Martek Biosciences Corp. v. Zuccaro

Full title: MARTEK BIOSCIENCES CORP., Plaintiff v. ROBERT ZUCCARO, as stocklholders…

Court: United States District Court, D. Maryland

Date published: Dec 23, 2004

CIVIL No. AMD 04-3349 (D. Md. Dec. 23, 2004)

Opinion

CIVIL No. AMD 04-3349.

December 23, 2004

ORDER

ANDRE DAVIS, District Judge

This is a contractual dispute arising out of an earnout provision in a merger agreement wherein plaintiff Martek Biosciences Corporation ("Martek") is required to distribute a specified number of shares of Martek common stock upon certain events. The merits of the parties' dispute is not before the court. Rather, a preliminary issue presented is whether the dispute is subject to arbitration.

Founded in 1987, OmegaTech, Inc., was a biotechnology company that developed and produced docosahexaenoic acid ("DHA"), an omega-3 fatty acid that improves cardiovascular health and aids in the development of the brain and the eyes. One of OmegaTech's competitors was Martek, which also specializes in the development and production of DHA. In the spring of 2002, Martek merged with OmegaTech. The initial purchase price for OmegaTech was approximately 1.92 million shares of Martek common stock having a market value in March 2002 of approximately $53.5 million. Additional shares, to a maximum of 2.3 million, were to be payable to former OmegaTech shareholders if four separate milestones were met. Two milestones were related to regulatory and labeling approvals ("Nutritional Milestones") and two milestones were tied to financial objectives for sales and gross profit margins ("Financial Milestones").

The instant dispute relates to whether one of the Nutritional Milestones has been met, requiring the issuance of additional Martek stock to former OmegaTech shareholders. The merger agreement includes a broad arbitration clause with an express exception, which provides, in pertinent part:

Except for Board Decisions and those matters covered by Section 1.5(j), any dispute, controversy or claim arising out of or relating to Section 1.5 of this Agreement (including but not limited to the provisos in Section 1.5(f)), including claims seeking redress or asserting rights under applicable Laws (a " Dispute"), shall be settled by binding arbitration.

MERGER AGREEMENT § 1.5(k) (emphasis in original). "Those matters covered by Section 1.5(j)" relevant to the Nutritional Milestones is limited to the following sentence:

Any portion of the Maximum Contingent Share Consideration to be issued upon the achievement of a Milestone in Section 1.5(c)(v)(A) or (B), shall be issued by Martek within 30 days after such Milestone is met.

MERGER AGREEMENT 1.5(j) (emphasis in original). The remainder of Section 1.5(j) describes, in detail, the dispute resolution procedure applicable to any disputes regarding the achievement of the Financial Milestones. The issue presented here is whether the aforementioned sentence excludes from arbitration any Nutritional Milestone dispute.

The merger agreement designates defendant Robert Zuccaro as the agent and attorney-in-fact for each shareholder of OmegaTech as of the date of the merger. MERGER AGMT § 7.3(a). Zuccaro has "full power and authority to represent all the Stockholders and their successors with respect to all matters arising under this [Merger] Agreement." Id.

On October 15, 2004, Zuccaro initiated an arbitration proceeding to resolve the ongoing Nutritional Milestone dispute. Upon receipt of the certified mail receipt signed by Martek, Zuccaro submitted the appropriate paperwork to Judicial Arbitration and Mediation Services ("JAMS") on October 25, 2004. In the meantime, on or about October 18, 2004, Martek filed this action seeking a declaratory judgment on the merits of the parties' dispute. Thereafter, Martek filed a motion for temporary restraining order and preliminary injunction asking this court to enjoin the arbitration proceedings. After a teleconference with the court on October 29, 2004, the parties agreed to proceed by way of a motion to stay arbitration to be filed by Martek.

Martek maintains that the relevant Nutritional Milestone has not been met and the resolution of whether the Nutritional Milestone has in fact been met should be resolved in a judicial forum rather than in arbitration. According to Martek, the current dispute arises out of and is covered by Section 1.5(j), making it clearly excepted from the arbitration clause.

