’).

TRU refused to honor the Award, forcing YAAS to petition

the District Court for recognition and enforcement under the

Convention. In the District Court, and in the Court of Appeals,

TRU argued that the Award should be overturned because the

the Award was completely irrational. These arguments were nothing

more than attempts by TRU to retry the arbitration in the courts.

The District Court confirmed the Award and the Court of Appeals

for the Second Circuit affirmed.

2

TRU now seeks review by this Court, but not on the grounds

that the Court of Appeals committed reversible error by failing to

properly apply the existing law laid down by this Court. Rather,

TRU argues for the first time that the standard of review which it

sought to have applied by the courts below should now be changed

to permit courts to refuse recognition and enforcement of

international arbitration awards if those awards are “clearly

erroneous.”

TRU’s assertion is at odds with the statutory framework

established by Congress for the enforcement of arbitral awards. It

is at odds with the prior decisions of this Court and all of the

decisional law of the circuit courts of appeals. It is at odds with the

overriding Federal policy in favor of arbitration, a policy which

applies with particular force in the international arena. And it is

premised on a fundamental mistrust of arbitration as an institution

— a mistrust which this Court has repeatedly stated is at odds with

modern law and policy. The Court of Appeals decision was correct

and the petition for a writ of certiorari should be denied.

A. The Facts

In 1982, YAAS entered into a License and Technical Assistance

Agreement (the “L&T Agreement”) and a Supply Agreement

(collectively, the “Agreements”) with TRU with the intention of

establishing and operating toy stores throughout the Middle East,

a territory which included Saudi Arabia, Kuwait, the United Arab

Emirates, Qatar, Oman, Bahrain, Yemen, Egypt, Sudan, Jordan,

Lebanon, Syria, Iraq and Iran (the “Territory’”). (A19, 80).' The

Agreements were broad and far reaching. YAAS was granted the

exclusive right to use all of TRU’s trademarks and logos in

1. References in the form “A__” are to the relevant pages of

the Petitioners’ Appendix. References in the form “RA__” are to the

relevant pages of the Respondent’s Appendix. References in the form

“_ Tr. __” are to transcripts in the Record. References in the form

“Petition at __” are to the petition for certiorari filed by TRU.

3

connection with the operation of the YAAS toy stores and was

provided with exclusive access to all of TRU’s know how,

technology and expertise regarding all aspects of the retail toy

business. In addition, the L&T Agreement obligated TRU to use

its best efforts to make the YAAS Toy Store business profitable.

(A19-20, RA6).

The Agreements also contemplated that YAAS could enter

into partnerships with third parties to operate YAAS toy stores in

the Territory, and that TRU would be required to provide the same

rights and assistance with respect to those stores as to stores operated

by YAAS alone. (A19, RA4).

The Agreements contained “Term and Termination” clauses

which provided for the extension of the Agreements as long as

YAAS opened a YAAS Toy Store every five or fewer years.

(A21-22, 82).

Within months of executing the Agreements, YAAS invested

substantial funds to start up and operate the toy business in Kuwait.

Toy stores were opened in November 1983, April 1985, December

1985 and January 1988. (A4, 106-107). YAAS ordered, and TRU

provided, merchandise for these stores. (A27). TRU only provided

technical advice and assistance to facilitate the opening of the first

store. YAAS nevertheless paid royalty and purchasing commissions

for all of the stores. (A22, RA6-7).

Without the assistance of TRU, the toy stores were not

profitable. To rectify the situation, in 1989, Amin Kadrie of YAAS

conducted an extensive review of the toy operations and reached

the conclusion that it was feasible to expand the toy business outside

of Kuwait. Realizing that YAAS needed TRU’s performance under

the Agreements to make the existing stores profitable and to open

additional stores in the Territory, Kadrie asked TRU for its

assistance. But TRU refused to send a representative to Kuwait in

response to Kadrie’s request. Kadrie nonetheless concluded that

4

YAAS should remain in the toy business and that expansion of

the business within the region presented a “very significant

opportunity” for YAAS. (A30).

On August 2, 1990, before YAAS could turn around its

operations and implement an expansion plan, Iraq invaded and

occupied Kuwait. The country sustained major damage during the

occupation. The many businesses operated by Alghanim, including

the YAAS toy business, ground to a halt. One of the toy stores was

burned to its foundation. Two other stores suffered severe fire and

structural damage. All of the stores were looted, and tens of millions

of dollars in inventory and equipment were destroyed. (A30).

Despite the devastation in Kuwait, YAAS quickly resolved to

restore its operations after the liberation. In April 1991, YAAS

notified TRU of its intention to reconstruct and Operate the toy

business. (A31). But, unbeknownst to YAAS, TRU had already

concluded that the Middle East had enormous potential for

development and that “YAAS’s [exclusive] Agreements were

blocking TRU from a gold mine.” (A23). Indeed, by April 1991,

TRU decided that the Agreements had to be terminated so that

TRU could “have a free hand in the Territory.” (A27). Certain,

however, that YAAS would not voluntarily abandon its valuable

rights under the Agreements, TRU devised a Strategy “to stall,

stonewall and obstruct YAAS while the clock ran out and the

Agreements ended under their termination Clauses.” (A25).

Unaware of TRU’s intentions, YAAS took a number of steps

to restore and expand its toy business. YAAS reopened the one

Store that was mostly intact after the Gulf War. (A31). To accomplish

a regional expansion, YAAS investigated sites for additional stores

in Kuwait, the United Arab Emirates and Saudi Arabia. (A31-32).

In March 1992, Kadrie also determined that YAAS should

reestablish its flagship store in Farwaniya, Kuwait which had been

destroyed during the War. In May 1992, after TRU informed YAAS

that TRU did not have the resources or interest to pursue a Middle

5

East expansion plan, a cost analysis of the Farwaniya project was

prepared by YAAS. In July 1992, YAAS prepared an investment

proposal, projecting a store opening by December 1, 1992. That

proposal was approved by top management at YAAS in mid-July

1992, and YAAS notified TRU that it intended to proceed in

accordance with the terms of the existing Agreements between the

parties and that it would “pursue its ‘immediate plans and priorities’

— which included a plan to open stores in at least one more

country.” (A33).

On July 20, 1992, before YAAS could open a store, TRU

issued a notice of termination, advising YAAS that the Agreements

would expire on January 31, 1993. (A94-95). However, TRU

soon learned from YAAS that its notice of termination was not

timely, and that YAAS refused to relinquish its rights in >

Territory. (A96-97). Therefore, TRU rethought its initial

interpretation of the termination provisions and issued a second

notice of nonrenewal that revised the expiration date to December

31, 1993. (A98-99).

