Julius W. Erving II v. ABG Intermediate Holdings 2, LLC ( 2022 )

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
NATHAN A. COOK LEONARD L. WILLIAMS JUSTICE CENTER
VICE CHANCELLOR 500 N. KING STREET, SUITE 11400
WILMINGTON, DELAWARE 19801-3734
Date Submitted: September 6, 2022
Date Decided: November 28, 2022
Travis S. Hunter R. Montgomery Donaldson
Griffin A. Schoenbaum Richard G. Placey
Richards, Layton & Finger, P.A. Montgomery, McCracken, Walker
One Rodney Square & Rhoads, LLP
920 North King Street 1105 North Market Street, Suite 1500
Wilmington, DE 19801 Wilmington, DE 19801
Re: Julius W. Erving II, et al. v. ABG Intermediate Holdings 2, LLC, et al.
C.A. No. 2021-0816-NAC
Dear Counsel:
This Letter Opinion addresses the Defendants’ motion to dismiss and compel
arbitration (the “Motion”). For the reasons stated below, I grant Defendants’
alternative requested relief of a stay pending the arbitrator’s decision on substantive
arbitrability.
I. BACKGROUND
I begin with a brief summary of the facts as alleged by the Plaintiffs. Julius
W. Erving II, known by the moniker “Dr. J,” is a basketball legend. In 2016, Mr.
Erving agreed to sell a majority interest in his trademark and other intellectual
property to Authentic Brands Group, LLC (“ABG”), a brand development and
C.A. No. 2021-0816-NAC
November 28, 2022
Page 2
marketing company.1 ABG and its controlling member and CEO, James Salter,
promised to grow Mr. Erving’s brand exponentially by obtaining new licensing
agreements, promotional appearances, and other marketing opportunities.2
In September 2016, Mr. Erving and his entity, Dr. J Enterprises, LLC,
executed a series of documents to place Mr. Erving’s intellectual property under the
control of ABG Intermediate Holdings 2, LLC (“ABG Intermediate”) and its
controller, ABG.3 To consummate the transaction, ABG Intermediate formed
ABG-Dr. J, LLC (“ABG-Dr. J”).4 Mr. Erving, Dr. J Enterprises, LLC, and two
other non-parties are minority members of ABG-Dr. J, while ABG Intermediate
owns the rest (51%).5 Relevant here, one of the documents executed in the
transaction was the limited liability company agreement for ABG-Dr. J (the
“Operating Agreement”).6 Since the transaction, ABG Intermediate, ABG, and Mr.
1
See Verified Compl. for Specific Performance and Breach of Contract (Dkt. 1)
(“Compl.”) ¶¶ 1, 16–17, 20–21.
2
Id.
3
Id. ¶¶ 2–3, 20.
4
Id. ¶¶ 3, 20.
5
Id.
6
Id. ¶ 23. The parties also entered an “Omnibus Agreement” contemporaneously with the
Operating Agreement, “pursuant to which Mr. Erving would agree to perform certain
C.A. No. 2021-0816-NAC
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Page 3
Salter (the “Defendants”) have allegedly breached their contractual duties to Mr.
Erving and Dr. J Enterprises, LLC (the “Plaintiffs”) and allegedly failed to devote
adequate resources to grow the “Dr. J” brand, instead effectively shelving it to focus
on more profitable brands.7
Plaintiffs brought this suit on September 22, 2021, bringing claims for breach
of contract and specific performance against ABG Intermediate.8 Specifically,
Plaintiffs allege that ABG Intermediate breached the Operating Agreement in the
following ways: wrongfully diverting funds to itself to pay an unauthorized 30%
management fee; using the wrong metric to determine distribution amounts,
resulting in lower distributions to Plaintiffs; failing to maintain and provide
Plaintiffs with documents, books, and records to which they were entitled; and
failing to devote reasonable efforts to exploit the Dr. J brand as required under the
personal and promotional appearances.” Id. ¶ 20. However, the parties do not rely on the
Omnibus Agreement as part of the present dispute. In addition, the Omnibus Agreement
contains an arbitration provision that is identical to the provision contained in the
Operating Agreement. See Defs.’ Opening Br. in Supp. of Mot. to Dismiss and Compel
Arb. (Dkt. 16) (“Defs.’ Opening Br.”) at 5; Pls.’ Opp’n to Defs.’ Mot. to Dismiss &
Compel Arb. (Dkt. 23) (“Pls.’ Opp’n”) at 10. Accordingly, this Letter Opinion focuses
on the relevant provisions within the Operating Agreement only.
