• Delaware Court of Chancery
  • D66295

DELAWARE COURT OF CHANCERY

Riley v. Brocade Communications Systems, Inc., DeFAX Case No. D66295 (Del. Ch. May 6, 2014) Noble, V.C. (7 pages).

The Court of Chancery ordered that this matter in which plaintiff sought advancement of fees be stayed pending an arbitration where parties agreed to arbitrate the issue of arbitrability by clear and unmistakable evidence and defendant had non-frivolous arguments for arbitration of the issues at bar. Stay ordered.

In this matter, plaintiff David T. Riley sought advancement from defendant, Brocade Communications Systems Inc., as successor by merger to Foundry Networks Inc., for attorney fees and expenses incurred in defending against criminal allegations of insider trading and misuse of Foundry's confidential information.

In response, Brocade argued that plaintiff signed an agreement and general release of claims through which he released his right to advancement. Brocade relied on a broad arbitration provision in the release and asked the Court of Chancery to dismiss or stay plaintiff's claims in favor of arbitration.

The court considered whether the parties agreed to arbitrate the issue of arbitrability by "clear and unmistakable evidence." Pursuant to James & Jackson LLC v. Willie Gary LLC, 906 A.2d 76 (Del. 2006), such evidence exists when an arbitration clause generally provides for arbitration of all disputes and there is a reference to arbitration rules that empower an arbitrator to decide arbitrability.

Not long after Willie Gary was decided, the test was expanded to include a third prong, which allowed the party seeking judicial relief to argue that the party seeking arbitration had essentially no non-frivolous argument about the substantive arbitrability of the dispute. When a non-frivolous argument in favor of substantive arbitrability exists and the first two prongs of Willie Gary are satisfied, the court should defer to the arbitrator.

Here, the parties disputed whether the release plaintiff signed upon leaving Brocade also released his claim to advancement under Foundry's bylaws and the subject merger agreement. The court found that the release provided for arbitration of any and all disputes arising out of or relating to the release or to plaintiff's employment with Foundry or its successor. As such, the release satisfied the first prong of the Willie Gary test.

Plaintiff argued that the arbitration provision set forth in paragraph 17 of the release was subject to an equitable carve-out in paragraph 12 and, therefore, paragraph 17 did not refer "all disputes" to arbitration and was otherwise not clear and unmistakable evidence of the parties' intention to arbitrate. The court noted that this argument had been addressed and rejected.

In GTSI Corp. v. Eyak Tech LLC, 10 A.3d 1116 (Del. Ch. 2010), the agreement at issue contained a general equitable remedy carve-out as well as a broad arbitration clause mandating that any dispute between the parties "shall" go to arbitration. The GTSI court concluded that the terms of the arbitration provision using the phrase "shall" required an arbitrator to determine arbitrability, despite the equitable remedy provision.

The court also noted that paragraph 17 of the release referred to paragraph 12 of the Foundry Change of Control Plan, which provided for arbitration through the Judicial Arbitration and Mediation Services (JAMS). JAMS rules empower arbitrators to decide issues of substantive arbitrability. As such, the court found that Willie Gary's second prong was satisfied.

Finally, the court determined that Brocade had non-frivolous arguments for arbitration of the issues at bar, including whether plaintiff had a viable claim for advancement and whether he released any such claim. As such, the minimal requirements of Willie Gary were satisfied. Accordingly, the court ordered that this action be stayed pending proceedings before JAMS.

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