AffiniPay, LLC v. Thomas West

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
AFFINIPAY, LLC AND AFFINIPAY )
PARENT, LLC, )
)
Plaintiffs, )
) C.A. No. 2021-0549-LWW
v. )
)
THOMAS WEST, )
)
Defendant. )
MEMORANDUM OPINION
Date Submitted: August 19, 2021
Date Decided: September 17, 2021
Rudolf Koch and Ryan D. Konstanzer, RICHARDS, LAYTON, & FINGER, P.A.,
Wilmington, Delaware; Joseph P. Rockers and Batoul Husain, GOODWIN
PROCTER LLP, Boston, Massachusetts; Counsel for Plaintiffs AffiniPay, LLC and
AffiniPay Parent, LLC
Peter B. Ladig, Thad J. Bracegirdle, and Justin C. Barrett, BAYARD, P.A.,
Wilmington, Delaware; Counsel for Defendant Thomas West
WILL, Vice Chancellor
This case arises from a disagreement over the number of vested options and
the valuation of incentive units granted to a former Chief Executive Officer. The
underlying dispute is subject to arbitration. The only issue presented to this court is
where and how those claims should be properly adjudicated.
The parties negotiated a series of agreements to govern the former officer’s
option grants and incentive units. Those agreements contain a trio of dispute
resolution provisions that call for different arbitral forums applying different arbitral
procedures. The agreements each contemplate that the arbitrator (albeit different
arbitrators) will decide the question of arbitrability.
The former officer—the defendant in this action—has initiated an arbitration
proceeding applying procedures called for in one of the agreements. The plaintiff—
his former employer—contends that the arbitration violates the dispute resolution
provisions in the other two agreements, which are relevant to the former officer’s
claims. The plaintiff asks that I preliminary enjoin those claims from proceeding in
the pending arbitration. The former officer asserts that this court lacks subject matter
jurisdiction to decide the preliminary injunction motion because the parties
delegated the issue of substantive arbitrability to the arbitrator. He has moved to
dismiss on that basis.
In this decision, I conclude that it is impossible to discern which arbitrator the
parties intended to decide the matter of arbitrability given the parties’ agreement to
1
three different dispute resolution provisions. The court therefore has subject matter
jurisdiction to resolve that dispute and the defendant’s motion to dismiss is
denied. Because the plaintiff has demonstrated that the elements of a preliminary
injunction are satisfied, I grant the plaintiff’s motion and preliminary enjoin the
equity-based claims from proceeding in the pending arbitration.
I. FACTUAL BACKGROUND
The following facts are drawn from the Verified Complaint and the documents
it incorporates by reference.1
A. The Employment Agreement
Plaintiffs AffiniPay, LLC and AffiniPay Parent, LLC (together, “AffiniPay”)
are Delaware entities with their principal places of business in Austin, Texas. 2
AffiniPay is a fintech market leader providing payment technology services to legal,
accounting, and association professionals throughout the United States.3 Defendant
Thomas West, a resident of Texas, was hired by AffiniPay on September 4, 2018 to
1
Verified Compl. (“Compl.”) (Dkt. 1). See Winshall v. Viacom Int’l, Inc., 76 A.3d 808,
818 (Del. 2013) (“[A] plaintiff may not reference certain documents outside the complaint
and at the same time prevent the court from considering those documents’ actual terms.”);
Freedman v. Adams, 2012 WL 1345638, at *5 (Del. Ch. Mar. 30, 2012) (“When a plaintiff
expressly refers to and heavily relies upon documents in her complaint, these documents
are considered to be incorporated by reference into the complaint . . . .”), aff’d, 58 A.3d
414 (Del. 2013).
2
Compl. ¶ 11.
3
Id. ¶¶ 2, 15.
2
serve as its Chief Growth Officer and later became its Chief Executive Officer.4
Upon his hiring, West and AffiniPay entered into an Employment Agreement
outlining West’s duties, compensation and benefits, and other aspects of West’s
employment.5
West was granted options in AffiniPay that vested over time as part of his
compensation package.6 The Employment Agreement states in Section 3(D) that
West would be “granted an option . . . under the AffiniPay Holdings LLC Unit
Option Plan” (the “2016 Option Plan”) to purchase incentive units in AffiniPay.7
The Employment Agreement also provides that the options would be “subject to all
other terms and conditions set forth in the [2016] Option Plan” and to the parties’
September 4, 2018 Unit Option Award Agreement (the “Award Agreement”).8
The vesting schedule included in Section 3(D) of the Employment Agreement
explains that, “[i]n the event of [West’s] termination of employment with
[AffiniPay] for any reason,” the options may be cancelled or repurchased by
AffiniPay “in accordance with the terms of the [2016] Option Plan and [A]ward
4
Id. ¶¶ 2, 16.
5
Id. ¶ 16.
6
Id. ¶ 3.
7
Compl. Ex. B § 3(D).
8
Id.
