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Home , Arbitration, Confidentiality

Confi dentiality in U.S. By Laura A. Kaster

Introduction vides for confi dential treatment of arbitration materials by 4 Almost all defi nitions of arbitration include the word the parties and arbitrators but not witnesses. “private,” whether in reference to the use of a private The AAA and ABA have Canons governing the ob- third-party neutral or in defi ning the process itself. Many ligations of arbitrators to maintain confi dentiality of the people assume that the of the process equates to proceedings.5 However, the AAA specifi es in its Statement confi dential treatment of exchanged during of Ethical Principles6 that while arbitrators and AAA staff arbitration. Indeed, decisions of the Second have a of confi dentiality, it is neutral as to whether and Fifth Circuit of Appeals have stated that confi - the parties should enter into a confi dentiality agreement or dentiality clauses are so common in arbitration that an “‘at- agreed order pertaining to the confi dentiality of the pro- tack on the confi dentiality provision is, in part, an attack ceeding or the award: “The parties always have a right to 1 on the character of arbitration itself.’” disclose details of the proceeding, unless they have a sepa- Privacy is the dominant feature of arbitration and rate confi dentiality agreement. Where public agencies are distinguishes it from open proceedings. Both the involved in disputes, these public agencies routinely make American Arbitration Association rules2 and JAMS’ Rule the award public.” 26 (c) (2009) give the arbitrators considerable discretion to Some strictures may apply automatically. For example, exclude any non-party from any part of a hearing. all U.S. arbitrators are bound by the ABA Code of 7 Nevertheless, the assumption that arbitration will al- for Arbitrators in Commercial Disputes (2004). Canon VI ways protect confi dential information can be misleading of the Code provides that “An arbitrator should be faithful and is certainly overbroad. Moreover, the scope of protec- to the relationship of trust and confi dentiality inherent in tions will be impacted by the circumstances in which infor- that offi ce.” And Canon VI B further elaborates that: “The mation is subsequently sought. Therefore, parties should arbitrator should keep confi dential all matters relating to take care to protect secrets, sensitive fi nancial infor- the arbitration.” This gives some comfort, but history in- mation, work product, and attorney-client privileged com- dicates that the primary concern in most cases will not be munications within the arbitration itself by seeking a pro- breach of confi dentiality by arbitrators but by parties and tective order and appropriately marking and maintaining witnesses. the information so that confi dentiality is maximized. Par- When confi dentiality is a central concern, the rules of ties proceed at their peril if they do not consider the scope the selected arbitral organization should be carefully ex- of confi dentiality provided by their agreement and by the amined. Specifi c attention to a confi dentiality agreement in orders of the arbitral . Corporate parties should the arbitration agreement, and additional protections either also be mindful of their reporting obligations and account in the terms of reference or a protective order entered by for them in drafting their confi dentiality agreements, be- the , are also important because the choice cause the regulatory reporting or disclosure requirements of applicable law in the absence of these pro-active efforts may not permit them to agree to complete confi dentiality. is not always clear.