But by solving one problem TRU created another: If the

expiration date of the Agreements became December 31, 1993,

YAAS would have 11 more months to open a store and

automatically extend the Agreements for another five years. To

prevent that, in early September, TRU “direct[ed] YAAS to cease

any efforts to open any new YAAS Toy Stores in the territory...”

(A99). TRU then threatened that a failure to heed that instruction

could constitute grounds for an immediate termination of the

Agreements and could subject YAAS to liability for monetary

damages. (A99).

While the Agreements were still in effect, TRU sold the rights

to the TRU trademarks and TRU’s technical assistance and expertise

— rights which belonged to YAAS — for six of the 14 countries

in YAAS’s Territory. Under these agreements, the two new

franchisees, ATA Development Co. (“ATA”) and Al-Futtaim Sons

Co. LLC (“Al-Futtaim”), agreed to pay upfront fees of $30 million

6

and royalty and purchasing commissions based on the future

operation of the new toy stores. (A28, 35). Under the Agreements

with YAAS, TRU was entitled to royalty and purchasing

commissions but was not entitled to any upfront fees.

B. The Proceedings Below

1. The AAA Arbitration

On December 20, 1993, TRU commenced an arbitration

against YAAS, seeking a declaration that the Agreements would

terminate on December 31, 1993. In response, YAAS

counterclaimed for damages for breach of the Agreements. (A11).

On May 4, 1994, the arbitrator issued an eight page Partial

Award, denying TRU’s request for a declaratory judgment.

(A1-9). The arbitrator found that under the termination provisions

of the Agreements YAAS had the absolute right to open toy stores,

even after a notice of termination, as long as the toy store was

opened within five years of the last store opening. In that event,

the Agreements by their terms would be extended for at least five

more years. The arbitrator further held that, depending upon the

proof submitted in subsequent evidentiary hearings, the initial term

of the Agreements might be extended and the Agreements might

have a longer term. (A8-9).

After the Partial Award was issued, the parties engaged in

document and expert discovery, the exchange of Evidentiary

Statements and motion practice. Thereafter, evidentiary hearings

were held on the counterclaims asserted by YAAS. The hearings

commenced in October 1994 and concluded in December 1995.

After the hearings, the parties submitted extensive main briefs,

reply briefs and proposed findings of fact and conclusions of law.

Oral argument was held on May 7, 1996.

7

On July 10, 1996, the arbitrator rendered an Award, holding

that TRU is obligated to pay YAAS $46,400,000 plus pre-Award

interest thereon at the New York statutory rate of 9% per annum

from December 31, 1994 through the date of the Award.

(A48-49). The arbitrator also issued a 47 page memorandum in

support of the Award in which he addressed each and every legal

and factual issue arguably relevant to the arbitration. (A10-47).

2. The District Court Proceedings

On August 2, 1996, after TRU notified YAAS that it would

not honor its payment obligations under the Award, YAAS filed a

petition to confirm the Award under the Convention. TRU cross

moved to vacate the Award, advancing three purported defenses to

confirmation: (i) the arbitrator disregarded several provisions of

the Agreements; (ii) the Award was rendered in “manifest disregard

of the law;” and (iii) the Award was “completely irrational.”

On December 13, 1996, the District Court issued a

memorandum and order confirming the Award and denying TRU’s

cross motion to vacate or modify the Award. (A50-55). The District

Court held that none of the limited grounds for vacating an arbitral

award available under the Convention, or the Federal Arbitration

Act (“FAA”), 9 U.S.C. §§ 1-16, had been established by TRU.

(A51-52, RA1-4).

3. The Court of Appeals Proceedings

On December 19, 1996, TRU appealed the District Court’s

ruling on the same grounds that it had advanced in support of its

motion to vacate or reduce the amount of the Award. YAAS opposed

TRU’s appeal, arguing that the FAA’s implied grounds for vacatur

— “clear irrationality” and “manifest disregard of the law” — were

not applicable to an Award falling under the Convention. YAAS

argued further that, even if such defenses were applied, the Award

would have to be upheld and the District Court affirmed.

8

On September 10, 1997, the Court of Appeals issued an

opinion and order affirming the District Court’s confirmation of

the Award. (A56-75). The Court of Appeals held that the FAA

implied defenses of “manifest disregard of the law” and “clear

irrationality” are not available under the Convention for international

arbitral awards rendered in, or under the law of, a foreign

jurisdiction. (A64). The court conversely held that, for international

arbitral awards rendered in or under the laws of the United States,

such as the Award at issue, the domestic arbitration laws and their

implied defenses do apply. (A66). Applying those defenses, the

Court of Appeals then carefully considered and swiftly rejected

TRU’s contentions, and held that the Award had not been rendered

in manifest disregard of the law or in manifest disregard of the

terms of the Agreements, and was not clearly irrational. (A70-75).

REASONS FOR DENYING THE WRIT

The petition’s contention appears to be that courts should

scrutinize international arbitral awards under a “clearly erroneous”

standard of judicial review. (Petition at 14). That contention does

not warrant consideration by this Court.

First, TRU asserts this argument for the first time in this Court.

Absent compelling circumstances, which do not exist in this case,

the Court should not consider arguments that were not presented

and preserved in the lower courts.

Second, the existing more restrictive standard for vacatur of

foreign arbitral awards is firmly rooted in 30 years of settled law

and is, contrary to TRU’s assertions, consistently applied in all of

the circuits. Indeed, the standard advocated by TRU is beyond the

authority granted by Congress for the review of arbitral awards.

Third, the arbitrator dealt exhaustively with the myriad

arguments raised in the petition by TRU in the Partial Award and

Memorandum supporting the final Award. His interpretations of

9

the contract, findings of fact and legal analysis not only were

supported by the record before him, they were clearly correct. Thus,

even under the novel standard of review proposed by TRU, the

Award issued in favor of YAAS would have been confirmed by

the District Court and upheld by the Court of Appeals.

Respondent respectfully requests that the Court decline to

exercise jurisdiction and deny TRU’s petition for a writ of certiorari.

1.

TRU SHOULD NOT ASSERT AN ARGUMENT

FOR THE FIRST TIME IN THIS COURT.

