Chancery Finds Arbitration Clause Governs Membership Interest Buyback
Reprinted with permission from the April 6, 2016 edition of the Delaware Business Court Insider. © 2016 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. (ALMReprints.com, 877.257.3382).
Over the past decade, parties have increasingly come to rely on extrajudicial methods of dispute resolution, frequently incorporating arbitration clauses into their agreements. But when a relationship sours and parties are unhappy with the arbitration bargain they struck, they frequently try to disavow their agreement by pursuing their claims in court. Vice Chancellor John W. Noble, in Align Strategic Partners v. Moesser, C.A. No. 11240-VCN (Feb. 26, 2016), the last opinion he penned prior to his retirement, rejected a party's argument that it could pursue its claims in court, dismissing its action in part after determining that the company had agreed to arbitrate its underlying claims.
Background
In September 2011, Lane Moesser, a co-founder of Align Strategic Partners, became Align's vice president and acquired a 7.5 percent ownership interest for $75,000. In connection with his new position and ownership stake, Moesser and Align executed several interrelated agreements, including an employment agreement, a membership interest purchase agreement, and Align's operating agreement. None of these agreements, standing alone, speaks to all of the parties' rights and obligations, but taken collectively, they address most areas of the parties' relationship. The agreements provide that when Moesser's employment with Align ends, Align may repurchase Moesser's membership interest. Read together, they also set forth a process for determining how much Align must pay Moesser should the company elect to exercise its repayment option upon termination of Moesser's employment.
In November 2014, Align terminated Moesser's employment, and a months-long dispute over the repurchase of his membership interest ensued. The parties were unable to agree upon a value for the membership interest, and Align ultimately made a unilateral determination of the fair market value of Moesser's interest, and notified him that it was exercising its repurchase right at the value it set, purportedly terminating Moesser's rights in the membership interest and the company. Moesser refused to recognize the notice or Align's claimed exercise of its repurchase right, and in turn made a books-and-records demand on the company. In response, Align sued Moesser for breach of the operating agreement, and sought declarations that its repurchase was valid, that Moesser was no longer a member of Align, and that the company was therefore not obligated to respond to his books-and-records demand.
Membership Interest Dispute Belongs in Arbitration
Granting Moesser's motion to dismiss for lack of subject matter jurisdiction in part, Noble ruled that any dispute over the repurchase of Moesser's membership interest must be brought in arbitration, pursuant to Moesser's employment agreement. The employment agreement provides, in relevant part: "Any dispute or claim arising to or in any way related to this agreement shall be settled by binding arbitration in Houston, Texas."
Applying Illinois law (as provided in the employment agreement), the court determined that "parties to an agreement are bound to arbitrate only those issues which by clear language and their intentions expressed in the language show they have agreed to arbitrate." The court further determined that so-called "generic" arbitration clauses—those that are "nonspecific in [their] designation of arbitrable disputes"—will cover disputes arising under a subsequent agreement "as long as the original agreement and the subsequent one concern the same subject matter." Determining the scope of a generic arbitration clause, the court opined, requires examining "both the wording of the particular clause and the terms of the contract in which it is included."
Noble determined that the employment agreement's arbitration clause was generic, and that to determine whether Align's claims were subject to arbitration required an analysis of whether the employment agreement and the purchase agreement addressed the same subject matter. Considering the factors evaluated by Illinois courts, Noble concluded that the agreements shared the same subject matter for two reasons. First, the two agreements shared the same "overall aim." Specifically, both agreements sought to establish Moesser's rights and obligations as an Align employee, including his ownership interest. In that respect, the employment agreement was more comprehensive than the purchase agreement, including describing the rights and obligations associated with Moesser's equity purchase, but the purchase agreement served as the vehicle for accomplishing the actual purchase, which was undoubtedly related to the purpose of the employment agreement.
Second, the court concluded that the two agreements were structurally interconnected. Specifically, the purchase agreement is an exhibit to the employment agreement. Additionally, the court opined that "aside from that anatomical connection, the purchase agreement is an incomplete contract whose provisions cannot be applied without consulting the employment agreement." The purchase agreement references defined terms contained only in the employment agreement, and there are no "redundant or conflicting provisions that would otherwise suggest they should be read separately." "These entanglements," the court wrote, "considered alongside the two agreements' shared function of defining Moesser's employment rights and obligations, demonstrate that the dispute over the repurchase 'relates to' the employment agreement under Illinois law."
Finally, the court determined that Align's defenses could not overcome the conclusion that the agreements, read together, required arbitration over claims relating to the status and valuation of Moesser's ownership interest in Align. The court then stayed the remaining claim—relating to Moesser's books-and-records demand—because it does not arise under the agreements and requires a prior determination of Moesser's membership status.
Conclusions
Align reminds parties to ensure they pay particular attention in the contracting process, not only to how they view a contractual provision, but how a court may interpret it if later called upon to do so. This is particularly true under Delaware law, where courts will adhere to the objective theory of contract interpretation, and place minimal consideration on a party's subjective intent. Although Align may not have intended to subject disputes over Moesser's membership interest to arbitration, the language and manner of the parties' agreements left no doubt in the court's mind that the dispute was arbitrable, (even under Illinois law).