An Eckert Seamans associate prepared this overview.
In Meyers v. Quiz-Dia LLC, C.A. No. 9878-VCL (Dec. 2, 2016), the Chancery Court stayed indemnification claims to determine whether they were arbitrable.
Background: This matter involves the perenial issue of arbitrability. Plaintiffs sued three Quiznos sandwich shop entities for indemnification and advancement pursuant to multiple agreements. Plaintiffs Greg MacDonald and Dennis Smythe were officers of Quiznos’ primary operating entity, QCE LLC (“OpCo”). MacDonald and Smythe left the company after it restructured a large amount of debt in 2012, which transferred ownership of OpCo and its subsidiaries to investors who owned the debt (the “Funds”).
In 2014, OpCo filed for bankruptcy and disclosed that the Funds would pursue litigation against various individuals, including MacDonald and Smythe. Thereafter, the two former officers demanded indemnification and advancement for expenses incurred in connection with the threatened litigation. The plaintiffs then filed the present action, asserting, inter alia, indemnification claims pursuant to various agreements. The original complaint did not seek indemnification under the plaintiffs’ respective employment agreements.
Approximately two weeks later, the Funds asserted fraud and securities-related claims against MacDonald, Smythe, and other individuals, alleging that they induced the Funds to participate in the restructuring by creating financial projections that made it appear that the post-restructuring debt burden would be sustainable. After that litigation had been pending for two years, MacDonald and Smythe amended the complaint in the present action to assert indemnification claims pursuant to their employment agreements, which contained broad arbitration provisions.
Parties’ Allegations: The defendants argued that the amended claims should be dismissed because they were subject to arbitration pursuant to the employment agreements. In response, MacDonald and Smythe argued that the defendants waived their right to arbitrate. Although the employment agreements were not previously explicitly raised, the original claims were rooted in the employment agreements. Therefore, the plaintiffs argued that the defendants should have demanded arbitration sooner, as the provisions in those agreements extended to claims for indemnification and advancement under separate and distinct agreements.
Court’s Analysis: The Court first decided the threshold question of whether it or an arbitrator should decide the issue of arbitrability. The employment agreements, which were governed by Colorado law, provided that any claims arising out of the agreements were to be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the “Rules”). The Rules provided that the arbitrator shall have the power to rule on his or her own jurisdiction. Thus, according to the employment agreements, it was for the arbitrator to decide arbitrability.
The Court then determined whether it was appropriate to stay or dismiss the action pending the arbitrator’s decision. Because that question was procedural, the Court analyzed the issue under Delaware law, more specifically, the Delaware Uniform Arbitration Act, which generally incorporates the terms of the Federal Arbitration Act (the “FAA”). Under the FAA, proceedings should be stayed when the issue involved is referable to arbitration. Because the issue of arbitrability was referable to arbitration, the Court stayed MacDonald’s and Smythe’s claims pending the arbitrator’s decision. See generally, the Delaware Supreme Court’s seminal Willie Gary opinion on this topic highlighted by this blog here.
The Court noted that if the arbitrator determined that the claims were arbitrable, it would dismiss the action for lack of jurisdiction, and it would defer to the arbitrator to determine whether the defendants waived their right to arbitrate. Finally, the Court explained that the stay was restricted solely to the claims under the employment agreements. Although there existed some risk for overlap, because those claims were not sufficiently intertwined with other agreements at issue in the action, a broader stay was not warranted.
Conclusion: The Court issued a limited stay pending referral to an arbitrator to determine the issue of arbitrability of the indemnification claims under the employment agreements. This decision is notable for those who may not have realized that indemnification claims are subject to arbitration provisions.