Chemours v. DowDuPont: Chancery Requires Subsidiary to Arbitrate Separation Agreement Dispute with Parent Despite the Subsidiary’s Lack of “Real World” Consent to the Separation Agreement
The Chemours Co. v. DowDuPont Inc., et al., C.A. No. 2019-0351-SG (Del. Ch. Mar. 30, 2020).
The subsidiary-plaintiff, created after the reorganization of the parent-defendant, brought an action against its parent and related entities challenging the enforceability of the Separation Agreement memorializing the terms of the subsidiary’s spin-off, including its arbitration clause. According to the subsidiary, certain liabilities assigned to the subsidiary in the spin-off were “vastly and wrongfully underestimated” by the parent, and the subsidiary brought suit to limit its obligations for those liabilities. The defendants moved to dismiss for lack of subject matter jurisdiction because the Separation Agreement contained an arbitration clause.
Vice Chancellor Sam Glasscock III looked to the provisions of the Separation Agreement concerning arbitration. Absent a clear contractual expression to the contrary, the Federal Arbitration Act (“FAA”) applies to matters involving interstate commerce. Because the Separation Agreement did not provide otherwise, the Court determined that the FAA controlled. Federal court precedent interpreting the FAA permits parties to defer questions of arbitrability to an arbitrator, referred to as a delegation clause or provision. The Vice Chancellor observed that when the contract delegates arbitrability to an arbitrator, “a court may not override the contract.” The Court, however, could not enforce a contractual provision delegating arbitrability to an arbitrator without first finding that the parties had consented to such a provision, because an arbitrator’s power only extends as far as the parties have contractually agreed.
The Court reasoned that, under Delaware law, when the parties have memorialized their agreement in a signed writing, that is “the most powerful and persuasive evidence of the parties’ intent” to be bound. There was no dispute that the then-Vice President of the subsidiary executed the Separation Agreement on the subsidiary’s behalf. The Vice Chancellor rejected the subsidiary’s assertion that because it was “animated solely by the will of its parent” its consent to arbitration was illusory. The Court instead reasoned: “[s]imply because the parent dictates terms to its wholly owned subsidiary is not grounds under Delaware law to infer lack of consent such that the contract would not be enforceable.” The subsidiary advocated for an exception to this established rule and asked the Court to require what it called “real world consent” before referring the entire matter to the arbitrator. The Vice Chancellor refused because it would violate the FAA, which requires the application of state contract law, and “Delaware law recognizes no subspecies of consent” of the kind urged by the subsidiary.
Finally, the Court refused to find the arbitration clause’s provision delegating decisions over substantive arbitrability to be unconscionable because the subsidiary was unable to demonstrate procedural or substantive unconscionability. The subsidiary challenged the powers granted to the arbitration panel and alleged limitations on its ability to grant the relief requested by the subsidiary as substantively unconscionable. Because these arguments did not address the unconscionability of the delegation provision itself, they were rejected. The Court reasoned that the subsidiary remained free to present its arguments on the merits about the unconscionability of the agreement to the arbitrators. The subsidiary’s procedural unconscionability argument mirrored its challenge based on the lack of any true, arms’-length “consent.” The Court again rejected that argument, reasoning Delaware law “enforces these admittedly non-consensual contracts [between parents and their wholly-owned subsidiaries] because they allow the corporate machinery to run smoothly….”
Because the Court lacked subject matter jurisdiction over matters the parties committed to arbitration, it accordingly dismissed the subsidiary’s complaint.