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ASDC Holdings, LLC, et al. v. Malouf, C.A. No. 6562-VCP (Del. Ch. Sept. 14, 2011) (Parsons, V. C.)

September 14, 2011

In this memorandum opinion granting plaintiffs’ motion for a preliminary injunction, the Court of Chancery found i) plaintiffs’ ability to raise a Delaware forum selection clause as an affirmative defense in the defendants’ simultaneous Texas state court litigation did not provide an adequate remedy at law, and ii) the Delaware forum selection clause was sufficiently broad in scope for plaintiffs to demonstrate a reasonable probability of success on the merits of their claims that Delaware courts possessed exclusive jurisdiction over the claims defendants had brought in Texas state court.

On June 30, 2010, defendant Dr. Richard J. Malouf entered into an agreement with plaintiff ASDC Holdings, LLC (“ASDC”), a Delaware limited liability company formed by plaintiff Valor Management Corp. (“Valor”), under which ASDC acquired 71% of All Smiles Dental Center, Inc. (“All Smiles”). Each of the relevant contracts under that transaction (the “Agreements”) contained identical forum selection clauses requiring the parties to submit “to the exclusive jurisdiction of any state court within New Castle County, Delaware . . . with respect to any claim or cause of action arising under or relating to th[e] Agreement[s] . . . .”  The Agreements also contained identical arbitration clauses providing that “any dispute regarding [the] Agreement[s] [would be resolved] through binding arbitration.” The relationship between ASDC and Malouf quickly deteriorated and on February 22, 2011, ASDC and All Smiles submitted an arbitration demand against Malouf to the American Arbitration Association for breach of contract, breach of fiduciary duties, and fraud related to the Agreements. Malouf responded by filing suit against ASDC and All Smiles in Dallas County District Court in Texas, asserting claims of fraud, fraud in the inducement, breach of fiduciary duties, negligent misrepresentation and tortious interference with contract (the “Texas Action”). ASDC and All Smiles filed a motion to dismiss the Texas Action on May 9, 2011, on the ground that the Agreements’ forum selection clauses conferred Delaware courts with exclusive jurisdiction over Malouf’s claims. ASDC and All Smiles filed the present action in Delaware on June 13, 2011, seeking specific performance, a preliminary injunction, and a declaratory judgment that Malouf must litigate exclusively in Delaware all claims arising under or relating to the Agreements.

In opposing plaintiffs’ action, Malouf argued that i) the Court does not have subject matter jurisdiction over plaintiffs’ claims because plaintiffs already have an adequate remedy at law through their ability to raise the forum selection clause as an affirmative defense in the Texas Action, and ii) plaintiffs failed to establish either a reasonable likelihood of success on the merits of theirs claims or that they will suffer imminent and irreparable harm if the Texas court were to decide whether the forum selection clause applies to the Texas Action. Addressing first whether it possessed subject matter jurisdiction over plaintiffs’ claims, the Court noted that Malouf’s opposition relied heavily on the Delaware Supreme Court’s decision in El Paso Natural Gas Co. v. TransAmerican Natural Gas Corp., 1994 WL 248195 (Del. 1994), which affirmed the Court of Chancery’s holding below that it lacked subject matter jurisdiction to enjoin an action ending in Texas state court even though the parties in that case had previously agreed to a Delaware forum selection clause. The Court here, however, quickly dismissed El Paso’s application to plaintiffs’ action based on two important  distinctions: i) the El Paso court found the forum selection clause at issue in that case to be unenforceable as to the claims asserted in the Texas proceeding, and ii) the El Paso forum selection clause was far more narrow in scope than the All Smiles forum selection clause. The El Paso clause applied only to “actions to enforce or seek damages, specific performance or other remedy for the alleged breach of this agreement.” The All Smiles forum selection clause applied more broadly to “any claim or cause of action arising under or relating to this Agreement.” The Court instead chose to rely on the past precedent found in Ingres Corp. v. CA, Inc., 8 A.3d 1143 (Del. 2010), which upheld a preliminary injunction based upon a forum selection clause with nearly identical wording and scope to the All Smiles forum selection clause. In upholding the preliminary injunction, the Delaware Supreme Court in Ingres stated, “where contracting parties have expressly agreed upon a legally enforceable forum election clause, a court should honor the parties’ contract and enforce the clause, even if, absent any forum selection clause, the McWane principle might otherwise require a different result.” The Court here echoed those sentiments, reiterating that forum selection clauses are presumptively valid in Delaware and that such a clause “displaces the traditional default presumptions under McWane.” Thus, the Court concluded that requiring plaintiffs to litigate the forum selection issue in the Texas Action would deprive plaintiffs of the benefit of their bargain and, therefore, could not serve as an adequate remedy at law. Without an adequate remedy at law, the Court could properly retain subject matter jurisdiction over plaintiffs’ action.

The Court next turned its attention to whether plaintiffs had demonstrated the requisite elements for a preliminary injunction: a reasonable probability of success on the merits, an imminent threat of irreparable injury, and a balance of the equities tipping in plaintiffs’ favor. Malouf argued that plaintiffs were not likely to succeed on the merits of their action because certain claims in the Texas Action were asserted against Valor and certain individual All Smiles officers and directors, all of whom were not signatories to the Agreements. The Court rejected this argument, however, finding that, despite being non-signatories to the Agreements, Valor and the individual All Smiles officers and directors were parties “closely related” and, therefore, still entitled to invoke the forum selection clause against Malouf who was a signatory and therefore bound by the forum selection clause. The Court also found that the scope of the forum selection clause was broad enough to cover the remaining claims for breach of fiduciary duty, conspiracy, and unjust enrichment in the Texas Action. Thus, the Court found that plaintiffs had demonstrated a reasonable probability of success on the merits of their action. Finally, the Court held that the procession of a claim in an unwarranted forum posed a significant enough threat of irreparable harm to plaintiffs to warrant a preliminary injunction and that the balance of the equities tipped in plaintiffs’ favor, as Malouf was not entitled to any deference for his alternative forum choice, having already agreed to submit all litigation arising out of or relating to the Agreements to the exclusive jurisdiction of Delaware courts.

The full opinion is available here