CURRENT MONTH (November 2020)
Business Litigation
Delaware Superior Court Dismisses Successor-by-Merger’s Claims Where Underlying Contract Contained Anti-Assignment Clause
By Patricia A. Winston, R. Eric Hacker, K. Tyler O’Connell
Plaintiff’s predecessor-in-interest conveyed mineral rights to Defendant. Under the agreement, Defendant owed a conditional additional $1 million at a future date. Before the payments became due, the predecessor was merged out of existence. As a result, Defendant asserted it had no obligation to pay the additional amount because the sale agreement included an anti-assignment provision that barred assignment absent Defendant’s consent, which was lacking.
In prior litigation, the Superior Court dismissed claims by the predecessor’s former stockholders seeking the payments. There, the Court concluded that the stockholders were not parties who could enforce the agreement directly; and any purported transfer of rights was prohibited by the agreement’s anti-assignment clause.
Here, too, the Court found that the anti-assignment clause prohibited any relief and dismissed the claims. Although the anti-assignment clause did not reference mergers directly, the clause expressly prohibited assignment “by operation of law.” The Superior Court explained that Delaware courts generally agree that this phrasing includes “mergers where the contracting company is not the surviving entity” unless such a reading creates ambiguity between the anti-assignment clause and the remainder of the agreement. Although Plaintiff argued that the agreement’s references to “successors” created ambiguity, the Court concluded that those references could only be reasonably read to include valid successors and that to read the agreement otherwise would nullify the “by operation of law” language.
Arbitrating Arbitrability: The Circuit Courts Weigh In
By Leslie A. Berkoff
The question of whether an arbitrator can determine the question of arbitrability, based upon the specific arbitration provisions contained in an agreement, has been the focal point of several recent federal appellate court decisions, (two in the Ninth Circuit and one in the Third Circuit).[1] These decisions underscore the importance for counsel to pay close attention when drafting arbitration provisions and ensure that the wording extends to addressing specifically the initial question of who decides arbitrability – the arbitrator or the court – for all key issues.
On September 9, 2020, the Ninth Circuit decided Shivkov v. Artex Risk Solutions, Inc., 974 F.3d 1051 (9th Cir. 2020), holding that absent clear language in an agreement the question of whether class arbitration was available was presumptively an issue for the court rather than the arbitrator to decide. The court noted that while the rules of the AAA provide for arbitrability to be decided by the arbitrator, the agreement in question did not specifically incorporate the AAA rules, but merely required that any arbitration, if necessary, be conducted before AAA. As such, the Shivkov court held that “absent clear and unmistakable evidence that the parties intended to delegate the gateway issue of class arbitration to the arbitrator” the issue would remain with the court.
On September 18, 2020 in SEIU Local 121RN v. Los Robles Regional Medical Center, 976 F.3d 849 (9th Cir. 2020), the Ninth Circuit again decided that absent “‘clear and unmistakable’ evidence of the parties’ intent to have an arbitrator – rather than the court – decide whether a grievance was arbitrable,” the question should be decided by the court. In this case the collective bargaining agreement at issue was silent as to the arbitrator’s authority to determine its own jurisdiction.
And on September 14, 2020, the Third Circuit in MZM Construction Co. v. New Jersey Building Laborers Statewide Benefit Funds, 974 F.3d 386 (3d Cir. 2020), held that an arbitration agreement which explicitly stated that the parties had agreed that questions or grievances involving the interpretation and application of the agreement would be arbitrated and that “[t]he Arbitrator shall have the authority to decide whether an Agreement [even] exists,” still opened the door for a court to determine the arbitrability at issue. The Court noted that earlier Circuit and Supreme Court decisions had not dealt with a contract-formation dispute involving a delegation provision assigning that task to the arbitrator. Rather, relying on Section 4 of the FAA – which mandates that a court be “satisfied” that an arbitration agreement exists – the MZM court held that courts still retain the primary power to decide questions of whether the parties “mutually assented to a contract containing or incorporating a delegation provision”. The court found that because the plaintiff had stated a claim for fraud in the execution of the contract that contained the delegation provision, the question of formation of the delegation clause was outside the scope of the arbitration provisions and triggered the court’s power to adjudicate the claim. The Third Circuit emphasized that the delegation to an arbitrator must come from an “independent source” and not general provisions in the agreement such that “unless the parties clearly and unmistakably agreed to arbitrate questions of contract formation in a contract whose formation is not in issue, those gateway questions are for the courts to decide.”