Organization Rules and Canons Impact Federal Law Nondisclosure of the Proceedings The U.S. Patent Act It is almost universally the case that the arbitral orga- nization’s administrative personnel and arbitrators have Under the Patent Act, 35 U.S.C. §294, arbitration of an obligation to protect information about the proceeding. patent disputes, including invalidity and infringement However, parties may or may not have confi dentiality ob- are arbitrable, but under §294 (d) and (e), any award must ligations, and frequently witnesses have no obligation to be reported to the Patent Offi ce and becomes part of the maintain either procedural or substantive information in patent prosecution fi le. The award is not enforceable until confi dence. such a report is made. Thus, full confi dentiality is not pos- sible with respect to U.S. patent litigation where issues of JAMS Rules are permissive, allowing the arbitrators invalidity and infringement are raised. to establish protective orders relating to trade secrets and other sensitive information, but imposing confi dentiality Federal Case Law only on the arbitrators and JAMS.3 Thus, neither parties Federal courts will enforce arbitration confi dentiality nor witnesses are covered unless further action is taken. between parties to an arbitration confi dentiality agreement 8 CPR, the Institute for Confl ict Prevention & Resolu- or arbitral order, but the availability of protections for tion, has rules for non-administered arbitration and it pro- materials other than attorney-client privileged information,

NYSBA New York Lawyer | Spring 2012 | Vol. 5 | No. 1 23 trade secrets or confi dential fi nancial, health or otherwise are entitled to know what the heavy fi nancial protected or privileged information as provided in the Fed- subsidy of litigation is producing. These are eral Rules of Civil Procedure, is much more tenuous. The among the reasons why very few categories analytical problem facing parties seeking to protect their of documents are kept confi dential once their information against third-parties was carefully described bearing on the merits of a suit has been re- by Judge Easterbrook in rejecting a plea to protect arbitral vealed. In civil litigation only trade secrets, information from disclosure in Gotham Holdings.9 In one of information covered by a recognized privi- few Appellate Court rulings on this issue, the court speci- lege (such as the attorney-client privilege), fi ed that bind only the parties: and information required by statute to be maintained in confi dence (such as the name No one can ‘‘agree’’ with someone else that of a minor victim of a sexual assault), is en- a stranger’s resort to under the titled to be kept secret on appeal.… [M]any Federal Rules of Civil Procedure will be cut litigants would like to keep confi dential the off.… Indeed, we have stated more broadly salary they make, the injuries they suffered, that a person’s desire for confi dentiality is or the price they agreed to pay under a con- not honored in litigation. Trade secrets, privi- tract, but when these things are vital to leges, and statutes or rules requiring confi - claims made in litigation they must be dentiality must be respected, see Fed.R.Civ.P. revealed.12 45(c)(3)(A)(iii), but litigants’ preference for does not create a legal bar to disclo- Moreover, the Court remarked that the means of en- sure… [The parties] were entitled to agree forcing a confi dentiality agreement when breached by the that they would not voluntarily disclose any fi ling of litigation was , not specifi c performance.13 information related to the arbitration.… Dis- closure would be authorized only when a When an arbitration award must be fi led in a court to third party had a legal right of access. be enforced, a similar analysis may be triggered, thereby exposing it to publication. This issue was addressed in In Lawrence E. Jaffe Pension Plan v. Household Int’l Inc.,10 Global Reinsurance Corp.-U.S. Branch v. Argonaut.14 The dis- the plaintiff subpoenaed a third party seeking all arbitra- trict court in that case had initially sealed an arbitration tion documents relating to an earlier, separate arbitration award submitted for enforcement but on reconsideration against Household. There was a blanket confi dentiality reversed itself, holding that the plaintiff had not made a agreement in that arbitration endorsed by the arbitrator. showing of harm suffi cient to justify impinging the pre- The third party was willing to produce but concerned sumption of access to judicial materials, particularly in that he would violate the confi dentiality order, House- light of the fact that the mere fi ling of an award for enforce- hold moved to quash the subpoena. The court refused to ment did not require the submission to the court of any reach what it viewed as the novel issue of its authority to underlying documentation, which could remain