In its petition for certiorari, TRU argues that the lower courts

should have independently reviewed the merits of the dispute

between the parties to the arbitration under a “clearly erroneous”

standard of review. (Petition at 16). This argument was not asserted

expressly or implicitly in either the District Court confirmation

proceedings or in the Court of Appeals. Indeed, in both

proceedings, TRU asked the courts to review the arbitrator’s

findings to determine whether he had manifestly disregarded New

York’s law of lost profits, manifestly disregarded the terms of the

Agreements or made findings of fact on damages that were

completely irrational. (A51, 73-75). It is only because those

arguments failed that TRU now urges a different standard of review,

a standard which has never been applied by a United States court

reviewing an arbitral award.

This Court generally has declined to consider matters that were

not presented and preserved in the lower courts in the absence of

compelling or extraordinary circumstances. See, e.g., Davis v.

United States, 495 U.S. 472, 489 (1990) (because the agency

argument was “neither raised before nor decided by the Court of

Appeals, we decline to address it here”); Patrick v. Burget, 486

U.S. 94, 100 n.5 (1988) (Court refused to consider evidentiary

10

issue not passed upon by the lower court); Delta Air Lines, Inc. v.

August, 450 U.S. 346, 362 (1981) (because defendants had failed

to raise in the Court of Appeals the issue as to whether denial of

their costs was an abuse of discretion, the issue was not properly

before the Supreme Court).

This case clearly does not present the type of extraordinary

circumstances which this Court has deemed to be sufficient to

override this prudential limitation. Cf, Wood v. Georgia, 450 U.S. |

261, 265 n.5 (1981); United States v. Mendenhall, 446 U.S. 544,

551 n.5 (1980). See generally Robert L. Stern & Eugene Gressman,

Supreme Court Practice § 6.27 (Sth ed. 1978) (“the Court doubtless

limits its power to notice plain error to those situations where it

feels the error is so serious as to constitute a fundamental unfairness

in the proceedings”). TRU has not alleged, and cannot demonstrate,

that a fundamental unfairness in the proceedings will result if this

Court declines to consider its new argument. Indeed, TRU does

not even contend that there was error — much less serious error —

in the courts below; it simply argues that the award would have to

be overturned if, and only if, a clearly erroneous standard of review

were applied to the contract interpretation and findings of fact made

by the arbitrator. (Petition at 17).

TRU’s new argument should not be considered for the first

time in this Court. The petition should be denied.

Il.

A CLEARLY ERRONEOUS STANDARD OF REVIEW IS

AT ODDS WITH THE PRIOR DECISIONS OF THIS

COURT AND THE COURTS OF APPEALS AS WELL AS

APPLICABLE STATUTES AND FEDERAL POLICY

FAVORING ARBITRATION.

Obviously disappointed with the results of the arbitration and

the decisions of the courts below which correctly applied existing

law, TRU now argues that the Court should jettison the well

o_o”

11

established principle of limited judicial review of arbitral decisions

in favor of a new standard of review. (Petition at 16). TRU justifies

this radical departure from existing law with the twin assertions

that arbitration has become increasingly lawless and that there is

division among the Circuit Courts concerning the manifest disregard

of the law standard of review. (Petition at 10-11). Both assertions

are baseless.

TRU’s claim that arbitrators are incapable, and perhaps even

unwilling, to accurately apply the law has no empirical support.

Not only is it manifestly false, it is premised on the same mistrust

and suspicion of the arbitral process that this Court has explicitly

rejected. In Shearson/American Express, Inc. v. McMahon, 482

U.S. 220 (1987), it was asserted that claims arising out of the anti-

fraud provisions of Section 10(b) of the Securities Exchange Act

of 1934 and Rule 10b-5 were not arbitrable because these statutory

rights implicated complex legal principles that arbitrators would

have difficulty in applying. Indeed, this had been an underpinning

of this Court’s original decision in Wilko v. Swan, 346 U.S. 427

(1953), which held that claims arising under the Securities Act of

1933 were not arbitrable. The Court rejected those assertions,

stating:

It is difficult to reconcile Wilko’s mistrust of the

arbitral process with this Court’s subsequent

decisions involving the Arbitration Act. See, e.g.,

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,

Inc. [473 U.S. 614 (1985)] [citations omitted].

Indeed, most of the reasons given in Wilko have been

rejected subsequently by the Court as a basis for

holding claims to be nonarbitrable. In Mitsubishi,

for example, we recognized that arbitral tribunals

are readily capable of handling factual and legal

complexities of antitrust claims, notwithstanding the

absence of judicial instruction and supervision. See

473 U.S., at 633-634. Likewise, we have concluded

12

that the streamlined procedures of arbitration do not

entail any consequential restriction on substantive

rights. Jd., at 628. Finally, we have indicated that

there is no reason to assume at the outset that

arbitrators wil! not follow the law; although judicial

scrutiny of arbitration awards necessarily is limited,

such review is sufficient to insure that arbitrators

comply with the requirements of the statute.

482 U.S. at 231-232. The Court went on to state, “the mistrust

of arbitration that formed the basis for the Wilko opinion in

1953 is difficult to square with the assessment of arbitration

that has prevailed since that time.” Jd. at 233. Thus, TRU’s

assumption that a new stricter standard of review is necessary

to insure that arbitrators comprehend and follow the law in |

international disputes has already been resolved by this Court. ;

_ — oe ee

TRU’s assertion that there is a split and confusion among the

Circuit Courts of Appeals concerning the standard of review to be

applied to arbitral decisions also is without merit. Eleven out of

the twelve Courts of Appeals have recognized that “manifest

disregard of the law” by the arbitrator is an appropriate reason to

vacate an arbitral award. In addition, these courts are consistent in

formulating the standard, i.e., that the arbitrator’s decision must

constitute a conscious disregard of a recognized controlling legal

principle rather than a mere error of law. See Prudential-Bache

Securities, Inc. v. Tanner, 72 F.3d 234 (CA1 1995) (arbitrator’s

finding that executives of brokerage house had been wrongfully

discharged was not in manifest disregard of the law and therefore

award was confirmed); Willemijn Houdstermaatschappij, BV v.

