Cold Springs Ventures, LLC v. Gilead Scis., Inc.

Cold Springs Ventures, LLC v. Gilead Scis., Inc., 2014 NCBC 10.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
COUNTY OF DURHAM 14 CVS 1873

COLD SPRINGS VENTURES, LLC, a North )
Carolina Limited Liability Company; )
COMMONWEALTH VENTURES, LLC, a )
Virginia Limited Liability Company; )
ENDEAVORS VENTURE, a Florida General )
Partnership; JAMES M. STRATHMEYER; ) AMENDED
BRUCE J. BOEHM and JEANNIE MULLEN, ) ORDER ON MOTION FOR
Plaintiffs ) PRELIMINARY INJUNCTION
) AND
v. ) NOTICE OF HEARING
)
GILEAD SCIENCES, INC.; a California )
Corporation; KRYOSPHERE, INC.; a )
Georgia Corporation; L. ERIC HALLMAN; )
DOUGLAS BAKER; NEIL JONES; MICHAEL )
J. SCHEIRBEEK; JOHN O. NORTON; )
PATRIC NORTON and RYAN NORTON, )
Defendants )

THIS Amended Order is filed on the court’s own motion pursuant to the

provisions of Rule 60(a), North Carolina Rules of Civil Procedure, to correct a clerical

mistake in that Order on Motion for Preliminary Injunction and Notice of Hearing

previously entered in this civil action on March 21, 2014 (“March 21 Order”). This

Amended Order shall supersede the March 21 Order in all respects. The March 21

Order is WITHDRAWN.

THIS CAUSE, designated a mandatory complex business case by Order of the

Chief Justice of the North Carolina Supreme Court, pursuant to N.C. Gen. Stat. § 7A-

45.4(b) (hereinafter, references to the North Carolina General Statutes will be to "G.S."),

and assigned to the undersigned Chief Special Superior Court Judge for Complex

Business Cases, came before the court for hearing upon Plaintiffs' request for
temporary, preliminary and permanent injunctive relief ("Motion"), contained in their

Amended Complaint;1 was so heard on March 4, 2014; and

THE COURT, after reviewing the Motion, briefs in support of and in opposition to

the Motion, arguments of counsel and other appropriate matters of record, FINDS and

CONCLUDES that:

Background

1. Defendant Gilead Sciences, Inc. ("Gilead") has joined Plaintiffs as

respondents in an arbitration action ("Arbitration") pending before the American

Arbitration Association ("AAA").2

2. Plaintiffs are former investors, shareholders, and directors of Old Kryo,

Inc. ("NC Kryo"),3 a North Carolina corporation. In September 2010, NC Kryo entered

into a contract with Gilead4 (“Gilead Contract”), which contained a mandatory arbitration

clause.5 In March 2011, NC Kryo entered into an agreement ("Kryo Transaction") to sell

all or substantially all of its assets and business to Kryosphere, Inc. ("GA Kryo"), a

Georgia corporation.6 As part of the Kryo Transaction, NC Kryo purportedly assigned

the Gilead Contract to GA Kryo.7 Gilead contends that NC Kryo did not obtain prior

written consent from Gilead for the assignment of the Gilead Contract to GA Kryo, which

is required under the Gilead Contract.8 NC Kryo was subsequently dissolved.9 In

1
In its February 11, 2014 Notice of Hearing, the court noticed Plaintiffs' request contained in their initial
Verified Complaint. Plaintiffs filed an Amended Complaint on February 28, 2014, and the Amended
Complaint is properly before the court.
2
Am. Compl. ¶¶ 79-80.
3
Id. ¶¶ 1-6.
4
Ex. A to Am. Compl.
5
Am. Compl. ¶¶ 24, 136.
6
Id. ¶¶ 55, 59.
7
See id. ¶ 68.
8
See id.; Pls.' Mem. Supp. Req. Prelim. Inj. ("Pls.' Br.") 5; Gilead Contract.
9
Am. Compl. ¶ 63.
October 2013, Gilead initiated the Arbitration against GA Kryo and the Plaintiffs in this

action for alleged breach of the Gilead Contract.10 The parties agree that Plaintiffs were

not signatories to the Gilead Contract and normally would not be bound under the

arbitration clause contained in that agreement.11

The Core Issue -- Piercing the Veil -- The Instrumentality Rule

3. Notwithstanding that Plaintiffs did not sign the Gilead Contract, they have

been named as respondents in the Arbitration. Gilead contends that Plaintiffs committed

fraud and depletion of NC Kryo's resources and that they in substance are the alter ego

of NC Kryo. Gilead argues that Plaintiffs’ actions and relationship with NC Kryo would

expose Plaintiffs to liability to Gilead under the instrumentality rule even though Plaintiffs

were not signatories to the Gilead Contract or any other arbitration agreement.12 The

"instrumentality rule" is a longstanding doctrine that enables courts to "disregard the

corporate form" and "pierce the corporate veil," extending liability to individuals where

"necessary to prevent fraud or to achieve equity." Glenn v. Wagner, 313 N.C. 450, 454

(1985) (citations omitted).

