Chancery Determines that Advancement Claim is Subject to Arbitration

Riley v. Brocade Communications Systems, Inc., C.A. No. 9486-VCN (Del. Ch. May 6, 2014).

Issue Addressed: Whether a claim for advancement, and its arbitrability, should be decided by an arbitrator.

Short Answer: Yes.

Brief Overview: This short letter decision addresses whether a claim for advancement was subject to an arbitration clause in an employment agreement and whether or not the issue of arbitrability should be addressed by the arbitrator or by the court.

The court determined that an arbitrator should decide the threshold issue of whether or not the claim is arbitrable; that is, whether or not it is covered by the arbitration clause.

The court explained that there is a three-part test to determine the issue of arbitrability.  The first two parts of the test are from the seminal Supreme Court decision of James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76, 78 (Del. 2006), which has been referenced many times on these pages.  The third part of the test is from the case of McLaughlin v. McCann, 942 A.2d 616, 626-27 (Del. Ch. 2008).

The three-part test to determine whether or the parties agreed to arbitrate the issue of arbitrability by “clear and unmistakable evidence” is determined by whether: (1) an arbitration clause generally provides for arbitration of all disputes; and (2) there is a reference to arbitration rules that empower an arbitrator to decide arbitrability. (For example, the AAA rules so empower an arbitrator.)  The third prong of the test is whether or not a “non-frivolous argument” argument in favor of substantive arbitrability exists.

The court also referred to the decision in GTSI Corp. v. EYAK Tech., LLC, 10 A.3d 1116, 1118 (Del. Ch. 2010), which addressed a general equitable remedy carve-out (as contrasted with a preliminary equitable remedy provision), and where, as here, a broad arbitration clause exists, the arbitrator can still determine the issue of arbitrability despite the equitable remedy provision.

In sum, the court determined that it need not address the merits surrounding the question of substantive arbitrability, which are not part of the Willie Gary analysis, and that the arbitration clause in this case was broad enough to satisfy the first prong of the test.  The second prong is also satisfied because the arbitration provisions refer to the rules of the Judicial Arbitration and Mediation Services (“JAMS”).  Those rules empower the arbitrator to decide issues of substantive arbitrability and therefore the second prong of Willie Gary is satisfied.  The third prong was satisfied because Brocade had non-frivolous arguments for arbitration regarding whether Riley had a viable claim for advancement and whether he released any claims pursuant to a release agreement.

Therefore, the court concluded that Riley and Brocade agreed by clear and unmistakable evidence to submit to an arbitrator any matter regarding the release at issue, including arbitrability, and Brocade had non-frivolous arguments concerning whether Riley agreed to arbitrate and whether the release protected it from advancement claims.