Standard Microsystems Corp., 103 F.3d 9 (CA2 1997) (arbitrator’s

finding that licensee was not entitled to benefits under most-

favored-licensee clause in agreement was not in manifest disregard

of the law and should have been confirmed); United Transport

Union, Local 1589 v. Suburban Transport Corp., 51 F.3d 376

(CA3 1995) (district court’s vacatur of award reversed as arbitrator’s

13

decision to reinstate bus driver involved in multiple accidents was

not in manifest disregard of the law); Upshur Coals Corp. v. United

Mineworkers of America, Dist. 31, 933 F.2d 225 (CA4 1991)

(district court’s vacatur of award reversed because arbitrator’s

finding that employer must continue to pay accrued health benefits

to laid-off employees after the expiration of the collective bargaining

agreement was not in manifest disregard of the law); M & C Corp.

vy. Erwin Behr GmbH & Co., 87 F.3d 844 (CA6 1996) (recognizing

manifest disregard of the law as a rationale for reversal under the

Federal Arbitration Act); National Wrecking Co. v. International

Brotherhood of Teamsters, Local 731, 990 F.2d 957 (CA7 1993)

(employer’s motion to vacate arbitrator's finding that truck driver’s

vision met Department of Transportation minimum standards

denied, as arbitrator’s legal conclusions will not be disturbed absent

manifest disregard of the law); Lee v. Chica, 983 F.2d 883 (CA8),

cert. denied, 510 U.S. 906 (1993) (district court set aside arbitrator’s

award of punitive damages for violations of Securities Exchange

Act and court of appeals reversed because award not completely

irrational or in manifest disregard of the law); Barnes v. Logan,

122 F.3d 820 (CA9 1997) (arbitrator found against broker in

dispute alleging mismanagement of customer’s securities account

and courts affirmed as they could only have set aside this finding

if arbitrator manifested complete disregard of the law); Denver &

Rio Grande Western Railroad Co. v. Union Pacific Railroad Co.,

119 F.3d 847 (CA10 1997) (court of appeals would not overturn

arbitrator’s finding of liability in multi-train collision as judicial

review of arbitration awards is among the narrowest known to the

law and such awards may be overturned only on very limited

grounds, including manifest disregard of the law); Montes v.

2. TRU’s statement that the Fourth Circuit has rejected the manifest

disregard of the law standard, citing to Remmey v. PaineWebber, Inc., 32

F.3d 143 (CA4 1994), cert. denied, 513 U.S. 1112 (1995) is mistaken.

(Petition at 11). In fact, in Remmey, the Fourth Circuit made clear that

manifest disregard of the law is an accepted ground for challenging an

arbitral award, citing Upshur Coals Corp. as controlling authority for

the proposition. 32 F.3d at 149.

14

Shearson Lehman Bros., Inc., 128 F.3d 1456 (CA11 1997)

(employee’s petition to vacate arbitration decision denying her claim

for overtime pay granted because arbitrators recognized express

request by employer’s counsel to disregard the prevailing law); Al-

Harbi v. Citibank, N.A., 85 F.3d 680 (CADC), cert. denied, 117

S. Ct. 432 (1996) (arbitrator’s award of $1.1 million-.o plaintiff in

suit alleging breach of fiduciary duty was not in manifest disregard

of the law and thus was upheld by court of appeals).’

The scope of judicial review of arbitral awards is consistent

throughout the circuits. And contrary to the assertion of TRU

(Petition at 16), the commercial world needs no clarification of

that scope in order to make intelligent decisions about whether to

submit controversies to arbitration. Anyone with a passing

familiarity with the law of arbitration knows that judicial review

of awards is narrow and limited. Indeed, as this Court recognized

in Mitsubishi, a party which opts for arbitration knowingly “trades

the procedures and opportunity for review of the courtroom for

the simplicity, informality, and expedition of arbitration.” 476 U.S.

at 628.

The adoption of the new and intrusive scope of review

advocated by TRU would create turmoil and uncertainty in the

commercial world. TRU’s clearly erroneous standard would

transform arbitral tribunals into mini-trial courts whose findings

would be subjected to rigorous judicial scrutiny. The courts

concommitantly would be drawn into each arbitration, required to

engage in an in-depth substantive review of the proceedings to

determine if the arbitrator’s contract interpretations and findings of

3. Only the Fifth Circuit appears to have refused to adopt the

manifest disregard standard as a separate basis for vacating an

arbitral award, restricting the grounds available to those explicitly

set forth in 9 U.S.C. § 10. R.M. Perez & Associates, Inc. v. Welsh, 960

F.2d 534, 539-40 (CA5 1992). However, we have found no case in

which the Fifth Circuit has enforced an award in which the arbitrator

acknowledged controlling law and declined to apply it.

15

fact and law are accurate.’ The principle of finality of arbitral awards

would be destroyed. The disruption would be particularly acute in

the international commercial sphere. Foreign parties, which often

agree to arbitration rather than submit themselves to the jurisdiction

of United States courts, would now be faced with the injection of

the United States judiciary into a process they previously viewed

as more neutral. In sum, the standard advocated by TRU would

undermine, not enhance, arbitration as an effective method of

international dispute resolution.

The foregoing is sufficient to dispose of TRU’s contention

that the Court should consider changing the existing standard of

review of arbitral awards. However, there is another significant

reason to deny TRU’s petition. The clearly erroneous standard of

review cannot be supported by the governing statutory authority.

Congress has set out in the FAA a well established statutory

scheme for the enforcement of arbitration agreements and arbitral

awards. 9 U.S.C. § 10 sets out the available grounds for vacating

an arbitral award.’ (A79). Courts have some latitude in interpreting

4. The extra burden imposed on the courts would be enormous.

As TRU points out (A10), in 1996, the American Arbitration

Association alone administered a total of 70,516 cases. Under TRU’s

standard, a court would have to thoroughly and meticulously review

the record of each case to see if any decisions of the arbitrator were

clearly erroneous. This creates a potential for more than 70,000

additional cases for the courts each year.

5. This assumes that the grounds set forth in 9 U.S.C. § 10 are

available to attack an award rendered under the Convention, a point

which YAAS does not concede. YAAS argued in the Court of Appeals

that the grounds asserted by TRU in attacking the award could not

apply in this case because those grounds find their source in the

FAA. Because the award at issue is an international award within the

terms of the Convention and the grounds for denying enforcement

(Cont'd)

16

the statutory provisions and indeed “manifest disregard of the law”

is, in some respects, a judicially created addition to the grounds

articulated in the statute. However, manifest disregard of the law

itself is firmly rooted in the provisions of the FAA, for if an

arbitrator has recognized that a point of law exists and controls an

issue, and simply refuses to apply it, the arbitrator is guilty of

misconduct, 9 U.S.C. § 10(a)(3), has exceeded his powers, or has

imperfectly executed them, 9 U.S.C. § 10(a)(4).°

Indeed, the context of this Court’s statement in Wilko v. Swan,

supra, regarding manifest disregard of the law was the recognition

that a United States court lacks the statutory authority to review

arbitrators’ decisions for legal error:

In unrestricted submission, such as the present

margin agreements envisage, the interpretations of

the law by the arbitrators in contrast to manifest

disregard are not subject, in the federal courts, to

judicial review for error in interpretation. The United

States Arbitration Act contains no provision for

judicial determination of legal issues such as is found

in the English law.