4. Plaintiffs concede that they could be compelled to participate in the

Arbitration if they are liable under the instrumentality rule.13 Plaintiffs contend, however,

that Gilead has not alleged any misconduct on Plaintiffs' part as investors and directors

of NC Kryo that would subject them to such liability. Plaintiffs argue that Gilead's "bare-

bone, conclusory allegations" of fraud and depletion of resources, and liability based

upon an alter ego theory, are insufficient to compel Plaintiffs to participate in the

10
Id. ¶ 79; Ex. B to Am. Compl. ("Arbitration Demand").
11
See Pls.' Br. 14; Def. Gilead Resp. Opp. Pls.' Mot. Prelim. Inj. ("Gilead Br.") 14.
12
See Arbitration Demand.
13
Pls.' Br. 14.
Arbitration.14 Plaintiffs thus object to their inclusion in the Arbitration and bring this civil

action seeking declaratory and injunctive relief from this court.

14
Id. at 16.
Discussion

5. For purposes of this Order, Plaintiffs' Motion15 is best characterized as

three separate requests for injunctive relief: (a) a request for preliminary and permanent

injunctive relief enjoining Gilead from seeking to arbitrate the jurisdictional question of

whether Plaintiffs are subject to arbitration,16 (b) a request for a preliminary injunction

staying the Arbitration until this court determines whether Plaintiffs are subject to the

AAA's jurisdiction and (c) a request for a preliminary injunction staying the Arbitration

until this court makes a final substantive determination on the merits of Gilead’s

contention that Plaintiffs may be liable to Gilead under the instrumentality rule.17

6. Insofar as the Motion seeks preliminary injunctive relief, Plaintiffs bear the

burden of persuasion. Pruitt v. Williams, 288 N.C. 368, 372 (1975). A preliminary

injunction is an extraordinary measure that "will not be lightly granted." Travenol Lab.,

Inc. v. Turner, 30 N.C. App. 686, 692 (1976) (citation omitted). A plaintiff must show "a

likelihood of success on the merits of his case and . . . [that] plaintiff is likely to sustain

irreparable loss unless the injunction is issued, or if, in the opinion of the Court,

issuance is necessary for the protection of his rights during the course of litigation."

Analog Devices, Inc. v. Michalski, 157 N.C. App. 462, 466 (2003) (citations omitted).

7. Gilead contends that it need not fully state a claim for relief in its

Arbitration Demand that would meet the standards of Rule 12(b)(6), North Carolina

15
See Am. Compl. ¶¶ 153-160.
16
Id. ¶ 159.
17
Am. Compl. ¶ 160. Plaintiffs seek an order "prohibiting Gilead from litigating its breach of contract
against [NC Kryo] in the [Arbitration] until such time that this [c]ourt determines whether Gilead has a valid
basis upon which to pierce [NC Kryo]'s corporate veil against [Plaintiffs]." It is unclear whether Plaintiffs'
request, in referencing "whether Gilead has a valid basis," incorporates only the substantive question of
whether Plaintiffs are liable or both that question and whether they are subject to the AAA's jurisdiction.
The court, in its discretion, reads both requests into the Motion.
Rules of Civil Procedure (“Rule(s)”) in order for the AAA properly to exercise jurisdiction

over Plaintiffs.18 Rather, Gilead argues that its stated intention "to recover from

[Plaintiffs] under a veil piercing theory" compels Plaintiffs to participate in the

Arbitration.19 Gilead appears to suggest that the court cannot properly consider the

instrumentality rule's applicability to this case in any way because such an inquiry would

impermissibly delve into the merits of Gilead's arbitration claims against Plaintiffs.20

8. As a preliminary matter, the court notes that this dispute is governed by

both the Federal Arbitration Act ("FAA"), 9 USC § 1 et seq., and North Carolina's

Revised Uniform Arbitration Act ("NCRUAA"), G.S. 1-569.1 et seq. As the parties agree

that the Gilead Contract is one evidencing a "transaction involving commerce" under the

FAA, the FAA clearly governs the dispute. See, e.g., Burke Co. Pub. Schs. Bd. of Ed. v.