7
Compl. ¶¶ 4–5.
8
Id. ¶¶ 97–129, 136–40.
C.A. No. 2021-0816-NAC
November 28, 2022
Page 4
Operating Agreement.9 They also bring claims for fraud, gross negligence, willful
misconduct, and unjust enrichment against ABG, ABG Intermediate, and Mr.
Salter, and a claim for tortious interference against ABG and Mr. Salter.10
Of key importance to the parties’ dispute is the “Dispute Resolution”
provision within the Operating Agreement, which provides in part as follows:
14.5 Dispute Resolution. The Parties agree to submit any dispute,
claim or controversy arising out of or relating to this Agreement, including
the determination of the scope or applicability of the Agreement to arbitrate,
to final and binding arbitration to be initiated and conducted according to
either the JAMS Streamlined Arbitration Rules and Procedures (for claims
under $250,000) or the JAMS Comprehensive Arbitration Rules and
Procedures (for claims equal to or over $250,000) (collectively, the “JAMS
Rules”) to the extent the JAMS Rules are not inconsistent with or expressly
modified by the terms of this Agreement. . . . The Parties agree that the
arbitrator(s), and not any court or other tribunal, shall have the exclusive
power to award any preliminary or interim injunctive relief. The arbitral
tribunal shall follow the law applicable to such dispute in accordance with
Section 14.3 and the Federal Rules of Evidence in adjudicating the dispute.
Subject to the Parties’ ability to vacate a decision or award under the Federal
Arbitration Act, any decision or award of the arbitrator shall be final, binding
and conclusive on the Parties to this Agreement and their respective
Affiliates. . . . If any Party refuses to perform any or all of its obligations
under the final arbitration award (following any petition to correct or vacate
the final arbitration award, if applicable) within thirty (30) days of such
award being rendered, then the other Party may enforce the final award in
any court of competent jurisdiction. . . . Except as otherwise provided in this
9
Id. ¶¶ 49–68; 72; 77–96.
10
Id. ¶¶ 130–35, 141–63.
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Agreement, arbitration shall be the sole and exclusive method of resolving
all claims, disputes or proceedings relating to this Agreement.11
Defendants have moved to dismiss the action under Court of Chancery Rule
12(b)(1) for lack of subject matter jurisdiction.12 They contend that the Operating
Agreement requires the parties to arbitrate this dispute.13 Alternatively, Defendants
request a stay of this case pending a decision from the arbitrator.14
II. ANALYSIS
“A motion to dismiss based on an arbitration clause goes to the court’s
subject matter jurisdiction over a dispute and is properly reviewed under Court of
Chancery Rule 12(b)(1).”15 “[T]his court will not ‘accept jurisdiction over’ claims
11
Ex. A to Aff. of Marc Rosen (Dkt. 19) (Limited Liability Company Agreement for
ABG-Dr. J, LLC) (“Operating Agreement”) § 14.5. Given the length of Section 14.5,
only a portion of the provision is included. The full text of Section 14.5 is set forth in
Appendix A of this Letter Opinion.
12
Defs.’ Mot. to Dismiss and Compel Arb. (Dkt. 15) at 1.
13
Defs.’ Opening Br. at 2.
14
Id. at 20.
15
Legend Nat. Gas II Hldgs., LP v. Hargis, 2012 WL 4481303, at *4 (Del. Ch. Sept. 28,
2012).