protected. countermand the arbitrator’s order, staying the discovery This suggests that the greater the information disclosed in against the third-party and requiring the parties to address an award, the more confi dentiality may be threatened, so the discovery issues in the underlying action. Because the that the desire for a reasoned award may have to be tem- material was produced, there was no further ruling. pered or satisfi ed in a form that is separate from the award itself if there is a great desire or need for privacy. In Alexan- In another opinion by Judge Easterbrook, the Seventh dria Real Estate Equities, Inc. v. Fair,15 the court employed a Circuit addressed and rejected the notion that parties to different rationale for refusing to seal copies of an arbitra- an arbitration confi dentiality agreement could prevent the tion award, record and documents that gave an account of Court from disclosing information when it was integral to an arbitration. In that case, the court relied on a qualifi ed Baxter Int’l Inc. v. Abbott its decision-making function. In First Amendment right of access to judicial documents and Labs.,11 the underlying arbitration involved a patent license proceedings, which the party seeking the sealing bears agreement. The parties agreed that disclosure would be the burden of showing that higher values overcome the damaging. The Court noted that the litigation under these presumption of public access. Fair was seeking to protect circumstances might be a way to leverage the desire for information about his employment history, which the court confi dentiality to obtain a , but it nevertheless found insuffi ciently sensitive, unlike medical information rejected a joint motion of the parties to maintain the confi - or attorney-client privileged information; the arbitral rules dentiality of certain documents, including portions of the of confi dentiality were insuffi cient to overcome the First in dispute. The Court explained: Amendment presumption of access. dispositive the documents in any litigation In American Central Eastern Texas Gas Co. v. Union Pa- enter the public record notwithstanding any cifi c Resources Group,16 a motion for injunctive relief and earlier agreement. How else are observers to to declare JAMS privacy rules applicable to protect an ar- know what the suit is about or assess the bitration award apparently was received with contumely judges’ disposition of it? Not only the legisla- because the court published the prior arbitral fi nding of ture but also students of the judicial system

24 NYSBA New York Dispute Resolution Lawyer | Spring 2012 | Vol. 5 | No. 1 antitrust violations against the Duke defendants in its own that govern arbitration confi dentiality in specifi c types of decision. The arbitrator in the underlying arbitration had cases.27 previously refused to impose the JAM’s privacy rules, fi nd- ing that there had been no agreement to adopt them by One Missouri court refused to permit production of ar- the parties. The district court found that Duke’s claim to bitration materials, including transcripts of testimony and irreparable injury was essentially that it would likely face evidence, and the award itself. It relied upon Missouri’s additional claims based on the underlying facts and that statutory protections, which treat arbitration communica- Group Health was not suffi cient in the face of the strong public interest tions as akin to settlement communication. In Plan, Inc. v. BJC Health Systems, Inc. 28 in knowing “the results of arbitration proceedings that , Group Health Plan involve allegations of anticompetitive and monopolistic sought an to prevent BJC from obtaining arbitra- conduct.”17 tion materials in an arbitration between the two compa- nies, arguing that the arbitrator had exceeded her authority Courts have also ignored the parties’ agreements in ordering production of confi dential information. The where public policy strongly supports disclosure. In Omaha materials sought related to an earlier arbitration to which Indem. Co. v. Royal Am. Managers, Inc.,18 the court found Group Health Plan had not been party. Testimony was that if parties to the arbitration testifi ed, federal prosecu- taken by the trial court on the confi dential nature of the tors could use arbitration testimony transcripts for im- documents, some of which contained patient information peachment in a criminal trial, even though the material and some of which had been marked attorneys’ eyes only was the subject both of a stipulation of confi dentiality and in the prior arbitration. The trial court imposed the injunc- a protective order. In City of Newark v. Law Dep’t of the City tion and on appeal, the Appellate Court affi rmed, relying of N.Y.,19 the City of Newark sought to compel disclosure heavily on the statute and the fact that the parties had under the Freedom of Information Law of documents relat- also entered a stipulated