IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
GREENSTAR IH REP, LLC and :
GARY SEGAL, :
:
Plaintiffs, :
:
v. : C.A. No. 12885-VCS
:
TUTOR PERINI CORPORATION, :
:
Defendant. :
MEMORANDUM OPINION
Date Submitted: January 20, 2017
Date Decided: February 23, 2017
Kenneth J. Nachbar, Esquire and Lauren K. Neal, Esquire of Morris, Nichols, Arsht
& Tunnell LLP, Wilmington, Delaware, and Ira Lee Sorkin, Esquire and Amit
Sondhi, Esquire of Mintz & Gold LLP, New York, New York, Attorneys for
Plaintiffs.
Brian C. Ralston, Esquire, Aaron R. Sims, Esquire and Kwesi Atta-Krah, Esquire of
Potter Anderson & Corroon LLP, Wilmington, Delaware, and Nomi L. Castle,
Esquire and Matthew J. Luce, Esquire of Castle & Associates, PLC, Beverly Hills,
California, Attorneys for Defendant.
SLIGHTS, Vice Chancellor
The Court is asked to decide the “rather arcane” question of who, as between
this Court or an arbitrator selected by the parties, should decide whether certain
disputes are arbitrable.1 The analysis of the question is complicated in this case
because the parties’ relationship, as relevant here, is governed by two contracts that
contain different choice of law, choice of forum and, importantly, dispute resolution
provisions. Specifically, one contract, an employment agreement, contains a
mandatory arbitration clause; the other contract, a merger agreement, provides that
all disputes arising under that agreement shall be adjudicated by a Delaware court.
The Plaintiffs have raised the issue of arbitrability by a motion for partial judgment
on the pleadings in which they seek a declaration that claims the Defendant has
asserted in a California arbitration proceeding arise under the merger agreement and
must, therefore, be litigated in a Delaware court.
The issue of substantive arbitrability in essence raises a question of subject
matter jurisdiction. Delaware courts are no strangers to the issue and the law of
substantive arbitrability can now safely be characterized as settled. Having applied
that law to the contractual arbitration clause at issue here, I am satisfied that the
motion for judgment on the pleadings must be granted in part and denied in part.
The Plaintiffs have demonstrated as a matter of undisputed fact and as a matter of
1
First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 945 (1995) (“the ‘who (primarily)
should decide arbitrability’ question-is rather arcane”).
1
law that a declaration of non-arbitrability is appropriate with respect to the so-called
“Earn-Out Claim” that has been brought in the California arbitration. Both parties
now appear to concede that this claim arises out of the merger agreement and should,
therefore, be pursued in a Delaware court. The Plaintiffs have failed to demonstrate,
however, as a matter of undisputed fact or as a matter of law that a declaration of
non-arbitrability is appropriate as to the so-called “Indemnification Claims” or the
“Consequential Damages Claim,” both of which have been brought in the California
arbitration. The question of arbitrability with respect to those claims must be
addressed to the California arbitrator.
I. FACTUAL BACKGROUND
I draw the facts from the Verified Complaint (the “Complaint”) and the
documents it incorporates by reference. I assume for now that the well-pled facts
are true.
A. The Parties and Relevant Non-Parties
Plaintiff Greenstar IH Rep LLC (“IH Rep”) is a Delaware Limited Liability
Company that represents the interests and rights of the “Interest Holders” (as
“Interest Holder Representative”) under an Agreement and Plan of Merger By and
Among Tutor Perini Corporation, Galaxy Merger, Inc., GreenStar Services
Corporation and Greenstar IH Rep, LLC (the “Merger Agreement”). Plaintiff Gary
Segal, a resident of New York, is the former CEO of Five Star Electric Corporation
2
(“Five Star”) and the former Chairman and CEO of GreenStar Services Corporation
(“GreenStar”). Segal is an Interest Holder under the Merger Agreement.
Defendant Tutor Perini Corporation “is an international civil and building
construction company which offers diversified general contracting, construction
management and design-build services to private customers and public agencies
throughout the world.”2 It is a Massachusetts corporation with its principal place of
business in Sylmar, California. Its common stock trades on the New York Stock
Exchange under the symbol “TPC.”
