In a January 2016 (unpublished) order, the North Carolina Business Court (NCBC) enforced a contract provision compelling arbitration and prohibiting any discovery prior to the arbitration.[1]
In Taggart v. Physicians Pharmacy Alliance, Inc., James Taggart sold his business, Physicians Pharmacy Alliance, Inc. (“PPA”), in a stock purchase agreement. The agreement contains a provision mandating arbitration as to “any claim, controversy, or other matter in question based upon, arising out of, or otherwise in respect of this Agreement.” The agreement further specifies:
“[i]t is the desire and intent of the Parties that such arbitration be held without any discovery, deposition or motion practice, that the arbitrator receive evidence solely through the written submissions and not hold any evidentiary hearing, and that the arbitrator has no ability to extend dates or apply rules that conflict with this provision.”
(emphasis added).
Parties are permitted to submit “presentations,” “arguments and position statements,” “exhibits,” and “testimony in the form of affidavits” to the arbitrator. Then, the agreement requires the arbitrator to make a decision within thirty (30) days of the submission, based solely upon these written presentations.
The issue at arbitration will be whether Taggart is bound to indemnify the buyer of PPA for a $5 million settlement payment, which resulted from an investigation by the U.S. Department of Justice after the sale of the company. Taggart objected to the agreement’s mandatory arbitration provision on the grounds that it is “procedurally and substantively unconscionable,” but the NCBC disagreed.
The agreement is governed by the Federal Arbitration Act, which applies general principals of state contract laws when the validity and/or enforceability of an arbitration provision is disputed. The agreement provides that Delaware substantive law governs the construction and enforcement of the arbitration. In applying Delaware law, the Court was tasked with determining “whether an enforceable agreement to arbitrate exists.” In determining whether a contract is unenforceable due to unconscionability, a court examines the “facts surrounding the commercial setting, purpose, and effect of a contract at the time it was made,”[2] and must find “an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.”[3] (emphasis added).
Taggart argued the agreement was unconscionable because it precludes him from fairly presenting his claims and is one-sided. Because PPA is in exclusive possession of the information relevant to the parties’ claims, precluding discovery prior to the arbitration would achieve an unconscionable result.
In looking at the circumstances surrounding the agreement when it was executed, rather than its resulting effect, the Court found Taggart did now show PPA took advantage of any unequal bargaining power or obtained Taggart’s agreement through some unfair or fraudulent means. The provision is not unconscionable because it does not relieve PPA from providing evidentiary proof of its claims, but only limits Taggart’s ability to review the proof in advance. The Court cited an Arizona District Court case in support of its opinion stating, “by agreeing to arbitrate, a party ‘trades the procedures and opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration.’ An agreement between two corporate parties to decrease expected litigation costs is not unconscionable, particularly when both sides must adhere to the same prohibitions.”[4]
Taggart was deemed a sophisticated party, who sold his company for $52.5 million, and was represented in the transaction by one of the largest law firms in the United States. In accordance with applicable Delaware law, the NCBC gave great deference to the voluntary agreement between these sophisticated parties. As such, PPA’s Motion to Compel Arbitration was granted and both parties remain bound by the provisions in the agreement.
[1] James Taggart v. Physicians Pharmacy Alliance, Inc., North Carolina Business Court, File No. 15-CVS-15061 (January 15, 2016).
[2] Tulowitzki v. Atl. Richfield Co., 396 A.2d 956, 961 (Del. 1978).
[3] Progressive Int’l Corp. v. E.I. Du Pont de Nemours & Co., 2002 WL 1558382, at *11 (Del. Ch. July 9, 2002).
[4] Tierra Right of Way Servs. v. Abengoa Solar Inc., No. CV-11-00323, 2011 U.S. Dist. LEXIS 61878, *15-16 (D. Ariz. June 9, 2011). (citations omitted).