C.A. No. 2021-0816-NAC
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that are properly committed to arbitration since in such circumstances arbitration is
an adequate legal remedy.”16
I acknowledge at the outset that the parties have presented vigorous
arguments concerning the merits of Plaintiffs’ claims against Defendants. The sole
issue before me, however, is the dispute resolution provision contained in the
Operating Agreement. On that, it is well-established that Delaware public policy
favors arbitration.17 Given this strong public policy, there is a presumption of
arbitrability: Delaware courts “ordinarily resolve any doubt as to arbitrability in
favor of arbitration”18 and “submit a dispute to arbitration unless it can be said with
positive assurance that the arbitration clause is not susceptible of an interpretation
that covers the asserted dispute.”19
16
Dresser Indus., Inc. v. Glob. Indus. Techs. Inc., 1999 WL 413401, at *4 (Del. Ch. June
9, 1999) (quoting McMahon v. New Castle Assocs., 532 A.2d 601, 603 (Del. Ch. 1987)).
17
See, e.g., Graham v. State Farm Mut. Auto. Ins. Co., 565 A.2d 908, 911 (Del. 1989)
(“[T]he public policy of this state favors the resolution of disputes through arbitration.”)
(citation omitted); Elf Atochem N. Am., Inc. v. Jaffari, 727 A.2d 286, 295 (Del. 1999)
(“Delaware recognizes a strong public policy in favor of arbitration.”); see generally 10
Del. C. § 5701.
18
Parfi Hldg. AB v. Mirror Image Internet, Inc., 817 A.2d 149, 156 (Del. 2002); see also
Jaffari, 727 A.2d at 295 (“Normally, doubts on the issue of whether a particular issue is
arbitrable will be resolved in favor of arbitration.”).
19
TMIP Participants LLC v. DSW Gp. Hldgs., 2016 WL 490257, at *13 (Del. Ch. Feb. 4,
2016) (citation omitted); see also Worthy v. Payne, 1998 WL 82992, at *1 (Del. Ch. Feb.
C.A. No. 2021-0816-NAC
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When addressing disputes concerning contractual arbitration provisions,
“this court turns first to the Delaware Uniform Arbitration Act (the ‘DUAA’).”20
Under the DUAA, disputes in this Court involving arbitration must be decided in
conformity with the Federal Arbitration Act (the “FAA”) unless the agreement in
question specifically references the DUAA.21 The Operating Agreement makes no
reference to the DUAA.22 Furthermore, neither party disputes the applicability of
the FAA. Therefore, the FAA applies.
12, 1998) (“[T]here is a presumption in favor of arbitration unless: it may be said with
positive assurance that the arbitration clause is not susceptible of an interpretation that
covers the asserted dispute.”) (citation omitted).
20
Innovation Inst., LLC v. St. Joseph Health Source, Inc., 2019 WL 4060351, at *4 (Del.
Ch. Aug. 28, 2019); see also Meyers v. Quiz-Dia LLC, 2016 WL 7048783, at *2 (Del. Ch.
Dec. 2, 2016) (“Because the matter concerns arbitration, the Delaware Uniform
Arbitration Act provides the pertinent law of the forum. That act incorporates the terms of
the Federal Arbitration Act unless the agreement at issue explicitly references the
Delaware Uniform Arbitration Act. The employment agreements do not explicitly
reference the Delaware Uniform Arbitration Act, so the terms of the Federal Arbitration
Act apply.”).
21
See 10 Del. C. § 5702 (a), (c); see also Innovation Inst., 2019 WL 4060351, at *4
(“Under the DUAA, unless the agreement at issue explicitly references the DUAA, the
courts of this state will incorporate the Federal Arbitration Act . . . as the binding source
of statutory law.”).
22
See Operating Agreement § 14.5.
C.A. No. 2021-0816-NAC
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On a motion to dismiss and compel arbitration, the court must consider
whether the threshold issue of substantive arbitrability—who decides the question
of arbitrability—should be decided by the court or the arbitrator.23 When the FAA
applies, “courts generally . . . should apply ordinary state-law principles that govern
the formation of contracts.”24 Delaware courts have adopted legal tests to determine
who should decide this question: “The general rule, announced by the United States
Supreme Court and followed by this Court, is that courts should decide questions
of substantive arbitrability. There is an exception, however, when there is ‘clear
and unmistakable evidence’ that the parties intended otherwise.”25
In James & Jackson, LLC v. Willie Gary, LLC, the Delaware Supreme Court
held that parties evidence a clear and unmistakable intent to submit the question of
23
See Hargis, 2012 WL 4481303, at *4 (“Even before courts confront questions of
procedural and substantive arbitrability, however, they first must address the threshold
question of who should decide whether the parties have agreed to submit the arbitrability
issue to arbitration.”) (citation omitted).
