Biz Lit Reporter
March 26, 2018

Business Litigation Reporter

Goodwin’s Business Litigation Reporter provides timely summaries of key cases and other developments within dedicated Business Litigation sessions and related courts throughout the country – courts within which Goodwin’s Business Litigation attorneys are continually litigating. In addition, each issue of the Business Litigation Reporter provides a more thorough discussion of one topic of particular importance to the business community.

0Emergency Relief and Arbitration Agreements

Many business contracts have arbitration clauses, under which the parties agree that all disputes arising from or relating to the contract will be resolved by an arbitrator, rather than by a court. But what if a dispute arises and one of the parties believes that it needs emergency or other interim relief, before the time it would normally take for an arbitrator to be selected, hold a hearing, and render a decision? 

Rules changes adopted several years ago by the major arbitration organizations, and subsequent decisions from various courts across the country, have unsettled this area of the law. Those changes, which added expedited procedures for seeking emergency relief from an arbitrator, have called into question the willingness of the courts to entertain requests for preliminary relief pending the outcome of the arbitration proceeding. That, in turn, has both presented litigators with new strategic decisions and reinforced the need for careful attention to, and drafting of, arbitration clauses in the first place.

Prior to 2010, the principal organizations providing commercial arbitration services did not have rules that automatically established an expedited process for seeking emergency relief. The Commercial Rules of the American Arbitration Association (AAA), for example, did have a provision, captioned “Interim Measures,” that allowed the arbitrator to “take whatever interim measures he or she deems necessary, including injunctive relief and measure for the protection or conservation of property and disposition of perishable goods.” But the rules did not provide an expedited process for selection of the arbitrator and for a hearing and decision in the event that emergency relief was claimed to be needed. The AAA did have a set of “Optional Rules for Emergency Measures of Protection” that established such a process, but they applied only if the parties’ contract had expressly adopted those optional rules.

Under those circumstances, most courts held that, in disputes covered by an arbitration clause, judges had the authority to grant preliminary injunctive relief needed to prevent a party from suffering irreparable harm pending the outcome of the arbitration proceeding. For example, although the parties’ dispute in Teradyne, Inc. v. Mostek Corp., 797 F.2d 43, 47 (1st Cir. 1986), was subject to arbitration with the AAA, the First Circuit upheld the district court’s grant of a preliminary injunction requiring the defendant to set aside funds to satisfy a possible arbitration award. The appeals court held that, notwithstanding the provisions of the Federal Arbitration Act, “a court can, and should, grant a preliminary injunction in an arbitrable dispute whenever an injunction is necessary to preserve the status quo pending arbitration.” The court reasoned that, where immediate irreparable harm was threatened, permitting a court to issue a preliminary injunction is essential “to preserve the meaningfulness of the arbitration process.” Id. Numerous other courts reached the same conclusion, and some states enacted statutes codifying this rule. E.g., Calif. Code Civ. Pro. § 1281.8(b).

In 2013 and 2014, however, the AAA and JAMS adopted new rules for commercial arbitrations that establish an expeditious process for an arbitrator to grant preliminary relief to avoid irreparable harm in disputes subject to arbitration. The AAA’s Rule 38, titled “Emergency Measures of Protection,” applies to arbitrations conducted under arbitration agreements entered into on or after October 1, 2013. It provides that a party needing emergency relief prior to an arbitration panel being chosen may notify the AAA in writing with a statement of the reasons for emergency relief. The movant must also include a statement certifying that all other parties have been notified, which can be done by email or fax, or explaining the steps taken in good faith to notify the other parties. Within one business day, the AAA is required to appoint a single emergency arbitrator who, within two business days, must issue a schedule that can provide for a hearing by telephone or video conference or for a ruling based just on the parties’ written submissions. The emergency arbitrator, in turn, may issue interim relief if satisfied that the party faces immediate and irreparable loss or damage and is entitled to such relief. Similarly, JAMS adopted Rule 2(c), captioned “Emergency Relief Procedures,” that apply in arbitrations filed after July 1, 2014. Likewise, effective July 1, 2013, the International Institute for Conflict Prevention & Resolution (CPR) issued its Administered Arbitration Rules. Rule 14 of those rules also provides that, before the arbitration panel is picked, any party may request that interim measures be granted against any other party by a special arbitrator, that the CPR is to appoint a special arbitrator within one day to the extent practicable, and that the arbitrator is to conduct the proceedings “as expeditiously as possible.”