Zuccaro, on the other hand, contends the merits of the Nutritional Milestone dispute is subject to arbitration because the proper reading of the first sentence of Section 1.5(j) exempts merely the ministerial function of issuing additional shares within 30 days after a Nutritional Milestone is achieved. He contends that Section 1.5(j) does not, as Martek suggests, set forth the process to determine whether a Nutritional Milestone has been achieved. The only "matter" covered by the first sentence of Section 1.5(j), and thus exempt from the arbitration clause, is the number of days Martek has to distribute the stock after the milestone is achieved, and thus that is the issue exempt from arbitration. Additionally, Zuccaro contends that the merger agreement's reference to the arbitration procedures of JAMS incorporates JAMS's procedural rules, which grant the arbitrator(s) jurisdiction to determine whether a particular dispute is arbitrable.

"The general rule is that whether particular disputes are arbitrable under a contractual arbitration clause are questions for the court to decide as a matter of contract interpretation." Virginia Carolina Tools, Inc. v. Int'l Tool Supply, Inc., 984 F.2d 113, 117 (4th Cir. 1993). Courts should not assume the parties agreed to arbitrate arbitrability unless there is "clea[r] and unmistakabl[e]" evidence that they did so. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995) (citing ATT Techs. v. Communication Workers, 475 U.S. 643, 649 (1986)). Although the normal practice is the imposition of a policy-based, federal presumption in favor of arbitration, the court should determine the arbitration provisions' scope and meaning, unless the parties clearly and unmistakably agreed otherwise. Carson v. Giant Food, Inc., 175 F.3d 325, 329 (4th Cir. 1999); see also Virginia Carolina Tools, 984 F.2d at 117 (stating that the policy-based federal presumption in favor of arbitration does not apply as a rule of contract interpretation to resolve questions of the arbitrability issues themselves). The key distinction affording the court jurisdiction, as opposed to the arbitrator, is the issue of defining the scope of the arbitration clause itself rather than the scope of an agreed upon arbitrable issue. See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985) ("[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration."); Carson, 175 F.3d at 330 ("The determination of the arbitration provision's scope and meaning is for the court to resolve.").

The determination of what disputes are arbitrable is primarily based on the intent of the parties because arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which she has not agreed so to submit. Carson, 175 F.3d at 328-29. The Fourth Circuit held that a broad arbitration clause that generally commits all interpretive disputes "relating to" or "arising out of" the agreement does not satisfy the clear and unmistakable test. Id. at 329-30 ("Expansive general arbitration clauses will not suffice to force the arbitration of arbitrability disputes.").

Section 1.5(k) of the merger agreement (the arbitration clause) is similar to the broad arbitration clause discussed in Carson. 175 F.3d at 329-30; see MERGER AGMT § 1.5(k) ("any dispute, controversy or claim arising out of or relating to Section 1.5 of this Agreement . . . shall be settled by binding arbitration"). Moreover, the arbitration clause does not explicitly provide that the arbitrator shall have the authority to resolve the question of arbitrability. MERGER AGMT § 1.5(k). Such silence supports the conclusion that the court, not the arbitrator, must decide the arbitrability issue. First Options, 514 U.S. at 944-45.

Zuccaro's attempt to incorporate by reference the JAMS rules providing the arbitrator with jurisdiction over the issue of arbitrability is unavailing. Zuccaro cites numerous extra-circuit appellate decisions ruling that contracting to arbitrate through a specified dispute resolution entity results in consent to be bound by the procedural rules of that entity. However, the specification in the arbitration clause that the rules of JAMS apply to matters submitted to arbitration does not clearly and unmistakably demonstrate an intent to have an arbitrator of JAMS determine the question of arbitrability. See Carson, 175 F.3d at 330-31 (concluding that absent a clear intent that all disputes concerning the arbitrability of particular disputes be committed to arbitration, the arbitrability of claims is for judicial resolution). Rather, the JAMS rules apply only to subject matter properly submitted to and before an arbitrator.

