Pinnacle Fertility Holdings, LP v. John Kumar Jain

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
MORGAN T. ZURN LEONARD L. WILLIAMS JUSTICE CENTER
VICE CHANCELLOR 500 N. KING STREET, SUITE 11400
WILMINGTON, DELAWARE 19801-3734
July 26, 2024
Ryan D. Stottmann, Esquire Henry E. Gallagher, Jr., Esquire
Morris, Nichols, Arsht & Tunnell LLP Connolly Gallagher LLP
1201 North Market Street, 16th Floor 1201 North Market Street, 20th Floor
Wilmington, DE 19801 Wilmington, DE 19801
RE: Pinnacle Fertility Hldgs., LP, et al. v. John Kumar Jain & Jain MD Hldgs., Inc.,
Civil Action No. 2023-1280-MTZ
Dear Counsel:
I write to address the defendants’ motion to dismiss or stay this action in favor
of arbitration. Fortunately for me, you have all agreed to two truisms: a party must
agree to give up her access to this forum in favor of arbitration, and, it follows, a
party must be bound by an arbitration provision in order for it to be enforced against
her. Your disagreement begins with whether the plaintiffs are bound by an
arbitration provision under a theory of equitable estoppel because they purportedly
received a direct benefit under the agreement containing the arbitration provision. If
they are not bound, the motion would be denied. If they are bound, this Court would
turn and run the gauntlet of questions framing arbitrability.
The agreement at issue, a physician employment agreement (the “PEA”), is
governed by California law.1 Section 5.1 of the PEA states:
1
Docket item (“D.I.”) 9, Ex. A § 7.10 [hereinafter “PEA”].
Pinnacle Fertility Hldgs, LP v. Jain,
C.A. No. 2023-1280-MTZ
July 26, 2024
Page 2 of 5
Physician and Employer agree that, except as provided herein, any and
all controversies, claims, or disputes with anyone (including Employer,
its affiliates and any of its and their employees, officers, directors,
stockholders or benefit plans) arising out of, relating to, or resulting
from this Agreement, Physician’s services to Employer, or the
termination of Physician’s employment with Employer (“Covered
Claims”), will be subject to binding individual arbitration under the
then-current Employment Arbitration Rules and Procedures set forth by
JAMS arbitration and mediation services for the resolution of
employment disputes (the “Rules”), and pursuant to the Federal
Arbitration Act.2
“Physician” is defined as defendant John Kumar Jain, and “Employer” is defined as
John Kumar Jain, MD Holdings, Inc.3 The plaintiffs in this action are neither of
those. Finally, and relatedly, Section 7.13 states “Nothing in this Agreement shall
be construed to give any person other than the express parties to this Agreement any
benefits, rights, or remedies.”4
By the plain meaning of Section 7.13, the parties to the PEA intended not to
benefit any third parties, and confirmed nobody, including the plaintiffs, is a
third-party beneficiary.5
2
Id. § 5.1.
3
Id. at preamble.
4
Id. § 7.13.
5
See Ambulnz Health, LLC v. Summers, 2022 WL 711356, at *5 (Cal. Ct. App.
Mar. 10, 2022); People ex rel. ILWU-PMA Welfare Plan v. David Edward Rivera, D.C.,
2020 WL 64096, at *5–6 (Cal. Ct. App. Jan. 7, 2020). Though these cases and others cited
herein are unpublished and therefore carry no precedential value in the California state
system, I can and do consider them as a possible reflection of California law. Talley v.
Gen. Motors, LLC, 2022 WL 958467, at *2 (D. Del. Mar. 30, 2022) (citing Daniel v. Ford.
Motor Co., 806 F.3d 1217, 1223 n.3 (9th Cir. 2015)). No party has identified a case with
precedential value that informs this issue, much less one that is inconsistent with the
nonprecedential cases cited herein.
Pinnacle Fertility Hldgs, LP v. Jain,
C.A. No. 2023-1280-MTZ
July 26, 2024
Page 3 of 5
Whether the plaintiffs are bound under principles of equitable estoppel is a
closer call.6 “A nonsignatory is estopped from refusing to comply with an arbitration
clause when it receives a direct benefit from a contract containing an arbitration
clause.”7 The benefit must be direct and “under the contract,” not indirect or
remote.8 Merely enjoying the fruits of a contract between signatories is not enough
to justify the application of equitable estoppel.9
At least in the context of a nonsignatory plaintiff, I read California law to
require that the benefit be in the form of a claim enforcing the agreement containing
the arbitration provision. “[E]quitable estoppel applies only if [the] plaintiff’s claims
. . . are dependent upon, or inextricably bound up with, the obligations imposed by
the contract . . . .”10 “[E]ven if a plaintiff’s claims touch matters relating to the
arbitration agreement, the claims are not arbitrable unless the plaintiff relies on the
agreement to establish its cause of action.”11 The California courts have explained:
6
See Ambulnz Health, 2022 WL 711356, at *5–6 (considering equitable estoppel
separately from a provision declaring an intent not to benefit any third parties).