24
First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944 (1995); see Chemours Co. v.
DowDuPont Inc., 2020 WL 1527783, at *9 (Del. Ch. Mar. 30, 2020) (“Section 2 of the
FAA mandates that arbitration agreements are to be enforced as contracts and it does not
alter background principles of state contract law regarding the scope of agreements
(including who is bound by them).”) (emphasis in original) (citation omitted).
25
James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76, 78 (Del. 2006) (quoting
Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002)).
C.A. No. 2021-0816-NAC
November 28, 2022
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arbitrability to the arbitrator when “the arbitration clause generally provides for
arbitration of all disputes and also incorporates a set of arbitration rules that
empower arbitrators to decide arbitrability.”26 After Willie Gary, “[t]his Court
subsequently held in McLaughlin v. McCann that to realize the efficiency goals of
the Willie Gary rule, ‘absent a clear showing that the party desiring arbitration has
essentially no non-frivolous argument about substantive arbitrability to make before
the arbitrator, the court should require the signatory to address its arguments against
arbitrability to the arbitrator.’”27 In addition, when “a contract clearly and
unmistakably provides that an arbitrator will decide substantive arbitrability, then
the contract controls.”28
Through Section 14.5 of the Operating Agreement, the parties clearly and
unmistakably agreed to submit the issue of arbitrability to the arbitrator. In
particular, Section 14.5 provides that “[t]he parties agree to submit any dispute,
claim or controversy arising out of or relating to this Agreement, including the
26
Id. at 80.
27
Glazer v. All. Beverage Distrib. Co., 2017 WL 822174, at *2 (Del. Ch. Mar. 2, 2017)
(quoting McLaughlin v. McCann, 942 A.2d 616, 627 (Del. Ch. 2008)).
28
GTSI Corp. v. Eyak Tech., LLC, 10 A.3d 1116, 1119 (Del. Ch. 2010).
C.A. No. 2021-0816-NAC
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determination of the scope or applicability of the Agreement to arbitrate, to final
and binding arbitration[.]”29 Section 14.5 also passes both prongs of the Willie Gary
test. It “generally provides for arbitration of all disputes”30 and “incorporates a set
of arbitration rules that empower[s] arbitrators to decide arbitrability.”31 Thus, no
matter how one slices it—whether by the plain terms of the provision or under the
Willie Gary test—the threshold question of arbitrability should be resolved in
arbitration.
Plaintiffs assert two primary arguments against arbitration. First, they argue
that the Operating Agreement “contains a conflicting exclusive jurisdiction
provision in Section 14.4—which Plaintiffs cited in the Complaint[.]”32 Because
29
Operating Agreement § 14.5 (emphasis added).
30
Willie Gary, 906 A.2d at 80; see also Operating Agreement § 14.5 (“The parties agree
to submit any dispute, claim or controversy arising out of or relating to this Agreement . .
. to final and binding arbitration . . . . Except as otherwise provided in this Agreement,
arbitration shall be the sole and exclusive method of resolving all claims, disputes or
proceedings relating to this Agreement.”) (emphases added).
31
Willie Gary, 906 A.2d at 80; see also Operating Agreement § 14.5 (providing for
arbitration “according to either the JAMS Streamlined Arbitration Rules and Procedures
(for claims under $250,000) or the JAMS Comprehensive Arbitration Rules and
Procedures (for claims equal to or over $250,000)”); Defs.’ Opening Br. at 12–13 (“Rule
11 of the JAMS Comprehensive Rules and Procedures states that ‘The Arbitrator has the
authority to determine jurisdiction and arbitrability issues as a preliminary matter.’”).
32
Pls.’ Opp’n at 2.
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of the “ambiguity created by the conflicting dispute resolution provisions,”
Plaintiffs say, this Court must deny the Motion and press forward.33
Section 14.4 of the Operating Agreement provides:
14.4 Jurisdiction. Each member hereby consents to the exclusive
jurisdiction of the state and federal courts sitting in Delaware. Each Member
further agrees that personal jurisdiction over it may be effected by service of
process by registered or certified mail addressed as provided in Section 14.1,
and that when so made shall be as if served upon him or her personally within
the State of Delaware.34
While I agree with Plaintiffs that, “where a contract contains two conflicting
provisions, the document is rendered ambiguous,”35 I disagree that there is a conflict
between the arbitration provision and the jurisdiction provision that “cannot be
resolved.”36
33
Id.
