The Court of Chancery granted defendants' motion to dismiss based on lack of subject matter jurisdiction. The court held that Elf's claims arose under the Agreement, or the transactions contemplated by the agreement, and were directly related to Jaffari's actions as manager of Malek LLC. Therefore, the court found that the Agreement governed the question of jurisdiction and that only a court of law or arbitrator in California is empowered to decide these claims.
Elf Atochem North America, Inc. v. Jaffari
Plaintiff Elf manufactured and distributed solvent-based maskants. Defendant Jaffari developed an environmentally friendly alternative maskant. The EPA passed regulations on maskants so Elf approached Jaffari and proposed investing in his product. They agreed and formed Malek LLC. Elf contributed $1 million for a 30% interest and Jaffari's company contributed its rights to its maskant for a 70% interest. They also agreed to arbitrate any disputes arising therefrom and to only allow suits in California and only then to compel or enforce arbitration.
Elf later sued Jaffari and Malek LLC in Delaware, seeking equitable remedies.
The dispute resolution clauses of the agreement were invalid because a Delaware Act prohibits parties from vesting exclusive jurisdiction in a forum outside the state.
The referenced section of the act is a permissive statue and does not prohibit the parties from vesting exclusive jurisdiction outside the state. Thus, the dispute resolution provisions are valid and do apply.
Were the arbitration and forum selection clauses valid?
(d) In a written limited liability company agreement or other writing, a manager or member may consent to be subject to the nonexclusive jurisdiction of the courts of, or arbitration in, a specified jurisdiction, or the exclusive jurisdiction of the courts of the State of Delaware, or the exclusivity of arbitration in a specified jurisdiction or the State of Delaware . . . .
The Delaware Act was intended to give the broadest discretion possible in drafting agreements and to only give default rules when agreements do not specify those terms. State policy also favors alternate dispute resolution mechanisms like arbitration.
It does not matter that Malek LLC did not sign the agreement as all of its members did.
While the law allows derivative claims against management of an LLC, Elf contracted away its right to bring such an action in Delaware, like all other potential actions. No "special" jurisdiction applies as again the freedom to contract is respected.
As the Act says that parties "may" agree, it is inferred that the options listed are merely some options, not an exhaustive list. Parties can still contract for another state's exclusive jurisdiction. If the General Assembly intended to prohibit such a thing, it could have said so.
- the Agreement is binding on the LLC as well as the members; and
- since the Act does not prohibit the members of an LLC from vesting exclusive subject matter jurisdiction in arbitration proceedings (or court enforcement of arbitration) in California to resolve disputes, the contractual forum selection provisions must govern.