When deciding whether a particular dispute is subject to arbitration, the court applies the law of the state mandated by the contract at issue. See First Options, 514 U.S. at 944 (stating that when interpreting the scope of the arbitration clause, the court should apply ordinary state-law principles that govern the formation of contracts). The instant merger agreement states that "the agreement shall be governed by and interpreted and enforced in accordance with the laws of the State of Delaware." MERGER AGMT § 8.9. Delaware follows the objective theory of contract interpretation. See, e.g., Indus. America, Inc. v. Fulton Indus., Inc., 285 A.2d 412, 415 (Del. 1971) (stating the overt manifestation of assent, not subjective intent, controls the formation of a contract); Leeds v. First Allied Connecticut Corp., 521 A.2d 1095, 1097 (Del.Ch. 1986) (applying the objective theory of contract law and disregarding the unexpressed, subjective intention of a party).

In interpreting a contract, Delaware courts first "examine the entire agreement to determine whether the parties' intent can be discerned from the express words used, or alternatively, whether its terms are ambiguous." Comrie v. Enterasys Networks, Inc., 837 A.2d 1, 13 (Del.Ch. 2003). Therefore, if the contract is clear on its face, the court relies on the evident, literal meaning of those words. See Aspen Advisors LCC v. United Artists Theater Co., 843 A.2d 697, 704 (Del Ch. 2004). However, if the contract is ambiguous or "fairly susceptible to different interpretations," then the court will consider extrinsic evidence to uphold the reasonable expectations of the parties at the time of contract formation. Comrie, 837 A.2d at 13.

The parties do not dispute that the issue of arbitrability of the Nutritional Milestones revolves around the proper interpretation of Section 1.5(k) (the arbitration clause) and Section 1.5(j) (the provision exempt from the arbitration clause). Section 1.5(k) unambiguously exempts all Board Decisions and "those matters covered by Section 1.5(j)" from the merger agreement's arbitration clause. MERGER AGMT § 1.5(k). Section 1.5(j) states, in pertinent part:

Any portion of the Maximum Contingent Share Consideration to be issued upon the achievement of a Milestone in Section 1.5(c)(v)(A) or (B), shall be issued by Martek within 30 days after such Milestone is met.

MERGER AGMT § 1.5(j). Moreover, the Nutritional Milestone provision, Section 1.5(c)(v), specifically references Section 1.5(j) as governing the issuance of the earned portion of the maximum contingent shares. MERGER AGMT § 1.5(c)(v) ("any portion so earned shall be issued to the Interest Holders pursuant to Section 1.5(j)").

Zuccaro's argument that such a reference is limited only to the issuance of shares rather than the achievement of the Nutritional Miles is unavailing. If the court were to adopt Zuccaro's interpretation of the merger agreement, the merits of whether the Nutritional Milestones were achieved would be decided by an arbitrator after which the court would still have to address whether the shares should be issued. Such an interpretation is not only inconsistent with the objective reading of the merger agreement, but would also result in a waste of resources for the parties. Finally, it is instructive that other subsections in Section 1.5 contain specific references to the arbitration clause, yet the pertinent Section 1.5(c)(v)(A) does not. See, e.g., MERGER AGMT §§ 1.5(e), 1.5(h)(ii), (iii).^_ The absence of any reference to 1.5(k) in any of the provisions governing the Nutritional Milestones further demonstrates that the parties did not intend that a dispute regarding their achievement be subject to arbitration.

_ Section 1.5(e) addresses operating budgets and specifically provides that any disputes arising out of that section "shall be submitted to binding arbitration pursuant to Section 1.5(k)." Similarly, sections 1.5(h)(ii) and 1.5(h)(iii) address various issues involved in a Sale of Technology also specify that any dispute arising under those provisions must be submitted "to binding arbitration pursuant to 1.5(k)." MERGER AGMT §§ 1.5(e), 1.5(h)(ii), (ii).

Applying the objective theory of contract interpretation, I find that the plain language of the arbitration clause of the merger agreement excludes the Nutritional Milestone dispute from the arbitration clause's ambit. Because the relevant contract provisions are unambiguous, I decline to consider the extrinsic evidence relied on by Zuccaro in the form of Martek Annual Report excerpts and Martek executives' statements in a local business journal. See Comrie, 837 A.2d at 13 (rejecting the consideration of extrinsic evidence unless the contract's terms are ambiguous).

For the reasons stated above, the motion to stay arbitration is GRANTED, AND DEFENDANT SHALL PROCEED NO FURTHER IN THE PENDING ARBITRATION PROCEEDINGS. THE MOTION TO COMPEL ARBITRATION IS DENIED.

SO ORDERED.