January 26, 2011
ZYMES, LLC, PLAINTIFF-APPELLANT,
BENJAMIN D. MAMOLA AND BRUCE H. LIPSHUTZ, DEFENDANTS-RESPONDENTS.
On appeal from the Superior Court of New Jersey, Chancery Division, Civil Part, Bergen County, Docket No. C-226-09.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued November 9, 2010 - Decided Before Judges Carchman and Messano.
Plaintiff Zymes, LLC (Zymes or plaintiff) appeals from a Chancery Division order holding that the issue of plaintiff's entitlement to permanent injunctive relief was a claim subject to arbitration. The judge further concluded that plaintiff was entitled to preliminary injunctive relief to be determined by the court. We affirm.
The underlying facts are not in significant dispute. Zymes is a bioscience company with four founding members. The ownership interests of the members evolved over time, but at the time of the lawsuit, the membership interests were: Vincent A. Morano (Morano), Chief Executive Officer and President of Zymes, 55%; Bruce H. Lipshutz, Ph.D. (Lipshutz), 25%; and Benjamin D. Mamola (Mamola), 20%. Zymes is suing Mamola and Lipshutz (collectively referred to as defendants) in their individual capacities for allegedly violating non-competition restrictive covenants.
Zymes, founded in September 2005, "focus[es] primarily on providing enabling technologies for the development of innovative products and efficient processes in the consumer, food and beverage, pharmaceutical, and industrial/chemical industries." On August 21, 2006, Zymes entered into a licensing agreement with the National Research Council of Canada, (NRC) "whereby [Zymes] acquired the exclusive worldwide license rights" to "a family of compounds, known as Ubisol-Aqua, that is capable of solubilizing a variety of water-insoluble, biologically active compounds." This license is vital to Zymes' business operations and is "referred to within the company as the 'mother patent.'"
At the time Zymes was formed, Morano, Mamola, and Lipshutz executed an agreement (the Agreement), which includes the following relevant provisions:
3.4 Duty of Loyalty.
A Member's duty of loyalty to the Company and the other Members is limited to the following:
(c) To refrain from competing with Company in the conduct of Company's business before Company's dissolution.
3.5 Duty of Care.
A Member's duty of care to Company and the other Members in the conduct and winding up of Company's business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.
3.6 Obligation of Good Faith and Fair Dealing.
A Member shall discharge the duties to Company and the other Members under this Agreement . . . and exercise any rights consistently with the obligation of good faith and fair dealing.
10. Announcements: Confidentiality. . . . .
Each Member agrees to maintain all confidential Company business information in confidence, and agrees not to use or disclose any Company business information, trade secrets, processes or confidences in competition with the Company.
In addition to the Agreement, defendants also simultaneously executed
"Nondisclosure, Non-Competition & Inventions Agreement[s],"*fn1
which contained the following identical clauses:
a) I shall not at any time, either during or after my engagement with ZYMES, use or disclose, or authorize anyone else to use or disclose, any Invention or any other secret or confidential matter relating to any aspect of the business of ZYMES without the written consent of ZYMES, except as may be necessary in the normal course of performing my duties for ZYMES;
4. NON-COMPETITION: During my engagement with ZYMES and for a period of five years after my engagement is terminated by ZYMES or by me for any reason, with or without cause:
a) I will not, in the United States . . . engage in or own or control an interest in . . . or act as an officer, director, or employee of, or consultant or adviser to, any firm, corporation or institution directly or indirectly in competition with or engaged in a business substantially similar to that of ZYMES . . .; and b) I will not recruit or hire any employee or consultant of ZYMES, or otherwise induce such employee or consultant to leave the employment of or engagement by ZYMES, to become an employee of or otherwise be associated with me or any company or business with which I am or may become associated.
Soon thereafter, on November 1, 2005, Zymes entered into a Consulting Agreement with Lipshutz, at the rate of $20,000 per month, and a Contractor Agreement with Mamola, at the rate of $25,000 per month.
On June 9, 2009, defendants tendered their letters of resignation to Morano. Both letters expressed grave concerns over Morano's repeated refusal to "obtain much-needed capital" at a time when Zymes owed approximately $1,800,000 to creditors, including over $1,000,000 to its principal product manufacturer, Albermale Corporation (Albermale). According to defendants, Zymes' insolvency placed the NRC license "in imminent jeopardy."