Non-party GreenStar was acquired by Tutor Perini pursuant to the Merger
Agreement. GreenStar consisted of three affiliated companies: Five Star, WDF, Inc.
and Nagelbush Mechanical, Inc. At the time of the acquisition, non-party Five Star,
a wholly owned subsidiary of Tutor Perini, was the largest electrical contractor in
the greater New York City area with more than 1,500 employees. It provided
electrical light, power and low-voltage systems to a range of public and private
sector customers.
B. The Merger Agreement and the Employment Agreement
The disputes between the parties follow a 2011 merger in which, as noted,
Tutor Perini acquired GreenStar. IH Rep served as the Interest Holder
2
Verified Complaint (“Compl.”) ¶ 2.
3
Representative for the former stockholders of GreenStar, inter alia, to assert their
rights under the Merger Agreement post-closing. The Merger Agreement contains
a Delaware choice of law provision and a forum selection provision designating any
state or federal court in Delaware as the exclusive forum. Through its acquisition of
GreenStar, Tutor Perini acquired GreenStar’s three affiliated companies including
Five Star.
At the time of the merger, Tutor Perini, Five Star and Segal executed an
Employment Agreement whereby Segal agreed to serve as President and CEO of
Five Star for an initial period of five years. The Employment Agreement contains a
New York choice of law provision and a mandatory arbitration provision. The
arbitration provision expressly states that the arbitration shall be conducted before
JAMS, in accordance with the rules and regulations promulgated by JAMS, and shall
be held in Los Angeles, California. The Employment Agreement also contains an
exclusive California forum selection clause that provides: “[t]he parties consent to
exclusive personal jurisdiction of the state and federal courts situated in the State of
California in respect to enforcement of this Agreement and waive any defenses based
on personal jurisdiction or venue in such courts.”
C. Procedural History
On September 29, 2016, Tutor Perini and Five Star initiated a JAMS
arbitration in Los Angeles against Segal alleging claims for breach of the
4
Employment Agreement, breach of the implied covenant of good faith and fair
dealing, fraud, conversion, and breach of fiduciary duty arising out of Segal’s
alleged misconduct as an employee of Five Star. In total, there are eight claims for
relief in the Demand for Arbitration (the “Demand”). The specific allegations—
which have been grouped together and restyled by the Plaintiffs into three defined
types of claims, the “Earn Out Claim,” the “Indemnification Claims,” and the
“Consequential Damages Claim”—appear in Tutor Perini’s and Five Star’s first,
fourth, fifth and eighth claims for relief. In the Demand, these claims are styled
Breach of Employment Agreement, Fraud and Concealment, Constructive Fraud and
Declaratory Judgment, respectively. According to Tutor Perini and Five Star, all
claims asserted in the California arbitration arise out of damage caused by Segal’s
conduct while acting as CEO of Five Star, including excessive personal expenditures
and improper contracting practices that prompted an investigation by the United
States Attorney’s Office, all of which allegedly resulted in the loss of significant
business opportunities and profits.
On November 7, 2016, Segal and IH Rep filed their Complaint in this Court
alleging breaches of the Merger Agreement and seeking declaratory judgments that
certain claims advanced by Tutor Perini in its Demand relate to representations and
warranties, indemnification commitments and related damages caps within the
Merger Agreement and are subject to that agreement’s exclusive Delaware forum
5
selection clause. Plaintiffs filed a motion for a preliminary injunction along with
their Complaint to prevent Tutor Perini from prosecuting claims arising under the
Merger Agreement in the arbitration. That motion was rendered moot when the
parties agreed to stay the arbitration proceedings pending resolution of the
declaratory judgment claims by way of this motion for judgment on the pleadings.
II. LEGAL ANALYSIS
Plaintiffs’ motion for judgment on the pleadings frames an issue that calls the
gating question of whether this Court can or should exercise subject matter
jurisdiction over certain claims raised in the California arbitration. There is no need
for a fully developed factual record to decide the issue. It can be decided as a matter
of law based on the matters pled in the Complaint and the documents attached
thereto.
A. Legal Standard
Under Court of Chancery Rule 12(c), the Court may grant a motion for
judgment on the pleadings if, when viewing the claims in the light most favorable to
the nonmoving party, there are no material issues of fact and the movant is entitled
to judgment as a matter of law.3 When seeking Rule 12(c) relief in connection with
a contract dispute, the moving party must show that the “contract’s meaning is
3
Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund II, L.P., 624 A.2d 1199,
1205 (Del. 1993).