346 U.S. at 436-37.

(Cont'd)

of such an award found in Article V are exclusive, under the terms

of the Convention as well as under the implementing legislation, 9

U.S.C. § 207, the FAA provisions do not apply. The Court of Appeals

disagreed, holding that the grounds for setting aside an award found

in 9 U.S.C. § 10 may apply to an award governed by the Convention

if the award is rendered in the United States. (A66).

6. TRU’s statement that some showing of misconduct by the

arbitrator is required under the manifest disregard standard is correct.

(Petition at 12). That ground is expressly articulated in the FAA,

and is the standard by which courts are bound.

17

Thus, the very standard advocated by TRU exceeds the

authority granted by Congress to the courts to review arbitral

awards. TRU’s petition should be denied.

Ii.

THE ARBITRAL AWARD WOULD BE CONFIRMED

EVEN UNDER A CLEARLY ERRONEOUS STANDARD

OF REVIEW.

As demonstrated in Point II supra, the clearly erroneous

standard of review should not be applied by appellate courts

reviewing foreign arbitral awards. However, even assuming

arguendo that the standard of review proposed by TRU had been

applied by the lower courts to assess the validity of the Award, the

Award would have been confirmed.

In the first instance, TRU provides no contours to the clearly

erroneous standard of review that it advocates. The clearly

erroneous standard is one applied by Courts of Appeals in

reviewing District Court findings of fact. Fact findings are

determined to be clearly erroneous if, and only if, an appellate

court has “a definite and firm conviction that a mistake has been

committed.” Concrete Pipe and Products of California, Inc. v.

Construction Laborers Pension Trust for Southern California, 508

U.S. 602, 623 (1993). This standard requires an appellate court to

defer to the lower court even if the court believes it would have

assessed the evidence differently or reached a different conclusion.

Indeed, as long as the lower court’s assessment of the evidence is

plausible in light of the record viewed in its entirety,

the [reviewing court] may not reverse it even though

convinced that had it been sitting as the trier of fact

it would have weighed the evidence differently.

Where there are two permissible views of the

evidence, the factfinder’s choice between them

cannot be clearly erroneous.

18

Anderson v. Bessemer City, 470 U.S. 564, 574-75 (1984).

Accord United States v. Yellow Cab Co., 338 U.S. 338, 342

(1949) (“A choice between two permissible views of the weight

of the evidence is not ‘clearly erroneous.’ ”). Therefore, even if

the TRU standard was applied, the arbitrator’s determinations

would be presumed to be correct and could not be overturned

simply because a court may have a different view. As long as

there is support in the record, the award would have to be

confirmed.

In this case, the arbitrator issued an extensive and well reasoned

47 page opinion in support of the final Award. (A10-47). In that

opinion, he expressly referred to and interpreted ali of the relevant

contractual provisions, cited to and applied the controlling legal

authority in New York for damages based upon lost profits, judged

the demeanor of the witnesses called by both sides, and thoroughly

weighed the evidence submitted during the hearings, ultimately

ruling in favor of YAAS. The arbitrator’s findings cannot be

overturned for clear error because they are completely supported

by the record.

A. The Arbitrator’s Liability Findings Were Not Clearly

Erroneous.

TRU claims that errors were made by the arbitrator when he

interpreted the contractual provisions of the L&T Agreement

against TRU. Principally, TRU contends that the arbitrator

erroneously interpreted paragraphs 8.01 and 2.07 of the L&T

Agreement. (Petition at 17). But there is no evidence to suggest

that the arbitrator misinterpreted these contract provisions. Rather,

he simply rejected TRU’s proffered interpretations for those

provisions because there was no evidence to support them.

1. Paragraph 8.01 of the L&T Agreement

The arbitrator’s interpretation of paragraph 8.01 is supported

by the plain language of the L&T Agreement and by other evidence

19

offered at the proceedings. In fact, the Partial Award makes clear

that the arbitrator considered the contract language as well as a

record that was jointly agreed upon and submitted by the parties.

(A12). In rejecting TRU’s construction of paragraph 8.01 — the

same construction that TRU proffers here — the arbitrator found

that YAAS and TRU agreed that “the ‘initial period’ could continue

indefinitely for successive five year periods if YAAS actually

continued to open stores during the initial period.” (A6). The

arbitrator also found that TRU could not divest YAAS of any of

the rights it had under the Agreements, including the right to open

new stores, by issuing of a notice of nonrenewal, whether timely

or not.’ (A7). Thus, the arbitrator interpreted paragraph 8.01 to

permit YAAS to extend the initial term of the Agreements by

opening “a new store at any time up to the last day of the initial

period . . .” (A6-7).

Even a cursory review of the Partial Award, which was devoted

exclusively to this issue, demonstrates that the arbitrator was

absolutely right in his interpretation of these provisions. But even

if he was not, TRU has not demonstrated that the arbitrator's

interpretation of paragraph 8.01 was unsupported by the language

in the L&T Agreement. At most, TRU has argued that the arbitrator

should have reached a different conclusion. This baseless assertion

does not demonstrate that the arbitrator’s interpretation of paragraph

8.01 was clearly erroneous.

2. Paragraph 2.07 of the L&T Agreement

TRU also repeats its argument that the arbitrator misinterpreted

and disregarded paragraph 2.07(b) of the L&T Agreement, which

obligated YAAS to consult with TRU about the “location, size,

design, construction and layout” of the stores and to comply with

TRU standards for those stores. (Petition at 17). Thus, according

to TRU, the arbitrator was wrong when he found that “{TRU] had

invoked paragraph 2.07 of the agreement as a ‘mere pretext to

7. TRU’s first notice of nonrenewal was not timely. (A13).

20

make it impossible for [YAAS] to fulfill the condition for extension

of the initial term.” (Petition at 17).

There is no evidence that the arbitrator misinterpreted

paragraph 2.07 or erred when he found that TRU, after it had

issued a notice of termination, invoked the conforming stores

provision solely to prevent YAAS from opening a store and

extending the Agreements. Indeed, the evidence suggests that

TRU’s interpretation of the provision was irrelevant to the

arbitrator’s analysis. As the arbitrator observed:

I am not persuaded that the stores contemplated in

the Agreements in 1982 were what TRU currently

characterizes as “conforming” stores. Moreover, the

whole course of dealing between TRU and YAAS

over the period from 1982 to 1992 shows that TRU

did not care at all about the size, shape or location

of YAAS’s toy stores.... TRU has abandoned

YAAS to practical autonomy regarding toy stores

in the Territory. TRU was being compensated under

the Agreements by royalties and commissions,

payable whether or not YAAS’s toy stores were

profitable. Given this background, I find that TRU’s

insistence, after it had given notice of termination,

on holding YAAS to its current standards for

“conforming” stores is a mere pretext to make it

impossible for YAAS to fulfill the condition for

extension of the initial term.

