EFiled: Feb 26 2016 04:25PM EST Transaction ID 58638039 Case No. 11240-VCN COURT OF CHANCERY OF THE STATE OF DELAWARE
JOHN W. NOBLE 417 SOUTH STATE STREET VICE CHANCELLOR DOVER, DELAWARE 19901 TELEPHONE: (302) 739-4397 FACSIMILE: (302) 739-6179
February 26, 2016
Robert K. Beste III, Esquire Kenneth J. Nachbar, Esquire Smith Katzenstein Jenkins LLP Morris, Nichols, Arsht & Tunnell LLP 1000 West Street, Suite 1501 1201 North Market Street Wilmington, DE 19801 Wilmington, DE 19801
Re: Align Strategic Partners LLC v. Moesser C.A. No. 11240-VCN Date Submitted: December 1, 2015
Dear Counsel:
Defendant Lane Moesser has moved to dismiss Plaintiff Align Strategic
Partners, LLC’s (“Align”)1 Complaint on grounds that an arbitration clause
requires the parties to resolve their dispute through binding arbitration in Houston,
Texas. In this action, Align seeks, among other relief, a declaration that it validly
repurchased Moesser’s ownership interest in Align and that Moesser is no longer a
member. A number of agreements between the parties address Align’s repurchase
1 Align is a Delaware limited liability company with its principal place of business in Houston, Texas. Verified Compl. (“Compl.” or “Complaint”) ¶ 1. Align Strategic Partners LLC v. Moesser C.A. No. 11240-VCN February 26, 2016 Page 2
right, but only one of them—Moesser’s Employment Agreement—contains an
arbitration clause. Align disputes this suit’s arbitrability by arguing, in essence,
that the Employment Agreement is too peripheral to the substance of this dispute
for its arbitration clause to apply. Moesser disagrees. For reasons that follow, part
of this case is dismissed in favor of arbitration and the remainder is stayed pending
the outcome of that proceeding.
***
Align is a professional recruiting firm that specializes in placing finance,
accounting, and information technology professionals in various positions.2
Moesser is one of Align’s co-founders. On or about September 12, 2011, Moesser
became Align’s Vice President and came to own a 7.5% ownership interest in
Align for which he has paid $63,333.3 Moesser and Align executed several
2 Id. 3 The purchase price of Moesser’s 7.5% interest was $75,000. He paid $40,000 toward that price and executed a promissory note, payable in installments, for the balance. To date, he has paid a total of $63,333 toward the Units’ purchase price. Id. ¶ 4. Align Strategic Partners LLC v. Moesser C.A. No. 11240-VCN February 26, 2016 Page 3
contracts around that time—the Employment Agreement,4 the Membership Interest
Purchase Agreement (“Purchase Agreement”),5 and the Limited Liability Company
Agreement (“Operating Agreement”)6—that establish these and other rights
between the parties.
Each contract listed above contains provisions that address, in varying
degrees, Align’s ability to repurchase Moesser’s 7.5% interest when his
employment ends. The Employment Agreement provides for both Moesser’s
initial purchase of “units of membership interest” (“Units”) and Align’s option to
repurchase those Units later as follows:
d. Equity Purchase. [Moesser] shall purchase units of membership interest in [Align] upon execution of this Agreement. Units shall be purchased by [Moesser] pursuant to that certain Membership Interest Purchase Agreement attached as Exhibit A to this Agreement. All units of membership interest in [Align] shall be subject to repurchase
4 Id. Ex. C (Employment Agreement). The Employment Agreement is dated September 12, 2011 and appears to have been signed by Moesser on the same date. 5 Id. Ex. B (Purchase Agreement). The Purchase Agreement is dated September 12, 2011, and appears to have been signed by Moesser on the same date. 6 Id. Ex. A (Operating Agreement). The Operating Agreement defines its “Effective Date” as September 12, 2011. Align Strategic Partners LLC v. Moesser C.A. No. 11240-VCN February 26, 2016 Page 4
by [Align] in accordance with the repurchase provisions included in Exhibit A.7
The Purchase Agreement, attached to the Employment Agreement as an exhibit,
provides the following framework for Align’s repurchase of Moesser’s Units:
4. Repurchase Rights of [Align]. In the event that the Employment Agreement . . . is terminated, then for a period of sixty days following such termination, [Align] shall have the option to repurchase the Purchased Interests from [Moesser], as follows:
a. If the Employment Agreement is terminated by [Align] with Cause, or [Moesser] without Good Reason (as such terms are defined in the Employment [Agreement], then the price [Align] must pay upon the exercise of its option shall be the lower of (a) the price paid by [Moesser] for the Purchased Units as set forth in this Agreement, or the then current Agreed Value of the Purchased Units (as such term is defined in the [Operating Agreement].