The adoption of these emergency-relief rules called into question whether a party to an arbitration agreement can still seek preliminary injunctive relief from a court. Over the past several years, courts have provided conflicting answers to that question.

Some courts have concluded that the availability of emergency relief in arbitration means that the courts should no longer entertain requests for interim relief. In Smart Technologies ULC v. Rapt Touch Ireland Ltd, 197 F. Supp. 3d 1204 (N.D. Cal. 2016), for example, the court refused to issue a temporary restraining order on the ground that the arbitration rules provide an expedited process for seeking emergency relief from an arbitrator. The court noted that those rules contain email and video conferencing procedures that may be more efficient than the rules that apply in federal court. And it held that even if the court had authority to do so, the plaintiff had provided “no explanation for why a federal court (rather than an arbitrator) should adjudicate the request for emergency relief” given that the parties had “agreed that their underlying dispute should be arbitrated.” Similarly, in TK Services, Inc. v. RWD Consulting, LLC, 263 F. Supp. 3d 64 (D.C.C. 2017), the court observed that under the AAA’s new rules, emergency relief can be obtained from an arbitrator, and that if the plaintiff believes that it faces irreparable harm, “it is free to seek interim relief from the arbitrators.” Additionally, in both A&C Discount Pharmacy, L.L.C. v. Carmark, L.L.C., 2016 U.S. Dist. LEXIS 82888 (N.D. Tex. Jun 27, 2016), and Rx Pros, Inc. v. CVS Health Corp., 2016 U.S. Dist. LEXIS 8983 (W.D. La. Jan. 26, 2016), the courts reasoned that because there was a dispute as to whether the request for preliminary relief was itself subject to mandatory arbitration, that issue had to be resolved by an arbitrator.

Other courts, however, have held that parties may continue to seek preliminary relief in the courts. In North American Deer Registry, Inc. v. DNA Solutions, Inc., 2017 U.S. Dist. LEXIS 61043, *5 (E.D. Tex. Apr. 21, 2017), the court noted that the AAA rule authorizing “interim measures” expressly provides that a request for interim relief from a court “shall not be deemed incompatible with the agreement to arbitrate or a waiver of the right to arbitrate.” Notably, the AAA rule authorizing “emergency measures” contains the same language. Likewise, in Mirage Casino-Hotel v. Beale Street Blues Co., 2016 WL 1335462 (Nev. 2016), the court cited the same language in holding that the movant had properly sought judicial relief even though it could have sought emergency relief under the AAA’s commercial rules. Yet courts reaching the opposite conclusion have essentially determined that this language does not change the fact that a party claiming a need for emergency relief now has an “adequate remedy” via the new arbitration rules, meaning that the traditional standards for a preliminary injunction are not met.

Thus, a party to an arbitrable dispute who needs emergency relief faces a strategic decision. Such a party might prefer to seek judicial relief because courts are accustomed to requests for preliminary relief and because their orders are immediately enforceable through the court’s contempt powers. But a party applying for such relief from a court now risks being told to apply to an arbitrator for that relief. And while a party that obtains an emergency order from an arbitration might need to seek to have that order confirmed by a court to be enforced, courts generally have viewed arbitration awards of interim relief as being subject to immediate confirmation. See Johnson v. Dentsply Sirona Inc., 2017 U.S. Dist. LEXIS 158285 (N.D. Okla. Sept. 27, 2017); Bowers v. Northern Two Cayes Co., 2016 U.S. Dist. LEXIS 88009 (W.D.N.C. July 7, 2016).

As with many issues concerning arbitration agreements (and contracts more generally), the end result may be affected – and greater certainty can be achieved – by careful and precise drafting of the arbitration clause. Because courts will typically enforce arbitration clauses in commercial agreements in accordance with their express terms, the contracting parties are free to specify that any request for emergency or other interim relief is – or is not – subject to mandatory arbitration as well. Given the unsettled state of the law, such careful drafting is especially warranted.