3
[A]greement.”9 Section 3(D) of the Employment Agreement further explains that
“to the extent the terms of the [2016] Option Plan or Award Agreement conflict with
this Section 3(D), the terms of the [2016] Option Plan or Award Agreement shall
control.”10
The Employment Agreement includes an arbitration clause:
[A]ny and all disputes or claims arising out of or relating to [the
Employment Agreement] or concerning [West’s] employment with
[AffiniPay] or termination thereof shall be settled by final and binding
arbitration to be conducted in Austin, Texas, under the then existing
Employment Arbitration and Mediation Procedures [Employment
Arbitration Rules]) of the American Arbitration Association (‘AAA’).11
The arbitration clause further provides that “[a]ny disagreement as to whether a
particular dispute is arbitrable under [the Employment Agreement] will itself be
subject to determination by the arbitrator in arbitration in accordance with the
procedures set forth herein.”12
B. The Award Agreement and 2016 Option Plan
On September 4, 2018, AffiniPay granted options to West pursuant to the
Award Agreement.13 The Award Agreement provides that the options were issued
“upon the terms and conditions set forth in the [2016 Option Plan]” and “[s]ubject
9
Id.
10
Id.
11
Compl. Ex. B at 10-11.
12
Id. at 11.
13
Compl. ¶ 18, Ex. C § 1.
4
to the terms and conditions” of the Award Agreement.14 The Award Agreement
contains a vesting schedule that is generally consistent with the vesting schedule in
the Employment Agreement but provides additional details about the forfeiture and
repurchase of the options in the event of West’s termination.15 The 2016 Option
Plan gives AffiniPay the right to repurchase incentive units acquired through options
granted under the 2016 Option Plan at a defined fair market value if West is
terminated for any reason.16
Disputes related to the Award Agreement are governed by Section 12 of the
2016 Option Plan.17 Section 12 also includes an arbitration clause:
Any dispute between [AffiniPay] and [West] as to the interpretation of any
provision of the [2016 Option Plan] or [the] Award Agreement or the rights
and obligations of any party thereunder . . . will be resolved through binding
arbitration as hereinafter provided in Austin, Texas . . . in accordance with the
Commercial Arbitration Rules of the [AAA] then in effect.18
Section 12 sets out the procedures that would govern any such arbitration.19
14
Compl. Ex. C (Preamble), § 1.
15
See Compl. Ex. B § 3(D), Ex. C §§ 2-3.
16
Compl. Ex. D § 9; see also id. § 2 (definitions of “Fair Market Value” and “Repurchase
Event”).
17
Compl. ¶ 19, Ex. D § 12.
18
Compl. Ex. D § 12.
19
Id. § 12(a).
5
C. The Rollover Agreement
On February 28, 2020, private equity firm TA Associates acquired a majority
interest in AffiniPay.20 The sale transaction triggered vesting acceleration provisions
in the Award Agreement and the Employment Agreement, causing a portion of
West’s options to vest.21 In connection with TA Associates’ acquisition of
AffiniPay, West entered into a Unit Option Rollover Agreement (the “Rollover
Agreement”) with AffiniPay.22
Under the Rollover Agreement, West exchanged his options for new, post-
deal options (referred to as the “New Options” in the Rollover Agreement) that
would allow West to purchase common units of AffiniPay Parent, LLC.23 The
Rollover Agreement provides that the New Options West received post-rollover
would “be governed by the same terms and conditions of the [2016 Option Plan and
the Award Agreement],” including with respect to vesting.24 The Rollover
Agreement does not reference the Employment Agreement other than to adopt its
20
Compl. ¶ 20, Ex. A ¶ 5.
21
Compl. ¶ 20, Ex. A ¶ 5, Ex. B § 3(D), Ex. C § 2.2.
22
Compl. ¶ 21, Ex. G (Preamble).
23
Compl. ¶ 21, Ex. G §§ 1-2.
24
Compl. Ex. G § 2(c). The Rollover Agreement incorporated the terms of the Award
Agreement and Options Agreement except “that all references in the [Award Agreement
and 2016 Option Plan] to the ‘Company’ shall be deemed to be references to [AffiniPay
Parent, LLC], and upon exercise of any New Option(s), [West] shall be entitled to receive
[common units of AffiniPay Parent, LLC].” Id.
6
definition of “Cause.”25 The Rollover Agreement also contains an integration clause
providing that it and “the agreements and documents referred to” in it constitute the
complete agreement between the parties on its subject matter and supersede any prior
understandings or agreements.26
D. The Profit Interest Agreement and 2020 Option Plan
On June 24, 2020, AffiniPay granted West incentive units in AffiniPay Parent,
LLC pursuant to a Profit Interest Award Agreement (the “Profit Interest
Agreement”).27 The Profit Interest Agreement explains that the units were granted
under the Company’s 2020 Unit Option and Grant Plan (“2020 Option Plan”), which
replaced the 2016 Option Plan post-acquisition, and “subject to the terms and
conditions set forth” in the Profit Interest Agreement.28
The Profit Interest Agreement contains a vesting schedule for the incentive
units.29 The 2020 Option Plan gives AffiniPay the right to repurchase West’s vested
units upon his termination at a defined “Fair Market Value” determined in
accordance with the 2020 Option Plan.30
25
Id.
26
Compl. Ex. G § 7.
27
Compl. ¶ 22, Ex. E (Preamble).
28
Compl. Ex. E (Preamble).
29
Compl. Ex. E § 1.
30
Compl. Ex. F § 9.