b. If the Employment Agreement is terminated by [Align] without Cause, or [Moesser] with Good Reason (as such terms are defined in the Employment Agreement, then the price [Align] must pay upon the exercise of its option shall be the higher of (a) price paid by [Moesser] for the Purchased Units as set forth in this Agreement, or the then current Agreed Value of the Purchased Units (as such term is defined in the [Operating Agreement].8
7 Employment Agreement § 2(d). 8 Purchase Agreement § 4(a)–(b). The original text lacks closing parentheses in both above-quoted subsections. Align Strategic Partners LLC v. Moesser C.A. No. 11240-VCN February 26, 2016 Page 5
The Purchase Agreement, however, does not define several terms critical to
determining how much Moesser is owed. The terms “Cause” and “Good Reason”
are both defined in the Employment Agreement,9 and the term “Agreed Value” is
defined in the Operating Agreement.10 The latter is defined as follows:
1.2 Agreed Value. “Agreed Value” shall mean the fair market value of an asset as of the date of valuation, which shall be determined by unanimous agreement of the Members or, if they cannot agree, by an independent appraiser selected by the Board of Managers.11
Thus, read in concert, the three agreements define a process for determining how
much Align “must pay”12 Moesser for his Units should it decide to exercise its
repurchase option upon termination of Moesser’s Employment Agreement.
The termination of Moesser’s employment on November 13, 2014, set into
motion a months-long dispute over Align’s repurchase of Moesser’s Units. After
Align’s initial efforts to discuss an Agreed Value with Moesser proved
unsuccessful, Align decided to move forward with the repurchase using its own
9 Employment Agreement § 5(b). 10 Operating Agreement § 1.2. 11 Id. The “Board of Managers” is the body charged with “exercis[ing]” “the powers of [Align]” and managing Align’s business and affairs. Id. § 5.1. 12 Repurchase Agreement § 4(a)–(b). Align Strategic Partners LLC v. Moesser C.A. No. 11240-VCN February 26, 2016 Page 6
valuation.13 In a letter dated January 12, 2015 (the “Repurchase Notice”), Align
informed Moesser that it was exercising its repurchase right, that it thought the fair
market value of Moesser’s Units was less than the amount Moesser paid for them,
that it had contemporaneously wired $63,333 to Moesser’s bank account in
accordance with Section 4(b) of the Purchase Agreement, and that Moesser’s rights
with respect to his Units had thereby been extinguished, “effective immediately.”14
Moesser disputed Align’s determination of fair market value and proposed
retaining an independent appraiser.15 Align selected an appraiser that in turn
valued Moesser’s interest at $42,375.16 Moesser disputed and has refused to
recognize this valuation, as well as the Repurchase Notice, the repurchase process,
and the repurchase of his interest in general.17 Further, Moesser made a books and
records demand on June 26, 2015.18 Align filed this lawsuit a week later alleging
that Moesser breached the Operating Agreement and seeking declarations that
13 See Compl. ¶¶ 7, 12; id. Ex. D. 14 Id. ¶ 13; id. Ex. D (Repurchase Notice). 15 Id. ¶ 14. 16 Id. ¶¶ 15–16. 17 Id. ¶¶ 17, 20. 18 Id. ¶ 18. Align Strategic Partners LLC v. Moesser C.A. No. 11240-VCN February 26, 2016 Page 7
Align has purchased Moesser’s Units, that Moesser no longer holds any ownership
interest in Align, that Moesser is not a member of Align, and that Align has no
obligation to respond to Moesser’s books and records demand.
