COURT OF CHANCERY OF THE S AM G LASS C OCK III

V ICE C HANCELLOR STATE OF DELAWARE C OURT OF C HANCERY C OURTHOUSE 34 T HE C IRCLE G EORGETOWN , D ELAWARE 19947
December 28, 2021

Rudolf Koch, Esquire Daniel Kaprow, Esquire Richards, Layton & Finger, P.A. 920 North King Street Wilmington, DE 19801 Kenneth Nachbar, Esquire Alexandra Cumings, Esquire Morris, Nichols, Arsht & Tunnell LLP 1201 N. Market Street Wilmington, DE 19801

RE: Daryl Hagler v. Evolve Acquisition LLC , et al. C. A. No. 20 21

- 0431

- SG
Dear Counsel: This litigation is before me on a Motion to Dismiss (the “Motion ” ) by
Defendant Evolve Growth Initiatives, LLC (“Defendant EGI”) citing lack of subject matter jurisdiction under Court of Chancery Rule 12(b)(1). Defendant
EGI 1 first filed an arbitration (the “Arbitration”) in March of this year 2 relating to certain indemnities for breaches of representations and warranties stemming from a Membership Interest Purchase Agreement (the “Purchase Agreement”) , by and

1 Co

- defendant Evolve Acquisition LLC did not join in the motion. 2 The Complaint refers to the arbitration’s filing as of “March 18, 2019,” but the original arbitration demand, which is before me, references a date of March 18, 2021. See Letter to the H onorable Sam Glasscock III from Rudolf Koch dated Sept. 9, 2021, regarding Arbitration Demands, Ex. A, at 17 [hereinafter “Original Arbitration Demand”]

.2 between, among others, the Plaintiff Hagler and Defendant EGI

. 3 Hagler then filed
this action in May 2021 , which EG I conclude s was meant to preempt the
Arbitration. Defendant E GI’s position is that the Plaintiff’s claims must be dismissed, as they must be pled in connection with the first

- filed Arbitration , because the parties’ agreement to arbitrate in the Purchase Agreement deprives me of jurisdi c tion . Any doubts about arbitrability, it avers , are matters for the arbitrators, and not this Court. Delaware’s jurisprudence in this realm does not represent, at least, a hobgoblin of little minds. Our caselaw makes clear that the right to arbitration is

on ly so broad as the contractual agreement between parties to a dispute. 4
Nonetheless , Delaware policy strongly supports resolution of disputes by arbitration, with doubts concerning arbitrability resolved in favor of arbitration. 5 Questions of arbitrabi lity

— that is, substantive arbitrability

— are matters for the court, not the arbitrator. 6 But this latter precept is overcome where the parties

3 Verified Compl. for Declaratory J., Breach of Contract, and Breach of the Implied Covenant of Good Faith and Fair Dealing, ¶¶ 40 , 35, 6, Dkt. No. 1 [hereinafter “Compl.”]. 4 See McLaughlin v. McCann , 942 A.2d 616, 622 (Del. Ch. 2008) (citing First Options of Chicago, Inc. v. Kaplan , 514 U.S. 938, 944 (1995)). 5 Id. at 621 (quoting Mitsubishi Motors Co rp. v. Soler Chrysler

- Plymouth, Inc. , 473 U.S. 614, 626 (1985)). 6 Id. at 621

– 22 (citation omitted) (“In applying those traditional state contract law principles to make a determination on substantive arbitrability

. . . ‘[c]ourts should not assume that the parties agreed to arbitrate arbitrability unless there is ‘clea[r] and unmistakabl[e]’ evidence that they did so.”).3 clearly indicate in their contract that arbitrability is for the arbitrator. 7 Delaware
law follows federal arb itration law , 8 and the majority federal rule is that, where parties have contractually adopted comprehensive rules that provide that arbitrability is for the arbitrator

