As reported earlier here, the well-known attorney Willie Gary had requested fees of over $100 million as sanctions against Motorola for their alleged violation of a sequestration order that allegedly was the cause of a mistrial. Recently, a Florida judge awarded him $22.9 million, as reported here by The Wall Street Journal Law Blog. Someone calculated that amount to be over $2,000 per hour based on the fee request. Of course, Motorola is appealing. (The initial link in this blog post includes citations to recent Delaware Chancery Court and Delaware Supreme Court decisions that I prevailed in on behalf of Willie Gary’s  business interests.)

Over the nearly two decades that I have maintained this blog, I have written about a fair number of court decisions involving statutory dissolution. The recent Delaware Court of Chancery decision styled:  In re Neworld Energy Holdings LLC, C.A. No. 2023-0282-MTZ (Del. Ch. August 24, 2023), granted a motion to dismiss based on an arbitration clause in an LLC Agreement that the court found to require arbitration of statutory dissolution claims. 

Seminal Delaware Opinion on Arbitrablity

Relying on the seminal Delaware Supreme Court decision in James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76, 79 (Del. 2006) (highlighted on these pages here and which this author argued before the Delaware Supreme Court), the court addressed those situations where an issue of substantive arbitrability should be determined by the court or an arbitrator.  In this decision, the court explained that the arbitration provision, which incorporated the American Arbitration Association Rules, evidenced a “clear and unmistakable intent to submit arbitrability issues to an arbitrator.”  The court determined that the agreement involved in this case provided an exception for seeking equitable relief–but that did not apply to a request for statutory dissolution. 

Additional Case Law Support

The court also found support for its reasoning in two other Delaware cases that applied the Willie Gary decision:  Blackmon v. O3 Insight, Inc., 2021 WL 868559 (Del. Ch. Mar. 9, 2021, and McLaughlin v. McCann, 942 A.2d 616, 622-35 (Del. Ch. 2008).  The court also referred to the recent United States Supreme Court decision in Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S.Ct. 524, 529 (2019)(highlighted on these pages here and here), regarding the position that a court possesses no power to decide an arbitrability issue when there is clear and unmistakable evidence that the parties intended to delegate issues of substantive arbitrability to an arbitrator. 

The court also noted in closing, in support of its decision. another Chancery opinion that concluded:

“There is nothing inherent in the claim for judicial dissolution that could not be fully and fairly litigated in the context of an arbitration.” (citing Johnson v. Foulk Road Med. Ctr. P’ship, 2001 WL 1563693, at *1-2 (Del. Ch. Nov. 21, 2001)).

A recent Delaware Court of Chancery opinion is noteworthy because it describes the impact of a recent decision of the United States Supreme Court on the Delaware law of arbitrability. In Gulf LNG Energy, LLC v. ENI USA Gas Marketing LLC, C.A. No. 2019-0460-AGB (Del. Ch. Dec. 30, 2019), the court also addressed two important lines of authority: (1) When a court should intervene to prevent collateral attacks on an arbitration award; and (2) What disputes will be covered by the contractual intent of the parties regarding who decides issues of arbitrability: the court or the arbitrators. Although many decisions on arbitrability have been covered on these pages over the last 15 years, this Chancery opinion provides helpful insights on relatively new nuances.

The detailed facts of this case should be reviewed for a full understanding of this decision, but this brief overview will be limited to the most important aspects of the decision with the widest applicability.

Basic Background:

Two energy companies entered into a long-term agreement involving a few hundred-million dollars. An arbitration decision initially resolved contractual disputes about the termination of that agreement. Subsequently, ENI initiated a separate, second arbitration, which prompted a lawsuit in Chancery seeking a permanent injunction to enjoin ENI from pursuing the second arbitration.