7
The Profit Interest Agreement also contains an arbitration clause in Section
5(j) to govern disputes about the incentive units:
The parties hereto agree that any dispute or controversy arising out of,
relating to, or in connection with [the Profit Interest Agreement] or the
transactions contemplated hereby shall be arbitrated pursuant to the
Delaware Rapid Arbitration Act, 10 Del. C. § 5801 et seq.31
Section 5(j) goes on to outline other terms and procedures to govern any arbitration,
including that the arbitration “shall be conducted in accordance with the Delaware
Rapid Arbitration Rules.”32
E. The Arbitration
On March 3, 2021, AffiniPay terminated West and provided him with a
proposed separation agreement.33 The separation agreement identified the number
of West’s options that AffiniPay claims had vested and informed West that
AffiniPay was electing to repurchase his incentive units at their “Fair Market
Value.”34 West disputed AffiniPay’s calculation of the number of options that had
vested and AffiniPay’s valuation of his incentive units.35 He refused to sign the
separation agreement and asserted that he was entitled to more than double the
number of vested options under his interpretation of the vesting provisions in the
31
Compl. Ex. E § 5(j).
32
Id.
33
Compl. ¶ 24, Ex. A ¶¶ 9, 10, 16.
34
Compl. ¶ 24.
35
Id. ¶ 25; see Compl. Ex. A ¶¶ 18-21.
8
Award Agreement and to a higher value for his incentive units.36 AffiniPay
responded that it viewed the vesting calculation to be consistent with the terms of
the Award Agreement, 2016 Option Plan, and Rollover Agreement and the
determination of “Fair Market Value” to be consistent with the terms of the Profit
Interest Agreement and 2020 Option Plan.37 West did not respond and the separation
agreement went unsigned.
On May 11, 2021, West filed a demand for arbitration in Austin, Texas
pursuant to the Employment Arbitration Rules of the AAA (the “Arbitration”).38
West brings five claims in the Arbitration, two of which are relevant here. First,
West asserts a breach of contract claim against AffiniPay (Count 4), alleging that
AffiniPay “breached [the Employment Agreement] by refusing to place the
appropriate value on West’s [options] and by attempting to manipulat[e] his vesting
schedule to deprive him of additional options.”39 Second, West asserts a fraud claim
against AffiniPay (Count 5), alleging that “AffiniPay committed fraud by
manipulating a vesting schedule.”40 The allegations in West’s Summary of Claim
seem to concern both the vesting schedule of his rolled-over New Options and the
36
Compl. ¶ 25.
37
Id. ¶ 26.
38
Id. ¶ 27.
39
Compl. Ex. A ¶¶ 36-39.
40
Id. ¶¶ 40-41.
9
value of the incentive units AffiniPay had elected to buy back.41 During oral
argument in this action, West’s attorney argued that West only intended to bring
claims pursuant to the Employment Agreement.42
F. Procedural Posture
On June 22, 2021, AffiniPay filed this action seeking declaratory and
injunctive relief to prevent West from arbitrating his equity-related claims in the
Arbitration. AffiniPay filed a motion for a preliminary injunction on the same day.
On July 2, 2021, the court approved a stipulation between the parties staying the
pending Arbitration until September 19, 2021.43 On July 26, 2021, West moved to
dismiss the complaint under Court of Chancery Rule 12(b)(1) for lack of subject
matter jurisdiction or, alternatively, “to stay this action pending the . . . arbitrator’s
determination of [the issue of] arbitrability.”44 The court heard argument on both
the motion for a preliminary injunction and motion to dismiss on August 19, 2021.45
II. LEGAL ANALYSIS
This decision must address two issues. First, I must determine whether the
court has subject matter jurisdiction to decide the issue of substantive arbitrability.
41
Id. ¶¶ 16, 20-21.
42
Oral Arg. Tr. 34 (Dkt. 38).
43
Dkt. 19.
44
Dkt. 26.
45
Dkt. 36.
10
If the issue of substantive arbitrability rests in this court, rather than with the
arbitrator, I must assess whether AffiniPay is entitled to an injunction to prevent the
equity-based claims from being heard in the Arbitration.
Court of Chancery Rule 12(b)(1) governs the first question. “In considering
a motion to dismiss under Rule 12(b)(1) for lack of subject matter jurisdiction, the
court must address the nature of the wrong alleged and the remedy sought to
determine whether a legal, as opposed to an equitable, remedy is available and
adequate.”46 “If a claim is arbitrable, i.e., properly committed to arbitration, this
Court lacks subject matter jurisdiction because arbitration provides an adequate legal
remedy.”47
The second question must be evaluated under the standard for a preliminary
injunction. To obtain a preliminary injunction, the moving party “must demonstrate
(i) a reasonable probability of success on the merits; (ii) a threat of irreparable injury
if an injunction is not granted; and (iii) that the balance of the equities favors the
issuance of an injunction.”48
For the reasons discussed below, I find that both questions must be answered
in the affirmative. Because the contracts at issue have conflicting dispute resolution
46
Julian v. Julian, 2009 WL 2937121, at *3 (Del. Ch. Sept. 9, 2009).
47
Id.48
Pell v. Kill, 135 A.3d 764, 783 (Del. Ch. 2016).
11
provisions, the court—rather than the arbitrator—must decide the question of
substantive arbitrability. Subject matter jurisdiction is therefore proper in this court.
An analysis of those same contracts, which are implicated by West’s equity-based
claims and contain separate arbitration provisions, also leads me to conclude that the
Arbitration must be enjoined.
A. This Court Has Subject Matter Jurisdiction to Decide Substantive
Arbitrability.