protective order. The statutory ing to an arbitration between New York City and the Port language related specifi cally to evidentiary use of arbitra- Authority. The Appellate Court reversed the denial of the tion material. It provided: “No admission, representation, petition holding that the arbitration tribunal did not have statement or other confi dential communication made in the power to deny the public access under the Freedom of setting up or conducting such [arbitration] proceedings not Information Law. otherwise discoverable or obtainable shall be admissible as evidence or subject to discovery.”29 Other district courts faced with discovery demands have been more sympathetic to the privacy and confi den- The Missouri Court distinguished an earlier ruling by tiality interests of ADR. In Fireman’s Fund Ins. Co. v. Cun- the Colorado Appellate Court in A.T. v. State Farm Mutual ningham Lindsey Claims Management,20 the court applied a Automobile Ins. Co.30 which had rejected a claim of confi - balancing test, weighing the “ADR confi dentiality inter- dentiality for medical information disclosed during a prior est” which it viewed as akin to settlement confi dentiality arbitration. The Colorado Court relied on the fact that the against the relevance and signifi cance of the evidence relat- parties had not entered into a confi dentiality agreement ing to the amount awarded in an arbitration proceeding. and that the arbitration was not conducted under rules that Finding that the subject matter of the dispute was relevant provided for confi dentiality. Moreover, the plaintiff had but the amount of the award was less so, it did not fi nd a made no effort to secure a protective order to preserve psy- compelling reason for ignoring the ADR confi dentiality chological disorder records. and denied production. But it must be noted that the court had permitted production of another substantive order States in which legislation expresses protection for from the same arbitration. arbitration communications are likely to be far more favor- ably disposed to parties seeking relief from production. But even in Missouri, the court system will not permit S tate Case Law on Arbitration Confi dentiality total anonymity for matters that need to be disclosed when If the parties clearly specify their election to be gov- arbitration enforcement in court is sought. In CPK/Kupper erned by state arbitration procedural and substantive law, Parker Communications, Inc. v. HGL/Gail Hart,31 the court that law will control.21 There are some state courts that ap- noted that the trial court had permitted the fi ling of the pear to be more favorably disposed to confi dentiality than case with the identifi cation of the parties by initials based their federal counterparts, which apply federal statutory on arbitration confi dentiality. The court specifi ed that be- law and look toward the federal rules of evidence and civil cause the courts are open and public, only protection of procedure. minors could justify anonymous fi ling. There are at least four states that have general (al- though varied) statutory protections for arbitration com- Protection of Business and Trade Secrets 22 23 24 munications: Arkansas, California, Missouri, and Independent of the arbitral dispute, preexisting secret 25 Texas. The Revised Uniform Arbitration Act provides that processes, fi nancial information, such as offers, bids, profi t arbitrators and arbitral organizations are not competent margins, formulas, data, programs, customer lists, and 26 to testify to matters that have come before them. Several a wide variety of information may be critical to business states also have selective statutory provisions and rules

NYSBA New York Dispute Resolution Lawyer | Spring 2012 | Vol. 5 | No. 1 25 success and to contractual agreements. Although the rules However, U.S. courts are chary to permit parties to use and law discussed above have focused on the protections confi dentiality issues as a shield to prevent enforcement of available generally for matters that arise out of the arbitra- an arbitration award. In AT&T Corp. v. Pub. Serv. Enterprises tion, including the facts of the dispute and the award, here of Pennsylvania, Inc.,32 AT&T sued PSE and others seeking the focus is on the protection of the underlying information to pierce the corporate veil and obtain judgment from a that the parties treated as confi dential prior to the dispute prior arbitration with PSE. PSE fi led a complaint claim- and protecting that information during arbitration. Some ing that the AT&T suit itself breached the confi dentiality of the same provisions, concepts, and rules apply, but by agreement in the underlying arbitration. The court granted and large, they do not specifi cally address this issue and AT&T’s motion to dismiss the PSE complaint, concluding they do not defi ne what is protected. In addition, care must that the