Sapp v. Industrial Action Services, LLC
1:19-cv-00912
D. Del.Mar 25, 2020Background
- Plaintiffs Sapp and Hopper sold two oil-cleaning businesses to IAS (a RelaDyne subsidiary) under a 2016 Asset Purchase Agreement (APA) that included up to $5M in contingent "Earn Out Consideration" based on Buyer EBITDA over three post-closing periods.
- APA required IAS to deliver an Earn Out Statement within 90 days after each period; Sellers had 30 days to object and, if timely, unresolved issues would be submitted to an independent accounting firm per Section 2.3(e).
- Section 2.6(g) of the APA obligates Buyer to act in good faith and not to take actions designed to circumvent earn-out payments; Plaintiffs allege IAS/RelaDyne diverted customers and revenue to other RelaDyne entities to avoid paying the earn-out.
- Defendants moved to dismiss or stay the case under the Federal Arbitration Act, arguing the APA requires arbitration/expert resolution by the Accounting Firm; they also challenged the sufficiency of the breach, tortious-interference, and declaratory-judgment claims.
- The magistrate judge concluded the APA contemplates a narrow expert accounting determination (not arbitration) and that Plaintiffs plausibly pleaded breach of Section 2.6(g), an actionable theory under Section 2.6(f) at this stage, tortious interference by parent RelaDyne, and a declaratory-judgment claim. The report recommends denying Defendants' motion.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the APA requires arbitration (stay under FAA) | APA authorizes only limited expert accounting determinations by the Accounting Firm, not arbitration; broader disputes belong in court | Disputes over earn-out calculations and alleged diversion are for the Accounting Firm/arbitration and thus must be stayed | APA construed under Delaware law: provision is an expert determination mechanism, not arbitration; deny stay/compel arbitration |
| Breach of contract (Section 2.6(g)) | Sapp alleges IAS/RelaDyne made false promises and diverted revenue to avoid earn-out, plausibly alleging bad faith breach | Defendants say allegations reflect ordinary business judgment and are not bad-faith circumvention | Allegations, read favorably, plausibly state bad-faith conduct that could breach Section 2.6(g); claim survives dismissal |
| Breach of contract (Section 2.6(f): disposition of assets) | Plaintiffs contend diversion of customer relationships and revenue effectively disposed of ‘‘Acquired Assets’’/goodwill, triggering earn-out payment | Defendants: 2.6(f) was meant for sale-type dispositions; Plaintiffs’ theory is a stretch and not covered | Court finds the APA does not unambiguously foreclose Plaintiffs’ theory; claim not dismissed at this stage |
| Tortious interference by parent RelaDyne | RelaDyne diverted business from IAS to its affiliates to frustrate earn-out, alleging conduct antithetical to IAS’s interests | Defendants argue parent had legitimate enterprise-wide economic interest; benefits to affiliates foreclose bad-faith interference | Under Delaware law plaintiff must allege interference against subsidiary’s interests; pleadings here plausibly allege RelaDyne acted against IAS’s profit-seeking activities—claim survives |
Key Cases Cited
- Flintkote Co. v. Aviva PLC, 769 F.3d 215 (3d Cir. 2014) (two-step arbitrability analysis: valid agreement and scope)
- John Hancock Mut. Life Ins. Co. v. Olick, 151 F.3d 132 (3d Cir. 1998) (arbitrability scope principles)
- AT&T Techs., Inc. v. Communications Workers of America, 475 U.S. 643 (U.S. 1986) (arbitration is a matter of contract; no arbitration without agreement)
- Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (U.S. 2010) (party cannot be required to arbitrate disputes not contractually submitted)
- Century Indem. Co. v. Certain Underwriters at Lloyd’s, London, 584 F.3d 513 (3d Cir. 2009) (apply ordinary state-law contract principles to determine arbitrability)
- Kuhn Constr., Inc. v. Diamond State Port Corp., 990 A.2d 393 (Del. 2010) (Delaware will not enforce an ambiguous arbitration intent)
- Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co. LLC, 166 A.3d 912 (Del. Ch. 2017) (short timeframes and procedural gaps indicate limited expert role rather than broad adjudicative powers)
- Bhole, Inc. v. Shore Inv., Inc., 67 A.3d 444 (Del. 2013) (parental interference actionable where conduct is antithetical to subsidiary’s profit-seeking activities)
- Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228 (Del. 1997) (contract interpretation standard; ambiguous contracting prevents dismissal)
- SGS N. Am., Inc. v. Mullholand, 135 N.E.3d 646 (Ind. Ct. App. 2019) (language labeling an accountant as "expert not arbitrator" is determinative of expert-versus-arbitrator role)