1. Substantive Arbitrability Generally
Substantive arbitrability is the question of whether a dispute is within the
scope of an arbitration provision and, therefore, subject to arbitration.49 Delaware
courts follow the “general rule, announced by the United States Supreme Court . . .
that courts should decide” the issue of substantive arbitrability.50 That rule has an
important exception: when parties delegate issues of arbitrability to an arbitrator, “a
court . . . possesses no power to decide the arbitrability issue.”51 For that exception
to apply, however, there must be clear and unmistakable evidence that the parties
intended to delegate issues of arbitrability to an arbitrator.52 That is so “even if the
49
UPM-Kymmene Corp. v. Renmatix, Inc., 2017 WL 4461130, at *4 (Del. Ch. Oct. 6,
2017).
50
James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76, 78 (Del. 2006).
51
Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524, 529 (2019).
52
See Willie Gary, 906 A.2d at 78; see also First Options of Chi., Inc. v. Kaplan, 514 U.S.
938, 944 (1995) (explaining that “[c]ourts should not assume that the parties agreed to
12
court thinks that the argument that the arbitration agreement applies to a particular
dispute is wholly groundless.”53
The Federal Arbitration Act (FAA) governs disputes over the arbitrability of
contracts involving interstate commerce.54 The FAA, in turn, implicates state law
contract principles. “When deciding whether the parties agreed to arbitrate . . . [the
issue of] arbitrability” under the FAA, “courts generally . . . should apply ordinary
state-law principles that govern the formation of contracts.”55
In Willie Gary, the Delaware Supreme Court explained that contractual
parties’ “clear and unmistakable intent” to submit arbitrability issues to an arbitrator
is found “where the arbitration clause generally provides for arbitration of all
disputes and also incorporates a set of arbitration rules that empower[s] arbitrators
arbitrate [the issue of] arbitrability unless there is ‘clea[r] and unmistakabl[e]’ evidence
that they did so”).
53
Henry Schein, 139 S. Ct. at 529.
54
9 U.S.C. § 2.
55
See First Options, 514 U.S. at 940; Ario v. Underwriting Members of Syndicate 53 at
Lloyds for 1998 Year of Acct., 618 F.3d 277, 288 (3d Cir. 2010), as amended (Dec. 7,
2010).
13
to decide arbitrability.”56 Delaware courts routinely apply Willie Gary in resolving
a question of substantive arbitrability.57
The analysis becomes complicated when the court is faced with multiple
agreements providing for dispute resolution in different arbitral forums. This court
has cautioned that the Willie Gary framework should not be applied “reflexively in
the multiple-contract scenario.”58 Rather, if various contracts are implicated in a
claim and those contracts diverge on the matter of arbitral dispute resolution, Willie
Gary’s requirement that a provision mandate the arbitration of “all disputes” is
impossible to satisfy.59 It then falls to the court to determine substantive
56
906 A.2d 76, at *80. In McLaughlin v. McCann, then-Vice Chancellor Strine added a
third consideration before a court will resolve substantive arbitrability: that there be
“essentially no non-frivolous argument about [issues of] . . . arbitrability to make before
the arbitrator.” 942 A.2d 616, 627 (Del. Ch. 2008). The United States Supreme Court’s
decision in Henry Schein renders that consideration a nullity. In Henry Schein, the Court
explained that a court cannot rule on the merits of an underlying claim, even if the claim
appears frivolous to the court, when parties clearly delegate the issue of substantive
arbitrability to an arbitrator. Henry Schein, 139 S. Ct. 529.
57
See UPM-Kymmene, 2017 WL 4461130, at *4 n.29 (collecting cases).
58
Id. at *6.
59
TowerHill Wealth Mgmt, LLC v. Bander Fam. P’ship, 2008 WL 4615865, at *3 (Del.
Ch. Oct. 9, 2008) (“[W]here there are various dispute resolution clauses in play in various
contracts, it is impossible to select one and say it applies generally to all disputes.”).
14
arbitrability.60 That is so even where the dispute resolution provisions reserve
questions of arbitrability for the arbitrator.61
Then-Chancellor Bouchard’s decision in UPM-Kymmene Corp. v. Renmatix
Inc. is instructive. There, the parties entered into two contracts with conflicting
arbitration clauses. Both clauses empowered an arbitrator to decide issues of
arbitrability, but the first contract called for resolution before the International
Chamber of Commerce (ICC) and the second contract contemplated arbitration
before the AAA.62 The first contract’s arbitration clause governed all disputes
between the parties.63 The second contract’s arbitration clause governed all disputes
under the second contract.64 Although the party demanding arbitration in UPM
asserted its claims before the AAA under the second contract, the court found that
both agreements—which were intended to operate concurrently—were in play.65
Faced with dueling arbitration clauses, the court could not conclude that there was a
“clear and unmistakable intention . . . that the parties wished to have one arbitrator
60
See id. at *3 (explaining that the court has jurisdiction to decide issues of substantive
arbitrability where an arbitration was brought under one contract but claims implicated
other contracts that mandated dispute resolution by the court).
61
UPM-Kymmene, 2017 WL 4461130, at *7.
62
Id. at *2.
63
Id.
64
Id.
65
Id. at *5-7.
15
rather than the other determine where the Demands should be arbitrated.”66 The
issue of arbitrability was therefore left for the court to decide.
2. Substantive Arbitrability in This Case
As in UPM, this court must assess whether the relevant contracts evidence
the parties’ clear and unmistakable intent to submit substantive arbitrability to the
arbitrator. The initial question is whether there are multiple contracts at issue. West
asserts that his breach of contract and fraud claims in the Arbitration are brought
only under the Employment Agreement.67 That is so, West argues, because he seeks
to remedy AffiniPay’s alleged violation of the Employment Agreement by
undervaluing his shares and manipulating the relevant vesting schedule after his
termination.68 If the Arbitration concerns only the Employment Agreement as he
claims, then under Willie Gary, the dispute resolution provision in the Employment
66
Id. at *7.