Shaver P'ship, 303 N.C. 408, 422 (1981) ("The Federal Arbitration Act, by virtue of the

Supremacy Clause, is . . . part of North Carolina law."). Nonetheless, it is also clear that

some provisions of the FAA apply solely to federal courts. See, e.g., Southland Corp. v.

Keating, 465 U.S. 1, 16 n.10 (1984) ("[W]e do not hold that §§ 3 and 4 of the [FAA]

apply to proceedings in state courts. Section 4, for example, provides that the Federal

Rules of Civil Procedure apply in proceedings to compel arbitration. The Federal Rules

do not apply in such state-court proceedings."). As such, even when the FAA governs a

dispute, state law fills procedural gaps in the FAA as it is applied in state courts. See

Carter v. TD Ameritrade Holding Corp., __ N.C. App. __, 721 S.E.2d 256, 260 (2012)

(trial court properly considered motion to compel arbitration under G.S. 1-569.7 in

18
See Gilead Br. 16.
19
Id. at 13.
20
Id. at 16.
matter governed by FAA). As such, Gilead correctly asserts that G.S. 1-569.7(b)

requires this court to make a threshold determination of whether Plaintiffs can be

compelled to be parties in the Arbitration. Plaintiffs' contentions that (a) the FAA is the

sole governing law in this matter and (b) Gilead is estopped from arguing otherwise are

both meritless.

9. Although both federal and North Carolina law favor the enforcement of

arbitration provisions, each requires the existence of a valid agreement to arbitrate.

See, e.g., 9 USC § 2 (providing that, under the FAA, a contractual arbitration provision

"shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or

in equity for the revocation of any contract"); G.S. 1-569.6; Routh v. Snap-On Tools

Corp., 108 N.C. App. 268, 271 (1992) (Routh II) ("[B]efore a dispute can be settled [by

arbitration], there must first exist a valid agreement to arbitrate.").

10. The arbitrability21 of a dispute is "subject to independent review by the

courts" unless there is "clear and unmistakable" evidence that the parties agreed to

"submit the question of arbitrability to arbitration." First Options v. Kaplan, 514 U.S. 938,

944-47 (1995) (internal quotations and citations omitted); see also AT&T Techs. v.

Communs. Workers of Am., 475 U.S. 643, 649 (1986) ("[A]rbitrability . . . is undeniably

an issue for judicial determination."). More specifically, the Supreme Court has held that

21
"Arbitrability" concerns the question of "whether the parties agreed to arbitrate" their dispute. First
Options v. Kaplan, 514 U.S. 938, 942 (1995). In First Options, the Supreme Court eloquently laid out the
conceptual background of arbitrability disputes by pointing to three "layers" of disagreement in the
arbitration context: (a) whether the parties agreed to arbitrate the merits of a dispute, (b) whether
arbitrators or courts decide (a), and (c) the merits of a dispute. As one commentator has noted, the term
itself is a source of confusion because courts use it interchangeably to refer either to disputes challenging
the existence or validity of arbitration agreements as well as disputes over whether a specific subset of
claims is within the scope of a valid arbitration clause. See Steven H. Reisberg, Article, The Rules
Governing Who Decides Jurisdictional Issues: First Options v. Kaplan Revisited, 20 AM. REV. INT'L ARB.
159 (2009). As this dispute is better characterized as one over the existence of an agreement to arbitrate
between the parties, this court refers to arbitrability with the former definition in mind.
the inquiry into whether a non-signatory is bound by an arbitration clause is one for

judicial determination. John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 547 (1964).

In that case, the Court noted that "compulsory submission to arbitration cannot precede

judicial determination that [an agreement] does in fact create such a duty." Id. The Court

went on to add that "just as [a party] has no obligation to arbitrate issues which it has

not agreed to arbitrate, so a fortiori, it cannot be compelled to arbitrate if an arbitration

clause does not bind it at all." Id.

11. Therefore, this court, rather than the AAA panel, must determine whether

a valid agreement to arbitrate exists, or "whether the parties agreed to arbitrate" the

merits of their dispute. First Options, 514 U.S. at 943. For that purpose, "when deciding

whether the parties agreed to arbitrate a certain matter (including arbitrability), courts

generally . . . should apply ordinary state-law principles that govern the formation of

contracts." Id. at 944.