(A29). Simply put, the arbitrator found that TRU was estopped

from relying on the conforming stores provision because it

ignored those standards over the course of the Agreements and

then attempted, by its deception and nonperformance, to prevent

YAAS from meeting those supposed standards.

TRU further claims the arbitrator ignored undisputed evidence

that YAAS could not have opened a toy store in time to extend the

21

Agreements. (Petition at 17). TRU is wrong and fails to inform the

Court that the record contained ample evidence that YAAS could

have opened a store in the four and one-half months between the

time TRU issued its notice of termination and the expiration of the

initial term of the Agreements. (A30-34; Staley Tr. 2687, 2671-72).

As the arbitrator held:

Could YAAS have opened a toy store between

September 2, 1992 and January 16, 1993? I find

that it could have.

YAAS is a large well-financed organization. At

the time in question it owned substantial real estate

in Kuwait and by leasing could have had access to

other real estate. One of its affiliates was a large

construction firm. Given that the rights YAAS had

were so valuable and that to extend the initial term

for five more years required merely the opening of

a single toy store, I find that YAAS could and would

have mustered sufficient capital and manpower to

accomplish this relatively modest task.

(A29-30).

B. The Arbitrator’s Damages Findings Were Not Clearly

Erroneous.

TRU also claims that the arbitrator’s findings on damages were

irrational because: (i) YAAS lost money during its ten year

relationship with TRU; and (ii) YAAS “asked for only $2 million

to relinquish its rights under its contract with [TRU] in September

1993, a full year after [TRU’s] alleged breach of contract.” (Petition

at 18-19). TRU also argues that the arbitrator’s application of the

leading lost profits case in New York, Kenford Co. v. County of

Erie, 67 N.Y.2d 257, 502 N.Y.S.2d 131 (1986), “was just plain

wrong.” (Petition at 19). TRU’s arguments are devoid of merit.

22

First, it was not error under New York law for the arbitrator to

award damages to a business with a limited history of profits. In

fact, it would have been error for the arbitrator to refuse to award

damages simply because YAAS lost money. In Lamborn v. Dittmer,

873 F.2d 522, 533 (CA2 1989), the Court of Appeals found that

plaintiffs proved damages with sufficient certainty, even though

plaintiffs’ commodities partnership had sustained substantial losses,

because the partnership had shown an upward trend in the six

months before defendant unilaterally terminated the relationship.

See also Autowest, Inc. v. Peugeot, Inc., 434 F.2d 556, 567 (CA2

1970). TRU offers no contrary authority.

YAAS was profitable after the Gulf War. (A105). Moreover,

as the arbitrator expressly found, YAAS likely would have turned

a profit much sooner if TRU had not “stall[ed], stonewall[ed] and

obstruct[ed]” YAAS’s efforts throughout their relationship. (A25)

Accordingly, YAAS’s losses over the life of the Agreements were

not material to the arbitrator’s analysis.

Second, TRU’s statement that YAAS valued the toy business

at $2 million is patently false. In 1993, after TRU had breached

the Agreements, YAAS and TRU discussed a $2 million payment

for the inventory YAAS had on hand after termination. The figure

was not based upon an assessment of the value of the toy business

in 1993. Significantly, TRU did not put it any evidence to the

contrary. Indeed, its own witness, Keith Van Beek, testified that

the value of YAAS’s operating losses was $2 million. (A109). Mr.

Van Beek did not testify, as TRU here suggests, that Mr. Kadrie

had valued the toy business at $2 million.

The arbitrator expressly ruled that there was no evidence of a

$2 million buyout. (A24). Reviewing the record, the Court of

Appeals concurred with the arbitrator:

As to the purported $2 million buyout offer, no

witness has testified that the $2 million figure was

23

an estimate of the value of [YAAS’s] toy business.

Kadrie, the primary [YAAS] officer involved with

the toy business, testified that, in his understanding,

settlement with [TRU] would serve to provide

[YAAS] “some relief on the cost of liquidating [its]

inventory.” [citation omitted] Accordingly, [YAAS]

argues that $2 million was the value [YAAS] placed

on its inventory at the time. Furthermore, according

to a [TRU] executive, Kadrie, in making this offer,

expressly stated that the $2 million was to recoup

losses [YAAS] had incurred in trying to develop

the business. Therefore, there is no proof that this

figure was [YAAS’s], or anyone else’s, estimation

of the value of the business. Thus, the arbitrator did

not manifestly disregard lost profits law in refusing

to treat the $2 million figure as a buyout offer.

(A73-74).

The arbitrator’s analysis of the lost profits law of New York

also survives the strictest scrutiny. The arbitrator considered, cited

and applied a leading case on damages in New York, Kenford Co.

v. County of Erie, 67 N.Y.2d 257, 502 N.Y.S.2d 131 (1986),

before he determined an appropriate damages figure. Under Kenford

and its progeny, lost profits may be awarded as damages in a breach

of contract action, unless the lost profits calculations are found to

be too speculative. See Ashland Managemen: v. Janien, 82 N.Y.2d

395, 403, 604 N.Y.S.2d 912, 916 (1993); Kenford, 67 N.Y.2d at

261, 502 N.Y.S.2d at 132; Int’l Telepassport Corp. v. USFI, Inc.,

89 F.3d 82, 85 (CA2 1996). TRU does not claim that the arbitrator

did not understand the lost profits law; rather, TRU alleges that the

arbitrator erred when he refused to find that the damages sought

by YAAS were speculative. (Petition at 19). This contention has

no merit.

The arbitrator, applying Kenford, found that damages were

not precluded in this case because YAAS’s damage calculations

24

were premised on very detailed business projections: prepared by

TRU (Exhibit 1015) prior to its breach of the YAAS Agreements.

(A35, 37-38). The New York Court of Appeals has held that this

type of damage evidence is reliable and sufficiently certain evidence

of lost profits. Ashland Management, 82 N.Y.2d at 406, 604

N.Y.S.2d at 917. Accordingly, the arbitrator did not misunderstand

or misapply the law of damages in New York.

