Delaware Court Reviews Enforceability And Alleged Waiver Of Arbitration Provision

Upholds contracting parties' right to seek arbitration and rejects arguments that the right is waived solely by initiation or defense of litigation

In Halpern Medical Services, LLC v. Geary,1 the Delaware Court of Chancery recently was asked to determine whether (i) claims based on breach of fiduciary duty, breach of contract and unjust enrichment were subject to a mandatory arbitration clause in an employment agreement and (ii) the parties to the agreement waived the right to invoke arbitration solely by reason of the commencement of litigation by one party and the filing of a motion to dismiss by the other. Utilizing a two-step process previously developed by the Delaware Supreme Court, the Court concluded that the claims were arbitrable and neither party had waived its right to seek arbitration.

Background

Dr. Harold Halpern is the majority owner of two companies in the eye care industry, Halpern Medical Services, LLC ("HMS") and Halpern Eye Associates, P.A. ("HEA" and, together with HMS, the "Companies"). In an effort "to reduce his involvement in day-to-day operations" and "grow his business," Halpern hired Arthur Geary to become HMS' President and Chief Operating Officer. To memorialize his arrangement, Geary entered into an employment agreement with HMS which gave him a 30% stake in HMS and a 9% stake in HEA. In addition, this agreement included (i) restrictive covenants limiting Geary's ability to work for third parties during the term of his employment agreement and to make investments in competing businesses, and (ii) an arbitration clause providing that all claims "arising out of or relating to, the [Employment Agreement] or the breach thereof ... shall first be submitted to arbitration" and "shall be final and binding ...."

Halpern became disenchanted with Geary's performance in a number of respects, leading the Companies eventually to seek damages from Geary premised on theories of breach of contract, breach of fiduciary duty and unjust enrichment. Among the Companies' allegations against Geary were that his taking of certain "ill-fated" business decisions, including one termed to have been "ill-conceived, rushed, and a complete disaster," constituted a breach of his employment agreement. In addition, the Companies challenged Geary's "partial equity ownership of, and compensated service on the boards of, third-party companies with which Geary and the [Companies] became involved ...." These arrangements, in the Companies' view...