All of these cases, which focus on interpretations of discrete provisions of an agreement, highlight that corporate lawyers and dispute resolution professionals should pay close attention when drafting to ensure they fully address what issues the parties want an arbitrator to determine. The parties must ensure that the arbitration agreement contains “clear and unmistakable” language as to arbitrability of these issues.
[1] The Supreme Court previously held in Henry Schein, Inc. v. Archer & White Sales, Inc., 207 L. Ed. 2d 1050 (2019), that courts should not assume whether parties have agreed to have an arbitrator determine the question of arbitrability unless there is clear and unmistakable intent to do so evidenced in the agreement.
A Widening Circuit Split: Is the Trend to Deny Discovery for Foreign Private Arbitrations Under 28 U.S.C. § 1782?
By Leslie A. Berkoff
The Seventh Circuit Court of Appeals issued a decision on September 22, 2020, joining the Second and Fifth Circuits in narrowly interpreting the statutory language contained in 28 U.S.C. § 1782(a), concerning the definition of a “foreign or international tribunal.” The court held Section 1782 does not authorize U.S. discovery for private foreign arbitrations. Servotronics, Inc. v. Rolls-Royce PLC, 975 F.3d 689, 694 (7th Cir. 2020) (“Servotronics II”); see also In re Application of Hanwei Guo for an Order to Take Discovery for Use in a Foreign Proceeding Pursuant to 28 U.S.C. § 1782, 965 F.3d 96 (2d Cir. 2020); Republic of Kazakhstan v. Biedermann Int’l, 168 F.3d 880, 883 (5th Cir. 1999). However, this Seventh Circuit decision is directly opposite to a decision issued by the Fourth Circuit, involving the same underlying arbitration in Servotronics II, in which that court broadly interpreted Section 1782 to permit U.S. discovery. Servotronics, Inc. v. Boeing Co., 954 F.3d 209 (4th Cir. 2020). Also, the Sixth Circuit held last year that Section 1782 allowed discovery in a private arbitration, Abdul Latif Jameel v. FedEx Corp., 939 F.3d 710 (6th Cir. 2019).
In Servotronics II, the Seventh Circuit concluded that the dictionary definition of the word “tribunal,” was inconclusive in deciding the issue because “[i]n both common and legal parlance, the phrase ‘foreign or international tribunal’ could be understood to mean not only state-sponsored tribunals, but could also can be understood to include private arbitration panels.” Id. In adopting a broader statutory interpretation, the court found that a more consistent reading of Section 1782 led to the conclusion that ‘foreign tribunal’ “means a governmental, administrative, or quasi-governmental tribunal operating pursuant to the foreign country’s ‘practice and procedure’ [and that] [p]rivate foreign arbitrations…are not included.” Id. The court stated that this reading of Section 1782 “avoids a serious conflict with the Federal Arbitration Act,” in particular Section 7 of the FAA. Looking to common principles of statutory interpretation, the court noted that “[w]hen a statute is susceptible of two interpretations, one that creates a conflict with another statute and another that avoids it, we have an obligation to avoid the conflict….” Id.
The clear Circuit split concerning the meaning of “foreign or international tribunal” in Section 1782 and whether it applies to private foreign arbitration, increases the likelihood that this issue will be addressed by the U.S. Supreme Court. For now, until the United States Supreme Court specifically addresses whether the term “foreign or international tribunal” encompasses private arbitration, counsel may want to consider which circuit they choose for filing claims.
