In this case, the Delaware Court of Chancery denied a motion for several forms of relief, including an order
disqualifying the opposing party’s counsel in arbitration and terminating all the opposing party’s claims and
defenses in arbitration. In doing so, the Court found that the inclusion in a contract of a broadly drafted
arbitration clause that requires the parties to arbitrate any dispute, claim or controversy arising out of or
relating to the agreement outweighs any public policy that would require questions of an attorney’s alleged
ethical violations to be determined in the first instance by a court rather than an arbitrator, particularly
where the attorney in question is not a Delaware attorney.
In November, 2008, SOC-SMG, Inc. (“SMG”), Day & Zimmerman, Inc. and The Day & Zimmerman
Group (together, “Day Zimmermann”) executed a limited liability company (“LLC”) agreement. The LLC
agreement included a broadly drafted arbitration clause that provided, in part, that “[a]ny dispute, claim
or controversy arising out of or relating to this Agreement or the breach, termination, enforcement,
interpretation or validity thereof, including the determination of the scope or applicability of this agreement
to arbitrate, shall be determined by arbitration….”
Each party contributed assets and had an ownership interest in the LLC. In addition to the cash contributed
at closing, Day Zimmermann agreed to contribute $12 million, to be paid in three installments, the first of
which was due on January 1, 2009. Day Zimmerman refused to pay the first installment upon procuring
electronically stored information from the LLC relating to SMG’s financial health and the value of its
contributed assets, which caused Day Zimmerman to question whether certain representations made by
SMG in connection with the closing were false.
After Day Zimmerman refused to make the installment payment, SMG initiated arbitration proceedings
in Pennsylvania. While the arbitration proceedings were ongoing, SMG brought the present action in
the Delaware Court of Chancery, seeking to have the Court disqualify Day Zimmerman’s counsel (a
Pennsylvania attorney) in the arbitration for breaching the attorney-client privilege held by SMG, impose
monetary sanctions, issue an order prohibiting further use of the allegedly privileged electronically stored
information and terminate all of Day Zimmerman’s claims in the arbitration proceedings. The Court denied
the motion and found that each of the questions should be decided in the first instance by an arbitrator,
pursuant to the arbitration clause. The Court further rejected SMG’s argument that public policy requires
that the Court, rather than an arbitrator, decide in the first instance issues of an attorney’s misconduct.
The Court stated that it will not permit a party to bring a claim for the sole purpose of securing a tactical
advantage in a pending proceeding, particularly where the claims of attorney misconduct are brought
against a non-Delaware attorney.
The Court entered summary judgment, sua sponte, in favor of Day Zimmerman, since the factual record
was undisputed on the relevant matters.
The full opinion is available here.