Chancery Court Compels Arbitration Based On Email Communications That Included All Essential Terms
By: Scott E. Waxman and Trevor M. Gates
In Gomes v. Karnell, No. 11814-VCMR (Del. Ch. Nov. 30, 2016), the Delaware Court of Chancery granted the defendants’ motion to compel arbitration and held that an email exchange between the parties’ attorneys formed a valid arbitration agreement. The plaintiff, Mark Gomes (“Gomes”), an investment analyst with thousands of followers, alleged breaches of fiduciary duty, breaches of contract, waste, and aiding and abetting breaches of fiduciary duty.
In 2009, Gomes began providing stock picks on a crowdsourced investment website. By 2013, Gomes and Ian Karnell had launched “PoisedToTriple.com,” a subscription service that circulates Gomes’s stock picks. Subsequently, Gomes and Ian founded PTT Capital, LLC (“PTT”), which would own PoisedToTriple.com, and Ian’s brother, Jeremi Karnell, eventually became a member of PTT (collectively, the “Karnells”). On June 8, 2015, Gomes and the Karnells executed an operating agreement for a new entity, Montext, LLC (“Montext”), which they planned to use to build a web-based investment platform. Shortly after the formation of Montext, disputes arose regarding the ownership of the platform.
In order to resolve those disputes, counsel for Gomes and counsel for the Karnells verbally agreed to mediate and, if mediation was not successful, to arbitrate. Gomes’s counsel wrote the Karnells’ counsel an e-mail titled “Agreement to mediate and arbitrate,” which stated: “This will memorialize our agreement as to how to move this matter forward. The parties (Mark Gomes, Jeremi Karnell, and Ian Karnell) agree to mediate all disputes between the three of them related to PTT and Montext. The parties, through counsel, agrees [sic] to use their best efforts to select a mediator by September 11. The parties further agree that if an impasse is declared by the mediator, the parties will immediately initiate the binding arbitration process in an effort to resolve these disputes.” The Karnells’ counsel then responded: “I am happy to call this an agreement on the core point of mediating/arbitrating in lieu of litigation. That said, let’s move on nailing down some particulars . . . .” In a subsequent email, the Karnells’ counsel also stated: “we have already agreed to mediate and arbitrate. That agreement is enforceable” (the above email exchange, collectively, the “Arbitration Agreement”).
Thereafter, Gomes’s counsel suggested possible mediators, the parties then selected a mediator, set a date for mediation, agreed to the scope of the mediation, and engaged in limited discovery. Gomes then cancelled the mediation days before it was scheduled to begin. On December 15, 2015, Gomes filed the complaint leading to this action, and the defendants moved to compel arbitration. Gomes argued that arbitration was improper, because the “bare-boned agreement” to arbitrate was missing “essential terms” and, therefore, reflected preliminary negotiations, rather than a final and binding arbitration agreement.
The court began its analysis with a look at the Federal Arbitration Act (“FAA”) and Delaware contract law principles. As stated by the court, once parties agree to arbitrate a dispute involving interstate commerce, the rules of the FAA generally govern. Under the FAA, agreements to arbitrate are “valid, irrevocable and enforceable,” unless invalidated upon such grounds that exist at law or in equity for the revocation of any contract (i.e., general contract law principles). Under Delaware law, a valid contract exists “when the parties intended that the contract would bind them, the terms of the contract are sufficiently definite, and the parties exchange legal consideration.”
Gomes argued that no contract was formed because the following “essential terms” were missing from the Arbitration Agreement: “the identity of the arbitrator, the means of selecting an arbitrator, the location of the arbitration, the applicable rules/procedures, the effect of the arbitration, the governing law, the type of relief available, the scope of permissible discovery, and the payment of arbitration fees.” In arguing this, Gomes cited several cases, but also conceded that there was no consensus among courts about what constitute the “essential terms” of arbitration agreements.
The court distinguished the facts of two cases in particular cited by Gomes: Ramone v. Lang and Leeds v. First Allied Connecticut Corp. In contrast with Ramone, the court found that the Karnells’ counsel expressed commitment “that was unconditional and without variation,” notwithstanding the fact that certain particulars were still to be “nailed down.” Specifically, the court found the Arbitration Agreement set forth the scope of arbitration; it described the timing of arbitration; and it set forth the parties. In addition, the court found that “[a]ll three parties acted with the understanding that ‘an agreement on the core point of mediating/arbitrating in lieu of litigation’ controlled their behavior.”
Similarly, in contrast with Leeds, the court did not find that any “extraordinary” terms were missing from the Arbitration Agreement. While the Arbitration Agreement did not set forth the identity and means of selecting an arbitrator, the court found that, in those situations, the FAA steps in, which allows the court to fill in and appoint an arbitrator.
The court also dismissed Gomes’s argument that the unsigned operating agreement for PTT should control, finding that Gomes presented no evidence that suggested the parties meant that agreement to be a final, enforceable document. Thus, the court granted the defendants’ motion to dismiss and to compel arbitration.