Moesser argues that the following language in the Employment Agreement
deprives this Court of subject matter jurisdiction:19
Any dispute or claim arising to or in any way related to this Agreement shall be settled by binding arbitration in Houston, Texas . . . . A demand for arbitration shall be made within a reasonable time after the claim, dispute or other matter has arisen . . . .20
The Employment Agreement is governed by Illinois law.21
Generally speaking, under Illinois law, “parties to an agreement are bound to
arbitrate only those issues which by clear language and their intentions expressed
19 “A motion to dismiss based on an arbitration clause is properly brought under Court of Chancery Rule 12(b)(1).” Maloney-Refaie v. Bridge at Sch., Inc., 958 A.2d 871, 882 (Del. Ch. 2008); see also Dresser Indus., Inc. v. Global Indus., Techs., Inc., 1999 WL 413401, at *5 (Del. Ch. June 9, 1999) (“[I]f the claims a plaintiff seeks to litigate in this court are subject to arbitration, this court will dismiss the plaintiff’s complaint for lack of subject matter jurisdiction.”). 20 Employment Agreement § 9(h) (emphasis added). 21 Id. § 9(g). Align Strategic Partners LLC v. Moesser C.A. No. 11240-VCN February 26, 2016 Page 8
in the language show they have agreed to arbitrate.”22 So-termed “generic”
arbitration clauses—those that are “nonspecific in [their] designation of arbitrable
disputes”23—will, however, cover disputes “arising under a subsequent
agreement . . . as long as the original agreement and the subsequent one concern
the same subject matter.”24 Determining the scope of a generic arbitration clause
requires examining “both the wording of the particular clause and the terms of the
contract in which it is included.”25 If this inquiry renders no clear answer, “the
question of substantive arbitrability should initially be decided by the arbitrator.”26
Illinois courts applying this standard have considered a number of
contractual features to determine whether two contracts have the same “subject
matter.” Unsurprisingly, courts have compared the overall aims of each contract in
22 Nagle v. Nadelhoffer, Nagle, Kuhn, Mitchell, Moss & Saloga, P.C., 613 N.E.2d 331, 334 (Ill. App. Ct. 1993). 23 Ozdeger v. Altay, 384 N.E.2d 82, 84 (Ill. App. Ct. 1978). Arbitration clauses that purport to apply to all claims “arising out of, or relating to” the agreement have been deemed generic. Id. at 83–84; Nagle, 613 N.E.2d at 334; A.E. Staley Mfg. Co. v. Robertson, 558 N.E.2d 434, 437 (Ill. App. Ct. 1990). 24 Nagle, 613 N.E.2d at 336 (citing Staley Mfg., 558 N.E.2d at 437). 25 Staley Mfg., 558 N.E.2d at 437; Ozdeger, 384 N.E.2d at 84. 26 Nagle, 613 N.E.2d at 337–38 (quoting Donaldson, Lufkin & Jenrette Futures, Inc. v. Barr, 530 N.E.2d 439 (Ill. 1988)). Align Strategic Partners LLC v. Moesser C.A. No. 11240-VCN February 26, 2016 Page 9
search of overlap.27 A separate contract’s tendency to address one portion of a
broader project contemplated in the contract containing the arbitration clause has
therefore weighed in favor of extending the clause’s reach.28 Further, courts have
considered the respective contracts’ internal structures—in particular, the degree to
which the two contracts overlap with, depend on, or interrelate with, one another.29
To that end, the fact that two contracts contained similar provisions and were
27 See, e.g., id. at 337 (holding that it was unclear whether two contracts concerned the same subject matter in part because the contract containing the arbitration clause concerned the plaintiff’s “rights and obligations as an employee,” whereas the contract giving rise to the dispute concerned his “rights and obligations as a shareholder in the firm”); Staley Mfg., 558 N.E.2d at 434–37 (holding that two contracts concerned the same subject matter—“benefits to be afforded the [promisee] in the event of his retirement or termination”—where the first contract entitled the promisee to an initial set of retirement benefits and the second afforded him an additional set); Ozdeger, 384 N.E.2d at 82–84 (holding that two contracts concerned the same subject matter—“the construction of plaintiffs’ home”—upon observing that the subsequent agreement was “but one phase” of the construction project contemplated in the initial agreement). 