Norwest Venture Partners XIV, LP v. Andreacchi

• Docket Number: C. A. 2024-0411-KSJM
• Decision Date: 04 November 2024
• Parties: NORWEST VENTURE PARTNERS XIV, LP, SONYA BROWN and STEW CAMPBELL, Plaintiffs, v. MICHAEL ANDREACCHI, Defendant.
• Court: Court of Chancery of Delaware

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NORWEST VENTURE PARTNERS XIV, LP, SONYA BROWN and STEW CAMPBELL, Plaintiffs, v. MICHAEL ANDREACCHI, Defendant.

C. A. No. 2024-0411-KSJM

Court of Chancery of Delaware

November 4, 2024

ORDER DENYING APPLICATION FOR CERTIFICATION OF INTERLOCUTORY APPEAL AND MOTION FOR PARTIAL FINAL JUDGMENT UNDER RULE 54(B)

KATHALEEN MCCORMICK, CHANCELLOR

1. One plaintiff, Norwest Venture Partners XIV, LP ("NVP"), has applied for certification of interlocutory appeal of this court's October 4, 2024 order (the "Application" and the "Order").^[1] NVP moves in the alternative for entry of a partial final judgment under Court of Chancery Rule 54(b).

2. The plaintiffs filed this suit to enjoin an arbitration proceeding that Defendant Michael Andreacchi initiated in California (the "Arbitration") pursuant to an arbitration provision in his employment agreement (the "Employment Agreement"). The plaintiffs moved for a preliminary injunction in this court, and the Arbitration was stayed briefly to allow the motion to move forward. Andreacchi moved to dismiss, and the court expedited the proceeding toward a September 12, 2024 hearing on the parties' motions. Less than a month later, the court issued the Order granting each motion in part.

3. Two NVP subsidiaries executed the Employment Agreement; NVP did not.^[2] NVP seeks interlocutory appeal or partial final judgment as to the following portion of the Order, which found that NVP was bound by the arbitration provision in the Employment Agreement although it was not a party to the agreement.

NVP is bound by the arbitration provision in the Employment Agreement, although it is not a party to the agreement .... California law governs this issue. "[U]nder California law, arbitration is strongly favored, and any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration. California also has a strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution." Ruiz v. Sysco Food Servs., 18 Cal.Rptr.3d 700, 713 (Ct. App. 2004) (cleaned up). These considerations are material here, where the dispute is between California parties concerning a California business and a California employment agreement. Under California law, "an arbitration agreement signed by a subsidiary may bind the parent company only where the party seeking to compel arbitration can show the parent had sufficient control over the subsidiary's activities such that the subsidiary was a mere agent or instrumentality of the parent and the causes of action or claims against the parent arise out of this relationship." Cohen v. TNP 2008 Participating Notes Program, LLC, 243 Cal.Rptr.3d 340, 363 (Ct. App. 2019). Here, NVP is the majority stakeholder of Junk King Holdings which is the sole member and manager of JKFS, the signatory to the Employment Agreement. As the majority holder of Holdings' preferred units, NVP has the power to choose four of Holdings' five board members. NVP controls Holdings, and through that relationship controls JKFS. The claims against NVP here arise out of its ability to control JKFS. NVP is therefore bound by the Employment Agreement.^[3]

4. Supreme Court Rule 42 governs applications for interlocutory appeals, requiring that they be filed within "10 days of the entry of the order from which the appeal is sought."^[4] Rule 42 cautions that "[i]nterlocutory appeals should be exceptional, not routine, because they disrupt the normal procession of litigation, cause delay, and can threaten to exhaust scarce party and judicial resources."^[5] This language from Rule 42 serves as an interpretive principle, requiring that the court construe its factors to make interlocutory appeals the exception and not the rule.^[6]

5. Rule 42 establishes a two-part test. The court must first determine whether "the order of the trial court decides a substantial issue of material importance that merits appellate review before a final judgment."^[7] If the substantial-issue requirement is met, then the court must analyze eight factors to determine whether "there are substantial benefits that will outweigh the certain costs that accompany an interlocutory appeal."^[8]

6. "The substantial issue requirement is met when an interlocutory order decides a main question of law which relates to the merits of the case, and not to collateral matters."^[9] The issue at the heart of NVP's appeal-whether NVP may be bound by an agreement executed by one of its second-tier subsidiaries-was determinative as to four of the six counts in this case. It was a substantive legal issue and not a "collateral issue" like a discovery matter.^[10] Therefore, the Order decided a substantial issue.