Moreover, there is substantial evidence in the record supporting

the Award as a whole and each of the individual components of

the Award. Indeed, the centerpiece of the damages case presented

by YAAS’s expert, Robert Sherwin, was Exhibit 1015, a 12 year

pro forma prepared by TRU that projected the operating results

associated with the opening of TRU toy stores in YAAS’s territory.

(A37-39).

In discussing Mr. Sherwin’s expert opinion, the arbitrator made

the following findings about TRU’s Exhibit 1015:

I found that Mr. Sherwin’s report and testimony were

credible in the main and that I can place reliance on

his report and testimony in fashioning the award

that I have determined is the fair outcome of this

case.

Mr. Sherwin performed two alternative

calculations of YAAS’s damages that may be called,

respectively, the “Cash Flow Analysis” and the

“Franchise Fee Analysis.”

For the Cash Flow Analysis, Mr. Sherwin

performed a damage calculation to measure what

YAAS would have earned if, in the absence of TRU’s

breach, YAAS had been able to continue its

25

operations in Kuwait, to expand those operations,

and to develop retail operations in other countries

in the Territory, either directly or in joint venture

with qualified local companies in those countries.

* * *

Mr. Sherwin based his cash flow projections on

Exhibit 1015. This exhibit, as noted above, prepared

by Mr. Van Beek . . . was used by TRU to negotiate

the up-front franchise fees to be paid by prospective

purchasers and to calculate the royalty and

purchasing commissions TRU would receive over

the life of the franchises. I find that Exhibit 1015 is

reliable. In concluding two substantial sales TRU

itself used Exhibit 1015 for pricing purposes. It is

therefore an inherently reliable document and

contains inherently reliable information for purposes

of calculating an income stream from new stores in

the Territory with reasonable certainty. I find that

Mr. Sherwin’s reliance on Exhibit 1015 resulted in

a cash flow projection for the Territory wi. ° is

reasonably certain.

It is not necessary to agree with TRU to conclude

that the Franchise Fee Analysis is based on much

more conservative assumptions. It assumes that

willing third parties would have independently

evaluated the projected income streams from the

point of view of 1993, as reflected in Exhibit 1015,

and would have priced their expectations at that time

in the same manner as the two organizations with

which TRU actually concluded sales. This

assumption, which I find reasonable, looks to the

26

question what would a willing third party have paid

YAAS for these rights at the time of the breach?

The future risks to the income stream may still

have been present. However, it is not disputed that

independent third parties were willing, at that time,

to calculate their own discount of those risks, and in

arms length bargaining, to agree to pay substantial

prices for the projected cash flows. TRU accepted

those prices. I find that this alternative, while it may

well be less than fair to YAAS in not fully reflecting

what it could have achieved, is firmly rooted in

documented past events. I believe it is the preferable

basis for damages in this case, and I so find.

(A36-37, 40).

Thus, there is reliable and uncontroverted evidence supporting

YAAS’s lost profits calculations. Further, notwithstanding TRU’s

mischaracterization of the damages award (petition at 17), YAAS

was not simply awarded damages for lost profits. (A40, 47). Nearly

60% of the damages (or $27,580,000) is derived from Mr. Sherwin’s

“Franchise Fee Analysis” and is based on the upfront fees ATA

and Al-Futtaim agreed to pay TRU for the right to open TRU toy

stores in Saudi Arabia, the United Arab Emirates, Qatar, Bahrain

and Oman. These fees are not speculative and, as the arbitrator

found, it was rational for YAAS’s expert to assume from the

“ “feeding frenzy’ to open toy stores in the region,” that YAAS

would have been able to secure suitable partners that

would have independently evaluated the projected

income streams from the point of view of 1993, as

reflected in Exhibit 1015, and would have priced

their expectations at that time in the same manner as

the two organizations with which TRU actually

concluded sales.

(A40-42).

os ne eer

27

In sum, a review of the arbitrator’s decision demonstrates that

he carefully considered the evidence offered during the damages

phase of the arbitration. His conclusion that the Award “may well

be less than fair to YAAS in not fully reflecting what it could have

achieved, [but which] is firmly rooted in documented past events”

(A40), was based on controlling principles of New York law and

ample factual support.

The Award can hardly be characterized as clearly erroneous.

Each of the arbitrator’s determinations is supported by the

evidentiary record and governing law. Even if the petition were to

be granted, the decision of the Court of Appeals would have to be

affirmed. TRU’s petition should be denied.

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted,

JOSEPH D. PIZZURRO

Counsel of Record

HERBERT M. LORD

MICHELLE A. RICE

CURTIS, MALLET-PREVOST,

COLT & MOSLE

101 Park Avenue

New York, New York 10178-0061

(212) 696-6000

Attorneys for Respondent

APPENDIX

1

RESPONDENT’S APPENDIX — TREATIES, STATUTES

AND CONTRACTUAL PROVISIONS INVOLVED

Treaties and Statutes

United Nations Convention On The Recognition And

Enforcement Of Foreign Arbitral Awards

Article I

1. This Convention shall 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 differencs 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. [remainder of

article omitted]

Article V

1. Recognition and enforcement of the award may be refused,

at the request of the party against whom it is invoked, only if

that party furnishes to the competent authority where the

recognition and enforcement is sought, proof that:

(a) The parties to the agreement referred to in article II

were, under the law applicable to them, under some incapacity,

or the said agreement is not valid under the law to which the

parties have subjected it or, failing any indication thereon, under

the law of the country where the award was made; or

(b) The party against whom the award is invoked was not

given proper notice of the appointment of the arbitrator or of

the arbitration proceedings or was otherwise unable to present

his case; or

2

Respondent’s Appendix

(c) The award deals with a difference not contemplated by

or not falling within the terms of the submission to arbitration,

or it contains decisions on matters beyond the scope of the

submission to arbitration, provided that, if the decisions on

matters submitted to arbitration can be separated from those not

so submitted, that part of the award which contains decisions

on matters submitted to arbitration may be recognized and

enforced; or

(d) The composition of the arbitral authority or the arbitral

procedure was not in accordance with the agreement of the

parties, or, failing such agreement, was not in accordance with

the law of the country where the arbitration took place; or

(e) The award has not yet become binding on the parties,

or has been set aside or suspended by a competent authority

of the country in which, or under the law of which, that award

was made.

2. Recognition and enforcement of an arbitral award may also

be refused if the competent authority in the country where

recognition and enforcement is sought finds that:

(a) The subject matter of the difference is not capable of

settlement by arbitration under the law of that country; or

(b) The recognition or enforcement of the award would

be contrary to the public policy of that country.