0Business Litigation Courts: Regional Case Summaries

California

Holding Company’s Principal Place of Business Is Where Its Meetings Are to Occur. In 3123 SMB LLC v. Horn, No. 16-55304, the Ninth Circuit held that a holding company has a principal place of business where its board meetings are to occur (regardless of whether such meetings have yet occurred), unless evidence shows that the holding company is directed from elsewhere. In so holding, the Ninth Circuit rejected the argument that a holding company’s principal place of business is the state in which its officers reside, finding that such a rule would be unworkable and uncertain. By contrast, the location for a company’s meetings typically is specified either in its bylaws or in the statutes of its state of incorporation. As such, “a rule presuming that from inception a holding company directs its business from the place where it holds board meetings is easy to apply.”

“Individualized Targeting” No Longer Sufficient Basis for Specific Jurisdiction. Prior to the Supreme Court’s decision in Walden v. Fiore, 134 S. Ct. 1115 (2014), the Ninth Circuit had held that a court has specific jurisdiction under an “individualized targeting” theory if the defendant had engaged in wrongful conduct targeting a resident of the forum state. In Axiom Foods, Inc. v. Acerchem Int’l, Inc., No. 15-56450 (9th Cir. 2017), however, the Ninth Circuit held that the “individualized targeting” theory is no longer good law. The court observed that, under Walden, specific jurisdiction requires a “substantial connection” between the defendant’s suit-related conduct and the forum state. In this case, Acerchem, a U.K. company, had sent the newsletter that allegedly infringed Axiom’s copyrights to some 343 recipients. The Ninth Circuit held that because only 10 of the 343 recipients were located in California, California was not the “focal point” of Acerchem’s conduct, and hence that Axiom had failed to establish specific jurisdiction under Walden.

Delaware

Survival Period in Parties’ Contract Shortened Applicable Statute of Limitations. In HBMA Holdings, LLC v. LSF9 Stardust Holdings LLC, C.A. No. 12806-VCMR (Del. Ch. Dec. 8, 2017), the plaintiff claimed that the defendant had violated a contractual covenant to operate the companies in the ordinary course during an earnout period. The court observed that the contract provided that the covenants would survive until June 13, 2016, and it interpreted that date as a contractual statute of limitations, meaning that any claim alleging breach of covenant had to be filed by that date. Because the plaintiff had not filed a claim by that date, and because the plaintiff’s arguments for extending that deadline based on estoppel, waiver, or acquiescence were unavailing, the court held that the plaintiff’s claims were time barred. This decision is important given the widespread inclusion of similar survival provisions in many business contracts.

Limited Inspection of LLC’s Books and Records Permitted. In Aloha Power Co., LLC v. Regenesis Power, LLC, C.A. No. 12697-VCMR (Del. Ch. Dec. 22, 2017), Aloha – a member of Regenesis – sought to inspect Regenesis’s books and records. The court held that, under Regenesis’s operating agreement, Aloha had the right to inspect certain specific records without any showing of need. The court also held that, under Delaware Code § 18-305(a), Aloha had shown a “proper” purpose to inspect a list of the names and contact information for each member of the LLC to understand the dilution of membership interests. But the court barred Aloha from obtaining Regeneris’s operating statements and general ledgers, as well as documents related to its “general affairs,” since attempts to uncover “possible general mismanagement, without more” will not justify an inspection demand. This decision adds to the body of case law concerning demands to inspect the books and records of a Delaware LLC (or, by analogy, a corporation served with a books-and-records request under § 220).

Massachusetts

Broad Release in Severance Agreement Barred Officer’s Claim to Stock Options. In MacDonald v. Jenzabar, Inc., 2018 Mass. App. LEXIS 5, the plaintiff asserted rights to certain preferred shares and stock option rights arising from his employment with the defendant. In support of his claim, he put in evidence that, even after he and the company signed a severance agreement, he and the company continued to communicate about possible ways to convert those options into cash. The Appeals Court held, however, that notwithstanding that evidence, his claim was barred by a broad and unambiguous release of all rights contained in the severance agreement. The court emphasized that Massachusetts law favors giving effect to general releases even if the parties did not, at the time of the release, have in mind all of the matters that it might cover.