34
Operating Agreement § 14.4.
35
Duff v. Innovative Discovery LLC, 2012 WL 6096586, at *12 (Del. Ch. Dec. 7, 2012).
36
See Pls.’ Opp’n at 8.
C.A. No. 2021-0816-NAC
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This is not a case where two contracts have “dueling arbitration clauses”37 or
forum selection clauses,38 like many of the cases Plaintiffs rely on. Rather, these
two provisions can—and should—be read harmoniously, with Section 14.4 directed
simply to personal jurisdiction and to channeling any court filing that might be
made, for whatever reason, into Delaware.39 Indeed, that is exactly what happened
here. Plaintiffs sought to avoid application of the arbitration requirement but, in
doing so, had to bring their claim in a Delaware court. And, as Defendants
persuasively point out,40 there are various reasons why members of a Delaware LLC
37
UPM-Kymmene Corp. v. Renmatix, Inc., 2017 WL 4461130, at *7 (Del. Ch. Oct. 6,
2017); see also AffiniPay, LLC v. West, 2021 WL 4262225, at *1 (Del. Ch. Sept. 17, 2021)
(concluding that “it is impossible to discern which arbitrator the parties intended to decide
the matter of arbitrability given the parties’ agreement to three different dispute resolution
provisions”).
38
See Duff, 2012 WL 6096586, at *12 (holding that two forum selection provisions in
different agreements conflict, making “the parties’ intent as to a contractual choice of
forum here far from ‘crystalline’”); CRE Niagara Hldgs., LLC v. Resort Gp., Inc., 2021
WL 1292792, at *5–7 (Del. Super. Ct. Apr. 7, 2021) (determining, in a “battle of the forum
selection clauses,” which one governs).
39
See, e.g., GRT, Inc. v. Marathon GTF Tech., Ltd., 2012 WL 2356489, at *6 (Del. Ch.
June 21, 2012) (“Delaware law requires that this court attempt to give effect to the plain
terms of all provisions of a contract, and to give them a harmonious reading.”); Menn v.
ConMed Corp., 2022 WL 2387802, at *38 (Del. Ch. June 30, 2022) (recognizing “the
principle of contract interpretation that requires this court to interpret the various
provisions of a contract harmoniously”).
40
See Reply Br. in Further Supp. of Defs.’ Mot. to Dismiss & Compel Arb. (Dkt. 25)
(“Defs.’ Reply Br.”) at 5–7. I also disagree with Plaintiffs’ assertion that Defendants
C.A. No. 2021-0816-NAC
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would consent to jurisdiction in Delaware courts in the same agreement where they
agree to arbitrate disputes arising from the agreement, including for purposes of
seeking a court order compelling arbitration or confirming the arbitration award.41
Given this plain language, I believe there is no “irreconcilable conflict”
between the two provisions, as Plaintiffs assert,42 and the jurisdiction provision is
consistent with the arbitration provision. And according to the plain language of
the arbitration provision, the parties agreed to send the issue of substantive
arbitrability to the arbitrator.
In addition, even if I were to conclude that Section 14.4 renders Section 14.5
ambiguous, I do not read the language of Section 14.4 as “so obviously broad and
“waived” the ability to respond to Plaintiffs’ opposition arguments in their reply brief.
See Pls.’ Opp’n at 7 n.3. Defendants properly responded to arguments raised in Plaintiffs’
opposition papers.
41
I note that Section 14.5’s provision that a “Party may enforce the final award in any
court of competent jurisdiction” (Operating Agreement § 14.5) is also consistent with the
understanding described above in that Section 14.4 identifies the state and federal courts
sitting in Delaware as the courts of competent jurisdiction here. See Defs.’ Reply Br. at
5–6 (citing 9 U.S.C. § 9 and stating that, “by consenting to jurisdiction of Delaware courts,
and to personal jurisdiction in the state of Delaware, the Members of the LLC make it
possible to enforce any arbitration award in Delaware”).