Two days later, on June 11, 2009, Morano received a letter from the NRC terminating the license because "it had become evident to [NRC] that [Zymes] [was] insolvent." The NRC letter "surprised" Morano because the license agreement "[did] not provide any mechanism for NRC to obtain financial information with respect to Zymes. There [was] neither a provision allowing NRC to request such information, nor a provision requiring Zymes to provide periodic reports with respect to its finances." Morano "believed that it was not mere coincidence that the NRC seemingly obtained private financial information regarding Zymes at about the same time that Mr. Mamola and Dr. Lipshutz had resigned." These suspicions were confirmed when NRC subsequently informed Morano about two letters it had previously received; one from Lipshutz "in which he indicate[d] that the funding situation at Zymes [had] been seriously deteriorating," and the other directly from Albermarle's counsel,*fn2 demanding payment on an $1,000,000 plus account receivable. In the interim, Zymes was successful in convincing the NRC to rescind the termination letter.
Zymes proceeded to review e-mails that had been sent and received by defendants through Zymes' computer system. Plaintiff asserts that "those e-mails suggest that in the month or two prior to their resignations, [defendants] planned to start a business that would compete with Zymes (and possibly to be the new licensee of the NRC's patented technology previously licensed to Zymes)."*fn3 Plaintiff further argues that the subsequent resignation of Volker Berl, Ph.D., Zymes' Chief Technology Officer, suggested that defendants may have solicited Berl "to become employed by their new venture," in violation of the Agreement.
Zymes filed a complaint in the Chancery Division against defendants, claiming, among other things, violation of the "Non-Disclosure, Non-Competition and Inventions Agreements." Zymes sought enforcement of the restrictive covenant that barred defendants from competing with Zymes during their employment and for five years after their resignation. Zymes also filed an Order to Show Cause seeking temporary restraints and preliminary injunctive relief, which was granted. The court restrained defendants from competing with Zymes and interfering with its customers, suppliers and licensors. In the interim, defendants filed an answer and counter-claimed for lost wages and reimbursement of out-of-pocket expenses.
Zymes moved to dismiss the counter-claims, arguing that under the Agreement's broad arbitration provision, defendants' counterclaim, but not plaintiff's claim for injunctive relief, must be arbitrated. The arbitration provision states:
13.3 Arbitration After Mediation. Subject to the terms and conditions of [Section 13.1, "Specific Performance,"] any unresolved disputed, difference or controversy arising under this Agreement or any of the Related Agreements shall be resolved by the Members' good faith effort.
(a) If the Members have not resolved the dispute by such dispute by such negotiation within 30 calendar days . . . the Members will engage in mediation of the dispute . . . .
(d) In respect of any unresolved dispute, difference or controversy arising under this Agreement or any of the Related Agreements: If non-binding mediation does not settle the matter within 60 days of selection of the mediator, the parties shall submit to binding arbitration by the American Arbitration Association ("AAA") in accordance with the AAA's then current Commercial Arbitration Rules for a single Arbitrator.
Despite the expansive reach of the arbitration provision, Zymes argued that the claim for injunctive relief was not subject to arbitration because in Sections 13.1 and 13.3 "[t]here is a single carve-out . . . which allows any of the parties to the [A]greement to bring claims for injunctive relief in a court of law . . . ." Section 13.1 of the Agreement, "Specific Performance," states:
The parties recognize that irreparable injury will result from a breach of any provision of [Section 10, "Announcements: Confidentiality"] of this Agreement and that money damages will be inadequate to remedy fully the injury. Accordingly, in the event of a breach or threatened breach of one or more of the provisions of this Agreement, any party who may be injured (in addition to any other remedy that may be available to that party) shall be entitled to one or more preliminary or permanent orders (a) restraining and enjoining any act that would constitute a breach or (b) compelling performance of any obligation that, if not performed, would constitute a breach.
Additionally, Section 13.3(c) provides that:
[N]othing in this Agreement shall constitute a waiver of the legal right of any Member hereto to assert any claims or defenses whatsoever or to obtain provisional relief.
In the event that any Member hereto initiates a lawsuit, arbitration or other adjudicative action with respect to this Agreement . . . .