12. Nonetheless, the posture of this particular dispute is atypical in that

regard. Here, the question is whether circumstances exist that compel non-signatories

to arbitrate, that is, whether circumstances exist to support piercing the corporate veil as

to one or more of the Plaintiffs. As a result, an inquiry into arbitrability in this matter is

necessarily a coincidental inquiry into issues that underlie the substantive merits of

Gilead's claim against Plaintiffs. When assessing arbitrability, the merits of a dispute are

unquestionably beyond the scope of the court's jurisdiction. See, e.g., AT&T Techs.,

475 U.S. at 649 ("[I]n deciding whether the parties have agreed to submit a particular

grievance to arbitration, a court is not to rule on the potential merits of the underlying

claims."); United Steelworkers of Am. v. Am. Mfg. Co., 363 U.S. 564, 568 (1960) ("The
courts . . . have no business weighing the merits of [a] grievance."); G.S. 1-569.7(d) (A

court should not refuse to compel arbitration "because the claim lacks merit or because

grounds for the claim have not been established.").

13. Indeed, Gilead, relying on G.S. 1-569.7(d), contends that its mere

allegation that the instrumentality rule applies is enough to subject Plaintiffs to the AAA's

jurisdiction.22 In essence, Gilead would have this court hold that the arbitrability of a

dispute is rendered beyond the court's jurisdiction when such an assessment would

require the court to consider issues that also underlie the merits of a claim.

14. Plaintiffs, on the other hand, ask this court to resolve conclusively whether

the instrumentality rule applies in this case.23 To that end, the Motion asks this court to

enjoin the entire Arbitration from proceeding pending a final determination by this court

on Plaintiffs' potential liability to Gilead under the instrumentality rule.24 Plaintiffs note

that Gilead's failure in the Arbitration Demand to "allege any specific factual allegations"

to support the application of the instrumentality rule would provide grounds for dismissal

under Rule 12(b)(6) in a regular civil action.25 Plaintiffs suggest that Gilead's failure to

make such allegations "highlights the fact that Gilead has no evidence to support" its

claim against Plaintiffs.26 Plaintiffs further contend that they have "submitted

evidence . . . through the factual allegations of their Verified Complaint . . . showing that

they did not engage in any conduct" that would support Gilead's instrumentality claim.27

Plaintiffs contend that they have thus demonstrated a likelihood of success on the

22
Gilead Br. 16.
23
See Am. Compl. ¶¶ 142-144.
24
Id. ¶ 160.
25
Pls.' Br. 17.
26
Id. at 18.
27
Id.
merits" on their claim seeking a declaration that there is no factual or legal basis for

Gilead to pierce [NC Kryo's] corporate veil against them." 28 Plaintiffs further suggest

that "the only way to ensure that [their] rights are fully protected is for this [c]ourt to

enjoin the Aribtration [and] decide the veil piercing issue. . . ."29

15. This appears to be an issue of first impression in North Carolina. However,

both North Carolina and federal law provide ample guidance for the court to conclude

that both parties' positions are untenable and must be rejected.

Likelihood of Success on the Merits of Plaintiffs’ Contentions

16. Gilead would have this court essentially hold that any shareholder or

director of a corporate signatory to an arbitration clause can be compelled to arbitration

by way of a claimant's bare allegation that the instrumentality rule applies. An important

distinction must be drawn between [impermissible] consideration of the merits of an

arbitrable claim and the threshold arbitrability inquiry that necessarily involves the same

issues that underly the merits of a claim. The mere fact that certain issues could later be

litigated substantively cannot on its own foreclose courts from assessing arbitrability. In

such a situation, the overriding spirit of the Supreme Court's jurisprudence30 demands

that courts nonetheless address those issues for the narrow and limited purpose of

determining whether a claimant seeking to compel arbitration can sufficiently allege a

basis for going forward against a responding party. As Plaintiff correctly states, though

this court cannot and should not address the merits of claims that the parties have

agreed to arbitrate, this court must "decide the threshold issue of whether the parties

28
Id. at 19.
29
Id. at 22.
30
See supra ¶ 10.
consented to the arbitration in the first place."31 That determination will ultimately

depend upon whether Gilead can allege facts and offer evidence that Plaintiffs are

deemed to have consented to arbitration by virtue of the instrumentality rule.

Accordingly, Plaintiffs have met their burden of showing a likelihood of success on the

merits of their contention that this court should decide the initial arbitrability issue.