67
Def.’s Opp. Br. at 39 (Dkt. 27).
68
Id. at 38-39. In further support of his argument, West cites several cases that he says are
examples of courts following the Willie Gary test and deferring issues of arbitrability to
arbitrators. See Pls.’ Opening Br. at 32-37, 40-43 (Dkt. 22) (citing Celestialrx Invs., LLC
v. Krivulka, 2019 WL 1396764 (Del. Ch. Mar. 27, 2019); Chemours Co. v. DowDuPont
Inc., 2020 WL 1527783 (Del. Ch. Mar. 30, 2020); Dewey v. Amazon.com, Inc., 2019 WL
3384769 (Del. Super. Ct. July 25, 2019); Blackmon v. O3 Insight, Inc., 2021 WL 868559(Del. Ch. Mar. 9, 2021)). There is a fundamental difference between the facts at issue in
those disputes and this case: none address dueling arbitration clauses. This court’s decision
in Celestialrx comes the closest. There, the parties entered into multiple agreements with
differing arbitration clauses, but the court found that only one arbitration clause was
implicated by the claims. Here, West’s claims implicate at least two (maybe three)
different arbitration clauses.
16
Agreement would mandate that arbitrability be addressed in arbitration under the
Employment Arbitration Rules of the AAA.69 The pending Arbitration is being
conducted in accordance with those rules.70
AffiniPay, for its part, argues that West’s claims cannot be decided without
also considering the 2016 Option Plan and Profit Interest Agreement.71 The
Employment Agreement, 2016 Option Plan, and Profit Interest Agreement each
contain a dispute resolution provision empowering a different arbitrator to determine
arbitrability.72 As a result, AffiniPay contends, there is no clear and unmistakable
evidence that the parties intended for one particular arbitrator to decide that issue.73
After reviewing the relevant contracts, I conclude that AffiniPay has the better
of the arguments. West is correct that the dispute resolution provision in the
Employment Agreement evidences the clearest intent of the parties to submit the
issue of substantive arbitrability to the arbitrator. It provides that “any and all
disputes” arising out of the Employment Agreement or concerning West’s
employment or termination from AffiniPay must be settled by arbitration under the
69
Compl. Ex. B at 11. The AAA Employment Arbitration Rules provide that “[t]he
arbitrator shall have the power to rule on his or her own jurisdiction.” AAA Empl. Proc.
Rule R–6.
70
Def.’s Opp. Br., Ex. 3 at 1.
71
Pls.’ Opening Br. at 15 (Dkt. 22).
72
Compl. Ex. B at 10-11, Ex. D § 12, Ex. E § 5(j).
73
Pls.’ Opening Br. at 16.
17
AAA Employment Arbitration Rules, including “any disagreement as to whether a
dispute is arbitrable under the [Employment Agreement].”74 If the Employment
Agreement was the only contract relevant to West’s equity-based claims, the Willie
Gary test would apply for the reasons discussed above.
But there are other relevant contracts that contain conflicting dispute
resolution provisions, making that conclusion impossible. The parties agreed in
Section 3(D) of the Employment Agreement that West’s options would be awarded
“subject to all other terms and conditions set forth in the [2016] Option Plan and the
[Award Agreement].”75 In other words, even if West’s equity claims in the
Arbitration are viewed narrowly to concern his options granted under the Award
Agreement, the terms of the 2016 Option Plan must be considered.
Both the Employment Agreement and 2016 Option Plan contemplate
arbitration before the AAA in Austin, Texas.76 But they adopt different arbitration
rules: the AAA Employment Arbitration Rules in the Employment Agreement, and
the AAA Commercial Arbitration Rules in the 2016 Option Plan.77 Although both
sets of rules delegate the issue of substantive arbitrability to the arbitrator, the rules
74
Compl. Ex. B at 11.
75
Compl. Ex. B § 3(D).
76
Compl. Ex. B at 10-11, Ex. D § 12.
77
Id.
18
are not identical.78 In application, the rules could lead to different results, for
example, in the selection of an arbitrator with particular expertise or in the
procedures that would apply.
The dispute resolution provision in a third agreement that may be relevant—
the Profit Interest Agreement—creates more uncertainty. As described in the next
section of this decision, the valuation allegations in West’s breach of contract claim
could be read to arise, at least in part, out of the Profit Interest Agreement.79 That
agreement contains a dispute resolution provision that mandates arbitration under
the Delaware Rapid Arbitration Act.80 The Delaware Arbitration Rules also provide
that the arbitrator has the authority “to resolve, finally and exclusively, any dispute
of substantive or procedural arbitrability.”81
The “policy that favors alternative dispute resolution mechanism, such as
arbitration, does not trump basic notions of contract interpretation.” 82 Faced with
two (perhaps three) dispute resolution clauses that are in tension, it is impossible to
discern which arbitrator (and which rules) the parties intended would determine the
78
See generally AAA. Com. Rules; AAA Empl. Proc. Rules.
79
See infra Section II.B.1.b.
80
Compl. Ex. E § 5(j); see 10 Del. C. § 5703(b).
81
See Del. Rapid Arb. R. 6.
82
Hough Assoc., Inc. v. Hill, 2007 WL 148751, at *13 (Del. Ch. Jan. 17, 2007) (quoting
Parfi Hldg. AB v. Mirror Image Internet, Inc., 817 A.2d 149, 156 (Del. 2002)).