case, although novel, was an effort to collect the be taken to avoid such stringent protections that a party in underlying judgment and was therefore a continuation of an arbitration hearing would be unable to meet its burden the arbitration proceeding. Therefore, the confi dentiality of proving its case because information is inaccessible to a provisions were not breached. In addition, the court lim- party with the burden of proof or to its experts under con- ited PSE’s motion to seal, holding PSE ‘s concerns did not fi dentiality protections. provide grounds for sealing the entire case: “The parties’ confi dentiality concerns are fully protected by their ability Remedies to designate any fi ling or portion thereof as ‘confi dential,’ and fi ling such pleadings or section under seal. To the Enforcement is a thorny problem. The measure of extent that confi dential materials are contained only in an damages may be diffi cult and timely preventive action by exhibit or an appendix to any court fi ling, only such exhibit way of injunctive relief requires knowledge that disclosure or appendix shall be fi led under seal.”33 is likely. The Seventh Circuit has held that when the alleged Injunctive Relief to Enforce Confi dentiality breach of confi dentiality is the act of fi ling or producing In ITT Educational Services v. Arce, 533 F.3d 342 (5th Cir. the material in litigation, injunctive relief or protective or- 2008), the Court of upheld a permanent injunction prevent- ders may not be available unless the material is subject to a ing disclosure of the rulings, decisions and awards of an recognized privilege or the requisite particularized show- arbitration and the use of evidence created for that arbitra- ing of harm is made; damages may be the only resort.34 tion made confi dential pursuant to the agreement of the parties. Arce’s counsel had signaled her intent to use infor- Remedies Before the Arbitration Tribunal mation about the arbitration results and other confi dential A party denied critical information may certainly raise information in a separate similar arbitration proceeding that issue with the tribunal, particularly where basic fair- brought by a student against ITT. In the face of the argu- ness is implicated. In addition, breaches of the tribunal’s ment that the arbitrator had found that the contract had confi dentiality orders or rules could also lead to tribunal been induced by , and rejecting the argument that sanctions or presumptions. Certainly, matters bearing on the confi dentiality provision was itself unconscionable and these issues should at least be preserved with the arbitral against public policy, the Court ruled that the arbitration tribunal if the affected party will want to challenge en- clause containing the confi dentiality provision was sepa- forcement of the award. But the critical role of the tribunal rable from the contract that contained it and not vitiated by is to keep the barn door closed before the horses escape. any fi nding of fraud. It therefore ruled that the confi denti- The terms of reference and protective orders are critical to ality agreement had continuing viability and was enforce- this end. The arbitration will not convert information that able. The arbitration provision stated under the heading is not protected as a into confi dential informa- “Resolution of Disputes” that the enforceability of the arbi- tion nor will it insulate witnesses in the arbitration from tration provision would be governed by the Federal Arbi- their duty to provide evidence that is not independently tration Act under the Commercial Arbitration Rules of the protected. American Arbitration Association and that: “All aspects of the arbitration proceeding, and any ruling, decision or Practical Conclusions award by the arbitrator, will be strictly confi dential. The parties will have the right to seek relief in the appropriate One of the painful realities of agreements containing court to prevent any actual or threatened breach of this arbitration clauses is that those clauses are most commonly provision.” an afterthought. Many and varied considerations face the drafter of a contract that includes an arbitration provision. The Court held that without injunctive relief, ITT But even in the glow of agreement, the parties, particularly would be without remedy and would suffer irreparable in- those who have undertaken an ongoing relationship, may and that the student could prove his own case without be able to agree that if any dispute arises, they will want to benefi t of the confi dential information as he had bargained resolve it privately and confi dentially. for.

