Commercial Division Blog
Party Did Not Waive Contractual Alternative Dispute Resolution Right to Have Expert Resolve Dispute
On April 8, 2020, Justice Sherwood of the New York County Commercial Division issued a decision in Dompe Farmaceutici S.P.A. v Lubris, LLC, 2020 NY Slip Op. 30934(U), holding that a party did not waive its contractual alternative dispute resolution right to have an expert resolve its dispute by moving to dismiss a lawsuit, explaining:
Lubris argues Dompe's narrow reading of the License Agreement is incorrect, that the clause applies to disputes "on any matter regarding the Development Program [or] the Business Plan". Delays by Lubris may cause revision of the Development Plan and/or Business Plan, which the parties must negotiate in .good faith, pursuant to section 2.7 of the First Amendment. The parties have been unable to agree on such revisions. Further, the expert is required to have experience in life sciences transactions, not just in the science. Section 2.7 of the First Amendment gives the expert the power to resolve disputes occurring during negotiations in the event of delays, showing the expert is not limited to technical issues.
Nor does the text of CPLR 7601 limit independent expert resolution to issues of valuation or appraisal. The language of the rule allows other issues to be resolved by an expert. Nor do the cases prohibit such an agreement by the parties. The legislative history also weighs against such a limitation.
As far as Dompe argues waiver, Lubris points out it is permitted to test the sufficiency of the complaint with a motion to dismiss before deciding whether to litigate or seek an alternative process, and Lubris' participation in this dispute is consistent with its intention to invoke the expert dispute resolution section of the License Agreement. Any delay occurred here because Dompe amended its complaint after the motion to dismiss was filed, which resulted in a motion to dismiss the amended complaint. The discovery stay was only lifted for a brief period, over Lubris' objections, and reinstated before the deadline to respond to demands. Lubris has been consistent and clear about its intentions here and has done nothing to show a preference for litigation. Nor has there been any prejudice to Dompe, as it was Dompe's choice to bring this suit rather than pursue the process contemplated in the License Agreement (id). Further, as the only relief Dompe is currently seeking is monetary, prejudice from delay is minor, and, in fact, resolution will be faster using the contractual process, since the expert is required to resolve the dispute in 90 days.
Regarding Dompe's procedural objection, that Lubris did not file a special proceeding, the caselaw does not support Dompe's position, and the citation relied upon by Dompe is a dissent to a First Department decision in a distinguishable case.
A special proceeding may be commenced to specifically enforce an agreement that a question of valuation, appraisal or other issue or controversy be determined by a person named or to be selected. The court may enforce such an agreement as if it were an arbitration agreement, in which case the proceeding shall be conducted as if brought under article seventy-five of this chapter. Where there is a defense which would require dismissal of an action for breach of the agreement, the proceeding shall be dismissed.
As far as Dompe relies on 873 Third Ave. Corp. v Madison Assoc., that case then treated the action as a special proceeding and considered it, rather than rejecting it, as Dompe seeks the court to do here. As far as Dompe relies on Rad v IAC/InterActiveCorp, for the premise that because plaintiffs do not seek to confirm an appraisal award or seek an order that the parties must submit to an appraisal, this action falls outside of the purview of CPLR 7601, that court also noted that here, the Agreements do not expressly refer to arbitration or an arbitration-like procedure. That court's determination does not apply here. Nor does Penn Cent. Corp. v Consol. Rail Corp. preclude application of CPLR 7601 here. To the contrary, the request to enforce an agreement requiring this matter to be sent to a person to be selected pursuant to an agreement by the parties falls squarely under CPLR 7601.
The License Agreement states:
In case of dispute (by the JSC or the CEOs, as the case may be) on any matter regarding the Development Program, the Business Plan, the calculation of the amount of royalties to be paid by Dompe and/or Lubris under this Agreement, including but not limited to results of royalties reports, which cannot be amicably resolved according to Section 14.4.1 above, then the Parties hereby agree to submit the relevant determination to an independent expert decision (the "'Independent Expert Decision"). The independent expert responsible for making Independent Expert Decisions (the "Expert") must have experience in life sciences transactions, and will be selected by a group of three independent arbitrators.
The License Agreement continues, providing the process for selecting the arbitrators and for the expert to make a determination. As far as Dompe relies on section 2.4 of the First Amendment, that section bars certain disputes from being submitted to an expert, but provides an exception for certain delays, including delays by Lubris under the plan for the Manufacture and supply of Lubricin provided by Lubris and approved by Dompe and delays or failure or shortage in the supply of Lubricin. This is such a dispute.
Nor has Lubris waived its right to enforce that provision of the License Agreement. Lubris is entitled to move to dismiss the complaint before seeking this relief. In the absence of unreasonable delay, so long as the defendant's actions are consistent with an assertion of the right to arbitrate, there is no waiver. Here, there has been no unreasonable delay, and Lubris' actions in moving to dismiss the complaint and amended complaint, and the very limited discovery, are consistent with Lubris' motion here. There is no waiver.
(Internal quotations and citations omitted).
Commercial litigation involves more than courts. Disputes often are--by agreement--decided by private arbitrators. But a party can lose the right to arbitrate if it litigates in court instead. Contact Schlam Stone & Dolan partner John Lundin at email@example.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.