19
matter of arbitrability. There is no clear and unmistakable evidence that the parties
intended to delegate substantive arbitrability to an arbitrator under the AAA
Employment Arbitration Rules, as West has done. This court, rather than the
arbitrator, must decide the issue of substantive arbitrability.83
B. The Arbitration Must Be Enjoined as to West’s Equity Claims.
Because subject matter jurisdiction is proper in this court,84 the remaining
question is whether West’s equity claims are subject to arbitration under the dispute
resolution provision in the Employment Agreement. AffiniPay seeks a preliminary
injunction preventing West from pursing in the Arbitration any claims about the
vesting schedule applicable to West’s options in AffiniPay or the fair market value
of West’s incentive units.85 I conclude that because AffiniPay has satisfied the
standard for a preliminary injunction, West must be preliminarily enjoined from
pursuing claims related to those issues in the pending Arbitration.
1. Reasonable Probability of Success on the Merits
AffiniPay’s complaint seeks injunctive relief and a declaratory judgment that
West must pursue his claims about the vesting schedule applicable to his AffiniPay
options in an arbitration that complies with Section 12 of the 2016 Option Plan and
83
See UPM-Kymmene, 2017 WL 4461130, at *7.
84
The court also has subject matter jurisdiction to order a preliminary injunction related to
the Arbitration. See 10 Del. C. § 341; 10 Del. C. § 5804(b); see also Eastman Kodak Co.
v. Cetus Corp., 1991 WL 202184, at *2 (Del. Ch. Oct. 4, 1991).
85
Dkt. 3.
20
about the valuation of his incentive units in an arbitration that complies with Section
5(j) of the Profit Interest Award.86 West contends that his claims arise only from the
Employment Agreement and that, as the claimant in the Arbitration, he is entitled to
that narrow framing.87
A review of West’s claims belies his position. First, West’s equity-based
allegations in the Arbitration are about the options he was originally promised
pursuant to the Employment Agreement. West’s Summary of Claim in the
Arbitration accuses AffiniPay of manipulating the vesting schedule for his New
Options post-rollover.88 Those allegations go to West’s breach of contract claim
(Count IV) that AffiniPay has “attempt[ed] to manipulate his vesting schedule to
deprive him of additional options” and his fraud claim (Count V) that AffiniPay
“manipulat[ed] a vesting schedule for which there was no consideration.”89 I will
refer to West’s claims about manipulation of his vesting schedule as the “Vesting
Claim.” West’s Summary of Claim also challenges AffiniPay’s valuation of the
incentive units he was awarded after the sale transaction as being below fair value.90
Those allegations pertaining to his claim in Count IV that AffiniPay has “refus[ed]
86
Compl. ¶ 40.
87
Def.’s Opp. Br. at 39.
88
Compl. Ex. A ¶¶ 19, 20.
89
Id. ¶¶ 38, 41.
90
Id. ¶ 21.
21
to place the appropriate value on West’s stock.”91 I will refer to that claim as the
“Valuation Claim.”
a. The Vesting Claim
With regard to West’s Vesting Claim, I begin—as I must—with a review of
the Employment Agreement. The Employment Agreement is governed by Texas
law,92 which, like Delaware law, requires courts to “afford common words their plain
meaning unless context indicates the word are used in another sense.”93 A court
must “consider the entire agreement in an effort to harmonize and give effect to all
provisions so that none are rendered meaningless.”94
The Employment Agreement contains a broad arbitration provision applying
to “all disputes or claims arising out of or relating to th[at] Agreement.” 95 But, in
determining whether AffiniPay has a reasonable probability of showing that the
Vesting Claim is not properly raised in the Arbitration, the plain language of Section
3(D) cannot be ignored. Section 3(D) says that West “will be granted an option”
and contains a vesting schedule but unambiguously states that the option will be
“subject to all other terms and conditions set forth in the [2016] Option Plan and the
91
Id. ¶ 38.
92
Compl. Ex. B at 10-11 (“The laws of the State of Texas shall govern this agreement.”).
93
N. Nat. Gas Co. v. Oneok Bushton Processing, Inc., 2012 WL 4364652, at *2 (Tex. App.
Sept. 25, 2012).
94
Id.95
Compl. Ex. B at 10-11.
22
[Award Agreement].”96 Moreover, the Employment Agreement states that if there
is any conflict between Section 3(D) and the 2016 Option Plan or Award Agreement
the terms of the latter “shall control.”97
It is reasonable to interpret those provisions as evidencing the parties’ intent
that the Award Agreement granting the options and the 2016 Option Plan providing
the terms for the grant would govern the option West was promised in the
Employment Agreement. The Award Agreement contains a detailed vesting
schedule and explains that the options will “vest and [be] exercisable only in
accordance with the conditions stated in” Section 2 of the Award Agreement.98 The
Award Agreement also provides that the options were granted “[p]ursuant to the
provisions of the [2016 Option Plan].”99
The 2016 Option Plan is subject to Delaware law.100 “Delaware law adheres
to the objective theory of contracts, i.e., a contract’s construction should be that
which would be understood by an objective, reasonable third party.”101 This court
96
Compl. Ex. B § 3(D).
97
Id.
98
Compl. Ex. C § 2.
99
Id. (Preamble).
100
Compl. Ex. D § 11 (“[The 2016 Option Plan] shall be subject to the governing law
provision set forth in the LLC Agreement.”); Konstanzer Decl. Ex. 1 (2015 AffiniPay
Holdings LLC Agreement) § 12.16 (applying Delaware law).