6
unambiguous and the underlying facts necessary to its application are not in
dispute.”4
B. The California Forum Selection Clause
At the outset, I note that Tutor Perini has urged me to decline to address the
substantive arbitrability question in deference to the California forum selection
clause in the Employment Agreement. In this regard, it is important to appreciate
the distinction between Tutor Perini’s argument that this Court lacks subject matter
jurisdiction based on the Employment Agreement’s forum selection clause and its
separate argument that this Court lacks subject matter jurisdiction because the parties
have agreed to arbitrate all disputes including the issue of arbitrability. As to the
latter argument, Tutor Perini asserts, as a matter of law, that this Court lacks subject
matter jurisdiction over issues which these parties have agreed to arbitrate and that
the arbitration provision in the Employment Agreement makes clear that the parties
agreed to arbitrate even the issue of substantive arbitrability.5 Tutor Perini’s separate
argument that this Court lacks subject matter jurisdiction under the Employment
4
Fiat N. Am. LLC v UAQ Retiree Med. Benefits Trust, 2013 WL 3963684, at *7 (Del. Ch.
July 30, 2013).
5
Tutor Perini has not moved to dismiss Counts VI–VIII of Plaintiffs’ Complaint in this
Court under Rule 12(b)(1), as it could have, but instead raises this jurisdictional argument
as a response to Plaintiffs’ motion for judgment on the pleadings.
7
Agreement’s forum selection clause is one-step further removed from that analysis.
Unlike the typical case where the relevant question is “who has the authority to
decide substantive arbitrability,” Tutor Perini asks the Court first to consider “who
has the authority to decide who has the authority to decide substantive arbitrability?”
While this matryoshka-like question might, in some instances, be complex, the
language of the Employment Agreement provides a rather straightforward answer
here.
Tutor Perini is correct that Section 16 of the Employment Agreement does
contain an exclusive California choice of forum clause. It ignores, however, the
exception to that clause within Section 8 that allows the parties to bypass arbitration
and to seek relief “in court” when seeking “temporary or preliminary injunctive
relief . . . for the limited purpose of avoiding immediate and irreparable harm.” This
clause also provides that “[t]he provisions of this Section 8 shall be enforceable in
any court of competent jurisdiction.” When read in its entirety, the plain meaning
of Section 8 reveals that a party seeking to avoid irreparable harm through injunctive
relief may proceed in any court of competent jurisdiction without first submitting
the matter to arbitration.
That is precisely what Plaintiffs have done in this case. Segal requested that
this Court enjoin Tutor Perini from prosecuting certain claims in the California
arbitration by declaring that they are non-arbitrable. “This Court has clearly held
8
that a party faced with immediate arbitration of non-arbitrable issues is threatened
with irreparable harm sufficient to warrant an injunction.”6 Therefore, the
Employment Agreement, by its terms, allows Plaintiffs to address their claims for
declaratory and injunctive relief to this Court notwithstanding the California forum
selection clause. I turn next to the question of whether this Court or the California
arbitrator should decide substantive arbitrability.7
C. The Parties Agreed to Arbitrate Arbitrability
As noted, the Employment Agreement is governed by New York law and the
Merger Agreement is governed by Delaware law. The parties have acknowledged
this fact but have relied principally upon Delaware law in their submissions and at
oral argument. As there does not appear to be a conflict of law, I agree that it is
6
HDS Inv. Hldg. Inc. v. Home Depot, Inc., 2008 WL 4606262, at *9 (Del. Ch. Oct. 17,
2008).
7
Tutor Perini made a separate argument, raised for the first time at oral argument, that the
Court should deny the motion because Plaintiffs did not name Five Star as a party in this
action. I note that Tutor Perini has not brought a motion to dismiss under Ct. Ch. R. 12 for
failure to join a necessary party under Rule 19. In any event, the indispensable party issue,
to the extent it is an issue, is moot because my rulings on this motion do not affect or
otherwise prejudice Five Star’s rights. The Court has granted the motion for judgment on
the pleadings as to Count VI of the Complaint in large part based on the concession of
Tutor Perini’s counsel that the Earn-Out Claim is not and should not be part of the
California arbitration. As to the other two counts of the Complaint at issue in this motion,
the Court has determined that all parties concerned should direct their arguments regarding
substantive arbitrability to the arbitrator.
