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SOC-SMG, Inc. v. Day & Zimmerman, Inc., et al., C.A. No. 5375-VCS (September 15, 2010)

September 15, 2010

In this case, the Delaware Court of Chancery denied a motion for several forms of relief, including an order disqualifying the opposing party’s counsel in arbitration and terminating all the opposing party’s claims and defenses in arbitration. In doing so, the Court found that the inclusion in a contract of a broadly drafted arbitration clause that requires the parties to arbitrate any dispute, claim or controversy arising out of or relating to the agreement outweighs any public policy that would require questions of an attorney’s alleged ethical violations to be determined in the first instance by a court rather than an arbitrator, particularly where the attorney in question is not a Delaware attorney.

In November, 2008, SOC-SMG, Inc. (“SMG”), Day & Zimmerman, Inc. and The Day & Zimmerman Group (together, “Day Zimmermann”) executed a limited liability company (“LLC”) agreement. The LLC agreement included a broadly drafted arbitration clause that provided, in part, that “[a]ny dispute, claim or controversy arising out of or relating to this Agreement or the breach, termination, enforcement, interpretation or validity thereof, including the determination of the scope or applicability of this agreement to arbitrate, shall be determined by arbitration….”

Each party contributed assets and had an ownership interest in the LLC. In addition to the cash contributed at closing, Day Zimmermann agreed to contribute $12 million, to be paid in three installments, the first of which was due on January 1, 2009. Day Zimmerman refused to pay the first installment upon procuring electronically stored information from the LLC relating to SMG’s financial health and the value of its contributed assets, which caused Day Zimmerman to question whether certain representations made by SMG in connection with the closing were false.

After Day Zimmerman refused to make the installment payment, SMG initiated arbitration proceedings in Pennsylvania. While the arbitration proceedings were ongoing, SMG brought the present action in the Delaware Court of Chancery, seeking to have the Court disqualify Day Zimmerman’s counsel (a Pennsylvania attorney) in the arbitration for breaching the attorney-client privilege held by SMG, impose monetary sanctions, issue an order prohibiting further use of the allegedly privileged electronically stored information and terminate all of Day Zimmerman’s claims in the arbitration proceedings. The Court denied the motion and found that each of the questions should be decided in the first instance by an arbitrator, pursuant to the arbitration clause. The Court further rejected SMG’s argument that public policy requires that the Court, rather than an arbitrator, decide in the first instance issues of an attorney’s misconduct.  The Court stated that it will not permit a party to bring a claim for the sole purpose of securing a tactical advantage in a pending roceeding, particularly where the claims of attorney misconduct are brought against a non-Delaware attorney.

The Court entered summary judgment, sua sponte, in favor of Day Zimmerman, since the factual record was undisputed on the relevant matters.

The full opinion is available here