101
Salamone v. Gorman, 106 W.3d 354, 367-68 (Del. 2014).
23
will review an agreement as a whole and give effect to each term and provision “so
as not to render any part of the contract mere surplusage.”102 The 2016 Option Plan
contains an arbitration clause requiring that “[a]ny dispute . . . as to the interpretation
of any provision of the [2016 Option Plan] or [the] Award Agreement or the rights
and obligations of any party thereunder” be arbitrated under the AAA Commercial
Arbitration Rules.103 In construing each of the relevant agreements, there is a
reasonable basis to conclude that parties intended that claims about West’s options
would be adjudicated under that provision.
The subsequent rollover of West’s options confirms that AffiniPay may
ultimately be able to demonstrate that the dispute resolution provision in the 2016
Option Plan applies to West’s Vesting Claim. The Rollover Agreement, which is
subject to Delaware law, provides that West’s AffiniPay options would be
exchanged into New Options to purchase parent units at the closing of the sale
transaction.104 The Rollover Agreement explains that those New Options are
“governed by the same terms and conditions of the [Award Agreement and 2016
Option Plan].”105 If that is the case, the Vesting Claim must be resolved in arbitration
under the AAA Commercial Arbitration Rules, as the 2016 Option Plan requires.
102
Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010).
103
Compl. Ex. D § 12.
104
Compl. Ex. G §§ 1-2, 7.
105
Id. § 2.
24
b. The Valuation Claim
Because West’s Valuation Claim is styled as one for breach of the
Employment Agreement, my analysis again begins with that contract. Section 3(D)
of the Employment Agreement concerns an option to purchase incentive units which,
if vested, AffiniPay could repurchase “in accordance with the terms of the [2016]
Option Plan and [A]ward [A]greement.”106 There is no provision for valuation of
incentive units in the Employment Agreement. Even if there was, the units at issue
in the Valuation Claim were—according to West’s arbitration claim—“new options
(issued at the TA transaction).”107
Based on West’s description of those units, the Valuation Claim concerns the
New Options issued post-rollover. In that case, the dispute resolution of the 2016
Option Plan—not the Employment Agreement—would be relevant. AffiniPay
would establish reasonable probability of success on the merits of its claim that the
Valuation Claim is improperly in the Arbitration for the reasons discussed above.
AffiniPay contends that the Profit Interest Agreement and the 2020 Option
Plan are, instead, the proper agreements that must be considered to resolve the
Valuation Claim.108 That is so, AffiniPay argues, because the Valuation Claim
106
Compl. Ex. B § 3(D), Ex. D § 9.
107
Compl. Ex. A ¶ 21.
108
Pls.’ Opening Br. at 22-23.
25
concerns a dispute about whether AffiniPay ascribed “fair value” to the incentive
units awarded in July 2020 that it sought to repurchase upon West’s termination.109
AffiniPay granted West those incentive units “subject to the terms and conditions
set forth” in the Profit Interest Agreement and the 2020 Option Plan.110 The 2020
Option Plan affords AffiniPay the right to repurchase West’s vested incentive units
upon his termination at their “Fair Market Value.”111 “Fair Market Value” is a term
defined in the 2020 Option Plan as being, in relevant part, “based on the reasonable
application of a reasonable valuation method not inconsistent with Section 409A of
the [Tax] Code, including a valuation conducted by an independent valuation
firm.”112
West’s Valuation Claim could be read to address those provisions of the 2020
Option Plan. West’s Summary of Claim in the Arbitration alleges that “AffiniPay
would prefer to set the fair value at the January 2011 409A valuation of 1.91 per
share or $751M total.”113 He further alleges that a valuation by Lazard “placing the
value at ~$1.4B” is more accurate.114
109
Compl. ¶¶ 22, 24-26, Ex. A ¶¶ 21, 38.
110
Compl. Ex. E (Preamble).
111
Compl. Ex. F § 9.
112
Id. § 1.
113
Compl. Ex. A ¶ 21.
114
Id.
26
There is also a definition of “Fair Market Value” in the 2016 Option Plan
providing that the determination of value “shall be made in good faith by [AffiniPay]
in compliance with Section 409A.”115 I cannot conclude at this phase that the 2016
Option Plan is irrelevant to the Valuation Claim. Perhaps provisions in both the
2016 Option Plan and 2020 Option Plan apply. Regardless, it is reasonably likely
that the Profit Interest Agreement, rather than the Employment Agreement, governs
at least some of the incentive units at issue in the Arbitration.116 The Profit Interest
Agreement, which is governed by Delaware law, provides that those units were
granted to West “subject to the terms and conditions” in the Profit Interest
Agreement, the 2020 Option Plan, and AffiniPay’s LLC Agreement.117 The Profit
Interest Agreement contains an arbitration clause requiring “that any dispute or
controversy arising out of, relating to, or in connection with” that agreement or the
transactions it contemplates must be arbitrated under the DRAA.118
115
Compl. Ex. D § 2.
116
Even if only the 2016 Option Plan was relevant, the Employment Agreement would not
be at issue in the Valuation Claim.
117
Compl. Ex. E at 1; id. § 5(e) (“This Agreement shall be governed by and construed in
accordance with the Delaware Limited Liability Company Act as to matters within the
scope thereof, and as to all other matters shall be governed and construed in accordance
with the internal laws of the State of Delaware . . . .”); Konstanzer Decl. Ex. 1 (2015
AffiniPay Holdings LLC Agreement) § 12.16 (applying Delaware law).