9
appropriate to rely upon Delaware law to resolve the question of who decides
substantive arbitrability.8
As a matter of public policy, Delaware favors the resolution of disputes by
arbitration.9 Even so, “the question of whether the parties agreed to arbitrate is
generally one for the courts to decide and not for the arbitrators.” 10 As the United
State Supreme Court has explained, this is because “arbitration is a matter of contract
and a party cannot be required to submit to arbitration any dispute which he has not
agreed so to submit.”11 Therefore, courts should not presume that parties agreed to
arbitrate the issue of arbitrability unless there is “clear and unmistakable evidence
that they did so.”12
In Willie Gary, our Supreme Court articulated a two-part test for determining
whether clear and unmistakable evidence reveals that the parties agreed to submit
the issue of arbitrability to the arbitrator: (1) the arbitration provision must generally
provide for arbitration of all disputes; and (2) the provision must incorporate a set of
8
Deuley v. DynCorp Int’l, Inc., 8 A.3d 1156, 1161 (Del. 2010) (quoting Berg Chilling Sys.,
Inc. v. Hull Corp., 435 F.3d 455, 462 (3d Cir. 2006)) (“According to conflicts of law
principles . . . [when] there is a ‘false conflict’ . . . the Court should avoid the choice-of-
law analysis altogether.”).
9
James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76, 79 (Del. 2006).
10
Id.
11
Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002).
12
Willie Gary, 906 A.2d at 79.
10
arbitration rules that empowers the arbitrator to decide arbitrability. 13 This
formulation, while simple in design, appeared to leave open for debate the question
of “when does an arbitration clause ‘generally provide for arbitration of all
disputes?’”
The Court confronted this question in McLaughlin v. McCann.14 There, the
court noted that the trial court opinion in Willie Gary15 acknowledged, but did not
fully endorse, the majority federal view that “contracts providing for arbitration in
accordance with the AAA Rules have, by that simple reference, evinced an intent
that an arbitrator rather than a judge, [should] determine whether claims must be
arbitrated.”16 The trial court in Willie Gary then suggested that, notwithstanding its
own reservations, the Delaware Supreme Court “might, for good reason, wish to
follow the weight of federal authority by holding as a matter of law that a contractual
clause calling for arbitration of a class of disputes under the AAA Rules evinces a
clear and unmistakable intent to arbitrate arbitrability questions.”17 This holding, it
13
Id. at 80.
14
942 A.2d 616, 625 (Del. Ch. 2008).
15
Willie Gary, LLC v. James & Jackson, LLC, 2006 WL 75309 (Del. Ch. Jan. 10, 2006).
16
Id. at *6.
17
Id. at *8.
11
was suggested, would “turn such a reference into a term of art” and would “arguably
be economically efficient as a general policy rule.”18
While recognizing the importance of the federal courts’ efficiency rationale,
our Supreme Court in Willie Gary stopped short of holding that an arbitration clause
that referenced a set of arbitration rules permitting the arbitrator to resolve disputes
about arbitrability alone would constitute clear and unmistakable evidence of the
parties’ intent to allow the arbitrator to decide substantive arbitrability. Instead, the
Supreme Court adopted the now-settled Willie Gary two-part test. The first element
of this test—that “the arbitration provision must generally provide for arbitration of
all disputes”—prompted the court in McLaughlin to observe that the test might be
applied in a manner that would undermine “the efficiency rationale” endorsed by our
Supreme Court.19
In reconciling what might be construed as a mixed message in Willie Gary,
McLaughlin noted that the “general tenor” of the two-part test “indicates that the
Delaware Supreme Court believes a reference to the AAA Rules has a critically
important role in determining whether the parties intended to arbitrate
arbitrability.”20 The court went on to hold that the “takeaway” from the “generally
18
Id.
19
McLaughlin, 942 A.2d at 623.
20
Id. at 625.