28 See Staley Mfg., 558 N.E.2d at 434–37; Ozdeger, 384 N.E.2d at 82–84; see also Nagle, 613 N.E.2d at 337 (contrasting the close relationships between the agreements at issue in Ozdeger and Staley Manufacturing with the somewhat more disjointed relationship between the agreements before the court). 29 See Nagle, 613 N.E.2d at 337; cf. Rosenblum v. Travelbyus.com Ltd., 299 F.3d 657, 663 (7th Cir. 2002) (considering internal structure to determine whether one contract’s arbitration clause applied to a dispute over another contract under Illinois law without explicitly applying the “subject matter” inquiry Illinois courts have applied to generic arbitration clauses). Align Strategic Partners LLC v. Moesser C.A. No. 11240-VCN February 26, 2016 Page 10
“complete on their own” without a need to borrow outside terms has weighed
against arbitrability, while a need to read the two contracts “in conjunction” has
done the opposite.30
These standards guide the Court’s present analysis because the Employment
Agreement’s arbitration clause—which broadly covers “[a]ny dispute or claim
arising to or in any way related to” the Employment Agreement—is generic.31 The
Complaint brings two counts and seeks varied relief, but its gravamen is that Align
extinguished Moesser’s ownership rights when it sent him the Repurchase Notice
and wired $63,333 to his bank account. That claim indisputably implicates the
Purchase Agreement, which sets forth the repurchase process that Align purported
to follow, but does not include an arbitration clause.32 Accordingly, the question
for this Court reduces to whether the Employment Agreement and Purchase
Agreement have the same subject matter such that the former’s arbitration clause
justifiably covers this dispute under Illinois law.
30 See Rosenblum, 299 F.3d at 663; Staley Mfg., 558 N.E.2d at 438. 31 See sources cited supra note 23. 32 See Compl. ¶¶ 8, 10, 12, 16; Repurchase Notice (claiming that Align was asserting its right to repurchase Moesser’s Units under Section 4(b) of the Purchase Agreement). Align Strategic Partners LLC v. Moesser C.A. No. 11240-VCN February 26, 2016 Page 11
Side-by-side analysis of the Employment Agreement and Purchase
Agreement reveals that the two share the same subject matter for two reasons:
(1) they have the same overall aim; and (2) they are structurally interconnected.
Following discussion elaborates on each in turn.
First, the Employment Agreement and Purchase Agreement share the same
overall aim: establishing Moesser’s rights and obligations as an Align employee.
Although the Employment Agreement accomplishes comparatively more than the
Purchase Agreement in furtherance of that overall effort, that is no reason to deny
the Purchase Agreement’s functional capacity to serve the same ends.
The idea that the Purchase Agreement is best viewed as a piecewise
contribution to the Employment Agreement’s broader objectives follows from the
Purchase Agreement’s failure to contain any rights and obligations associated with
the equity purchase outside of those listed within the Employment Agreement
itself. Section 2(d) of the Employment Agreement simply provides that Moesser
“shall” purchase Units as of the Employment Agreement’s execution, those Units
“shall” be subject to repurchase by Align, and that this successive purchase and
potential re-sale would be governed by the attached Purchase Agreement. The Align Strategic Partners LLC v. Moesser C.A. No. 11240-VCN February 26, 2016 Page 12
Purchase Agreement does just that—pours substance into the purchase and
repurchase by filling in the practical details of each. But the rest of the Purchase
Agreement, which does nothing more than list representations and warranties and
address notices that must appear on any certificates, goes no further; it fails to
define, for example, Moesser’s entitlements and duties as an Align member. The
Operating Agreement fills that role.33 In sum, because the Purchase Agreement
only addresses employment-related aspects of Moesser’s equity purchase—and at
that, only a part of its functionality as compensation34—it shares the same aim as
the Employment Agreement: defining Moesser’s rights and obligations as an Align
employee.