42
Pls.’ Opp’n at 11 (first citing O’Shaugnessy v. Young Living Essential Oils, LC, 2019
WL 5296359, at *4 (W.D. Tex. Oct. 18, 2019); then citing Bellman v. i3Carbon, LLC,
563 F. App’x 608, 614–15 (10th Cir. 2014)).
C.A. No. 2021-0816-NAC
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substantial as to overcome a heavy presumption” that the parties intended to submit
disputes to an arbitrator.43 As a consequence, the result here would not change.
Second, Plaintiffs argue that the Operating Agreement “carves out actions for
specific performance from the arbitration clause,” and therefore “did not delegate
to the arbitrator authority to resolve all potential claims.”44 Section 14.7 of the
Operating Agreement provides:
14.7 Injunctive Relief; Specific Performance. The parties hereby agree
and acknowledge that a breach of any material term, condition or provision
of this Agreement that provides for an obligation other than the payment of
money would result in severe and irreparable injury to the other party, which
injury could not be adequately compensated by an award of money damages,
and the parties therefore agree and acknowledge that they shall be entitled to
injunctive relief in the event of any breach of any material term, condition or
provision of this Agreement, or to enjoin or prevent such a breach, including
without limitation an action for specific performance hereof, and the parties
hereby irrevocably consent to the issuance of any such injunction. The
parties further agree that no bond or surety shall be required in connection
therewith.45
In essence, Plaintiffs argue that, because the Operating Agreement mandates
arbitration “except as otherwise provided in this agreement,” it contemplates that
43
McLaughlin, 942 A.2d at 625.
44
Pls.’ Opp’n at 4–5, 9.
45
Operating Agreement § 14.7.
C.A. No. 2021-0816-NAC
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some claims may be brought outside of arbitration—in particular, actions for
“specific performance” as described in Section 14.7.46 But Delaware courts have
held that language regarding injunctive relief or specific performance does not
override mandatory arbitration provisions in contracts,47 “including disputes over
substantive arbitrability.”48
The fact that the Operating Agreement allows for injunctive relief does not
remove Plaintiffs’ claim for specific performance (Count IV) from the scope of the
arbitrator’s jurisdiction under Section 14.5. Indeed, Plaintiffs are not precluded at
46
Pls.’ Opp’n at 9.
47
See, e.g., Blackmon v. O3 Insight, Inc., 2021 WL 868559, at *3 (Del. Ch. Mar. 8, 2021)
(“I also note that while the Stockholders Agreement preserves, at Section 9.13, a right to
seek equitable relief in court, it does not preclude equitable relief from being sought via
arbitration; in fact, it preserves ‘all other rights and remedies that may be available to [the
parties] in respect of’ a breach requiring equitable relief. In other words, Section 9.13 is
a permissive out, not a limitation on the otherwise-comprehensive jurisdiction of the
arbitrator.”); Riley v. Brocade Commc’n Sys., Inc., 2014 WL 1813285, at *2 (Del. Ch.
May 6, 2014) (“[Plaintiff] argues that Paragraph 17 of the Release . . . is subject to an
equitable carve-out . . . . He therefore contends that Paragraph 17 does not refer ‘all
disputes’ to arbitration and is otherwise not clear and unmistakable evidence of the parties’
intention to arbitrate. However, this issue has been addressed. In GTSI Corp., an
agreement contained a general equitable remedy carve-out . . . in addition to a broad
arbitration clause which mandated that any dispute between the parties ‘shall’ go to
arbitration. The Court determined that the terms of the arbitration provision using the
phrase ‘shall’ required an arbitrator to determine the issue of arbitrability, despite the
equitable remedy provision. The same result should apply here.”) (emphasis added).
48
Innovation Inst., 2019 WL 4060351, at *5.
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all from seeking specific performance in arbitration. Under the arbitration rules
incorporated into the Operating Agreement, an arbitrator “may grant any remedy or
relief that is just and equitable and within the scope of the Parties’ Agreement,
including, but not limited to, specific performance of a contract or any other
equitable or legal remedy.”49 More importantly, whether the claim for specific
performance here is subject to the arbitration clause is for the arbitrator to decide.