118
Compl. Ex. E § 5(j).
27
In short, I do not read the Valuation Claim to concern any of the rights and
obligations provided for in the Employment Agreement. Under the court’s
reasoning in Parfi Hldg. AB v. Mirror Image Internet, Inc., if a claim does not
address any of the rights and obligations provided for in an underlying agreement,
then the claim is beyond the reach of the underlying agreement’s arbitration
clause.119 The Valuation Claim therefore may be beyond the scope of the
Employment Agreement’s arbitration clause.
The subject matter of the Valuation Claim suggests that the 2016 Option
Plan’s arbitration clause, and possibly the Profit Interest Agreement’s dispute
resolution provision, will control. I need not make that ultimate determination at the
present stage. The relevant issue for AffiniPay’s preliminary injunction motion is
whether AffiniPay is reasonably likely to prevail in demonstrating that the pending
Arbitration is an inappropriate forum to arbitrate the Vesting and Valuation Claims.
AffiniPay has made that showing.
119
817 A.2d 149, 156 (Del. 2002); see also Chandler v. Ciccoricco, 2003 WL 21040185,
at *15 n.65 (Del. Ch. May 5, 2003) (denying the enforcement of an arbitration provision
because the claims did not arise out of the underlying agreement); Seven Hills Com., LLC
v. Mirabal Custom Homes, Inc., 442 S.W.3d 706 (Tex. App. 2014) (holding that courts
will not enforce an agreement’s arbitration provisions unless the claims arise out of or
relate to the underlying agreement).
28
2. Threat of Irreparable Injury
AffiniPay has also demonstrated that it faces irreparable harm if the Vesting
Claim and Valuation Claim go forward in the pending Arbitration. “Delaware courts
have consistently found that threatened, wrongful enforcement of an arbitration
clause constitutes sufficient irreparable harm to justify an injunction.”120 West
asserts that AffiniPay faces no risk of harm because it agreed to arbitrate before the
AAA pursuant to the Employment Arbitration Rules.121 But if AffiniPay’s
interpretation of the relevant contracts is correct, the Arbitration would effectively
strip it of the dispute resolution procedures it bargained for in the 2016 Option Plan
and Profit Interest Award. To force AffiniPay to proceed with the Arbitration,
pursuant to the Employment Arbitration Rules, “involves a quantum of irreparable
harm that outweighs the risk of improvidently granting a preliminary injunction.”122
3. Balance of the Equities
The balance of the equities also favors the issuance of an injunction barring
West from pursuing the Vesting Claim and Valuation Claim in the Arbitration. If
the court does not grant an injunction, AffiniPay may be subjected to arbitral rules
in an arbitral forum that it never agreed to. West argues that if injunctive relief is
granted, he will be “deprived of the mutual covenants that both parties made when
120
Brown v. T-Ink, LLC, 2007 WL 4302594, at *16 (Del. Ch. Dec. 4, 2007).
121
Def.’s Opp. Br. at 44-45.
122
Angus v. Ajio, LLC, 2016 WL 2894246, at *1 (Del. Ch. May 13, 2016).
29
entering into the Employment Agreement.”123 If AffiniPay’s arguments ultimately
bear out, however, the parties’ agreements will be honored. Moreover, West will
not be prevented from pursuing his equity-based claims against AffiniPay. He
simply would be required to pursue them in the forum and subject to the rules the
parties contracted for. Neither party would be forced to arbitrate under procedures
inconsistent with the parties’ arbitration agreements.
4. Bond
Under Court of Chancery Rule 65(c), the court must impose a bond when
granting a preliminary injunction.124 The bond is to be “in such sum as the Court
deems proper, for the payment of such costs and damages as may be incurred or
suffered by any party who is found to have been wrongfully enjoined or
restrained.”125
Only AffiniPay makes any argument about the appropriate amount of a bond,
contending that a nominal bond of $1.00 should be imposed.126 West has no
response. Because West does not appear to face cognizable harm from the issuance
of a limited preliminary injunction and has not set forth any argument that would
123
Def.’s Opp. Br. at 46.
124
Ct. Ch. R. 65(c).
125
Id.126
Pls.’ Opening Br. at note 6.
30
support the imposition of a significant bond, I conclude that a nominal bond of
$1,000 is appropriate.127
III. CONCLUSION
For the reasons described above, West’s motion to dismiss for lack of subject
matter jurisdiction is denied. Because AffiniPay has shown a reasonable probability
of success on the merits, a sufficient threat of irreparable injury, and that the balance
of the equities favors the issuance of an injunction, AffiniPay’s motion for
preliminary injunction is granted. West is preliminarily enjoined from pursuing in
the Arbitration claims relating to the vesting schedule applicable to his AffiniPay
options or the fair value of his incentive units, including the Vesting Claim and
Valuation Claim.
127
In Rodgers v. Bingham, the court set a “nominal bond” of $1,000 where the defendant
“did not set forth any facts of record or any realistic theory” to support a significant bond.
C.A. No. 2017-0314-AGB, at 96 (Del. Ch. June 1, 2017) (TRANSCRIPT). In Angus v.
Ajio, LLC, the parties agreed to a bond in the amount of $1,000 where the court preliminary
enjoined an arbitration. C.A. No. 11895–VCG (Del. Ch. April 4, 2016) (Dkt. 44).
31