33 E.g., Operating Agreement §§ 5.2(d) (providing that certain members have authority to remove individuals from Align’s Board of Managers), 6.5 (giving members the right to inspect Align’s books and records, subject to certain conditions), 9.1 (providing that certain Operating Agreement provisions shall govern the allocation of Net Profits and Net Losses to members). 34 Moesser’s equity ownership entitles him to forms of compensation not provided for in the Purchase Agreement—including, for example, distributions under article 9 of the Operating Agreement. The Purchase Agreement simply actualizes Moesser’s purchase of Units and gives Align the option to repurchase them when Moesser’s employment ends. Align Strategic Partners LLC v. Moesser C.A. No. 11240-VCN February 26, 2016 Page 13
Second, the Employment Agreement and Purchase Agreement are
thoroughly interconnected. Most fundamentally, the Employment Agreement
attaches the Purchase Agreement as an exhibit.35 Aside from that anatomical
connection, the Purchase Agreement is an incomplete contract whose provisions
cannot be applied without consulting the Employment Agreement. To determine
what price Moesser is owed in the event of repurchase under Section 4 of the
Purchase Agreement, one must know the meaning of “Cause” and “Good Reason,”
which are only defined in the Employment Agreement. Further, the two
agreements do not contain redundant or conflicting provisions that would
otherwise suggest they should be read separately.36 All of these indicators of
35 See Employment Agreement § 2(d). 36 Align argues that the presence of a merger clause in the Employment Agreement suggests that the parties intended for the Employment Agreement to define “its own subject matter, and only that subject matter.” Pl.’s Answering Br. Opposing Def.’s Mot. to Dismiss 18; see also Employment Agreement § 9(a) (“This Agreement contains the entire agreement of the parties with respect to its subject matter. This Agreement may not be altered, amended or modified except in writing duly executed by both of the parties.”). But the presence of this clause arguably goes both ways; the presence of a merger clause in the Employment Agreement but not its attachment could indicate that the both were intended as the parties’ full expression of their agreement, especially given that the Purchase Agreement does not have a merger clause that would create a redundancy. Further, Align Strategic Partners LLC v. Moesser C.A. No. 11240-VCN February 26, 2016 Page 14
Purchase Agreement’s dependence on, and interconnectedness with, the
Employment Agreement weigh in favor of arbitrability. These entanglements,
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.
Align resists this outcome on several grounds that spring from the same
basic factual premise: that Moesser both refused to negotiate an agreed price and
insisted on using what Align calls a “separate dispute resolution mechanism”
contained in the Purchase Agreement to contest Align’s valuation instead of
commencing with arbitration immediately. This, argues Align, has several
important consequences—namely, that (1) Moesser violated the arbitration
clause’s requirement that any arbitration demand “shall be made within a
reasonable time after the claim, dispute or other matter has arisen”;37 and (2) that
Align’s argument seems to misunderstand the role of merger clauses, which often function to “permit[] either party to invoke the parol evidence rule to exclude evidence of additional contractual terms” mentioned in negotiations or prior contract drafts as expressions of the parties’ agreement. See Rosenblum, 229 F.3d at 665. 37 Employment Agreement § 9(h). Align Strategic Partners LLC v. Moesser C.A. No. 11240-VCN February 26, 2016 Page 15
the doctrines of estoppel, waiver, and acquiescence preclude Moesser from now
raising a demand to arbitrate. Both arguments fail.
