Elf Atochem North America, Inc. v. Jafari And Malek LLC

727 A.2d 286 (1999)

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Nature of the Case

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Facts

ELF (P) is a Pennsylvania corporation that manufactures and distributes solvent-based maskants to the aerospace and aviation industries throughout the world. Jaffari (D) is president of Malek a California Corporation. D had developed an alternative to maskants that was environmentally friendly. Recently the EPA classified solvent-based maskants as hazardous chemicals and air contaminants. To avoid EPA problems, P considered developing and distributing a maskant less harmful to the environment. P approached D and proposed investing in his product and assisting in its marketing. D liked the idea because he had limited resources and little international sales experience. D and P agreed to a joint venture that was to be carried out using a LLC as a vehicle. They created a 38-page single-spaced document setting forth the detailed governance provisions for the LLC, which itself was not a signatory to the agreement. P contributed $1 million in exchange for 30%, and D contributed his rights to the water-based maskant for 70%. The agreement had an arbitration clause for all disputes with mandatory jurisdiction in San Francisco. P sued D and the LLC on April 27, 1998, in Delaware Chancery. P sue individually and derivatively on behalf of Malek LLC. D claims that all disputes that arise out of, under, or in connection with the Agreement must be resolved exclusively in California by arbitration or court proceedings as per the terms of the agreement. Ds allege that the characterization of Ps claim as direct or derivative is irrelevant, as the Agreement provides that the members would not institute 'any' action at law or equity except one to compel arbitration and that any such action must be brought in California. P alleged that D breached his fiduciary duty to LLC, used LLC funds for personal use, interfered with business opportunities, failed to make disclosures to P, and threatened to make poor quality maskant and to violate environmental regulations. P alleged breach of contract, tortious interference with prospective business relations, and fraud against D. D moved to dismiss for lack of subject matter jurisdiction. That motion was granted; the court held that P’s claims arose under the agreement or transactions contemplated by the agreement and were related to D’s activities as manager of the LLC and thus there must be arbitration in California. P appealed.