7. Certification of interlocutory appeal does not automatically follow from a conclusion that a ruling addresses a substantial issue. It just means that the court moves to the second step of the analysis to determine, based on Rule 42's eight factors, whether there are substantial benefits outweighing the costs of an interlocutory appeal. NVP relies on two of Rule 42's eight factors, arguing that the Order conflicts with previous trial court decisions, and that interlocutory review will serve considerations of justice.^[11] Neither factor supports certification.

8. Presumably to get the high court's attention, NVP frames the issue on which trial courts conflict as one of corporate separateness. NVP writes: No "California theory of agency permits a Delaware court to disregard Delaware's long-established principle of corporate separateness[.]"^[12] But the question is not whether the court may disregard corporate separateness. Rather, the question is whether it is fair to bind a parent company to an arbitration provision found in an employment agreement signed by its controlled subsidiaries.

9. The Employment Agreement contains a California choice-of-law provision, and so California and not Delaware law governed the court's analysis.^[13] For California law, the Order relied on a California appellate decision, Cohen v. TNP 2008 Participating Notes Program, LLC. There, the court held that:

an arbitration agreement signed by a subsidiary may bind the parent company only where the party seeking to compel arbitration can show the parent had sufficient control over the subsidiary's activities such that the subsidiary was a mere agent or instrumentality of the parent and the causes of action or claims against that parent arise out of this relationship.^[14]

In Cohen, the court found that the parent company sufficiently controlled the signatory subsidiary where the parent sent a letter "on its letterhead . . . that substantially blurred the lines between the two entities and held out [the parent company] . . . as more than just [a] parent[.]"^[15] The Cohen court also noted that "the entities shared the same address and phone number."^[16] Cohen is consistent with other California decisions deploying agency theories to bind non-signatories to arbitration provisions.^[17]

10. NVP contends that Cohen is inapposite because Andreacchi "presented no evidence of unusual circumstances in corporate structure, such as a 'purposeful disregard of [JFKS's] independent existence or that [NVP] controlled [JKFS's] day-to-day operations."^[18] NVP is right, to a degree. Andreacchi did not provide the materials that formed the bases of the court's decision. NVP did.

11. In determining the level of control that NVP exerted over JKFS, the court examined the Employment Agreement, the Arbitration Demand, the Purchase Agreement, and the JK Holdings LLC Agreement-each of which were an exhibit to NVP's complaint or opening brief in support of its motion for a preliminary injunction.^[19]

12. The following examples from these documents demonstrate the expansive control NVP exerted over JKFS:

• The board of JK Holdings (the "Board") had the "authority, power and discretion to manage and control the business, property and affairs of [JK Holdings] and its Subsidiaries [including JKFS], to make all decisions regarding those matters and to supervise, direct and control the actions of the Officers and to perform any and all other actions customary or incident to the management of the Company's business, property and affairs."^[20] The Board was comprised of five managers, and NVP designated four of them. ^[21] NVP also had the power to remove any of its Board designees "at any time . . . with or without cause."^[22]

• The members of JK Holdings had "no power to participate in the management of [JK Holdings] or to vote on any matter, except as specifically set forth in [the JK Holdings LLC Agreement], or as may be required" by law.^[23]

• JKFS could not undertake any one of sixteen enumerated actions without express approval of the NVP-controlled Board, including "hir[ing] or terminating] any officer, or approving] or modifying] the base salary, bonus or other material compensation arrangements for any officer, including any issuance of Performance Units purusuant to the Company Incentive Plan."^[24] • Andreacchi, in his capacity as JKFS's CEO, did not report to the managers of JKFS, but instead, to the NVP-controlled Board.^[25]

• The NVP-controlled Board determined Andreacchi's JKFS base salary, incentive compensation, and equity compensation.^[26]

• The NVP-controlled Board could terminate Andreacchi for cause if he, among other things, violated its "reasonable directives."^[27]

• Legal notice to JK Holdings required notice to NVP.^[28]

13. The above list, like the letter and shared address and telephone number in Cohen,^[29] elucidates who called the shots in this arrangement. NVP controlled the JK Holdings Board, which in turn, exerted near total control over JKFS. The Order's conclusion that NVP controlled JKFS does not...