Irreparable Injury

17. As concluded above, Plaintiffs are entitled to a judicial determination at

this stage of whether they must remain in the Arbitration. Federal law suggests that

forcing a party to arbitrate an issue absent an agreement to do so constitutes "per se

irreparable" harm. Paine Webber, Inc. v. Hartmann, 921 F.2d 507, 514 (3d Cir. 1990);

see also UBS Sec. LLC v. Voegeli, 684 F. Supp. 2d 351, 354 (S.D.N.Y. 2010).

Therefore, the court concludes that Plaintiffs have satisfied their burden for injunctive

relief on this issue.

18. The court concludes therefore that on the narrow question of whether

Gilead can compel Plaintiffs to be parties to the Arbitration, Plaintiffs' Motion should be

GRANTED, in part, as reflected in this Order.

19. However, the court further concludes that Plaintiffs cannot prevail in their

request that the Arbitration be stayed until the court conclusively determines whether

Plaintiffs can be liable to Gilead under the instrumentality rule. The standards of Rule

12(b)(6) are not controlling in this situation, and on the limited record before it, this court

is not able to conclude that Plaintiffs have demonstrated a likelihood of success on the

merits of their substantive claim opposing application of the instrumentality rule. In

31
Pls.' Rep. Def. Gilead Resp. Pls.' Mot. Prelim. Inj. ("Pls.' Rep.") 3 (citing First Options, 514 U.S. at 943).
addition to the fact that the court concludes that it does not presently have jurisdiction to

affirmatively determine the instrumentality issue on the merits, it is not clear that the

court will ever have that jurisdiction.32 The court cannot, and should not, enjoin the

arbitration in its entirety pending a determination that it lacks the authority to make at

this stage.

20. Plaintiffs argue that should this court not enjoin the Arbitration until there is

a substantive determination of the instrumentality rule issue in the trial court, they could

later be held liable "on some as yet unknown basis."33 The court is sensitive to

Plaintiffs' concerns that a preliminary determination that Plaintiffs cannot be compelled

to arbitration, without a corresponding resolution on the merits of the instrumentality rule

issue, might put Plaintiffs in an awkward "Catch-22"34 situation. For example, if the

Arbitration goes forward without Plaintiffs as parties and results in a substantial

judgment in favor of Gilead against NC Kryo, later may face – either in this action or

another action – a claim at law by Gilead that pursuant to the instrumentality rule,

Plaintiffs are liable for that judgment. If this risk is a sufficient concern to Plaintiffs, they

are free to take a Rule 41 voluntary dismissal of their declaratory judgment claims and

defend at the Arbitration if they so choose. However, Plaintiffs’ concerns, while

potentially real, do not confer jurisdiction on this court that it otherwise lacks.

32
Even if Plaintiffs prevail on the question of arbitrability and are removed from the Arbitration, it is
unclear whether this court could properly consider a declaratory judgment action on this issue prior to the
Arbitration's resolution, if at all. See, e.g., Lide v. Mears, 231 N.C. 111 (1949) (G.S. 1-253 requires an
"actual controversy" and prohibits advisory opinions.); Sharpe v. Park Newspapers of Lumberton, 317
N.C. 579, 585 (1986) (G.S. 1-253 requires that "an actual controversy exists both at the time of the filing
of the pleading and at the time of hearing.") (citations omitted); Tryon v. Power Co., 222 N.C. 200, 204
(1942) (G.S. 1-253 prohibits trial courts from issuing "a purely advisory opinion which the parties might, so
to speak, put on ice to be used if and when occasion might arise.") (citations omitted).
33
Pls.' Br. 22.
34
Joseph Heller, Catch-22 (1961).
21. Therefore, the court CONCLUDES that to the extent Plaintiffs’ Motion

seeks to enjoin the Arbitration until this court makes a conclusive determination on the

merits as to Plaintiffs' liability under the instrumentality rule, it should be DENIED.

Procedure Going Forward

22. Under G.S. 1-569.7(b), "[o]n motion of a person alleging that an arbitration

proceeding has been initiated . . . but that there is no agreement to arbitrate, the court

shall proceed summarily to decide the issue." Defendants do not challenge the

contention that the court should summarily decide the issue of arbitrability. However,

given the unusual procedural posture of this matter, the court deems it appropriate to

clarify suitable procedure moving forward in light of the requirement that it

"summarily . . . decide the issue." G.S. 1-569.7(b).35

23. G.S. 1-569.7 is titled "Motion to compel or stay arbitration" and G.S. 1-

569.5(a) provides that "an application for judicial relief under [the NCRUAA] shall be

made by motion to the court and heard in the manner provided by law or rule of court for

making and hearing motions." It has similarly been noted that the statute "clearly

requires a 'motion' to be filed in the trial court." Linsenmayer v. Omni Homes, Inc., 193

N.C. App. 703, 706 (2008) (quoting G.S. 1-569.7). See also Adams v. Nelsen, 313 N.C.