Trial Required on Claims Alleging Misappropriation of Confidential Business Information. In Butts v. Freedman, 2017 Mass. Super. LEXIS 194, the plaintiff sued a former partner and employee for breach of fiduciary obligations and breach of contract for allegedly taking confidential information when they left the business. Moving for summary judgment, the defendants argued that they were not bound by any noncompete agreement, but the court held that Massachusetts law applies a multi-factor, fact-dependent test to determine whether information is entitled to information as confidential or proprietary. The court also held that the defendants were not entitled to summary judgment simply because their employment contract did not specify that they owed a fiduciary duty, holding that such a duty may exist unless there is a contractual provision expressly eliminating a fiduciary duty.

New York

Commencement of Action Seeking Rescission and/or Reformation of a Contract Does Not Constitute Anticipatory Breach. In Princes Point v. Muss Dev., 30 N.Y.3d 127 (2017), a prospective real estate purchaser sued the sellers seeking to rescind an amendment to the purchase agreement on the basis of fraud. The seller filed a counterclaim asserting that the lawsuit constituted an anticipatory breach of the agreement. Reversing the First Department, the Court of Appeals held that there was no material difference between the buyer’s action for recession and an action for declaratory judgment and that, particularly where the plaintiff sought reformation of the amendments to the contract and specific performance of the original agreement, there was no “positive and unequivocal” repudiation of the parties’ contract.

Parties Must Notify Putative Class Members of a Proposed Settlement or Dismissal Even Where the Class Has Yet to Be Certified. In Desrosiers v. Perry Ellis Menswear, LLC, 2017 NY Slip Op 08620 (2017), the New York Court of Appeals considered the question of whether CPLR 908, which requires notice of the dismissal or compromise of a class action, applied to putative class actions that are settled or dismissed before the class has been certified. The Court of Appeals held that although the text of CPLR 908 is ambiguous, its legislative history showed that it applies even in cases where the putative class has not yet been certified.

Assurances That a Contractual Offer Is “Firm and Binding” Do Not Transform an Offer Contingent on Execution Into a Binding Agreement. In Keitel v. E*TRADE Fin. Corp., 2017 NY Slip Op 06624 (1st Dep’t Sept. 26, 2017), the plaintiff alleged that the defendant had made a “firm and binding offer” to hire him as a celebrity spokesperson, but later backed out of that deal. The First Department affirmed Justice Ramos’ decision that no binding agreement had even been created. This was so because, even though the defendant had expressly referred to its proposal to the plaintiff as a “firm and binding offer,” the term sheet embodying that offer had expressly stated that “neither party shall be bound until the parties execute a more formal written agreement.”

0Making an Impact: Partners in the News

Hong Kong Voluntary Liquidation: Recognition Granted in Landmark US Bankruptcy Court Ruling
Conventus Law (Daniel Glosband)

March 20, 2018

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Lawdragon 500
Lawdragon (Brian Pastuszenski, Neel Chatterjee)

March 15, 2018

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6 Things You Need to Know About Insuring Cryptocurrency
IA Magazine (Brian Mukherjee)

March 14, 2018

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Asbestos Suits Not Barred by Chapter 11 Plan, 3rd Circuit Told
Law360 (Michael Giannotto, Brian Burgess)

March 7, 2018

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The Securities Law Questions Raised By #MeToo
Law360 (Deborah Birnbach, Jennifer Fay, Dylan Schweers)

February 28, 2018

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Securities Litigation Leader Brian Pastuszenski Discusses The Current Practice Horizon
Lawdragon (Brian Pastuszenski)

February 25, 2018

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A Hotelier’s Guide to Business-Interruption Insurance Claims
Lodging Magazine (Adam Chud)

February 22, 2018

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DOJ Gives Mixed Messages on False Claims Act Enforcement
New York Law Journal (Richard Strassberg, William Harrington)

February 22, 2018

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JP Morgan Beats Investor Suit Over Mutual Fund Fees
Law360 (Mark Holland, Michael Isenman, Valerie Haggans, Charles Brown)

February 14, 2018

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What to Expect in Cryptocurrency Policy
Yahoo Finance (Grant Fondo)

February 8, 2018

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Crypto Pros Warn Yahoo: Invest at Your Own Risk
Coindesk (Grant Fondo)

February 7, 2018

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ICOs in 2018: Increased Regulatory Scrutiny, and Alternatives to Traditional “Utility” Token ICOs
Brave New Coin (Grant Fondo, Meghan Spillane, Mitzi Chang)

January 19, 2018

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SEC Issues Warning on Token and Digital Currency Use
American Bar Association (Grant Fondo)

January 4, 2018