Following up on last week’s discussion of who decides arbitrability, Rhode Island business court judge Richard A. Licht recently issued an opinion on the same subject. Associate Justice Licht’s January 29, 2020 opinion in CanWell, LLC v. High Street Capital Partners, LLC can be found here. His earlier December 2019 opinion provides additional background and context for the arbitrability decision, a copy of which can be found here. Aside from the subject matter, these opinions offer a model for how to clarify and organize a head-spinning array of parties, contracts, and issues.
In last week’s post, linked here, Wisconsin business court judge Michael Aprahamian found the arbitrator was empowered to decide arbitrability because the arbitration agreement itself expressly provided the arbitrator with that power. That court did not have to address the issue of whether adoption of a particular set of arbitration rules within the arbitration agreement provided that power. For example, AAA arbitration rules give the arbitrator authority to decide arbitrability. There is a split in case law authority, however, over whether incorporating these rules, standing alone, is enough to confer the power to decide arbitrability on the arbitrator.
In the present Rhode Island Business Calendar case, there is no express language addressing arbitrability in the contract itself. Rather, the Rules of the Superior Court of the State of Rhode Island and AAA rules are incorporated into the respective arbitration agreements potentially at issue. Justice Licht, applying Delaware law as required by the parties’ agreements, follows the majority rule that if the incorporated arbitration rules give the arbitrator power to decide arbitrability, this is sufficient in itself.
Our focus here will be on Justice Licth’s January 29, 2020 opinion, and the issue of who decides arbitrability. We will not be discussing the portion of that opinion addressing arbitrator selection, and commend you to Judge Licht’s opinion on that issue.
The case involves troubled business relationships in the cannabis alternative dosage industry aka “edibles”. There are multiple parties with different alleged ownership interests in different LLCs, all revolving around the cannabis business. All but one of the parties is a Delaware LLC, with that party being a Maine non-profit corporation. The parties’ dispute center on the alleged termination of one of their agreements, and alleged violation of a non-compete.
The petitioners are CanWell, LLC (CanWell) and two of its state-based subsidiaries, CanWell Maine and CanWell Rhode Island. CanWell has expertise in all aspects of the cannabis business and owns the significant majority interest in CanWell Maine and CanWell Rhode Island. The respondents are WPMC, WCC, Acreage, and Northeast (the Maine non-profit). WPMC is in the “flower side” of the cannabis business. Acreage is a high growth cannabis operation, and Northeast has a license to cultivate and dispense marijuana, and to run dispensaries.
CanWell owns the significant majority interest in CanWell Maine and CanWell Rhode Island. WPMC and WCC own less than 5% interests in CanWell Maine and CanWell Rhode Island. Acreage owns the vast majority of WPMC, Northeast owns a small percentage of WPMC, and CanWell owns .1% of WPMC. CanWell also asserts that Northeast is WPMC’s successor in interest.
The Agreements and Dispute Resolution Provisions
The disputes between the parties involve alleged termination of an Alternative Dosage Agreement (ADA), and the alleged violation of the ADA’s non-competition provision.
1. CanWell entered the ADA with Northeast, WCC, and WPMC to sublicense certain material and intellectual property re carrying out edibles business in Maine. The ADA contained a non-compete. It included a Maine forum selection clause for Maine courts in the event of any disputes.
2. There are WPMC operating agreements involving WPMC, Northeast, CanWell and Acreage, among others. These agreements do not specifically reference the ADA by name. They include arbitration clauses stating:
“The parties hereby agree that unless otherwise specifically required by law, any and all disputes, and legal and equitable claims arising between or among the Shareholders, the Directors, the officers, the Company, or any of them or any combination of them, which relate to the rights and obligations of such Persons under the terms of this Agreement, any agreement contemplated hereby, or any future agreement, understanding or instrument to which two or more such Persons may be parties, shall be submitted to binding arbitration in Providence, Rhode Island in accordance with the commercial rules of the American Arbitration Association.” (Court’s emphases).
3. There are subsidiary operating agreement between CanWell, CanWell Maine, CanWell Rhode Island, WPMC, and WCC. These agreements do include reference to the ADA as a defined term, and incorporate the ADA’s non-compete by reference.
The most recent versions of these agreements include arbitration provisions stating:
“The parties hereby agree that unless otherwise . . . required by law, any and all disputes, and legal and equitable claims arising between or among the Members, the Managers, the officers, the Company, or any of them or any combination of them, which relate to the rights and obligations of such Persons under the terms of this Agreement, any agreement contemplated hereby, or referenced herein, or any future agreement, understanding or instrument to which two or more such Persons may be parties, shall be submitted to binding arbitration in . . . Rhode Island, in accordance with the Rules of the Superior Court of the State of Rhode Island with the arbitrator designated by the Board of Managers;. . . .” (Court’s emphases).