In response, defendants did not challenge Zymes' interpretation of Sections 13.1 and 13.3, but instead, cited concerns of judicial efficiency. Approximately one month before this lawsuit was initiated, Morano sued Mamola in the Law Division for failing to perform on a note. Therefore, defendants argued that "[i]f the counterclaims were severed and we were made to arbitrate, then . . . we would be in three different forums.*fn4 It just makes no sense at all. These are all interrelated transactions."
The judge declined to consolidate, and instead, determined that "the [entire] matter does belong in arbitration and that it should go there now and go there with the [preliminary] injunctive relief in place and leave it up to the arbitrator as to what relief should ultimately be granted . . . ."
After the hearing, but before an order was entered, Zymes informed the court of our decision in EPIX Holdings Corp. v. Marsh & Mclennan Cos., Inc., 410 N.J. Super. 453 (App. Div. 2009). According to Zymes, EPIX concluded "that an agreed-upon dispute resolution scheme should not be disregarded to avoid perceived inefficiency resulting from the existence of simultaneous proceedings in litigation and arbitration." The judge rejected Zymes' argument and entered an order dismissing defendants' counter-claims and further ordering "[t]hat upon the initiation by defendants of an arbitration proceeding to determine their [counter-claims], the plaintiff's [permanent] injunctive relief claims will be transferred to such arbitration proceeding." Moreover, the preliminary injunction was to "remain in effect until further [o]rder of this [c]court or a determination by the arbitrator." Zymes' motion for reconsideration was also denied.
Zymes' reconsideration motion also informed the court that defendants "filed a lawsuit in the Chancery Court of Delaware seeking dissolution of Zymes, liquidation of the company, and appointment of a trustee." Defendants "acknowledge[d] that the reason why they went to Delaware and started that case is because if they get the Delaware court to dissolve [Zymes], then that's a way [to] render moot the [preliminary injunction]" and "compete freely without any restrictions." Zymes also moved for an anti-suit injunction. At oral argument, the following colloquy took place:
THE COURT: . . . [A]s a practical matter, if you need immediate injunctive relief, you can get it but not in order to have an entire trial that would be taking place in the court, [when] there is a counterclaim that's going on in arbitration. That just did not make sense to me. And specifically I'm looking at [Section 13.1, "Specific Performance,"] in the [A]greement which says any party who may be injured shall be entitled to one or more preliminary or permanent orders. It doesn't say anything about court . . . . [ZYMES'S COUNSEL]: Well, the reference in [Section 13.3(c)] . . . to initiate and lawsuit and then it continues on [to] arbitration or other adjudication.
[THE COURT]: . . . [S]o the only thing that's carved out of the arbitration clause, the way I look at it is, this -- the idea of a preliminary or permanent order restraining and enjoining any act that would constitute a breach or compelling performance of any obligation. All the rest of it is arbitrable. [ZYMES'S COUNSEL]: . . . My only claim is a permanent injunctive relief order enjoining [defendants] from violating their restrictive covenant. That's it.
THE COURT: But I think that . . . guts the arbitration provision, because what's at stake here is [any] unresolved dispute difference or controversy arising out of this [A]greement or any other [R]elated
[A]greement, and to say that you don't have to arbitrate if you seek injunctive relief, just, it seems to me, guts the whole arbitration provision.
THE COURT: . . . In my view the [c]court gave [Zymes] what [it was] entitled to under the [A]greement, which [was] a temporary restraint that preserved the situation until arbitration could deal with it.
The judge denied Zymes' motion for reconsideration but enjoined defendants "from pursuing or otherwise taking any action in connection with . . . the dissolution and liquidation of Zymes." Zymes appealed.
On appeal, Zymes asserts that it is entitled to litigate its injunctive relief claims in a court rather than through arbitration, it properly chose the forum and any claim of judicial inefficiency is irrelevant to interpretation of the contract.*fn5 Most importantly, the parties acknowledge that the standard of review in Delaware is consistent with New Jersey's standard of review of arbitration contracts. "'[A]rbitration is a matter of contract . . . .;'" James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76, 78 (Del. 2006) (quoting Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83, 123 S. Ct. 588, 591, 154 L. Ed. 2d 491, 496 (2002)). Review of questions of law, "including contract interpretation[,] [is] de novo." Kuhn Constr., Inc. v. Diamond State Port Corp., 990 A.2d 393, 396 (Del. 2010).
Section 13.1, "Specific Performance," states when "money damages will be inadequate to remedy fully the injury," any injured party "shall be entitled to one or more preliminary or permanent orders" of restraint or enjoinment. However, the provision is silent as to forum.