442, 447 (1985) ("The Court of Appeals correctly concluded that the proper procedure

for staying litigation and compelling arbitration is by a proper motion." (assessing

predecessor statute)). Thus, the proper mechanism for Plaintiffs to seek relief from the

court is a motion to stay arbitration. A court's ruling under the statute constitutes a final

35
The cases addressing G.S. 1-569.7 and its predecessors mostly concern motions to compel rather
than, as in this case, a separate declaratory judgment action filed by the resisting party in a collateral
attack on the arbitration's jurisdiction.
determination of arbitrability, and an order granting a motion to permanently stay

arbitration (or denial of a motion to compel) is immediately appealable. See, e.g., G.S.

1-569.28; Bennish v. North Carolina Dance Theater, Inc., 108 N.C. App. 42 (1992) ("[A]

trial court's order denying arbitration, although interlocutory, is immediately appealable

because it involves a substantial right which might be lost if appeal is delayed.")

(internal quotations and citations omitted); Sims v. Ritter Constr., Inc., 62 N.C. App. 52

(1983).

24. In its February 11, 2014 Notice of Hearing, the court noticed Plaintiffs'

requests for temporary, preliminary, and permanent injunctive relief contained in their

Fourth Cause of Action36 ("Claim Four"). In Claim Four, Plaintiffs allege, among other

things, that they are "entitled to temporary and preliminary injunctive relief prohibiting

Gilead from litigating its breach of contract against [NC Kryo] in the Aribtration

Proceeding until such time that this Court determines whether Gilead has a valid basis

upon which to pierce [NC Kryo's] corporate veil against [Plaintiffs]."37 On the other hand,

in their First Cause of Action38 ("Claim One"), Plaintiffs seek a declaratory judgment

under G.S. 1-253. There, Plaintiffs ask this court for an order declaring, in part, that they

"are not bound by the arbitration provision in the Gilead Contract" and, similarly, that the

"AAA has no jurisdiction over Plaintiffs with regard to any disputes arising out of the

Gilead Contract."39

25. Therefore, Plaintiffs' Motion presently before this court is best

characterized as a motion to stay temporarily the Arbitration pending a final

36
Am. Compl. ¶¶ 153-160.
37
Id. ¶ 160.
38
Id. ¶¶ 135-141.
39
Id. ¶ 141(b)-(c).
determination by the court on whether Plaintiffs can be compelled to arbitrate. By

contrast, though not fashioned as such, Plaintiffs' First Claim is functionally the same as

a motion to stay arbitration under G.S. 1-569.7(b) and will be treated as such when the

court ultimately addresses it.40,41

26. The sole remaining issue presently before this court is whether, and to

what extent, Plaintiffs are entitled to preliminary injunctive relief staying the Arbitration

pending the outcome of their Declaratory Action to Stay Arbitration.

27. Plaintiffs, as movants, technically bear the burden of persuasion here.

However, under both state and federal law, the party seeking to compel arbitration

bears the "burden of establishing an agreement to arbitrate." Routh II, 108 N.C. App. at

274. See also General Ass'n of Regular Baptist Churches v. Scott, 2013 U.S. App.

LEXIS 23099 (7th Cir. 2013) (unpublished) ("[A] party seeking to compel arbitration

must show a valid arbitration agreement"). Gilead has yet to make specific allegations,

or otherwise make a showing in this court, on which Plaintiffs might be held liable under

the instrumentality rule. If the Rules were to govern the Arbitration pleadings, given the

sparse and conclusory allegations contained in the Arbitration Demand, Plaintiffs would

have shown a likelihood of success on the merits as to the limited question of whether

Gilead can compel arbitration as to Plaintiffs via the instrumentality rule. To find

otherwise essentially would require Plaintiffs to prove a negative. Although the Rules

do not govern the Arbitration, and Gilead’s allegations in the Arbitration Demand are not

40
The court will hereinafter refer to the requests contained at Am. Compl. ¶ 141 (b)-(c) as Plaintiffs'
"Declaratory Action to Stay Arbitration." The court will hold the declaratory request contained at Am.
Compl. ¶ 141(a) in abeyance.
41
Although Plaintiffs have asserted their right to trial by jury, under G.S. 1-253 the court may determine a
motion to stay arbitration on its own if it is purely a question of law. See, Hall v. Hall, 35 N.C. App. 664
(1978) (citing Iowa Mut. Ins. Co. v. Fred M. Simmons, Inc., 258 N.C. 69 (1962), for the proposition that the
court may determine questions of law under GS 1-253 notwithstanding a jury demand).
held to the pleading standards of the Rules, the court concludes that justice requires

further inquiry into whether Gilead’s allegations and appropriate evidentiary showing

support the contention that Plaintiffs can be compelled into the Arbitration.