12
provides for arbitration of all disputes” requirement is that “the carve-outs and
exceptions to committing disputes to arbitration should not be so obviously broad
and substantial as to overcome a heavy presumption that the parties agreed by
reference . . . to [arbitration panel] Rules . . . that the arbitrator, and not a court,
would resolve disputes about substantive arbitrability.”21 The court concluded: “in
a case where there is any rational basis for doubt about . . . the court should defer to
arbitration, leaving the arbitrator to determine what is or is not before her.”22
Here, both prongs of the Willie Gary test are easily satisfied, particularly when
viewed through the McLaughlin lens. The arbitration provision at issue states, in
part:
Except with respect to injunctive relief, which may be sought in
a court of competent jurisdiction, all disputes, claims, or controversies
arising out of or relating to this Agreement or the breach thereof or
otherwise arising out of Segal’s employment or the termination of that
employment. . . shall, to the fullest extent permitted by law, be resolved
solely and exclusively by binding arbitration to be conducted before
J.A.M.S./Endispute, Inc. or its successor. The arbitration shall be held
in Los Angeles, California, before a single arbitrator and shall be
conducted in accordance with the rules and regulations promulgated by
J.A.M.S./Endispute, Inc . . .
21
Id. This approach is consistent with other decisions from this court holding that an
arbitration clause can be broad enough to meet the Willie Gary test while still providing
“limited ancillary relief to protect [the parties’] interests during the pendency of the
arbitration process.” BAYPO Ltd. Partnership v. Tech. JV, LP, 940 A.2d 20, 27 (Del. Ch.
2007).
22
McLaughlin, 942 A.2d at 625.
13
The clause is broad and unquestionably “provides for arbitration of all
disputes” arising from the Employment Agreement. The references to seeking
injunctive relief in a court of competent jurisdiction as an exception to arbitration is
not “so obviously broad and substantial” as to justify a finding that the parties
intended to diminish the breadth of their commitment to arbitrate all disputes arising
out of Segal’s employment or relating to the employment agreement.23 The
provision also expressly incorporates a set of arbitration rules—“the rules and
regulations promulgated by J.A.M.S./Endispute, Inc.” Rule 11(b) of the J.A.M.S.
Rules expressly authorizes the arbitrator to decide arbitrability.24 When read in total,
the parties’ negotiated arbitration clause reflects their unmistakable intent to
empower the arbitrator to decide issues of substantive arbitrability.
D. The McLaughlin “Non-Frivolous” Inquiry
Plaintiffs maintain that even if the Court concludes that the arbitration clause
in the Employment Agreement satisfies the Willie Gary test, the Court should still
conclude that any argument that the “Earn-Out Claim,”25 “Indemnification
23
BAYPO, 940 A.2d at 27.
24
Def.’s Answering Br. in Opp’n to Pls.’ Mot for J. on the Pleadings (“Def.’s Answering
Br.”), Ex. C at 14.
25
Compl. Ex. D, Demand for Arbitration (“Demand”) ¶ 110(b). See Pls.’ Opening Br. 10–
12 (defining the claims in the Demand that Plaintiffs believe are captured within the dispute
resolution provisions of the Merger Agreement).
14
Claims”26 and “Consequential Damages Claim,”27 as alleged in the California
arbitration, are arbitrable must be deemed “frivolous.” This is significant because
in McLaughlin, again relying upon federal arbitration jurisprudence,28 the court
determined that, in addition to applying the Willie Gary test, when addressing a
substantive arbitrability challenge, the trial court should consider whether an
argument that a claim is subject to arbitration is “frivolous” on its face. Stated
differently, having passed the Willie Gary test, the matter of arbitrability should be
submitted to the arbitrator if the party challenging arbitrability cannot make a “clear
showing that the party desiring arbitration has essentially no non-frivolous argument
about substantive arbitrability to make before the arbitrator.”29
McLaughlin’s non-frivolous inquiry further promotes the efficiency gains
advanced by the court in Willie Gary. Although the public policy of this State favors
26
Demand ¶¶ 73(a)–(g), 74(j), 87–92, 109.
27
Demand ¶¶ 74(k), 98.
28
Local 358, Bakery & Confectionery Workers v. Nolde Bros., 530 F.2d 548, 553 (4th Cir.
1975) (“[T]he arbitrability of a dispute may itself be subject to arbitration if the parties
have clearly so provided in the agreement. Of course, the court must decide the threshold
question whether the parties have in fact conferred this power on the arbitrator. If they
have, the court should stay proceedings pending the arbitrator’s determination of his own
jurisdiction, unless it is clear that the claim of arbitrability is wholly groundless.”), aff’d,
430 U.S. 243 (1977).
29
McLaughlin, 942 A.2d at 626–27. The court noted that this additional element did not
create an exception to Willie Gary, nor did it represent a radical extension of Delaware law.
