Halpern Medical Services, LLC v. Greary, Del. Ch., C.A. No. 6679-VCN (Feb. 17, 2012).
This case serves as a refresher on several issues that are frequently argued before the Court of Chancery: (1) the arbitrability of a claim under a contractual arbitration clause; (2) waiver of the right to invoke arbitration; and (3) the application-by-analogy of the statute of limitations to a laches defense.
This summary was prepared by a former associate of Eckert Seamans.
Plaintiffs, Halpern Medical Serices, LLC (“HMS”) and Halpern Eye Associates, P.A. (“HEA”), alleged claims of breach of fiduciary duty, breach of contract, and unjust enrichment against Defendant Authur Greary. Greary was hired by the majority-owner of HMS and HEA in April 2002, to manage the companies’ day-to-day operations. Greary entered into an employment agreement with HMS that contained an arbitration clause providing that: “any dispute ‘arising out of, or relating to, [the Employment Agreement] or the breach thereof . . . shall first be submitted to arbitration in Kent County, Delaware,’ and that any arbitration award ‘shall be final and binding, with no right of appeal.’”
Plaintiffs asserted that Greary breached the employment agreement by investing in, associating with, and consulting for third parties while employed by HMS. For instance, Greary caused HMS and HEA to implement software purchased from a company in which Greary was an investor, and caused HMS and HEA to lease space from another company in which Greary was an investor.
Before analyzing the arbitrability of the plaintiffs’ claims, the Court distinguished which claims were made on behalf of HMS and HEA, and found that the claims made by HEA, which was not a signatory to the employment agreement, would not be subject to arbitration.
Next, the Court implemented the two-step process enunciated in Parfi Holding AB v. Mirror Image Internet, Inc., for determining the arbitrability of a claim: (1) determine whether the arbitration clause is broad or narrow; and (2) apply the scope of the clause to the claims to determine whether the claims are within the scope. The arbitration clause in the employment agreement was found to be broad—based on the inclusive language of the clause and its similarity to the clause in Parfi, which was also found to be broad. As such, the Court was required to “defer to arbitration  any issues that touch on contract rights or contract performance for which arbitration is the agreed-upon mode of dispute resolution.” The Court also referenced Delaware’s public policy in support of arbitration, and the strong presumption in favor of arbitration where a reasonable interpretation of the parties’ intent to arbitrate exists.
Plaintiffs’ breach of contract claim was solidly based on a breach of the employment agreement, and clearly fell within the scope of the arbitration clause. The claim for breach of fiduciary duty was based on the “contractual duty of loyalty” and performance of the employment agreement, which were embodied in the employment agreement. And Plaintiffs did not contest that their unjust enrichment claim alleging that Greary was reimbursed for non-HMS expenses and that he received outside compensation during his employment, were based on specific provisions of the employment agreement. Accordingly, the Court held that all of HMS’s claims against Greary were subject to arbitration. The Court stayed (but did not dismiss) HMS’s claims against Greary.
II. Waiver of the Right to Invoke Arbitration
In this case, both parties argued that the other had waived the right to invoke the arbitration clause of the employment agreement. The Court rejected both parties’ arguments, and reiterated the well-established standard for finding waiver.
Waiver is not lightly inferred. Rather, it will only be found where the party seeking arbitration has actively taken action inconsistent with the right to arbitration. However, it is “the presence or absence of prejudice which is determinative of the issue of waiver.”
The Court focuses on two factors when determining whether a party has waived its right to arbitrate: (1) the length of time between the commencement of the suit and the demand for arbitration or dismissal due to the arbitrability of the claims; and (2) whether the parties have engaged in extensive discovery. Since only two months had elapsed between the filing of the suit and the defendant’s motion to dismiss, there was no basis for a finding of waiver.
It is important for Chancery litigators to note that participating in the initial stages of litigation will not amount to a waiver of the right to arbitrate. The Court specifically rejected the argument that filing suit is enough to waive the right to arbitrate, and also rejected the argument that filing a motion to dismiss is sufficient to waive to the right to arbitrate.
The Court applied the “laches-borrowed three-year statute of limitations” to the breach of fiduciary duty and unjust enrichment claims. “To prevail on a laches defense, a defendant must show that: (1) the plaintiff had knowledge of his claim; (2) he delayed unreasonably in bringing that claims; and (3) the defendant suffered resulting prejudice.”
Defendants’ actions that occurred outside of the three-year period were barred by laches. The complaint was unclear as to the timing of one alleged wrongful act, so the Court denied the motion to dismiss that claim. With respect to the remaining claims, the Court found that the defendant did not satisfy all three elements of a laches defense, and denied the motion to dismiss those claims.