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GTSI Corp. v. Eyak Technology, LLC, et al., C.A. No. 5815-VCL (Del. Ch. Nov. 15, 2010)

November 15, 2010

In this case, the Delaware Court of Chancery granted a motion to stay until an arbitrator could determine whether the claims brought by the plaintiff, GTSI Corporation (“GTSI”), were subject to arbitration under Eyak Technology, LLC’s (the (“LLC”) limited liability company operating agreement (the “LLC Agreement”) because the arbitration provision of the LLC Agreement provided clear and unmistakable evidence that an arbitrator should decide the issue of substantive arbitrability by including language that the members “shall” arbitrate “any dispute…including the validity, scope and enforceability of [the] arbitration provisions.”

GTSI, Eyak Corporation and Global Technology, LLC were members of the LLC, with GTSI holding 37% of the membership interests. The LLC was eligible for and participated in the Section 8(a) Business Development Program (the “Section 8(a) Program”), a federal program administered by the Small Business Association (“SBA”) that provides assistance to companies owned by members of historically disadvantaged populations. On November 20, 2009, The LLC sought and was granted “early graduation” from the Section 8(a) Program. The LLC later executed a Voluntary Early Graduation Agreement by which it withdrew from the Section 8(a) Program effective May 10, 2010.

The LLC Agreement provided that upon the graduation or final withdrawal of the LLC from the Section 8(a) Program, the LLC must dissolve and commence winding up and liquidating, unless the members, by a 65% vote, decide to continue the LLC’s business operations. GTSI, which  could essentially veto any 65% vote as a holder of 37% of the membership interest, asserted that the LLC must dissolve as a result of its graduation from the Section 8(a) Program. The LLC offered to purchase GTSI rather than dissolve, and GTSI rejected such offer and subsequently brought the current action. The defendants, in response, brought an arbitration demand and filed a motion to stay the judicial proceedings.

In support of the motion to stay, the defendants argued that Section 13.10 of the LLC Agreement (the “Arbitration Provision”) required that an arbitrator, rather than the Court, decide the case. The Arbitration Provision stated:

The Members agree that any dispute between them or between any of them and the [LLC] arising out of, or in connection with, the execution, interpretation, performance or non-performance of this Agreement (including the validity, scope and enforceability of these arbitration provisions) shall be settled by arbitration conducted in the English language, in accordance with the commercial arbitration rules of the American Arbitration Association (“AAA”) by a single arbitrator, designated by the AAA in accordance with the AAA rules… The decision of the AAA shall be final, binding on the Members and the Company….  The AAA and the arbitrator shall be authorized to award equitable relief, including specific performance or othet  injunctive relief… Notwithstanding the foregoing agreement to arbitrate, the parties expressly reserve the right to seek provisional relief from any court of competent jurisdiction to preserve their respective rights pending arbitration.

The Court noted that the law presumes that a court will decide substantive arbitrability unless the contract clearly and unmistakably provides that an arbitrator will decide the issue, in which case the contract controls. The Court then found that the Arbitration Provision clearly and unmistakably provided that the parties intended the arbitrator would decide substantive arbitrability by including the language that the members “shall” arbitrate "any dispute…including the validity, scope and enforceability of these arbitration provisions.”

The Court went on to distinguish this case from Willie Gary (James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76 (Del. 2006)). Unlike Willie Gary, this case could be decided on the threshold issue of determining substantive arbitrability (i.e. that the LLC Agreement clearly and unmistakably provided that an arbitrator would decide substantive arbitrability). In Willie Gary, the Delaware Supreme Court proceeded to the next step of the analysis to determine whether the LLC Agreement generally provided for arbitration of all disputes as was necessary in Willie Gary because the LLC agreement in Willie Gary did not contain language that clearly and unmistakably provided for arbitration of substantive arbitrability.

Also unlike Willie Gary, the Arbitration Provision specifically contemplated that the arbitrator must decide whether a claim is properly brought in arbitration and empowered the arbitrator to award equitable relief. In Willie Gary, the arbitration provision carved out equitable relief as being reserved for the courts. The only carve-out of the Arbitration Provision was a limited opportunity to seek provisional relief until the arbitrator could address the parties’ equitable claims, which would allow a party to seek immediate provisional relief from a judicial officer. The Court further noted that the other provisions of the LLC Agreement that related to equitable relief did not provide a right of action in any court; rather, such provisions addressed only the type of relief that the parties could obtain in a court.

The Court therefore granted the motion to stay the action pending the arbitrator’s decision on substantive arbitrability.

The full opinion is available here