Clarifying "Clear and Unmistakable"

I was intrigued by the standard set out by the Supreme Court in First Options of Chicago, Inc. v. Kaplan (514 US 938) regarding who determines whether parties agreed to “arbitrate arbitrability” of a specific issue. The Court said that unless the parties could provide “clear and unmistakable evidence” that they intended for such a dispute to be arbitrated, the court, not the arbitrator, would be the entity that decided the issue. Since “clear and unmistakable evidence” is a fairly high standard, I decided to do some research and find some examples of cases that would add clarity to the phrase.

            The quote from First Options has been cited in hundreds of cases since its publication—with both positive and negative treatment. After reading several of them, I found two opinions (though I am sure there are many more) where lower courts took it upon themselves to further clarify the standard from First Options.

In Waveland Capital Partners, LLC v. Tommerup (840 F.Supp.2d 1243), the United States District Court of Montana determined that “[w]here a party has notice of a specific claim, and agrees to submit all aspects of that dispute to arbitration, yet does not reserve its right to challenge the arbitrators’ jurisdiction, it has clearly and unmistakably agreed to arbitrate the general arbitrability of the dispute” (1248-49). Though this is helpful because it gives an example of what “clear and unmistakable evidence” could be, the Waveland case is special because the arbitration agreement was signed after the challenging party received notice of the claim.

            In P. McGregor Enterprises, Inc. v. Denman Building Products, Ltd., the Court of Appeals of Texas (Amarillo) used the phrase and the fact scenario of First Options to suggest an example of “clear and unmistakable evidence”—the filing of a written jurisdictional objection with the arbitrators and a resassertion of that objection during the arbitration hearing. The Court of Appeals contrasts the facts in First Options with the circumstances in the case at bar—where an objection was made during first during the arbitration hearing, and then in the post-arbitration brief. The Court of Appeals felt that since the jurisdictional objection (which included an objection that the parties had not signed a written arbitration agreement) was not made from the first instance, and appeared to be merely an afterthought, the evidence that the parties had not agreed to arbitration regarding the arbitrability of the dispute was not “clear and unmistakable” (723-24). 

            From these two cases, I see a common thread—both courts decided that a party challenging an arbitrator’s jurisdiction was an important component of the “clear and unmistakable evidence” that had to be presented by the challenging party. By not reserving the option to challenge jurisdiction, the challenging party in Waveland was found to have agreed to arbitration of arbitrability. And by not challenging jurisdiction early enough, the losing party in P. McGregor also was found to have consented to the arbitrability of the arbitration clause dispute. From the case law, though, it still seems as though the standard of “clear and unmistakable” is developing, so I plan on keeping an eye out for any further definitions!

Problem 6: Guidance to a Client on Confidentiality

Dear Ms. Wiggins,

            I recently received your memorandum describing some of the questions you had regarding confidentiality in the forthcoming arbitration process between your company and that International House of Crepes. I will respond to each question in the order they were presented.

            First, regarding the confidentiality protection that you can expect under the AAA Rules of Commercial Arbitration, it is true that arbitration has a reputation for being a more confidential process than open trial. However, it is important to note that there is no automatic confidentiality protection built into the AAA Rules. The rules do specify that the arbitrator, if appointed through the AAA system, is technically bound by the Code of Ethics for Arbitrators in Commercial Disputes (though these are not “rules” necessarily). Canon VI of the Code of Ethics obligates arbitrators to “keep confidential all matters relating to the arbitration proceedings and decision”—which means that they probably wouldn’t be the source of any confidentiality/privacy concerns you may have. Further, your arbitrator will not ever be called to testify in court about the arbitration proceedings in question.

It is probably the most advisable for you to contact IHOC’s General Counsel now, before the arbitration process commences, and attempt to secure a confidentiality agreement. If such an agreement is in place when the arbitration commences, you should have no issues with privacy (unless you believe that IHOC will not abide by it). If you are unable to secure such an agreement, you absolutely must bring up the issue of trade secrets, at the latest, during either your administrative conference (see Rule L-1) or your Preliminary Hearing (see Rule L-3). This will make the arbitrator aware of the concerns you have regarding confidentiality and privacy, and may result in a determination that a stenographic record should not be kept of some or all of the proceedings (see Rule L-3(h)). It may also lead to the issuance of a protective order or a post-dispute confidentiality agreement by the arbitrator.

