The Order in Cold Springs Ventures, LLC v. Gilead Sciences, Inc., 2014 NCBC 10 is a procedural conundrum wrapped up in arbitration issues [an enhanced version of this opinion is available to lexis.com subscribers]. The Plaintiffs in the Business Court are the respondents in a separate arbitration proceeding brought by the Defendant. But none of the Plaintiffs -- all of whom were shareholders or directors of a corporation which had signed off on the arbitration agreement forming the basis for the arbitration -- had personally signed the arbitration agreement.
There's nothing novel about holding persons who haven't signed arbitration agreements to be bound by them. The NC Court of Appeals held years ago that "well-established common law principles dictate that in an appropriate case a nonsignatory can enforce, or be bound by, an arbitration provision within a contract executed by other parties.” Ellen v. A.C. Schultes of Md., Inc.,172 N.C. App. 317, 320, 615 S.E.2d 729, 732 (2005) [enhanced version] (quoting Wash. Square Sec., Inc. v. Aune, 385 F.3d 432, 435 (4th Cir. 2004)).
The non-signatories in Cold Springs were not willing to go to arbitration. They moved for a preliminary injunction to enjoin the Defendant from proceeding with the arbitration against them. The Defendants' response was that they were entitled to "pierce the veil" against the corporate signer of the arbitration agreement and thereby get to the shareholders.
But is a Court entitled to determine a piercing the veil theory up front, in advance of an arbitration that is based on that very issue, or does that improperly delve into the merits?
Start with the concept of "arbitrability," which is "undeniably an issue for judicial determination." AT&T Techs. v. CWA, 475 U.S. 643, 649 (1986) [enhanced version]. Going along with that, however, is the concept that the court "is not to rule on the potential merits of the underlying claims." Id.
So what's a court to do when arbitrability is wrapped up with the merits of the case? Especially when the Defendants' demand for arbitration provides no specifics as to why the veil should be pierced, and makes only rote allegations as to why it should obtain that result.
Judge Jolly had little hesitation about getting at least somewhat into the merits. He held:
An important distinction must be drawn between [impermissible] consideration of the merits of an arbitrable claim and the threshold arbitrability inquiry that necessarily involves the same issues that underly the merits of a claim. The mere fact that certain issues could later be litigated substantively cannot on its own foreclose courts from assessing arbitrability. In such a situation, the overriding spirit of the Supreme Court's jurisprudence demands that courts nonetheless address those issues for the narrow and limited purpose of determining whether a claimant seeking to compel arbitration can sufficiently allege a basis for going forward against a responding party.
Remember that this was a Motion for a Preliminary Injunction, to enjoin the Defendants from proceeding with the arbitration against the Plaintiff shareholders. So what else did Plaintiff have to show to halt the arbitration? Irreparable harm and a likelihood of success on the merits.
Irreparable harm was present, because "forcing a party to arbitrate an issue absent an agreement to do so constitutes 'per se irreparable' harm." Op. ¶17.
On likelihood of success on the merits, Judge Jolly looked to G.S. § 1-569.7(b), which says that"[o]n motion of a person alleging that an arbitration proceeding has been initiated or threatened but that there is no agreement to arbitrate, the court shall proceed summarily to decide the issue."
He ruled that the parties should plan limited discovery on whether the shareholder Plaintiffs could be compelled to arbitrate, to be concluded in about the next six weeks. The Judge also stayed the arbitration pending a ruling on the piercing the veil basis for the arbitration.
Oh, and if you are wondering which party has the burden of proof going forward, it is the Defendant, because "under both state and federal law, the party seeking to compel arbitration bears the "burden of establishing an agreement to arbitrate." Op. ¶ 27 (citing Routh v. Snap-On Tools Corp., 108 N.C. App. 268, 274 (1992).
That's a heavy burden here, because the NC Supreme Court said in State ex rel. Cooper v. Ridgeway Brands Mfg., LLC [enhanced version] that "proceeding beyond the corporate form is a strong step: 'Like lightning, it is rare [and] severe[.]'"
Read other articles on the North Carolina Business Litigation Report, a blog for lawyers focusing on issues of North Carolina business law and the day-to-day practice of business litigation in North Carolina courts.
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