Most Notable Takeaways from Decision:

  • This decision observed that both Delaware law and New York law are essentially the same on the issue of arbitrability to the extent that when the parties specifically incorporate rules such as those of the American Arbitration Association, the net result is that it demonstrates an intent of the parties to have arbitrators decide issues of arbitrability.
  • This decision compares the differences between the issue of arbitrability and the separate collateral attack doctrine. The latter allows a court to issue an injunction to prevent a circumvention of a prior arbitration ruling.
  • The United Supreme Court recently issued an important decision on arbitrability styled Henry Schein, Inc. v. Archer and White Sales, Inc., 139 S.Ct. 524, 529 (2019). The Court of Chancery noted that: “One consequence of Schein is that it should end the additional ‘no non-frivolous argument about substantive arbitrability’ inquiry” this court has conducted under McLaughlin v. McCann, 942 A.2d 616, 626-27 (Del. Ch. 2008), to guard against the frivolous invocation of an arbitration clause even when the [Delaware Supreme Court’s] Willie Gary test has been satisfied.” UPM-Kymmene, 2017 WL 4461130, at * 4. See footnote 83.
  • But the Court of Chancery emphasized that the SCOTUS decision in Schein “does not address the collateral attack doctrine. Nor does Schein address the scenario present here where a second, related arbitration proceeding has been filed.”
  • The Court of Chancery conducts a very careful analysis to determine whether the claims in the second arbitration should be considered prohibited under the collateral attack doctrine or whether they present issues of arbitrability for the arbitration panel to determine. After synthesizing federal case law interpreting the Federal Arbitration Act, the court determined that one of the claims in the second arbitration was barred by the collateral attack doctrine and would be permanently enjoined, but that the other issue raised in the second arbitration presented an issue of arbitrability for the arbitrators to determine. That is, the arbitrators would determine whether the second issue raised in the subsequent arbitration was covered by the arbitration clause or should be decided in some other manner. See Slip op. at 30 – 33.

A recent decision of the United States Supreme Court addressed the frequently encountered issue of arbitrability—that is, whether a court or an arbitrator should decide whether or not a particular issue is subject to arbitration based on the arbitration clause in an agreement.

This decision is noteworthy because the issue often arises about how to handle an argument that a claim is subject to arbitration when that claim is frivolous (at least in one party’s view.) In Henry Schein, Inc. v. Archer & White Sales, Inc., U.S. Supr. Ct., No. 17-1272 (Jan. 8, 2019), a unanimous decision written by Justice Brett Kavanaugh, the court rejected a judicially-imposed exception to arbitrability under the Federal Arbitration Act.  The court determined that if an agreement containing an arbitration clause provides that arbitrators have the power to resolve arbitrability questions, then an arbitrator—not the court—should decide whether the arbitration provision applies to the issue involved, regardless of whether the arbitration demand is “groundless.”

The court rejected an argument followed by some lower courts that if an arbitration claim was “wholly groundless,” a court should decide arbitrability. The nation’s high court reasoned that because the statute did not impose a “wholly groundless” exception, the gateway question of arbitrability is a matter of contract law and, for example, when an agreement refers to the rules of the American Arbitration Association, those rules provide for the arbitrator to have the power to resolve arbitrability questions.

This decision should be compared to the long line of Delaware cases on arbitrability beginning with the Delaware Supreme Court decision in Willie Gary, highlighted on these pages here, that almost 13 years ago reached a similar result regarding questions of arbitrability. (Yours truly successfully argued that Willie Gary case.)

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.

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.

Shareholder Representative Services, LLC v. ExlService Holdings, Inc., C.A. No. 8367-VCG (Del. Ch., Aug. 27, 2013).

This is yet another Chancery decision on the issue of arbitrability.  In essence, this Court of Chancery opinion addresses the substantive arbitrability of a claim but distinguished the seminal Delaware decision in the Willie Gary case, and ruled that despite a carve-out for seeking injunctive relief in the agreement, the plaintiff was neither seeking equitable relief (despite the “façade of prayers” requested), nor was it entitled to equitable relief under the facts of the case, notwithstanding the parties’ contract provision agreeing to irreparable harm.

Li v. Standard Fiber LLC, C.A. No. 8191-VCN (Del. Ch. March 28, 2013).

This Court of Chancery opinion addressed a recurring theme in Delaware commercial litigation: substantive arbitrability.  That is, whether the court or an arbitrator should determine whether a particular claim is subject to an arbitration clause.  This opinion also addresses how multiple agreements, each with an integration clause, interface with each other when some but not all of them have arbitration clauses.

Brief Overview

This claim is based on an indemnification agreement which also provided for advancement.  The court determined that the advancement claims were subject to arbitration.

The court applied the familiar test of arbitrability in the seminal Delaware Supreme Court decision of James and Jackson LLC v. Willie Gary, LLC, 906 A.2d 76 (Del. 2006), highlighted on these pages here.  The threshold question of who decides arbitrability, the court or the arbitrator, was determined in a test set forth in the Willie Gary case.