Id.
15
arbitration of disputes, it also places a premium on freedom of contract. Once a
court determines that the parties have evinced a clear and unmistakable intent to send
all issues to the arbitrator, which in our State is determined by analyzing the two
prongs of Willie Gary, the court is to err on the side of arbitration in order to abide
by the parties’ agreement. As a final measure to protect the first-order concern that
parties not be required to arbitrate issues they did not agree to arbitrate, the court
undertakes the limited inquiry of determining whether the party resisting arbitration
has made a clear showing that the party seeking arbitration has no-non frivolous
argument to make to the arbitrator regarding arbitrability. This approach protects
the efficiency gains discussed in Willie Gary and McLaughlin without sacrificing
the parties’ contractual freedom.30 It does so by allowing them to agree “generally
[to] provide for arbitration of all disputes,” including disputes over substantive
arbitrability, while remaining secure in the knowledge that the court will not send
claims to an arbitrator when it is clear that the assertion of substantive arbitrability
is frivolous.
For its part, Tutor Perini disagrees that the claims in the Demand are not
subject to arbitration, subject to its concession of non-arbitrability with respect to
the Earn-Out Claim. It argues that all of the misconduct identified in the Demand
30
Li v. Standard Fiber, LLC, 2013 WL 1286202, at *5 (Del. Ch. Mar. 28, 2013).
16
arose from Segal’s position as an employee of Five Star and is therefore subject to
the Employment Agreement.
Having determined under Willie Gary that the arbitration clause in the
Employment Agreement evinces a clear intent to arbitrate the issue of substantive
arbitrability, the Court’s next task is to subject the claims in the Demand to the
McLaughlin non-frivolous inquiry. This required a claim-by-claim analysis.31
E. Tutor Perini Has Presented Non-Frivolous Arbitrability Arguments
In the Demand, Five Star and Tutor Perini have advanced claims against Segal
which they allege arise out of his misconduct while acting as CEO of Five Star. The
Plaintiffs here have styled these claims as the “Earn-Out Claim,” the
“Indemnification Claims” and the “Consequential Damages Claim.” I start where
there appears to be little, if any, disagreement. It is clear on the face of the Merger
Agreement and the Demand that any claim Segal may have to earn-out payments
arises solely from his status as an Interest Holder under the Merger Agreement. As
noted, any dispute over whether earn-out payments are due under the Merger
Agreement must be litigated in a Delaware court. In the Demand, Five Star and
Tutor Perini ask for a declaratory judgment that Segal “is not entitled to receive any
31
Id.
17
further earn-out payments under the Employment Agreement.”32 But Segal was
never entitled to any earn-out payments under his Employment Agreement. The
merits of Segal’s right to earn-out payments under the Merger Agreement are wholly
disconnected from his conduct as an employee of Five Star.
Tutor Perini has acknowledged as much in its filings in this Court and at oral
argument. In its Answering Brief, Tutor Perini represented that “the allegation in
the Arbitration Demand regarding earn-out payments [was] included to preempt any
attempt by Segal to end run the dispute resolution procedures in the Merger
Agreement by asserting a counterclaim in the Arbitration seeking to compel earn-
out payments to himself.”33 Taking this statement at face value, it appears that Tutor
Perini prophylactically asserted a claim in the arbitration proceeding that it admits
arises solely from the Merger Agreement so that Plaintiffs could not seek to arbitrate
that issue. Counsel for Tutor Perini reiterated this position at oral argument.34 While
32
Demand ¶ 110(b).
33
Def.’s Answering Br. 44–45.
