Viacom International, Inc. v. Winshall, C.A. No. 7149-CS (Del. Ch. Aug. 9, 2012).
Issue: Whether the decision of an expert (as opposed to a conventional arbitrator) chosen in the merger agreement to decide earn-out dispute should be treated as an arbitration award, and vacated based on the Federal Arbitration Act? Short Answer: No.
This Court of Chancery opinion involved an earn-out dispute resulting from an acquisition by Viacom. The parties provided in their merger agreement that the amount of the earn-out would be determined pursuant to an alternative dispute resolution procedure that submitted the issue to a binding decision by an accountant (as opposed to a law-trained arbitrator). Viacom challenged the determination of the accountant. Even though the decision of the accountant was binding, Viacom challenged it based on the standards outlined in the Federal Arbitration Act (“FAA”). Moreover, a related issue is whether the Court could even consider the matter or whether it was a dispute that needed to be decided by the person chosen to make the initial decision pursuant to the agreement. That person determined that Viacom owed approximately $300 million pursuant to the earn-out provisions of the merger agreement. This Court of Chancery decision upheld that determination or, in other words, refused to vacate the $300 million award of the accountant.
The Court discussed first the sub-issues of “substantive arbitrability” and “procedural arbitrability”, and whether or not the Court should even address the issue presented to it. See footnotes 91 to 94. Another formulation of the issues was whether the determination, pursuant to the merger agreement by the selected accountant, was within the authority granted by the merger agreement to the accountant for determination of those issues. Secondly, the Court turned to whether or not there was a sufficient basis under the FAA to vacate that determination. In essence, the Court rejected all of Viacom’s arguments.
The Court observed that the standard of review under the FAA when a Court reviews an arbitration award is “one of the narrowest standards of review in all of American jurisprudence.” See footnotes 81 to 86. The limited scope of review only allows for a successful challenged when arbitration awards have been procured by fraud, or when the arbitrators were clearly guilty of misconduct, or when the arbitrators exceeded their powers. See slip op. at 25. See also 9 U.S.C. Sections 10(a)(3), (4).
Also useful to note is the citation to a U.S. Supreme Court decision for the statement of law that: “The scope of judicial review of an arbitration award under the FAA cannot be expanded by contract.” See footnote 80.
The Court flatly rejected the argument that “experts” who serve the role of arbitrators pursuant to a private resolution agreement should be treated differently for purposes of review than a law-trained arbitrator. The Court cited to cases acknowledging that when a private resolution procedure is provided for by agreement, even when those disputes are referred to a “expert” as opposed to an “arbitrator” as a decision maker, (such as an accountant), those proceedings will be treated as an arbitration for purposes of judicial review. See footnote 78 and federal as well as Delaware cases cited therein.
The opinion provides cites to several decisions of the Court of Chancery that address whether post-closing earn-out procedural issues should be decided by a Court or by an arbitrator, but acknowledged that those decisions regarding arbitrability issues are not easily reconciled. See footnotes 107 and 108 and accompanying text.
Also useful for practitioners is the opinion’s notable reference to the applicability of the FAA to arbitration agreements in Delaware unless the agreements specifically require or seek the application of the Delaware Uniform Arbitration Act (“DUAA”). See footnote 109 (referring to recent amendment of 10 Del. C. Section 5702(a), (c) (2009) which provides that the FAA applies to arbitration agreements that do not specifically state that the parties desire the DUAA to govern.) This recent DUAA amendment reflects the desire of the state to promote certainty and efficiency for parties choosing arbitration.
The Court also observed that: “The game of arbitrator-judicial badminton that Viacom’s argument would promote is, in practical effect, inconsistent with the pro-efficiency objective of Delaware statutory law.”
The final footnote of the opinion contains a citation to a practical decision that may be of relevance to those who toil in the fields of commercial litigation. See footnote 131 (citing to Court of Chancery decision for the position of Delaware law that: “There is no right to set-off of a possible, unliquidated liability against a liquidated claim that is due and payable.”)