In early December 2021, a Pennsylvania federal judge referred a dispute over the termination of a biopharmaceutical and former medical cannabis company’s ex-CEO, Raza Bokhari, to arbitration in Canada.

In July 2021, the company, FSD Pharma Inc.(“FSD”), announced that its board of directors had terminated Bokhari for cause. A special committee and international law firm claimed the company’s then CEO had engaged in misconduct, including breaching court orders, improperly issuing shares, and attempting to misappropriate company funds.

The board appointed Anthony Durkacz as FSD’s interim CEO, and Zeeshan Saeed was reinstated as the company’s president. Then, Bokhari filed a complaint in Pennsylvania state court against FSD, Durkacz, and Saeed, asserting claims for tortious interference with contractual relations and conversion.

As part of its response, FSD filed a motion to compel arbitration, claiming that the dispute’s focus falls within the scope of an arbitration provision included in Bokhari’s employment agreement, entered into with FSD when it appointed Bokhari CEO in July 2020.

FSD announced it would discontinue engaging in the medical cannabis business. Since this announcement, FSD redirected its operations into psychedelic-based therapies and acquired Lucid Psycheceuticals Inc. earlier this year.

The arbitration order states that under the terms of the agreement, Bokhari agreed to receive compensation in the form of “stock grants and/or option grants of equity in the company, based on the prior and anticipated performance and accomplishments of the executive.”

The agreement also stated that if any dispute over the agreement arose, the parties would resolve it using alternative dispute resolution, which included binding arbitration, at the request of either party, under the Arbitration Act of Ontario.

U.S. District Judge Joshua D. Wolson’s order contained a two-step inquiry related to granting motions to compel arbitration. First, a valid agreement to arbitrate must exist, and second, the dispute must fall within the scope of the agreement. “The presumption in favor of arbitration means district courts should refrain from denying a motion to compel arbitration absent certainty that the claims do not fall within the scope of an arbitration clause,” the order states.

According to Judge Wolston, the parties do not dispute whether the employment agreement exists but rather whether the dispute falls within the scope of the arbitration provisions in the contract. Because Bokhari based his opposition on Pennsylvania law rather than Ontario law, the court would apply Pennsylvania law to interpret the agreement, Judge Wolston said.

According to Wolston’s order, under Pennsylvania law, an arbitration agreement applies to all claims that arise from the contractual agreement, not just the claims that allege breach of contract. The order states that Bokhari relied on a decision by the Pennsylvania Commonwealth Court in Hazleton Area School District v. Bosak, arguing that his tort claims were not within the scope of the arbitration clause in his employment agreement.

Judge Wolston disagreed and stated that Bosak has long been “disapproved” by the Pennsylvania Superior Court, and he predicts that “if faced with the choice, the Supreme Court would adopt the Superior Court’s broader reading of arbitration provisions.” Therefore, “there is little question” that Bokhari’s claims relate to his employment agreement, Judge Wolston said, since he is disputing shares that he received and then was forced to relinquish after termination.

Because the employment agreement mentioned the shares or non-cash compensation Bokhari received, the case “arises out of or relates to the employment agreement and falls within the scope of the employment agreement’s arbitration provision,” the order states. “Bokhari agreed to arbitrate all disputes arising out of his employment agreement, and this is one such dispute. He must live by his bargain,” the order states.

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