34
See also Oral Arg. Tr. 35–36 (THE COURT: “So with that said, to clean it up, why not
concede, at least as to, I think, Count VI, that the earn-out payment or rights to an earn-out
payment are not subject to arbitration?” MR. RALSTON: “We’re fine with that. The
mechanics of the earn-out payment, whether it is owed under the merger agreement to
interest holders—we, obviously, have an argument that we have damages, and whatever
pro rata portion, to the extent there is an earn-out payment in the future, Mr. Segal will just
have to pay that back to us. And that’s really what we’re getting at in the arbitration
demand. But in terms of—in other words, seeking an order from the arbitrator that no earn-
out payments are owed under the merger agreement, that’s—inartful pleading, I guess, is
the way that I would characterize the arbitration demand in that respect.” THE COURT:
18
I do not follow the strategic logic, in this case, I do not have to. Both parties have
acknowledged that any party’s right to an earn-out is subject only to the Merger
Agreement and cannot be arbitrated absent further agreement of the of the parties.
In my view, that ends the inquiry.
The same does not hold true with respect to the so-called Indemnification
Claims and the Consequential Damages Claim. In the Demand, Five Star and Tutor
Perini allege a long-running and factually complex course of wrongdoing by Segal
with improper conduct occurring both pre-merger and post-merger. Plaintiffs are
correct that many of the allegations of wrongdoing in the Demand might well relate
to potential liability issues that were investigated as part of the negotiation of the
Merger Agreement. I also acknowledge that the Merger Agreement sets forth
detailed procedures for seeking indemnification and contains potentially applicable
liability caps. In Plaintiffs’ view, Tutor Perini and Five Star are trying to bypass
these highly negotiated mechanisms, most importantly, the monetary caps. Tutor
Perini maintains that the damages sought in arbitration are based on various
allegations of misconduct relating to Segal’s employment and other breaches of the
Employment Agreement that are not the subject of the indemnification provisions or
consequential damages caps in the Merger Agreement.
“So at least—” MR. RALSTON: “So I'll concede, at least on that, that is a claim that, if
taken literally or characterized the way that Mr. Nachbar has characterized it in his papers,
which was not the intent of the pleading, is beyond the scope of the arbitration provision.”).
19
A review of the Demand suggests that Tutor Perini’s characterization of its
claims, and its arguments regarding arbitrability with respect to these claims, is not
frivolous. At this stage, that is all that is required.35 It is for the arbitrator to
determine whether the Indemnification Claims and the Consequential Damages
Claim arise under the Employee Agreement, the Merger Agreement or, perhaps,
both. And it is for the arbitrator to determine whether the claims are arbitrable. To
go further in characterizing the allegations in the Demand or considering the merits
of the claims set forth there would risk essentially deciding the issue of substantive
arbitrability. This would infringe upon the jurisdiction of the arbitrator.36
III. CONCLUSION
Because the arbitration provision within the Employment Agreement provides
generally that all disputes arising out the agreement should be subject to arbitration
35
McLaughlin, 942 A.2d at 626–27.
36
Id. at 623 (observing that once the court determines the agreement at issue requires the
arbitrator to decide substantive arbitrability, “the trial court is not required to delve into the
scope of the arbitration clause and the details of the contract and pending lawsuit—that is
the job of the arbitrator.”); see also Li, 2013 WL 1286202, at *5 (“Delaware courts have
necessarily limited the preliminary evaluation step to determining whether there is no non-
frivolous argument; otherwise a court would be deciding the first-order question of
substantive arbitrability before deciding the second-order question of who decides
substantive arbitrability.”); 3850 & 3860 Colonial Blvd., LLC v. Griffin, 2015 WL 894928,
at *7 (Del. Ch. Feb. 26, 2015) (“Nonetheless, the Court must be careful not to conflate [the
non-frivolous] analysis with the ultimate question of whether the underlying claims relate
to or arise out of the agreement.”) (internal citation omitted).
20
and incorporates a set of arbitration rules that empower the arbitrator to decide
arbitrability, I am satisfied under Willie Gary that there is clear and unmistakable
evidence that the parties intended to arbitrate arbitrability. I am also satisfied under
McLaughlin that there has not been a clear showing that the party desiring arbitration
(Tutor Perini) has essentially no non-frivolous argument about substantive
arbitrability to make before the arbitrator as to the claims addressed in Counts VII
and VIII of Plaintiffs’ Complaint. Mr. Segal, as a signatory to the Employment
Agreement, must address his arguments against arbitrability to the arbitrator.
Plaintiffs’ Motion for Judgment on the Pleadings is GRANTED with respect
to Count VI of the Complaint and DENIED with respect to Counts VII and VIII of
the Complaint.
IT IS SO ORDERED.
21