United States: Delaware Court Reviews Enforceability And Alleged Waiver Of Arbitration Provision

Upholds contracting parties' right to seek arbitration and rejects arguments that the right is waived solely by initiation or defense of litigation

In Halpern Medical Services, LLC v. Geary,1 the Delaware Court of Chancery recently was asked to determine whether (i) claims based on breach of fiduciary duty, breach of contract and unjust enrichment were subject to a mandatory arbitration clause in an employment agreement and (ii) the parties to the agreement waived the right to invoke arbitration solely by reason of the commencement of litigation by one party and the filing of a motion to dismiss by the other. Utilizing a two-step process previously developed by the Delaware Supreme Court, the Court concluded that the claims were arbitrable and neither party had waived its right to seek arbitration.


Dr. Harold Halpern is the majority owner of two companies in the eye care industry, Halpern Medical Services, LLC ("HMS") and Halpern Eye Associates, P.A. ("HEA" and, together with HMS, the "Companies"). In an effort "to reduce his involvement in day-to-day operations" and "grow his business," Halpern hired Arthur Geary to become HMS' President and Chief Operating Officer. To memorialize his arrangement, Geary entered into an employment agreement with HMS which gave him a 30% stake in HMS and a 9% stake in HEA. In addition, this agreement included (i) restrictive covenants limiting Geary's ability to work for third parties during the term of his employment agreement and to make investments in competing businesses, and (ii) an arbitration clause providing that all claims "arising out of or relating to, the [Employment Agreement] or the breach thereof ... shall first be submitted to arbitration" and "shall be final and binding ...."

Halpern became disenchanted with Geary's performance in a number of respects, leading the Companies eventually to seek damages from Geary premised on theories of breach of contract, breach of fiduciary duty and unjust enrichment. Among the Companies' allegations against Geary were that his taking of certain "ill-fated" business decisions, including one termed to have been "ill-conceived, rushed, and a complete disaster," constituted a breach of his employment agreement. In addition, the Companies challenged Geary's "partial equity ownership of, and compensated service on the boards of, third-party companies with which Geary and the [Companies] became involved ...." These arrangements, in the Companies' view, violated the restrictive covenants in Geary's employment agreement.

Geary moved to dismiss, arguing (among other things) that HMS' claims were "barred" by the mandatory arbitration clause in his employment agreement.2 Each party also contended that the other had waived its right to seek arbitration.

The Court's Analysis

In determining whether a claim is subject to arbitration pursuant to the terms of a contract, the Court followed the two-step process set forth in Parfi Holding AB v. Mirror Image Internet, Inc.3:

  • first, the Court must determine whether the arbitration clause is "broad or narrow in scope," and
  • second, the Court must determine whether the claims in question fall within the scope of the particular clause.

When an arbitration clause is "broad" in scope, Parfi instructs the Court to "defer to arbitration on any issues that touch on contract rights or contract performance for which arbitration is the agreed-upon mode of dispute resolution." Further, the Court recognized that Delaware public policy has a "strong presumption in favor of arbitration" and "requires that doubts should be resolved in favor of arbitrability when a reasonable interpretation in that direction exists."


The Court had little difficulty accepting Geary's contention that HMS' claims for damages were subject to arbitration under the terms of the employment agreement. First, the Court found the arbitration provision to be "undoubtedly broad in scope" inasmuch as "its wording is very close to that of the clause at issue in Parfi ...."

Next, the Court found that each of HMS' claims fell within the scope of the arbitration clause:

  • The breach of contract claim based on Geary's alleged breach of specific terms in his employment agreement "falls within the scope of the Arbitration Clause contained in that Agreement."
  • The breach of fiduciary duty claim was predicated on a "contractual duty of loyalty" embodied in the restrictive covenants of the employment agreement.
  • The claim for unjust enrichment was based on the fact that Geary supposedly received (i) compensation for outside services barred by the restrictive covenants and (ii) reimbursement for non-HMS expenses.


The Court then turned to each party's argument "that the other has waived the right to invoke the Arbitration Clause" by virtue of HMS' decision to litigate its claims against Geary and Geary's filing of a motion to dismiss those claims. The Court rejected these arguments on public policy grounds, which dictate that "waiver is not to be lightly inferred." Rather, while "waiver 'will be found if the party seeking arbitration has actively participated in a lawsuit or taken other action inconsistent with the right to arbitration,'" it is "the presence or absence of prejudice which is determinative of the issue of waiver." Accordingly, in determining whether waiver has occurred, Delaware courts have focused on the length of time elapsed since the commencement of the suit and whether the parties have yet engaged in "extensive discovery."

Focusing on these two factors in the context of the motions before it, the Court rejected HMS' argument that Geary waived his right to invoke the arbitration clause by filing a motion to dismiss. The Court pointed out that "Geary filed his motion to dismiss less than two months after [HMS] filed the Complaint" and "he has not participated in discovery." The Court also rejected Geary's argument HMS waived its right to invoke the arbitration clause. While acknowledging Geary's contention that HMS had neither served him with a notice of intent to arbitrate nor sought arbitration as a part of the dispute, the Court found that "Geary cites nothing in support of his contention that filing this suit, alone, should act as a waiver of HMS' right to arbitrate, nor does he point to any prejudice that he would suffer if HMS later seeks arbitration." Accordingly, the Court ordered a stay of HMS's claims "to allow HMS to pursue arbitration."


The Halpern decision is a helpful review of the Delaware courts' attitude toward the enforceability of arbitration clauses, as well as the standards for analyzing whether an agreement to arbitrate has been waived. Clearly, Delaware public policy favors agreements between contracting parties to arbitrate rather than litigate, and the courts will not lightly conclude that such a provision has been waived by either party.


1 Civil Action No. 6679-VCN (Del. Ch. February 17, 2012).

2 Geary also argued that the Plaintiffs' claims were outside the statute of limitations and were time barred by the doctrine of laches, issues which are not addressed by this Client Alert.

3 817 A.2d 149 (Del. 2002).

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