— for instance, the American Arbitration
Association ( “ AAA ” ) rules

— the parties have ther eby sufficiently demonstrated
the ir agreement to submit arbitrability to the arbitrator, and not the court. 9 Delaware embraces the minority view, however, that something more than adoption of the AAA rules is need ed to make “ clear and unmistakable ” that the parties wished an arbitrator to address substantive arbitrability. 10 That something
more includes a broad contractual reference of issues to an arbitrator; thus, including a contractual carve - out for a court to exercise equitab le jurisdiction , for instance, may be sufficient to cast doubt on the parties ’ intentions, and thro w the
threshold arbitrability question back to the court. 11 Nonetheless, simply adopting the AAA rules raises a strong presumption that the parties intended substantive

7 See id. 8 I note that federal arbitration law is followed by Delaware courts where the Delaware Uniform Arbitration Act is not specifically referenced in the subject document. See 10 Del. C. § 5702

. The parties do not dispute whether the Delaware Uniform Arbitration Act is applicable here. 9 See id. ; see generally Willie Gary, L LC v. James & Jackson, LLC , 2006 WL 75309 (Del. Ch. Jan. 10, 2006). 10 McLaughlin , 942 A.2d at 622

– 23. 11 See, e.g. , James & Jackson, LLC v. Willie Gary, LLC , 906 A.2d 76, 81 (Del. 2006)

.4 arbitrability for the arbitrator, not the court. 12 And where substantive arbitrability is for the arbitrator, a court may not dismiss even a frivolous claim of arbitrability , but must submit the matter for arbitration

. 13 With this guidance in mind, I find that the arbitrability of the issues raised in
the Plaintiff’s C omplaint must be referred to an arbitrator, for the reasons below.

1. Background Facts The facts underlying the instant Motion , as well as the Arbitration, largely
arise from the te xt of the Purchase Agreement. 14 The identities of each of the parties in the contexts of the Purchase Agreement, the Arbitration and this instant action are somewhat complex. Defendant EGI was the target company under the Purchase Agreement. 15
As a limited liability company , Defendant EGI had three members, each a Seller under the Purchase Agreement. 16 The Sellers are not party to this suit. 17

12 McLaughlin , 942 A.2d at 625 (referencing the “heavy presumption” t hat referencing the AAA Rules suggests an agreement between the parties that an arbitrator, not a court, should resolve disputes about substantive arbitrability). 13 Henry Schein, Inc. v. Archer & White Sales , 139 S. Ct. 524, 529 (2019). 14 I note that, whi le the Purchase Agreement appears to have been amended three times, I only have the text of the Purchase Agreement itself and the text of its third amendment available to
me. No party has argued that either of the first or second amendment contained different operative language, so I assume without deciding that I can rely on the text of the Purchase Agreement as amended by the third amendment. 15 See Opening Br. Supp. o f Def. Evolve Growth Initiatives, LLC’s Mot. to Dismiss Verified Compl., Ex. A, at 1, Dkt. No. 7 [hereinafter “Purchase Agreement”]. 16 See Purchase Agreement, at Annex I. 17 See generally Compl

.5 The Plaintiff here is Daryl Hagler, the Sellers’ Representative under the Purchase Agreement. 18
The Arbitration was brought by Defendant EGI and two associated entities not parties to this litigation against Hagler and the Sellers. 19 Defendant Evolve Acquisition LLC merged into Defendant EGI and is the other named defendant in this litigation. 20
Defen dant EGI, Plaintiff Hagler, the Sellers, and Defendant Evolve Acquisition LLC a re the parties to the Purchase Agreement. 21 Under the Purchase Agreement, Evolve Acquisition LLC bought all of the membership interests in EGI belonging to each of the three Sel lers. 22 The Purchase Agreement provided for a $10 million indemnification escrow account. 23 The overwhelming majority of this money remains in escrow as of the date of the Complaint and was due to be released in two installments on March 19, 2021 and
Dec ember 19, 2021. 24 Just prior to the March date, Defendant EGI and its counsel