7
Id. at *6 (cleaned up).
8
Id.
9
Id.
10
ILWU-PMA Welfare Plan, 2020 WL 64096, at *3–4 (first and second alteration in
original) (internal quotation marks omitted) (quoting JSM Tuscany, LLC v. Superior Ct.,
193 Cal. App. 4th 1222, 1239 (Cal. Ct. App. 2011)); accord Jensen v. U-Haul Co. of Cal.,
226 Cal. Rptr. 3d 797, 806–07 (Cal. Ct. App. 2017) (noting where a nonsignatory plaintiff’s
asserted claims are “fully viable without reference to the terms” of the agreement, the basis
for equitable estoppel is “completely absent” (internal quotation marks omitted) (quoting
Goldman v. KPMG, LLP, 173 Cal. App. 4th 209, 230 (Cal. Ct. App. 2009))).
11
Jensen, 226 Cal. Rptr. 3d at 806 (cleaned up); see Kothari v. Desai, 2022 WL 1419594,
at *10–11 (Cal. Ct. App. May 5, 2022) (cleaving a factual overlap argument from an
estoppel argument and instead considering it under the goal of avoiding inconsistent
results).
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July 26, 2024
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The purpose of the doctrine of equitable estoppel is to prevent a party
from using the terms or obligations of an agreement as the basis for his
claims while at the same time refusing to arbitrate under another clause
of the same agreement. Thus, when a plaintiff brings a claim which
relies on contract terms against a defendant, the plaintiff may be
equitably estopped from repudiating the arbitration clause contained in
that agreement.
Merely making reference to an agreement with an arbitration clause is
not enough. Even if the allegations of a complaint touch matters
relating to such an agreement, that is not sufficient under state or federal
law to support application of the equitable estoppel doctrine to a non-
signatory plaintiff. Equitable estoppel applies when the signatory to a
written agreement containing an arbitration clause must rely on the
terms of the written agreement in asserting its claims against the
nonsignatory. Where plaintiff’s claims are fully viable without
reference to the terms of the agreement, the basis for equitable estoppel
is completely absent.12
The plaintiffs did not sue on the PEA; they sued on a separate purchase
agreement. The defendants argue the plaintiffs extracted a direct benefit from the
agreement by causing Employer to terminate Physician under that agreement; the
conduct underlying the plaintiffs’ claims may be the same conduct that inspired
Physician’s termination under the PEA; and the PEA itself may have benefitted the
plaintiffs as they invested in the subject medical practice. Because the plaintiffs
have not sued on the PEA, I do not believe those other ties comprise a direct benefit
12
ILWU-PMA Welfare Plan, 2020 WL 64096, at *4 (cleaned up); see also Ambulnz Health,
2022 WL 711356, at *6 (concluding a nonsignatory was not equitably stopped where he
“did not seek to enforce the agreement . . . or claim any rights under the agreement”);
Kothari, 2022 WL 1419594, at *10 (noting there may be “unique circumstances” in which
a court would apply equitable estoppel to bind a nonsignatory to an arbitration provision
and concluding the doctrine did not apply where all the plaintiff did not receive a personal
benefit from the agreement and where his causes of action were based on violations of
other agreements).
Pinnacle Fertility Hldgs, LP v. Jain,
C.A. No. 2023-1280-MTZ
July 26, 2024
Page 5 of 5
under California law such that equity requires binding the nonsignatory plaintiffs to
the PEA’s arbitration provision.
In briefing, the defendants also contend the plaintiffs are bound by the
arbitration provision because they are among the “affiliates” named in Section 5.1.
That undefined word is used to define the scope of arbitrable disputes, not persons
bound by the provision.13
And so, this letter ends where it began, with the conclusion that California’s
doctrine of equitable estoppel does not bind the nonsignatory plaintiffs to the PEA’s
arbitration provision. The defendants’ motion to dismiss is DENIED. The parties
shall confer and submit a stipulated scheduling order.
Sincerely,
/s/ Morgan T. Zurn
Vice Chancellor
MTZ/ms
cc: All Counsel of Record, via File & ServeXpress
13
Ambulnz Health, 2022 WL 711356, at *5; Lap-ping Chen v. BMW of N. Am. LLC, 2021
WL 3604691 (N.D. Cal. Aug. 31, 2021).