McKellar v. Mithril Capital Management LLC

Background

Crystal Scripps McKellar formerly served as a Managing Director and General Counsel of Mithril Capital Management LLC. She was also a member of Mithril GP Employee Feeder LLC and was entitled to carried-interest awards. Mithril Capital’s owner and Managing General Partner was Ajay Royan.

McKellar signed a Separation Agreement and a Consulting Agreement on February 12, 2019. The Separation Agreement provided for a $225,000 severance payment and carried-interest points. The Consulting Agreement provided for another $225,000 for independent-contractor work and stated that McKellar would provide advisory services under instructions from Royan or another company officer. Both agreements contained broad arbitration provisions requiring disputes relating to McKellar’s relationship with the company or its end to be arbitrated in Travis County, Texas. Both also contained Texas choice-of-law provisions.

After Mithril sent McKellar a letter stating that it was terminating the agreements and forfeiting her employment compensation, including her carried interest, Mithril Capital sued her in Texas state court. Mithril Feeder later sued her in Delaware state court, seeking a declaration concerning her carried interest. McKellar filed this federal action seeking a preliminary injunction under California Labor Code section 925 that would bar Mithril from prosecuting the Texas and Delaware actions.

Arbitration

The court granted Mithril’s motion to compel arbitration of McKellar’s claims against Mithril Capital and Royan. It held that the agreements incorporated the American Arbitration Association’s employment rules, which gave the arbitrator authority to decide the arbitrator’s own jurisdiction, including objections to the existence, scope, or validity of the arbitration agreement. Under Ninth Circuit precedent, incorporating those rules was clear and unmistakable evidence that the parties delegated questions of arbitrability—whether a dispute must be arbitrated—to the arbitrator.

McKellar argued that the delegation provision was unconscionable. Unconscionability is a contract doctrine that can make a provision unenforceable when it is both unfairly imposed and overly one-sided. The court concluded that McKellar’s allegations showed, at most, some procedural unfairness because she had little time to review the agreements and was not represented by counsel. But she did not show that delegating arbitrability questions was substantively unconscionable—that is, so one-sided that it shocked the conscience. The court therefore did not consider her broader arguments that the arbitration provisions were unconscionable.

The court also rejected McKellar’s argument that Mithril waived its right to arbitrate. Filing the Texas lawsuit, without more, was insufficient to show conduct inconsistent with arbitration, particularly because the Texas case had barely been litigated. Mithril had only requested and received a continuance while this motion was pending, and the court found that it had not waived arbitration.

Where the Arbitration Would Occur

The court applied California Labor Code section 925, which can void a contract term requiring an employee who primarily resides and works in California to resolve a California claim outside California or lose California-law protections. When properly invoked, the statute requires the matter to be handled in California under California law.

The court concluded that McKellar adequately alleged that she remained an employee after signing the agreements. The Consulting Agreement gave Mithril control over the manner and means of her work, and McKellar alleged that she worked under Kingsbury’s direction as Royan’s proxy. She also alleged that she worked in Mithril’s office, used Mithril’s equipment, received a salary, and performed work connected to Mithril’s regular business. The court found those allegations sufficient under either of the California employee-status tests discussed by the parties.

The court also rejected Mithril’s argument that section 925 did not apply because McKellar had been represented by counsel. Mithril relied on a contract statement that McKellar was represented, but the court held that this statement could not conclusively establish representation when McKellar alleged that the contract was otherwise unfairly obtained. The court found no evidence that she was actually represented during negotiations. It therefore ordered arbitration in California rather than Texas.

Claims Against Mithril Feeder

The court declined jurisdiction over McKellar’s claims against Mithril Feeder under the first-to-file rule. That rule gives a federal district court discretion to decline a case when an earlier-filed case involving substantially similar parties and issues is pending elsewhere.

The Delaware Action was filed first and involved the same parties. It also involved substantially similar issues because Mithril Feeder sought declarations and damages based on alleged breaches of the agreement, while McKellar’s claims against Mithril Feeder concerned her alleged entitlement to carried interest and whether she had breached that agreement. The court concluded that keeping both cases would risk duplicative work and conflicting judgments. It therefore dismissed McKellar’s claims against Mithril Feeder.

Disposition

The court granted Mithril’s motion to compel arbitration, compelling McKellar’s claims against Royan and Mithril Capital to arbitration in California. It dismissed McKellar’s claims against Mithril Feeder and denied McKellar’s motion for a preliminary injunction. The court also denied the sealing motions as to material referenced in the order and otherwise granted those motions.