18 See id. at 1. 19 See Opening Br. Supp. o f Def. Evolve Growth Initi atives, LLC’s Mot. to Dismiss Verified Compl. 1 , 3 , Dkt. No. 7 [hereinafter “OB”]; see also Compl. ¶ 40 (identifying the arbitration proceeding as ongoing but not identifying all pertinent parties). 20 See generally Compl.; see also OB 3. Evidently, Defen dant EGI and Evolve Acquisition LLC have merged since the performance of the Purchase Agreement. This is pled in the papers, but the background facts provided do not explain the process by which these entities became one and the same. 21 See Purchase Agr eement, at 1. 22 See generally id

. 23 See Compl. ¶ 29. 24 Id. ¶ 34.6 sent a letter claiming that certain financial figures in connection with the Purchase Agreement were improperly calculated and “intentionally inflated.” 25 On March 18, 2021, De fendant EGI filed its arbitration proceeding seeking indemnification with respect to the financial figures, which purportedly affected the purchase price paid under the Purchase Agreement, and certain “ O ther Losses.” 26
Section 9 of the Purchase Agreement deals with indemnification for a number of claims that could arise under the agreement and the procedure for so proceeding with indemnification claims. 27 Section 9.2 indicates that t he Sellers were responsible for indemnifying the p urchaser (Evo lve Acquisition LLC) and its affiliates “in respect of any Losses which [Evolve Acquisition LLC and its affiliates] may suffer as a result of, in connection with or relating to any of”
fourteen various enumerated types of claims. 28 Among the types of inde mnifiable claims listed are claims arising from any breach or inaccuracy in any representation or warranty, and any claim arising from the calculation of the purchase price. 29 Per Defendant EGI’s briefing, the claims brought in the
Arbitration are due ind emnification under this provision, as they fit into one or more of the enumerated categories. 30

25 See id. ¶ 35. 26 Id. ¶¶ 40 , 35, 6, 36 n.1 ; see also Original Arbitration Demand. 27 Purchase Agreement , at 55

– 61. 28 Id. at 55

– 57. 29 Id. 30 OB 5.7 The Purchase Agreement includes an arbitration provision in Section 9.6, which reads in pertinent part as follows:
(a) Any dispute or controversy arising between t he parties to this Agreement in connection with the amount of any indemnity owed pursuant to Section 9.2 or Section 9.3 shall be determined and settled by arbitration in New York, New York, by a panel of three members who shall be selected, and such arbitr ation shall be conducted, in accordance with the commercial arbitration rules of the American Arbitration Association, as then in effect

. . . . (b) Notwithstanding anything to the contrary in this Agreement, each party retains the right to bring a proceeding before a court (or seek judicial assistance) to compel arbitration in accordance with Section 9.6(a) , enforce an arbitration award granted pursua nt to the procedure set forth in Section 9.6(a) or to obtain injunctive relief hereunder. 31 Section 9 .9 of the Purchase Agreement provides that the indemnification
remedies under the contract are the “sole and exclusive monetary remedies” of the indemnified parties for both of the buyer and seller, respectively, except “in the case of fraud or intentional misrepresentation

. . . .” 32 Additionally , Section 9.7
discusses at length the procedure for any third

- party indemnification claims. 33 Beyond indemnification, fraud, and misrepresentation, the Purchase Agreement also includes a provision entitled “Consent to Jurisdiction” in Section
12.13. 34 The Consent to Jurisdiction section identifies the appropriate jurisdiction for “any Proceeding” against (1) Lender Related Parties, as defined in the Purchase