An earlier version of these agreements had an arbitration provision stating:
“The parties hereby agree that unless otherwise . . . required by law, any and all disputes, and legal and equitable claims arising between or among the Members, the Managers, the officers, the Company, or any of them or any combination of them, which relate to the rights and obligations of such Persons under the terms of this Agreement, any agreement contemplated hereby, or any future agreement, understanding or instrument to which two or more such Persons may be parties, shall be submitted to binding arbitration in . . . Rhode Island, in accordance with the commercial rules of the American Arbitration Association.” (Court’s Emphases).
The Arbitrability Disputes
All of the CanWell entities seek arbitration under the operating agreements. CanWell alone seeks arbitration against Northeast on the theory that even though the ADA itself has no arbitration agreement, because the ADA is a future agreement or contemplated agreement under the arbitration provision found in the WPMC operating agreement, ADA disputes are arbitrable.
Justice Licht determined there was a single issue before the court: “who decides, this Court or the arbitrator, whether the ADA disputes are arbitrable.” He makes clear that (1) the merits of these disputes, and (2) in what forum the merits will be decided, are not before the Court.
As a precursor to his analysis, Justice Licht first determined that Delaware law applied under the Federal Arbitration Act, as the parties had contractually agreed to Delaware law.
The Arbitrator Makes the Arbitrability Decision When the Contract or Incorporated Arbitration Rules Clearly and Unmistakably Say So
Citing James & Jackson, LLC v. Willie Gary, 906 A.2d 76, 79 (Del. 2006), Justice Licht states that Delaware law observes a difference between “substantive arbitrability” and “procedural arbitrability”. Relying on U.S. Supreme Court precedent, Justice Licht then states that “[s]ubstantive arbitrability issues are gateway questions about the scope of an arbitration provision and its applicability to a given dispute.” Further, “[t]he well-established presumption favoring arbitrability is reversed when applying contract law principles to determine substantive arbitrability: ‘Although the Court has also long recognized and enforced a “liberal federal policy favoring arbitration agreements,” it has made clear that there is an exception to this policy: The question whether the parties have submitted a particular dispute to arbitration, i.e. the “question of arbitrability,” is “an issue for judicial determination [u]nless the parties clearly and unmistakably provide otherwise.’” [Court’s emphasis]
Then, turning back to Delaware Supreme Court precedent, “Delaware has ‘adopt[ed] the majority federal view that reference to the AAA rules evidences a clear and unmistakable intent to submit arbitrability issues to an arbitrator.’” More specifically, “’[t]he majority view does not, however, mandate that arbitrators decide arbitrability in all cases where an arbitration clause incorporates the AAA rules. Rather, it applies in those cases where the arbitration clause generally provides for arbitration of all disputes and also incorporates a set of arbitration rules that empower arbitrators to decide arbitrability.’”
Thus, there is a two-step test when the arbitration agreement does not include express language empowering the arbitrator to decide arbitrability: (1) does the arbitration clause generally provide for arbitration of all disputes; and (2) does the arbitration clause incorporate a set of arbitration rules that empower arbitrators to determine arbitrability. [Justice Licht notes that Delaware courts had recognized the “wholly groundless” exception to allowing an arbitrator to decide arbitrability, but the U.S. Supreme Court rejected that exception in the Henry Schein case.]
On the Facts of this Case, the Arbitrator Decides Arbitrability
The court found that the CanWell operating agreements encompassed the ADA. Justice Licht recognized that the ADA’s Maine judicial choice of forum provision might create a conflict with the operating agreements’ arbitration clauses over where to litigate the dispute. That is a question for the arbitrator to decide, however, not the court.
As to the arbitration rules issue, the operating agreements provide for binding arbitration under the Rules of the Superior Court of the State of Rhode Island. These rules state “that an arbitration ‘award must resolve all issues raised by the pleadings.’” In this case, “Petitioners pled … that the parties’ disputes must be sent to arbitration ….” Respondents moved to dismiss on the basis that ADA disputes are not arbitrable because of the ADA’s Maine forum selection clause. Justice Licht denied that motion. He found that “whether the ADA Disputes are arbitrable is an issue that was raised in the pleadings and should be considered and decided by the arbitrator.”
Thus, “[b]ecause a fair reading of the Rhode Island Superior Court Arbitration Rules empowers the arbitrator to decide all issues, the second standard is also met, and arbitrability goes to the arbitrator.” Justice Licht similarly found that even under the arbitration language of the original operating agreement, referencing AAA rules, arbitrability still goes to the arbitrator and not the courts.
A second petition addressed the WPMC operating agreement. This agreement included an arbitration provision in accordance with AAA rules. Justice Licht again found the arbitration language broad enough to encompass the parties’ dispute over the ADA. Further, the AAA rules provide “that ‘[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.’” Thus, following Delaware law, the incorporation of the AAA’s rules ultimately requires the arbitrator to decide arbitrability.