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Weiner v. Milliken Design, Inc., C.A. No. 9671-VCP (Del. Ch. Jan. 30, 2015) (Parsons, V.C.)

January 30, 2015

In this memorandum opinion, the Court of Chancery granted the plaintiff-counterclaim defendant’s motion for summary judgment seeking to compel arbitration of a post-closing price adjustment to a stock purchase agreement and denied the defendant-counterclaim plaintiff’s cross-motion for summary judgment seeking to limit the scope of that arbitration, concluding, among other things, that the defendant-counterclaim plaintiff’s objections to the arbitrability of certain issues were questions of procedural arbitrability that should be decided by the arbitrator.

In October 2009, Defendant-counterclaim plaintiff Milliken Design, Inc. (“Milliken”) entered into a Stock and Unit Purchase Agreement (the “Agreement”) to acquire several entities (the “Acquired Companies”) owned by plaintiff-counterclaim defendant Dr. Robert Weiner (“Weiner”) and his former business partners (collectively, the “Sellers”).  Pursuant to the Agreement, Milliken purchased the Acquired Companies for $30 million in cash and assumed approximately $16 million in net debt.  That $46 million figure potentially could be adjusted by a net working capital adjustment and certain earnout payments to yield the total purchase price. 

The Agreement provided for potential earnout payments at the end of 2010, 2011, and 2012.  For each of those years, the Agreement established a target revenue that, if met or exceeded, would require Milliken to pay the Sellers $2.3 million as an addition to the purchase price; if target revenue were not met, then the Agreement provided a formula to calculate the additional earnout payment, if any.  With respect to 2011 and 2012, the Agreement required Milliken to make additional payments in the form of a cumulative earnout if the sum of 2010 and 2011 revenues, or the sum of 2010, 2011, and 2012 revenues, met or exceeded certain thresholds.  Under the Agreement, the cumulative earnout payments would be made in addition to the 2011 and 2012 earnout payments.  The Agreement capped the aggregate of all earnout payments at $7 million.

Under the Agreement, Milliken was required to make the appropriate payments within 120 days after the end of each year and concurrently deliver to the “Sellers Representative” a calculation supporting the earnout payment.  Upon receipt of the earnout calculation, the Sellers Representative had 30 days to object by delivering to Milliken a “Certificate of Earnout Dispute,” defined by the Agreement as substantially in the form of an exhibit to the Agreement and signed by the Sellers Representative.  Under the Agreement, if the Sellers Representative did not object within 30 days, the earnout calculation for that applicable year “shall be final and binding on the parties.”  If the Sellers Representative delivered a timely Certificate of Earnout Dispute, the Agreement required the parties to use their reasonable efforts to resolve the dispute and, if no such resolution could be reached within 30 days, submit the dispute “to an arbitrator who shall have at least 20 years of experience in the floor coverings industry (the ‘Arbitrator’).”

The parties also could arrive in earnout-related arbitration in the event that the Sellers Representative delivered a Certificate of Earnout Dispute within 30 days after Milliken “takes an action that would likely require an adjustment contemplated by the definition of Revenues[.]”  To that end, Milliken was required to keep Weiner and other former senior managers of the Acquired Companies “reasonably informed” of operations, though Weiner had no actual involvement in management post-closing.

The Sellers Representative had no objection to the 2010 earnout calculation.  Throughout 2011 and 2012, however, Weiner raised numerous concerns in writing that Milliken’s management of the Acquired Companies was inconsistent with pre-Agreement representations and would have adverse effects on operations.  Weiner claimed that these poor decisions improperly depressed the 2011 earnout payment.  Weiner became Sellers Representative during 2011.

While Milliken did not deny that Weiner complained in writing in 2011 and 2012 regarding its management decisions and alleged improper depression of the 2011 earnout payment, it contended that a Certificate of Earnout Dispute was not provided in the form required by the Agreement.  Milliken argued that the only Certificate of Earnout Dispute ever received by it was in April 2013, concededly within the 30-day period following Milliken’s delivery to Weiner of the 2012 earnout calculation.  In that certificate, Weiner noted that he previously had “expressed objections, concerns, and disagreement with various policies that Milliken has employed … [which] have directly and adversely impacted the ability to maximize the Earnout.”  Milliken countered that such certificate applied to the 2012 earnout calculation only, and not to prior years or to the cumulative earnout.  The parties attempted without success to resolve their dispute.

The parties also could not agree upon the selection of the Arbitrator.  In such a situation, the Agreement provides that the parties are to each select one person who meets the arbitrator qualifications and those two persons shall jointly select a person who meets the arbitrator qualifications to serve as the Arbitrator.  The parties, however, could not even agree on whether the other party’s selected persons satisfied the arbitrator qualifications.  Weiner argued that Milliken’s selections did not have “at least 20 years of experience in the floor coverings industry,” whereas Milliken asserted that Weiner’s selections had no previous experience as arbitrators.

On May 19, 2014, Weiner filed a complaint in the Court of Chancery seeking to compel arbitration.  On June 17, 2014, Milliken filed its answer and counterclaims, seeking an order enjoining the parties from arbitrating any claim concerning the 2010 or 2011 earnout calculations and arguing that those calculations and related earnout payments were “final and binding” by operation of the 30-day deadline set forth in the Agreement.  Both parties moved for summary judgment on their claims.

The Court granted Weiner’s motion and denied Milliken’s motion, holding that Milliken’s counterclaims asked it to decide issues of procedural arbitrability that must be decided by the Arbitrator.  The Court contrasted issues of substantive arbitrability—i.e., gateway questions relating to the scope of an arbitration provision and its applicability to a given dispute—with issues of procedural arbitrability—i.e., whether the parties have complied with the terms of an arbitration provision, including prerequisites and defenses to arbitrability such as time limits, notice, laches, estoppel, conditions precedent, waiver, delay, etc.—and concluded that Milliken’s arguments relate to “procedural questions that grow out of the dispute and bear on its final disposition” that “should be left to the arbitrator.”

According to the Court, “the Agreement clearly provides for arbitration of unresolved disputes that arise in the process of the calculation and payment of the Earnouts.  The fact that [the Agreement] also delineates the procedural mechanism for perfecting such a ‘dispute’ and presenting it to the arbitrator does not transform the procedural and formal requirements of [the Agreement] into ‘gateway questions’ of substantive arbitrability.”  The Court explained that adopting Milliken’s argument would “invite[] a needlessly bifurcated adjudication of the issues in this dispute.”

With respect to the selection of the Arbitrator, the Court agreed with Weiner’s interpretation of the Agreement’s language that the dispute was to be submitted “to an arbitrator who shall have at least 20 years of experience in the floor coverings industry,” concluding that the Arbitrator must have at least 20 years of experience in the floor coverings industry and need not be “someone who routinely serves as an arbitrator of disputes on a professional basis,” as Milliken argued.  The Court explained that Milliken’s interpretation was unreasonable and would add a requirement the parties easily could have included at the time of contracting (but did not) by including a word like “experienced” or “professional,” or “by making reference to organizations like the American Arbitration Association or Judicial Arbitration and Mediation Services.”

Accordingly, the Court granted summary judgment in favor of Weiner and against Milliken.  The Court ordered the parties each to submit up to three potential arbitrator candidates from whom the Court would select the Arbitrator.

The full opinion is available here