Section 13.3, "Arbitration After Mediation," states that it is "[s]ubject to the terms and conditions of [Section] 13.1." Subsection (c) provides that:
Unless otherwise expressly provided, nothing in this Agreement shall constitute a waiver of the legal right of any Member hereto to assert any claims or defenses whatsoever or to obtain provisional relief. In the event that any Member initiates a lawsuit, arbitration other adjudicative action with respect to this Agreement, then he, she or it shall agree to stay all proceedings in such action for as long as . .
The provision makes reference to provisional relief, which is not defined in the Agreement but can be interpreted to refer to preliminary injunctive relief. There is, likewise, reference to "initiat[ion] of a lawsuit," without additional defining language.
According to Zymes, "[t]he reference to 'provisional relief' in [S]section 13.3(c) encompasses any type of interim relief, including prejudgment attachment or orders restraining the fraudulent transfer of funds. By contrast, [S]section 13.1 specifically allows injunctive relief preventing a breach of the
[A]greement or compelling performance of the [A]greement." Our interpretation is that read in pari materia, the
provisions are designed to insure that no damage can ensue to the detriment of the injured party while an arbitration is proceeding. That may include provisional relief or even permanent relief that may be necessary to preserve the integrity of the agreement while at the same time ensuring that the arbitration may proceed forward to resolve the underlying contract issues in dispute. The general reference to a "lawsuit" in subsection (c), cannot be read as providing an alternative to the broad arbitration provisions agreed to here by the parties.
The limitation to "provisional relief" in Section 13.3(c) is material. This language must be contrasted with the broader language in Section 13.1 to give the full contract meaning. Kuhn Constr., Inc., supra, 990 A.2d at 396-397 ("[Delaware courts] will read a contract as a whole and . . . will give each provision and term effect, so as not to render any part of the contract mere surplusage.").
Our interpretation gives full effect to the entire Agreement. Parfi Holding AB v. Mirror Image Internet, Inc., 817 A.2d 149, 158 (Del. 2002); Sonitrol Holding Co. v. Marceau Investments, 607 A.2d 1177, 1183 (Del. 1992) ("Under general principles of contract law, a contract should be interpreted in such a way as to not render any of its provisions illusory or meaningless.").
As Zymes acknowledges, the Agreement's arbitration clause is broad based on "arising under" language. See also Carder v. Carl M. Freeman Cmtys., LLC, 2009 Del. Ch. LEXIS 2 at *15 (Del. Ch. Jan. 5, 2009) (quoting McLaughlin v. McCann, 942 A.2d 616, 623 (Del. Ch. 2008) ("Delaware courts previously have characterized . . . 'arising under' language as reflecting a broad arbitration provision . . . [and] such language 'generally provides for arbitration of all disputes.'"). Here, although the arbitration section is "subject to" Section 13.3 and there is a reference to "initiat[ing] a lawsuit," the language is not as explicit as: "the [non-breaching] Members shall be entitled to injunctive relief . . . instituted in any court of the United States or any state thereof having subject matter jurisdiction thereof." Willie Gary, supra, 906 A.2d at 79-80. This absence of precise language leads us to conclude that the parties did not intend to create yet another forum for resolution of disputes.
A full reading of the arbitration provisions of the Agreement ascribes to the parties an intent to resolve their contract differences first in mediation and then arbitration. This elaborate mechanism established a framework for the deferral of litigation for dispute resolution. The parties did recognize that circumstances could arise that would require timely intervention and availability of prompt resolution to preserve the positions of the parties. Absent specific language to the contrary, we conclude that the provisions of the Agreement do not create a "carve out" to allow a separate forum for the resolution of issues that will in effect "swallow up" the subject matter of the arbitration. In her carefully conceived decision, the chancery judge recognized exactly this. She formulated a remedy that recognized the obligations of the parties to arbitrate and the limitations on the parties of creating yet another cause of action. Her decision was sound and sustainable.
Our conclusion that the issue of permanent injunctive relief must ultimately be resolved in arbitration renders moot any further consideration of Zymes' additional arguments. We do note, however, that Epix, cited by Zymes both here and in the trial court, is distinguishable on its facts and not relevant to our consideration here. We do note that unlike Epix, the proliferation of lawsuits between parties subject to the arbitration provisions of the Agreement is a proper consideration of a court.