Even if I were to agree that this Court, rather than the arbitrator, is required
to determine the substantive arbitrability of Plaintiffs’ claim for specific
performance separately from Plaintiffs’ other claims, this claim would still likely
be subject to the Operating Agreement’s arbitration clause under Delaware law.
Where a contract contains a broad arbitration provision, parties must submit to
arbitration “any issues that touch on contract rights or contract performance.”50 A
claim “touches on” a contract right or contract performance if the claim “depend[s]
on the existence of the agreement that contains the arbitration provision.”51 In
49
JAMS Rule 24(c).
50
Parfi Hldg. AB, 817 A.2d at 155.
51
Rummel Klepper & Kahl, LLP v. Del. River & Bay Auth., 2022 WL 29831, at *11 (Del.
Ch. Jan. 3, 2022) (citation omitted).
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determining the arbitrability of a given claim, “[t]he only question a court should
decide is whether the subject matter in dispute falls within an arbitration
provision.”52
The scope of the Operating Agreement’s arbitration provision is broad.53
Furthermore, Plaintiffs’ claim here is one demanding specific performance of the
Operating Agreement—this claim clearly is dependent on the existence of the
Operating Agreement, which contains the arbitration provision. Therefore, even
assuming, for the sake of argument, that I must determine the substantive
arbitrability of Plaintiffs’ claim for specific performance separately, I would likely
conclude that this claim would still be subject to the arbitration provision because
it “touches on” performance of the Operating Agreement.
Having rejected Plaintiffs’ arguments, I am convinced that the arbitrator must
decide the issue of arbitrability. “The ensuing question is what to do with this action
52
CLP Toxicology, Inc. v. Casla Bio Hldgs. LLC, 2021 WL 2588905, at *9 (Del. Ch. June
14, 2021).
53
See Parfi Hldg. AB, 817 A.2d at 155 (holding that an arbitration provision submitting
to arbitration “any dispute, controversy, or claim arising out of or in connection with” the
agreement was broad). The arbitration provision in the Operating Agreement is almost
identical to the broad arbitration provision at issue in Parfi.
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in the meantime.”54 Defendants have asked this Court to dismiss the case or, in the
alternative, for a stay. Vice Chancellor Laster has provided insightful direction on
this point:
Whether to stay or dismiss this action pending the arbitrator’s decision
is a procedural matter governed by the law of the forum. . . . Section 3
of the [FAA] provides for a stay of proceedings when “the issue
involved in . . . [a] proceeding is referable to arbitration.” The issue of
arbitrability is referable to arbitration, so MacDonald and Smythe’s
claims under their employment agreements are stayed pending the
arbitrator’s decision. If the arbitrator determines that their claims are
arbitrable, then those claims will be dismissed in this action for lack of
jurisdiction.55
This analysis is directly applicable here. As in Meyers, the Operating
Agreement does not specifically reference the DUAA. Under Section 3 of the
FAA,56 and in this Court’s discretion,57 I believe a stay is the best path forward.
54
Meyers, 2016 WL 7048783, at *2.
55
Id. at *2–3 (citations omitted).
56
See 9 U.S.C. § 3 (providing that if an issue is “referable to arbitration under an
agreement,” the court “shall on application of one of the parties stay the trial of the action
until such arbitration has been had in accordance with the terms of the agreement”).
57
See, e.g., In re Bay Hills Emerging P’rs I, L.P., 2018 WL 3545305, at *2 (Del. Ch. July
23, 2018) (“The Court’s right to grant a stay is within the exclusive discretion of the Court.
The discretion to issue a stay is inherent in every court and flows from its control over the
disposition of cases on its docket.”) (citation omitted).
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III. CONCLUSION
Because the parties evidenced a clear and unmistakable intent to have the
arbitrator decide issues of substantive arbitrability, the action is STAYED pending
the arbitrator’s decision. “If the arbitrator determines the claim is arbitrable, then
this action will be dismissed for lack of jurisdiction . . . . If the arbitrator determines
the matter is not arbitrable, then the parties may return to this Court for further
proceedings.”58 The parties shall confer and submit a form of implementing order
within ten (10) days.
IT IS SO ORDERED.