31 Purchase Agreement , at 59. 32 Id. at 61. 33 Id. at 59

– 6 1

. 34 Id. at 59

– 60, 73.8 Agreement (not relevant here), and (2) “other Persons.” 35 “Person” is defined in the Purchase Agreement as “an individual, partnership, corporati on, limited liability company, association, joint stock company, trust, joint venture, unincorporated organization, Government Entity or department, agen cy or political subdivision thereof or other entity.” 36 The definition of “Proceeding” includes
both a ctions/suits and “any arbitration proceeding.” 37 The parties disagree about the scope of Section 12.13, 38 but it is clear from the face of the contract that the vast majority of foreseeable claims likely to arise from the Purchase Agreement among the parti es before me would fall into the
indemnification subsections of Section 9. Finally, Section 12.8 of the Purchase Agreement provides guidance with respect to the construction of certain words, including “hereunder.” The text of the agreement indicates tha t when “hereunder” (among other words) is used in the contract, that reference should be taken as a reference to the Purchase Agreement as a whole, rather than to any particular provision of the agreement. 39

35 Id. at 73. 36 Id. at Ex. A. 37 Id. 38 See generally Pl. Daryl Hagler’s Br. Opp’n to Def. Evolve Growth Initiatives, LLC’s Mot. to Dismiss the Verified Compl. [hereinafter “AB”]; see also Reply Br. Supp. of Def. Evolve Growth Initiatives, LLC’s Mot. to Dismiss Verified Compl. 39 Purchase Agreement, at 71.9 The Plaintiff’s Complaint brings claims for decl aratory judgment regarding
the same financial figures at issue in the Arbitration , 40 breach of contract, 41 and breach of the implied covenant of good faith and fair dealing. 42 The declaratory judgment claim also prays that this Court will enjoin Defendant EGI to execute a

“ disbursement request ” to release the indemnity escrow monies to the Sellers. 43 The parties disagree as to whether these claims are responsive in nature to the
Arbitration. 44 Determining whether this Court has subject matter jurisdiction is a necessary predicate to reaching any of the Plaintiff’s substantive claims.

2. Analysis If the parties have agreed to arbitrate the claims at issue, I have no jurisdiction here. The right to invoke arbitration to defeat jurisdiction of this Court arises, if at all, from contract. 45 The parties here disagree as to whether the issues raised in the Complaint are subject to arbitration. The first

- order question I must
addres s is whether that disagreement is itself a matter for the Court, or whether it is
reserved to the arbitrators. In resolving this question, I must , again, turn to the

40 Compl. ¶¶ 47

– 51. 41 Id. ¶¶ 52

– 57. 42 Id. ¶¶ 58

– 66. 43 Id. ¶ 51. 44 See generally OB (arguing that these claims are properly brought as procedural defenses in the Arbitration ); see generally AB (arguing that the claims have their own independent merit and are not merely responsive to the Ar bitration). 45 Willie Gary , 906 A.2d at 78

– 79 (quoting Howsam v Dean Witter Reynolds, Inc. , 537 U.S

. 79, 83 (2002)).10 contract. The default rule is th at arbitrability is a question for the courts , unless th e contract at issue provides otherwise

. 46 The contract here does not explicitly address the question. Under our caselaw, however, the parties are considered to have explicitly and clearly provided for arbitrability to be an issue for the arbitrator where they have “generall y provide[d]” for arbitration of all disputes, and “incorporate [ d ] a set of arbitration rules” ( such as the AAA rules ) that provide for
the arbitrator to address the iss ue. 47 The parties chose AAA rules here. That choice creates a “heavy presumption” that substantive arbitrability is to be decided by the arbitrators; such presumption is overcome where the carve

- outs to
arbitration are “so obvious ly broad and substantial” as to indicate that the parties,
notwi thstanding their adoption of the AAA rules, intended arbitrability to be for
the c ourt. 48 Here, the Plaintiff points to the contractual dispute

- resolution scheme under
Section 12.13 as a broad carve

- out from arbitration , indicating substantive
arbitrabilit y is an issue for this Court. It is true that proceedings involving the
“Lend er Related Parties” and “ o ther Persons ” are assigned venues in court in the Purchase Agreement

. As for the parties here, however, representatives of the buyer and the sellers, v irtually all non

- fraud actions are subject broadly to

46 Id. 47 Willie Gary , 906 A.2d at 80. 48 McLaughlin , 942 A.2d at 625.11 arbitration: “ Any dispute or controversy arising between the parties to this Agreement in connection with the amount of any indemnity owed pursuant to Section 9.2 or Section 9.3 shall be determined and settled by arbitration