Although there is a general presumption that the question of substantive arbitrability, i.e., whether the parties agree to arbitrate, is generally one for the courts to decide, that presumption is overcome when there is “clear and unmistakable” evidence that parties agree to arbitrate.

The court in Willie Gary held that “such clear evidence is present when an arbitration clause:  (1) generally provides for arbitration of disputes, and (2) incorporates a set of arbitration rules that empower arbitrators to decide arbitrability.”  Willie Gary’s progeny have since modified the “clear and unmistakable test” in one important respect.  Even when the Willie Gary test is satisfied, a court:  “must still make a preliminary evaluation of whether the party seeking to avoid arbitration of arbitrability has made a clear showing that its adversary has made “essentially no non-frivolous argument about substantive arbitrability.”  See footnote 45.  This additional step was meant to avoid situations in which the Willie Gary test is “technically satisfied but there is no non-frivolous argument that the arbitration clause covers the underlying dispute.”

Although related agreements involved in this case included arbitration clauses that satisfied the two prongs of the Willie Gary test, the indemnification agreement had an integration clause that did not include an arbitration clause.  The court determined however, that the arbitration clauses in the related agreements–without the same integration clause–also covered the claims related to the advancement and indemnification issues.

The opinion also includes a helpful discussion of integration clauses in multiple related agreements that also have integration clauses even though they are obviously interfacing with other agreements.

Legend Natural Gas II Holdings, LP v. Hargis, C.A. No. 7213-VCP (Del. Ch. Sept. 28, 2012).

This decision addresses the well-worn issue of arbitrability. Because this issue is so frequently the subject of Chancery decisions highlighted on these pages, I will point out only a few bullet points that are noteworthy for future reference:

  • The court also addresses the power of the court to stay a case pending arbitration.
  • The risk of forcing a party to submit the issue of arbitrability to an arbitrator–when the argument is clearly frivolous, in light of the analytical approach required by the applicable standard, is discussed at length by the court.
  • The two-prong test to determine arbitrability as announced by the 2006 Delaware Supreme Court decision in Willie Gary is reiterated.

Preferred Sands of Genoa, LLC v. Outotec (USA) Inc., C.A. No. 6011-VCN (Del. Ch. July 29, 2011), read letter decision here. This jewel of a pithy decision includes one of the most concise summaries of the Delaware law on arbitrability that one is likely to find in a Court ruling.

(  The new Kent County Superior Court  Pictured is the recently completed Kent County Courthouse building which will house the Court of Chancery’s Dover Courtrooms until the old Courthouse building is renovated, at which time they will move back to their renovated quarters on The Green.)

Issues Addressed:

(1) The issue of arbitrability in this case specifically related to a settlement agreement and whether the enforceability of a settlement agreement (which did not have an arbitration clause), was covered by the same arbitration clause in the prime agreement for which a breach of contract case had previously been inititated before an arbitration panel. The settlement agreement purported to settle the pending arbitration proceeding.

(2) The high threshold (not met here) of trying to dismiss a case in Delaware based on forum non conveniens was also addressed by the Court.

Key Legal Points

When an agreement involves interstate commerce, the Federal Arbitration Act (which Delaware law closely tracks), applies. See footnote 8. The Court also cited the seminal Delaware Supreme Court decision on arbitrability,  James & Jackson LLC v. Willie Gary, LLC, 906 A.2d 76, 80 (Del. 2006)(summarized on these pages here), as well as related decisions. This decision is consistent with similar federal law on arbitrability which squarely resolved this case and sent it back to the arbitrators.

The issue of arbitrability or in other words: “who decides whether a claim should be arbitrated, the court or the arbitrator,” was analyzed by the Court in a succinct fashion. The Court observed that Section 5703 of Title 10 of the Delaware Code gives Chancery jurisdiction to enjoin an arbitration when no binding arbitration agreement exists. If such an applicable arbitration agreement exists, however, it divests the Court of jurisdiction.

The issue of forum non conveniens was also easily dispatched and it was noted that despite linguistic appearances, mere inconvenience is not a basis in Delaware to have a case dismissed, but rather substantial hardship is required if  forum non conveniens is relied on for a motion to dismiss.