Eitan v. Aterian, Inc.

Background

Josef Eitan and Ran Nir sold Photo Paper Direct Ltd. to Aterian, Inc. and Truweo, LLC under a Stock Purchase Agreement dated May 5, 2021. The agreement required the respondents to pay an additional earn-out amount based on the company’s 2021 earnings before interest, taxes, depreciation, and amortization, or EBITDA.

The agreement required the respondents to provide an Earn-Out Statement showing their calculation. It allowed Eitan to challenge the amount or calculation by sending a written dispute notice within 30 days. The notice had to identify disputed items in reasonable detail and state the correct amount claimed for each item. After a 15-day period for good-faith negotiations, unresolved disputes were to be submitted to an independent accountant. The accountant’s determinations would be final, conclusive, and binding, subject to enforcement in court absent manifest error or fraud.

The respondents provided the Earn-Out Statement on February 10, 2022, reporting an Earn-Out Payment of 0 because they calculated the company’s 2021 EBITDA as less than the Measurement Date EBITDA. Eitan sent a dispute notice on February 24, 2022. He challenged deductions from EBITDA, questioned the treatment of certain costs and salary expenses, requested supporting documents, and attached an alternative EBITDA calculation prepared by his accountant.

The parties negotiated for several months but did not resolve the issues. Eitan formally demanded engagement of an independent accountant on July 29, 2022. The respondents refused to jointly engage one, arguing that Eitan had not supplied a sufficiently specific list of disputed items. Eitan and Nir then filed the petition to compel arbitration.

Legal standard

Under Section 4 of the Federal Arbitration Act, a court must compel arbitration when the record shows that a valid agreement to arbitrate covers the dispute and one party has failed, neglected, or refused to arbitrate. The court applies a standard similar to the standard used for summary judgment, considering the parties’ evidence and deciding whether a material factual dispute prevents a legal ruling.

Court’s analysis

The court held that the Stock Purchase Agreement contained an enforceable arbitration agreement even though it did not use the word “arbitrate.” The agreement clearly required unresolved earn-out disputes to be decided by an independent accountant, and made that decision final, conclusive, and binding.

The court also held that the respondents had refused to proceed with the required dispute-resolution process. Eitan had submitted a timely dispute notice, the parties had negotiated without resolving the disputes, and Eitan had formally requested engagement of the independent accountant.

The court rejected the respondents’ argument that the agreement required a separate “disputed items list.” It found that the dispute notice itself satisfied the agreement because it provided reasonable detail about the challenged EBITDA items and included an alternative calculation. The court concluded that the independent accountant should resolve the issues preserved in the dispute notice and not resolved during negotiations.

The court explained that the process did not authorize an unlimited review of the company’s books and records. The agreement limited the accountant’s review to items properly identified in the dispute notice, with the required alternative amounts. The accountant could guide the parties in submitting relevant materials and could evaluate the competing EBITDA calculations.

The court did not decide whether the parties’ negotiation communications were protected by the federal evidence rule concerning settlement discussions or by the agreement’s confidentiality provision, because those communications were not relevant to the motion.

Disposition

The court granted Petitioners’ motion to compel arbitration. It ordered the parties to proceed with the independent-accountant process and stayed the case while they arbitrate.