28. Further, depending on when the Motion is resolved by this court, and

when the Arbitration proceeding actually takes place, it also is likely that Plaintiffs may

suffer irreparable harm, especially if the Arbitration were to proceed before this court

makes a determination on the issue of whether Plaintiffs can be compelled to arbitrate.

Given representations of counsel for Gilead that the Arbitration proceeding is not likely

to occur within the next four months, the court concludes, and the ends of justice

dictate, that a short delay in the Arbitration is appropriate and will not materially

prejudice the rights of either Defendants or Plaintiffs while the court determines whether

Plaintiffs can be compelled to be parties to the Arbitration. For that reason, the court, as

a matter of law and in the exercise of its discretion, CONCLUDES that to the limited

extent the Motion requests a preliminary stay of the Arbitration pending determination of

whether Plaintiffs can be compelled to be parties to the Arbitration, the Motion should be

GRANTED.

29. Under G.S. 1-569.7(b), the court is tasked with 'summarily' rendering a

final determination on whether Gilead can show a sufficient basis to require Plaintiffs to

join the Arbitration. For the reasons discussed above, this limited inquiry is undertaken

for the sole purpose of determining whether pursuant to the instrumentality rule,

Plaintiffs can be bound by the arbitration clause in the Gilead Contract. As it is

impossible for the court to reach appropriate findings and conclusions on this matter
with the limited record before it, evidence will have to be considered. The burden of

proof will be upon Gilead.

30. Little guidance exists on the precise contours of the court's inquiry under

G.S. 1-569.7. Our Court of Appeals has made clear, however, that the application of a

summary judgment standard is inappropriate. Routh v. Snap-On Tools Corp., 101 N.C.

App. 703, 706 (1991) (Routh I). There, analyzing a predecessor statute with similar

language, the court held that the trial court "failed to comply with the statute" when it

"applied a summary judgment standard of whether there was a genuine issue of

material fact with regard to the validity and enforceability of [the agreement]." Id.

(internal quotations omitted). Instead, the court is required "to summarily determine

whether, as a matter of law, a valid arbitration agreement exists." Id.

31. On at least one prior occasion, this court has allowed limited discovery

prior to determining a G.S. 1-569.7(a) motion to compel arbitration. See Capps v.

Blondeau, 2010 NCBC 7 at *5 (N.C. Super. Ct. 2010) ("On May 2, 2008, the court

entered an Order permitting the parties to conduct discovery limited to the issues of (a)

whether a valid agreement to arbitrate exists, and if so (b) whether the agreement is

unconscionable.") (internal quotations and citations omitted). See also Capps v.

Blondeau, 07 CVS 16486 (May 2, 2008) (order granting a motion for pre-arbitration

discovery). Federal courts have also found it appropriate to allow limited discovery in

similar circumstances. See, e.g., Clutts v. Dillard's, Inc., 484 F. Supp. 2d 1222, 1225-26

(D. Kan. 2007); Deputy v. Lehman Bros., Inc., 345 F.3d 494 (7th Cir. 2003); Guidotti v.

Legal Helpers Debt Resolution, L.L.C., 716 F.3d 764, 774 n.5 (3d Cir. 2013) ("[A]ny time

the court must make a finding to determine arbitrability, pre-arbitration discovery may be
warranted."). In McCrary v. Byrd, our Court of Appeals held that it was not an abuse of

the trial court's discretion to allow a party to complete discovery efforts before ruling on

a motion to compel arbitration, "particularly since those efforts began prior to plaintiffs'

motion to compel arbitration." 136 N.C. App. 487, 492-93 (2000) (emphasis omitted). In

that case, the defendants contended that the plaintiffs waived the right to compel

arbitration. Id. The Court of Appeals noted that while "the trial court should rule on the

motion . . . without undue delay, some delay [was] inherent" because an evidentiary

hearing was required on the issue. Id. at 491. While this matter does not require an

evidentiary hearing, the interests of justice are best served by allowing brief discovery

before considering Plaintiffs' Declaratory Action to Stay Arbitration.