26 NYSBA New York Dispute Resolution Lawyer | Spring 2012 | Vol. 5 | No. 1 Where the parties agree that confi dential treatment of Endnotes the arbitration itself is the dominant critical issue, the fol- 1. Guyden v. Aetna, Inc., 544 F.3d 376, 385 (2d Cir. 2008), quoting Iberia lowing check list ought to be considered: Credit Bureau, Inc, v. Cingular Wireless LLC, 379 F.3d 159, 175 (5th Cir. 2004). a. Draft a provision in the governing agreement to 2. The AAA Commercial Arbitration Rules R-23 (2009). arbitrate specifying confi dentiality requirements 3. JAMS Rule 26. (2009). for documents or other business secrets that will 4. CPR Rule 18 (2007). be exchanged, how they will be identifi ed and 5. Canon VI of the AAA Code of Ethics requires arbitrators to what steps must be taken to avoid distribution or maintain the of all matters relating to the arbitration. disclosure. 6. http://www.adr.org/sp.asp?id=22036. b. Draft a provision in the agreement to arbitrate that 7. http://www.abanet.org/dispute/commercial_disputes.pdf. expresses the parties’ intent that the fact of arbitra- 8. E.g., ITT Educational Services v. Arce, 533 F.3d 342 (5th Cir. 2008). tion, the matters submitted in arbitration, witness 9. Gotham Holdings LP v. Health Grades, Inc., 580 F.3d 664, 665-66 (7th Cir. 2009) (citations omitted). statements, the reasoning of the arbitrators, and the award be maintained as confi dential by all partici- 10. 2004 WL 1821968 (D. Colo. 2004). pants in the arbitration, the arbitrators, witnesses, 11. 297 F.3d 544 (7th Cir. 2002). experts and administrative personnel, except as re- 12. Id. at 546-47 (citations omitted). quired by law or fi nancial reporting requirements. 13. Id. at 548. 14. 2008 WL 1805459 (S.D.N.Y. 2008). c. Choose governing law for the agreement that is 15. 2011 UL 6015646 (S.D.N.Y).. sympathetic to remedying confi dentiality rights. 16. 2000 WL 33176064 (E.D. Tex 2000). d. Consider declining to have a reasoned award to 17. Id. at *1. avoid having to submit the reasoning to a court 18. 140 F.R.D. 398, 400 (W.D. Mo. 1991). where it may be disclosed. Here there are certainly 19. 760 N.Y.S.2d 431, 436-37 (NY App. 2003). countervailing considerations, but enforcement or 20. 2005 WL 1522783 (E.D.N.Y. 2005). challenge to the award is one place where there 21. Volt Info. Sciences, Inv. v. Bd of Trustees of Leland Stanford Junior is a serious potential for unwanted disclosure or Univ., 489 U.S. 468, 476 (1989). publication. 22. Ark. Code Ann. § 16-7-206 (1999). 23. Cal. Evid. Code § 703.5 (West 1995). e. Provide that without consent of the parties, only 24. Mo. Ann. Stat. § 435.014 (West 1992). such information as is required by law shall be dis- 25. Tex. Civ. Prac. & Rem. Code Ann. § 154.073 (Vernon 2005). closed in connection with enforcement or challenge 26. The Revised Unifo rm Arbitration Act § 14 (d) (2000) provides to the award. with limited exceptions: “ (d) In a judicial, administrative, or similar proceeding, an arbitrator or representative of an arbitration f. With respect to business secrets, mark them, iden- organization is not competent to testify, and may not be required tify them to the other party and require confi denti- to produce records as to any statement, conduct, decision, or ruling ality protections for them under the agreement. occurring during the arbitration proceeding, to the same extent as a judge of a court of this State acting in a judicial capacity.” g. Have the arbitration tribunal establish a procedure 27. See Richard C. Reuben, Confidentiality in Arbitration: Beyond the in a protective order or the terms of reference relat- Myth, 54 U. Kan. L. Rev. 1255, 1264 (June 2006). ing to the treatment of business secrets. Maintain 28. 30 S.W.3d 198 (Mo.App.Ct. 2000). procedures for identifying the materials as con- 29. V.A.M.S. § 435.014(2). fi dential, and controlling their use and distribu- 30. 989 P.2d 219 (Colo.Ct.App 1999). tion. Make sure witnesses sign a confi dentiality 31. 51 S.W. 3d 881, at n.1 (Mo. App. 2001). undertaking. At the same time, take care to follow 32. 2000 WL 387738 (E.D. Pa. Apr. 12, 2000). requirements pertaining to the business secrets of 33. Id. your opposing party. 34. Baxter Int’l v. Abbott Labs, 297 F.3d 544, 548 (7th Cir. 2002). h. In the terms of reference or protective order, pro- vide for an arbitral expert to review the documents Laura A. Kaster is an arbitrator and mediator in in the event there is a dispute about disclosure to Princeton, NJ working in the wider metropolitan area. the arbitration tribunal or opposing party. She is Co-Editor-in-Chief of this Journal, Chair of the NJ State Bar Association Dispute Resolution Section, a Even with the maximum effort and care, there remains CEDR Accredited mediator, and has IMI Certifi cation. exposure to disclosure if third-party non-participants in She has lectured for PLI, the ABA Annual Dispute Reso- the arbitration have legitimate need of the information in lution Section meetings, NJAPM the NJSBA, and NYSBA connection with unrelated litigation. Dispute Resolution Sections. More information is avail- able at www.AppropriateDisputeSolutions.com.

NYSBA New York Dispute Resolution Lawyer | Spring 2012 | Vol. 5 | No. 1 27