As to your second question, I will again say that the AAA Rules do not directly enforce confidentiality of arbitration proceedings. They do, on the other hand, have very clear rules regarding the confidentiality of mediation proceedings. Rule M-10 (in case you don’t have a chance to look at it yourself) states that a mediator cannot divulge any confidential information disclosed during the mediation, and that the mediator cannot testify. It further binds the parties to maintain the confidentiality of the mediation, and states that no party can use any of the discussions during the mediation process as evidence in a later dispute resolution process (including arbitration). Rule M-11 then makes clear that no stenographic record will be made of the mediation process, thus ensuring that your discussions will remain private.

It is certainly possible for an arbitration proceeding to be as confidential as a mediation proceeding, however, you must take precautions in advance of the arbitration process to ensure that this is the case. By this I am again referring to the signing of a confidentiality agreement—which is really the most surefire way to keep your arbitration private. This is because there are no specific rules which state that an arbitration must remain private—it is partly up to the discretion of the arbitrator (during the Preliminary Hearing, for example), and partly up to the participants.

Because the disclosure of certain proprietary information related to your arbitration would prove, as you stated, highly damaging to your company, I would definitely advise you to attempt mediation before entering the arbitration process. There are a few advantages to pursuing this course of action. First, there is the potential of resolving your entire dispute without entrusting the decision-making to a third party arbitrator who may come up with a decision that you are not satisfied with. After reviewing the information you sent me in your memorandum, it appears to me that your dispute with IHOC stems from a misunderstanding—that is, that you are licensing the same batter to Pancake Kastle as you are to IHOC and Wee Willie’s. The confidentiality of the mediation process would allow you to divulge the information necessary to show IHOC that this claim is untrue. Even if you are not able to do this, mediation may help to narrow the issues to be considered in arbitration, and may also provide you an opportunity to create the vital confidentiality agreement for the pending arbitration process.

In response to your third question, I would say that your colleague is not entirely wrong, but is certainly misguided in their belief that discovery does not exist in arbitration. Actually, AAA Rule L-3(c) states that the arbitrator can decide the extent to which discovery shall be conducted in a large/complex commercial dispute (such as the one at hand). Rule L-4(c) clarifies this by stating that parties involved in an arbitration may conduct such discovery as may be agreed upon by the parties, so long as the arbitrator deems the extent of discovery appropriate. If the parties cannot agree on discovery, then the arbitrator can step in and establish discovery parameters unilaterally. If you are able to get a confidentiality agreement between your company and IHOC regarding the arbitration, then the degree to which discovery is conducted should not be of issue to you. On the other hand, if you are not able to secure the confidentiality of the arbitration proceedings, it is vital that you try and work out a discovery agreement before the proceedings begin. You can also make it clear to the arbitrator that these issues involve proprietary information, and request that he/she issue a protective order or a post-dispute confidentiality agreement, but you should at least try taking the affirmative steps to secure the information in advance.

Finally, to answer your fourth question, there are several things that you can do in order to protect your information and product both presently and in any future litigation you may have. I don’t mean to sound like a broken record here, but a confidentiality agreement in advance of the arbitration proceedings would provide these protections. If there is no record made of the arbitration, and if the evidence produced through discovery is kept confidential, then you should not have to fear that another competitor would discover information by reading the results of the proceeding. You also absolutely must request that the arbitrator issue a protective order to prevent the disclosure of your proprietary information. By taking both of these steps, you will ensure that your information will remain secure against competitors.

In terms of limiting what IHOC sees during the arbitration process, and especially considering that you also possess some proprietary information that IHOC would not want to be disclosed, you may also be able to work out an agreement, either prior to the arbitration proceedings or during your Preliminary Hearing, that some proprietary material should not be disclosed during the course of the mediation. Ultimately, the arbitrator can place limitations on discovery (as I previously mentioned), so you should discuss these concerns with him/her, in the event that you are unable to reach an agreement.

In conclusion, your most important task at this moment is to try and formulate a confidentiality agreement that IHOC will agree to. Attempt mediation, either just to come up with a confidentiality agreement or to try and resolve the larger issue at hand. Regardless of your agreement, also ask the arbitrator for a protective order to ensure that your proprietary information will not be divulged to any party outside of the arbitration. And also review the licensing agreement that your company signed with IHOC, as it may contain some additional provisions regarding the protection of trade secrets and proprietary information.