32. Equity and precedent dictate that a party opposing arbitration may not use

judicial discovery procedures to obtain discovery regarding the substance of an

arbitrable dispute. See generally Cyclone Roofing Co. v. David M. LaFave Co., 312

N.C. 224 (1984). Consequently, discovery undertaken prior to determination of the

Motion should be limited to the specific issue of whether Plaintiffs' involvement with NC

Kryo and the Kryo Transaction could expose them to liability under the instrumentality

rule and thus confers jurisdiction over them upon the AAA.

NOW THEREFORE, based on the foregoing FINDINGS and CONCLUSIONS, it

hereby is ORDERED that:

1. To the extent the Motion asks this court to stay the Arbitration pending a

substantive ruling on whether Plaintiffs may be found liable to Gilead under the

instrumentality rule, the Motion is DENIED.
2. To the extent the Motion asks this court to exercise its exclusive

jurisdiction to rule on whether Plaintiffs may be compelled to be parties to the Arbitration

under G.S. 1-569.7(b), the Motion is GRANTED.

3. To the extent the Motion asks this court to stay the Arbitration pending the

court’s ruling on the jurisdictional issue of whether Plaintiffs may be compelled to be

parties to the Arbitration, the Motion is GRANTED. Accordingly, until further order of

this court, the Arbitration is STAYED, and Defendants are ENJOINED from attempting

to arbitrate the issue of whether Plaintiffs are bound by the Gilead Contract's arbitration

provision.

4. To the extent the Motion asks this court to enjoin the Arbitration pending

the substantive outcome of Plaintiffs' Declaratory Action to Stay Arbitration, the Motion

is DENIED.

5. Except as specifically granted herein, the Motion is DENIED.

6. Prior to a hearing on the issue of whether Plaintiffs may be compelled to

be parties to the Arbitration, the parties shall be allowed to take limited discovery. Such

discovery shall be limited to the threshold issue of whether Plaintiffs can be compelled

to be parties to the Arbitration under the instrumentality rule for purposes of NC Kryo's

alleged breach of the Gilead Contract.

7. The discovery allowed by this Order shall be completed no later than

Monday, May 12, 2014. The parties are cautioned to plan and propound any discovery

initiatives with a view toward allowing a responding party sufficient time for a good faith

response to such discovery before expiration of the foregoing deadline.
8. The court does not intend to micro-manage discovery in this action, and

has not undertaken to define the scope or breadth of specific discovery allowed by this

Order, except as stated above. In the spirit of Rule 26(f) and Rule 18.6(a) of the General

Rules of Practice and Procedure for the North Carolina Business Court (“BCR”), the

parties are directed to confer with each other in a good faith effort to reach agreement

on planning the nature and scope of discovery that will be undertaken pursuant to this

Order. If the parties are unable to agree, they may apply to the court for appropriate

relief.

9. Upon completion of the above discovery, the parties may file post-

discovery briefs in support of their respective positions as follows:

(a) On or before Monday, May 19, 2014, Defendants shall file their

brief, if any, in opposition to Plaintiffs' Declaratory Action to Stay Arbitration.

(b) On or before Monday, May 26, 2014, Plaintiffs shall file a

responsive brief, if any, in support of their Declaratory Action to Stay Arbitration.

(c) On or before Friday, May 29, 2014, Defendants shall file a reply

brief, if any, in opposition to Plaintiffs' Declaratory Action to Stay Arbitration.

10. Briefs shall address only the issue of whether Plaintiffs can be compelled

to be parties to the Arbitration under the instrumentality rule for purposes of NC Kryo's

alleged breach of the Gilead Contract, and shall be limited in length to the standard

specified under BCR Rule 15.8.

11. This matter will come before the court for a hearing on Plaintiffs'

Declaratory Action to Stay Arbitration on Wednesday, June 4, 2014, beginning at 2:00

p.m. at the North Carolina Business Court, 225 Hillsborough Street, Suite 303, Raleigh.
The hearing will be limited to the issue of issue of whether Plaintiffs can be compelled to

be parties to the Arbitration under the instrumentality rule for purposes of NC Kryo's

alleged breach of the Gilead Contract. The court will receive arguments and evidence

on the issue as may be appropriate.

12. This Order shall be effective immediately. Pursuant to the provisions of

Rule 65(c), on or before Tuesday, March 25, 2014, Plaintiffs shall post an injunction

security bond in the amount of $5,000 with the Clerk of Superior Court of Durham

County.

13. Plaintiffs forthwith shall serve a copy of this Order upon the AAA.

This the 26th day of March, 2014.