Sincerely,
/s/ Nathan A. Cook
Nathan A. Cook
Vice Chancellor
cc: All counsel of record (by File & ServeXpress)
58
Innovation Inst., 2019 WL 4060351, at *6.
APPENDIX A
OPERATING AGREEMENT § 14.5
14.5 Dispute Resolution. The Parties agree to submit any dispute, claim or
controversy arising out of or relating to this Agreement, including the determination
of the scope or applicability of the Agreement to arbitrate, to final and binding
arbitration to be initiated and conducted according to either the JAMS Streamlined
Arbitration Rules and Procedures (for claims under $250,000) or the JAMS
Comprehensive Arbitration Rules and Procedures (for claims equal to or over
$250,000) (collectively, the “JAMS Rules”) to the extent the JAMS Rules are not
inconsistent with or expressly modified by the terms of this Agreement. The
arbitration shall be conducted in New York, New York or any other location the
parties may agree upon, in accordance with the JAMS Rules. The arbitral tribunal
in any dispute in which the total value of all claims and counterclaims is less than
one million dollars ($1,000,000) shall consist of a single arbitrator who shall be
appointed pursuant to the JAMS Rules pertaining to the selection of a single
arbitrator. In any dispute in which the total value of the claims and counterclaims
is one million dollars ($1,000,000) or more, the arbitral tribunal shall consist of
three (3) arbitrators. In disputes for which three arbitrators shall preside, the Dr J
Member shall appoint one arbitrator and the ABG Member shall appoint one
arbitrator, in each case within thirty (30) days after any request for arbitration
hereunder. The two arbitrators thus appointed shall choose the third arbitrator
within thirty (30) days after their appointment; provided, however, that if the two
arbitrators are unable to agree on the appointment of the third arbitrator within thirty
(30) days after their appointment, either arbitrator may petition JAMS to make the
appointment. No arbitrator shall be affiliated with any Party hereto or any of their
Affiliates. The Parties agree that the arbitrator(s), and not any court or other
tribunal, shall have the exclusive power to award any preliminary or interim
injunctive relief. The arbitral tribunal shall follow the law applicable to such
dispute in accordance with Section 14.3 and the Federal Rules of Evidence in
adjudicating the dispute. Subject to the Parties’ ability to vacate a decision or award
under the Federal Arbitration Act, any decision or award of the arbitrator shall be
final, binding and conclusive on the Parties to this Agreement and their respective
Affiliates. The arbitral tribunal will provide a detailed written statement of decision
within sixty (60) days after the appointment of the last arbitrator and not more than
thirty (30) days after a hearing regarding a dispute, or as promptly as possible
thereafter. The arbitral tribunal’s detailed written statement of decision will be part
of the arbitration award and admissible in any judicial proceeding to confirm,
correct or vacate the award and such written statement shall declare a prevailing
party and a non-prevailing party. If any Party refuses to perform any or all of its
obligations under the final arbitration award (following any petition to correct or
vacate the final arbitration award, if applicable) within thirty (30) days of such
award being rendered, then the other Party may enforce the final award in any court
of competent jurisdiction. The non-prevailing party will reimburse the prevailing
party for its reasonable attorneys’ fees incurred in connection with such arbitration,
including the cost of any arbitration administrative fee and the compensation of the
arbitral tribunal. Except as otherwise provided in this Agreement, arbitration shall
be the sole and exclusive method of resolving all claims, disputes or proceedings
relating to this Agreement. Consistent with the mutual interest of reducing the cost
and promoting the expeditious resolution of any disputes under this Agreement, the
Parties intend that discovery of documents and testimony in the arbitration shall be
limited respectively to (i) the initial exchange of documentation described in Rule
17(a) of the JAMS Comprehensive Arbitration Rules & Procedures (effective July
1, 2014), and (ii) a single deposition per side, unless otherwise ordered by the
arbitral tribunal upon a showing of good cause by either Party. The Parties adopt
and agree to implement the JAMS Optional Arbitration Appeal Procedure (as it
exists on the effective date of this Agreement) with respect to any final award in an
arbitration arising out of or related to this Agreement; provided, that the size of the
arbitral tribunal in connection therewith shall be determined by the procedures set
forth above in this Section 14.5.