21 U.S.T. 2517, T.I.A.S. 6997, 330 U.N.T.S. 3.

3

Respondent's Appendix

Chapter 2 of the Federal Arbitration Act

The Convention on the Recognition and Enforcement of

Foreign Arbitral Awards of June 10, 1958, shall be enforced in

United States courts in accordance with this chapter.

9 U.S.C. § 201 (1997).

An arbitration agreement or arbitral award arising out of a legal

relationship, whether contractual or not, which is considered as

commercial, including a transaction, contract, or agreement

described in section 2 of this title, falls under the Convention.

An 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. For the purpose of this section a corporation is a

citizen of the United States if it is incorporated or has its principal

place of business in the United States.

9 U.S.C. § 202 (1997).

Within three years after an arbitral award falling under the

Convention is made, any party to the arbitration may apply to

any court having jurisdiction under this chapter for an order

confirming the award as against any other party to the arbitration.

The court shall confirm the award unless it finds one of the

grounds for refusal or deferral of recognition or enforcement of

the award specified in the said Convention.

9 U.S.C. § 207 (1997).

4

Respondent’s Appendix

Chapter | applies to actions and proceedings brought under

this chapter to the extent that that chapter is not in conflict with

this chapter or the Convention as ratified by the United States.

9 U.S.C. § 208 (1997).

Contractual Provisions

Additional pertinent provisions of the License and Technical

Assistance Agreement Between Toys “R” Us, Inc., TRU (HK)

Limited and Yusuf Ahmed Alghanim & Sons, W.L.L., signed

and executed on November 16, 1982 in New York, New York,

are as follows:

1.08 “YAAS Toy Store” means a retail store engaged

primarily in selling TRU-type merchandise, owned or

controlled by YAAS or an affiliate thereof, or by any

legal entity formed by YAAS or any partner or affiliate

of YAAS and other third parties for the purpose of

opening a toy store in any country of the territory,

{remainder of section omitted]

* * *

3.01 TRU shall provide YAAS during the term of this

Agreement with technical advice and assistance

pertaining to the establishment, maintenance,

operation, development and expansion of YAAS Toy

Stores in the Territory.

3.02 TRU shall render advice and assistance to YAAS,

initially and on a continuing basis at such times as

YAAS reasonably requests during the term of this

Agreement, with a view toward helping YAAS realize

3.03

3.04

5

Respondent’s Appendix

success and profitability in its toy business in the

territory.

Without limiting the generality of Sections 3.01 and

3.02, TRU shall render advice to YAAS in the following

areas: establishment of initial operating procedures

and the revision thereof as changes develop in the art

of toy trade and retailing or areas of policy within the

territory; establishment of performance guidelines;

management training; site planning and selection;

office and warehouse procedures; merchandising; store

layout and fixturing; marketing; advertising; sales

promotion; inventory control and replenishment

systems; cost and overhead control systems; cost data

for capital goods, equipment and supplies; and methods

of employee compensation and incentives.

At the request of YAAS, TRU shall send to the territory

at any time upon reasonable notice, for any reasonable

length of time, such of TRU’s qualified personnel as

TRU deems necessary to render the technical advice

and assistance required by YAAS. Such personnel shall

act in a consulting capacity only and shall not be

responsible for the supervision of personnel employed

by YAAS. The salaries and other compensation of all

such TRU personnel shall be borne by TRU during the

entire term of this Agreement. YAAS shall bear all

reasonable board, lodging and local travel expenses

of such personnel (in a manner befitting the individuals

involved) while they are in the territory. [remainder

of section omitted]

4.01

5.01

6

Respondent’s Appendix

* %* *

Although it is in the interests of both parties that the

YAAS Toy Store business be financially successful,

YAAS recognizes that it alone bears the responsibility

for raising the necessary capital to finance the business

(including the purchase of merchandise), acquiring or

constructing the necessary store and warehouse facilities,

and retaining the necessary management and other

personnel for the operation of the business. YAAS

acknowledges that, except for the services which TRU

has specifically agreed in this Agreement to provide,

TRU has no obligation, financial or otherwise. YAAS

also acknowledges that TRU’s decision to participate

in the Toy Store business as set forth in this Agreement

is predicated on the understanding that YAAS will use

its best efforts to make the YAAS Toy Store business

profitable.

Likewise, TRU acknowledges that YAAS’s decision to

resort to TRU’s services as hereunder set forth is

predicated on the understanding that TRU will use its

best efforts within its areas of responsibility under this

Agreement to make the YAAS Toy Store business

profitable.

* * *

YAAS will pay TRU a fee equal to three per cent (3%)

of all net sales of (a) all merchandise sold at retail by

YAAS Toy Stores in the territory during the term of

this Agreement and (b) all TRU-type merchandise sold

by YAAS pursuant to Section 4.03(a) and (c) during

the term of this Agreement, [remainder of Section

omitted]

7.01

7

Respondent’s Appendix

* * *

TRU agrees that, during the term of this Agreement, it

will not enter into any other agreement with any person

providing for the granting of trademark licenses or the

furnishing of technical advice and assistance with respect

to any toy store business in the territory.

The pertinent provisions of the Supply Agreement Between

TRU (HK) Limited and Yusuf Ahmed Alghanim & Sons,

W.L.L., signed and executed on November 16, 1982 in New

York, New York, are as follows:

2.01

3.01

4.01

Subject to Section 2.02, YAAS will order and purchase

through TRU-HK YAAS’s requirements of TRU-type

merchandise for all YAAS Toy Stores in the territory.

* * *

YAAS will pay TRU-HK compensation equal to five

per cent (5%) of TRU-HK’s invoice price of all

merchandise purchased by YAAS through TRU-HK

during the term of this Agreement. [remainder of section

omitted]

TRU-HK agrees that, during the term of the Agreement,

it shall not sell at wholesale, distribute or consign any

TRU-type merchandise to any person in the territory

except YAAS. TRU-HK further agrees not to effect

such sales, distributions or consignments under

circumstances known to TRU-HK which make it likely

that such merchandise will be sold in the territory,

[remainder of section omitted]

6.10

8

Respondent’s Appendix

* %* *

In the event of any dispute or difference of opinion

between the parties arising out of or in connection with

this Agreement, each of the parties shall use its best

efforts to settle such dispute or difference of opinion

amicably by negotiation. All disputes which cannot

be amicably settled by negotiation shall be finally

settled by arbitration to be held in New York City in

accordance with the Rules of the American Arbitration

Association, and judgment upon any award rendered

in any such arbitration may be —* in any court of

competent jurisdiction.