Delaware Business Litigation Report

Chancery Orders Stay of “Dr. J” Litigation Pending Arbitrator’s Decision on Arbitrability

Erving v. ABG Intermediate Holdings 2, LLC, C.A. No. 2021-0816-NAC (Del. Ch. Nov. 28, 2022)
Basketball legend Julius W. Erving II, also known as “Dr. J”, sold a majority interest in his trademark and other intellectual property to a brand development and marketing company. The transaction involved the creation of an LLC—in which Dr. J held a minority interest and the marketing company held a majority interest and promised to grow Dr. J’s brand. The LLC operating agreement contained a dispute resolution provision that included an exclusive arbitration clause. Several years later, Dr. J filed claims in the Court of Chancery, alleging that the defendants had wrongfully diverted funds and failed to devote reasonable efforts to grow Dr. J’s brand. Defendants moved to dismiss the action in favor of arbitration or, in the alternative, to stay the case pending an arbitrator’s decision regarding whether the dispute must be arbitrated.

The Court of Chancery stayed Dr. J’s action pending the arbitrator’s decision as to whether the dispute must be arbitrated. The LLC agreement did not reference the Delaware Uniform Arbitration Act, and so the Federal Arbitration Act applied. Under the FAA, state-law principles apply to determine the issue of substantive arbitrability (i.e., who decides the question of arbitrability). Under Delaware law, parties evidence a clear intent to submit the question of arbitrability to an arbitrator when the arbitration clause provides for arbitration of all disputes and also incorporates a set of arbitration rules that empower arbitrators to decide arbitrability. The Court examined the LLC agreement and determined that the plain language of the arbitration clause met both of these elements.

The Court reasoned that the presence of an exclusive Delaware jurisdiction clause in the LLC agreement did not run counter to the arbitration clause because the jurisdiction clause simply meant that any court filing that might occur must be filed in Delaware. The LLC agreement’s language regarding injunctive relief and specific performance also was not an obstacle to arbitration because the agreement incorporated arbitration rules that permitted the arbitrator to award equitable relief, charged the arbitrator with deciding the issue of arbitrability, and included expansive language that would subject a claim for specific performance to arbitration. Accordingly, the Court stayed the action pending an arbitrator’s decision regarding arbitrability, noting that an arbitrator’s decision finding arbitrability would result in the dismissal of the Delaware action for lack of jurisdiction.

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