Moesser asserted the arbitration clause within a reasonable time frame. The
appraiser’s valuation is dated June 15, 2015; Align filed the Complaint on July 2,
2015; Moesser was served on July 23, 2013; and Moesser filed this Motion to
Dismiss on September 18, 2015. Perhaps Moesser could have commenced
arbitration before June 15, 2015, or before this lawsuit commenced. But waiting to
do so until after the appraiser’s report arrived made sense given the ex ante
possibility that the independent appraisal would lead to resolution. And once
Align filed this lawsuit, it was reasonable for Moesser to delay commencing
arbitration in Houston, Texas absent a dismissal or stay from this Court.
Align’s equitable defenses do not apply in this case because Moesser did not
mislead Align,38 take action inconsistent with the right to arbitration,39 or otherwise
38 “Estoppel applies ‘when a party by his conduct intentionally or unintentionally leads another, in reliance on that conduct, to change position to h[er] detriment.’” Bantum v. New Castle Cnty. Vo-Tech Educ. Ass’n, 21 A.3d 44, 50 (Del. 2011) (quoting Waggoner v. Laster, 581 A.2d 1127, 1136 (Del. 1990)). 39 “For a party to be found to have waived its right to arbitrate, it must have actively participated in a lawsuit or taken other action inconsistent with the right to Align Strategic Partners LLC v. Moesser C.A. No. 11240-VCN February 26, 2016 Page 16
acknowledge that some distinct “dispute resolution mechanism” governed.40 The
“mechanism” Align identifies—contained in Purchase Agreement Section 4(b)—
does not purport to prescribe definitively any method for resolving Moesser’s
concerns about the appraiser’s valuation, Repurchase Notice, repurchase process,
and repurchase of his interest. That provision—and the extra-contractual
definitions it relies upon—instead addresses the narrow question of how to
determine Agreed Value in the event Align’s members cannot unanimously agree
on Align’s fair market value.41 Thus, Moesser’s proposal to engage an
independent appraiser cannot be deemed an admission or recognition that
arbitration is not warranted.
arbitration.” Falcon Steel Co. v. Weber Eng’g Co., Inc., 517 A.2d 281, 288 (Del. Ch. 1986). 40 “Acquiescence arises where a complainant has full knowledge of his rights and the material facts and (1) remains inactive for a considerable period of time; or (2) freely does what amounts to recognition of the complained of act; or (3) acts in a manner inconsistent with the subsequent repudiation, which leads the other party to believe the act has been approved.” NTC Gp., Inc. v. W. Point-Pepperell, Inc., 1990 WL 143842, at *2 (Del. Ch. Sept. 26, 1990). 41 See Operating Agreement § 1.2. Align Strategic Partners LLC v. Moesser C.A. No. 11240-VCN February 26, 2016 Page 17
For all of these reasons, the Employment Agreement’s broad, generic
arbitration clause justifiably applies to the parties’ dispute over the validity of
Align’s purported repurchase. Determining whether Align effectively bought
Moesser’s ownership interest will require assessing Align’s adherence to a
framework set forth in the Purchase Agreement, a document that concerns the
same subject matter as the Employment Agreement. That aspect of Align’s claims
is therefore dismissed in favor of arbitration.42 The remainder of this action—
which concerns Align’s request for a declaration that it need not respond to
Moesser’s books and records demand—is stayed because that claim does not arise
under the Purchase Agreement or Employment Agreements and requires a
determination as to Moesser’s membership status.
42 The Complaint (at paragraph 20) asserts generally that Moesser breached the Operating Agreement, but does not specify which provisions have been breached. The Court is unaware of any aspect of this breach of contract claim that does not concern Moesser’s refusal “to recognize the Repurchase Notice, the repurchase process, and the repurchase of [Moesser’s] interest”—issues the Court now directs to arbitration. Align Strategic Partners LLC v. Moesser C.A. No. 11240-VCN February 26, 2016 Page 18
IT IS SO ORDERED.
Very truly yours,
/s/ John W. Noble
JWN/cap cc: Register in Chancery-K