. . . .” 49 “In a case where there is any rational basis for doubt about [whether the parties
intended an arbitrator to determine arbitr ability], the court should defer to arbitration, leaving the arbitrator to determine what is or is not before her.” 50 The broad submission of all disputes relating to escrow to arbitration, along with the adoption of the AAA rules, at leas t raises such a doubt here. The Plaintiff, citing Willie Gary , notes that the arbitration clause has an equity carv e - out. 51 That carve

- out, unlike in Willie Gary , is not a general reservation of equitable jurisdiction to the courts . The Agreement provides that each part y has the right to seek court intervention in three cases: to “ [1] compel arbitration in accordance with Section 9.6(a), [2] enforce an arbitration award granted pursuant to the procedure set forth in Section 9.6(a) or [3] to obtain injunctive relief hereunder .” 52 As I read th is provision, it provides a limited role for equity: to compel arbitration; to enforce an arbitration award; or to provide
similar “injunctive relief hereunder.” The Plaintiff raises that Section 12.8 of the

49 Purchase Agreement, at 59 (emphasis added). 50 McLaughlin , 942 A.2d at 625

. 51 See Willie Gary , 2006 WL 75309 , at *9. 52 Purchase Agreement, at 59.12 Agreement indicates that “he re under” i s to be read , generally , as under the Agreement in its entirety ; 53 accordingly, he argues that any request for injunctive
relief takes th e di s pute out of the arbitration provision. This would be a broad

carve - out indeed. But th e Plainti ff’s reading is not sensible; it renders the first two provisions

— enforcing arbitrability

— surplusage. 54 In context, the only type of

court

- provided injunctive relief available “ in connection with the amount of any indemnity owed ” is in aid of arbitration. Injunctive relief “hereunder ” must refer
to relief of that ilk. 55 Concerning the amounts in escrow, the parties agreed to a broad arbitration provision , adopting rules assigning substantive arbitrability to an arbitral panel

. The Plaintiff a rgues that its Complaint does not, strictly speaking, address the

escrow. 56 Since I have found that the arbitration clause broadly provides for arbitration of all disputes “in connection with” the amounts in escrow, and adopts
the AAA rule s concerning sub stantive arbitrability, the issue of whether the

53 Id. at 71. 54 See, e.g. , Kuhn Const r ., Inc. v. Diamond State Port Corp. , 990 A.2d 393, 396

– 97 (Del. 2010) (citation omitted) (“We will read a contract as a whole and we will give each provision and term effect, so as not to render any part of the contract mere surplusage.”). 55 That is, the language is subject to the rule of ejusdem generis , that where a general follows a specific, the general relates to the specific

. See , e .g., S P ay, Inc . v. Stack Media Inc., 2021 WL 1009181 ( Del. Ch. Dec. 21, 2021 )

. 56 See AB 18.13 Complaint is “ in connection with the amount of any indemnity owed ” from escrow is one for the panel of arbitrators. 57 Since I am without jurisdiction here, it would be an advisory opinion to
comment on the i ssue just addressed, and I decline to do so here. I will point out, however, that the clear relationship between the Defendants ’ demand underlying
the Arbitration and the Plaintiff’s Complaint raise substantial questions of whether a stay would be appropr iate under the McWane 58 doctrine, in favor of arbitration , to the extent jurisdiction over the Complaint does exist in this Court.
Th e parties should inform me whether a stay pending review of arbitrability by the arbitrators or a dismissal is preferrable.

Sincerely,
/s/ Sam Glasscock III Vice Chancellor

57 See Schein , 139 S. Ct

. at 530 (directing courts faced with any question of substantive arbitrability to defer to the arbitrator where the parties’ contract so provides )

. 58 See generally McWane Cast Iron Pipe Corp. v. McDowell

- Wellman Eng ’ g Co. , 263 A.2d 281 (Del. 1970).