For more information about these issues, I urge you to consult the AAA Commercial Arbitration Rules and Mediation Procedures, located here  and the AAA Code of Ethics, available here. Since arbitration is a process where the rules can be altered by the parties participating, I would also suggest that you consult the CPR Rules for Non-Administered Arbitration of Patent & Trade Secret Disputes, (located here) which may be able to provide some provisions outside of the AAA rules that you should seek to introduce into your proceedings.

Med-Arb and Arb-Med

Combining the mediation and arbitration processes seems to be a very logical way to resolve disputes outside of court. I find it interesting that the same neutral party sometimes serves as both arbitrator and mediator (though not necessarily in that order). From a cost standpoint, which the textbook addresses, I definitely see why a party would rather hire one neutral person than two. On the other hand, as a party considering only hiring one neutral arbitrator/mediator, I would have serious concerns about neutrality continuing throughout the whole process. Personally, after becoming familiar with an issue, I tend to mentally ‘take a side’, which obviously would make it hard to suddenly have to return to the role of neutral decision maker. But maybe experienced mediators and arbitrators are so used to the process that it isn’t difficult for them to detach and remain objective and impartial.

I feel as though a process of “Med-Arb” (or mediation followed by arbitration should the former fail) is a great idea, because I feel like it gives the parties an incentive to work things out in mediation, which usually ensures an outcome that both parties can accept (if both parties are willing to work together and compromise, that is). Med-Arb would keep the threat of a neutral arbitrator making a decision hanging over the heads of the negotiating parties—reminding them that if they can’t work things out amongst themselves, the arbitrator is going to make an award that neither party may like. Conversely, if the parties are especially contentious, the promise of an arbitration decision if mediation fails may be seen as a relief to two parties who have run out of options and compromises. Of course, I can’t ignore the less-desired possibility that two parties may not try hard to reach an agreement during mediation because they know that arbitration will take care of it eventually. I’m not really sure any parties would ever pick that third option, since they are trying to resolve a dispute quickly, after all.

I think that Arb-Med is a really interesting concept, even more so than Med-Arb, because it’s kind of going through the ADR spectrum backwards. I am wavering between thinking that it’s really cool and thinking that it’s a concept that isn’t really practical. On the one hand, just as in Med-Arb, parties will have even more of an incentive to reach an agreement through mediation, since the arbitration award has already been written and the parties won’t get another chance to resolve the dispute if they fail at mediation. On the other hand, I don’t really see why parties who would go through the entire arbitration process wouldn’t just want the award—and instead would rather rehash the entire dispute in mediation, which could possibly take up a lot of time and resources (and could still result in nothing but the arbitration award being published). I wonder how common the use of this tactic actually is. I’m thinking that it isn’t very popular, just based on the face that the textbook didn’t provide a real-world example to accompany its discussion. 

The "Seven Deadly Sins" of Arbitration Clause Drafting

I thought that the section of the reading which describes the "7 Deadly Sins" of drafting arbitration clauses (which starts on page 571) was really interesting. In my mind, it shouldn't be too hard to draft an arbitration clause, especially considering that the textbook was able to break a good clause down into a list of four clear requirements.

After doing the reading, though, it appears that lawyers have been taking shortcuts with arbitration clauses--with the result that some poorly-drafted clauses make the contract (or at least the clause) unenforceable. In fact, it would seem that some clauses are so badly written that disputing parties would probably need to arbitrate (or even litigate) their arbitration clauses to determine the format by which their actual dispute can be resolved. This seems to completely negate the reason that some parties plug in arbitration clauses in the first place--to save time and avoid costly litigation. It seems that this problem plagues both overly simple and overly complicated arbitration clauses, leading to the not-so-shocking This would mean that attorneys who are drafting an arbitration clause should consider what format of arbitration will lead to a simple and speedy dispute resolution process for both parties. This would entail elaborating on a "one size fits all" clause to fit the circumstances of the parties involved, or, making it easy for the arbitration process to proceed--without excessive restrictions as to the qualifications of arbitrators and the time the arbitrators have to make a decision.

On the casebook's suggestion, I thought I'd look up an agreement that I signed (admittedly, without reading), to see if it a) had an arbitration clause and b) whether that arbitration clause was well drafted. I thought I'd look at the Apple End User License Agreement, but it doesn't have an arbitration clause that  I could find. AT&T, on the other hand, does have a mandatory arbitration clause in Section 2.0 of its Wireless Customer Agreement (available here: http://www.wireless.att.com/learn/articles-resources/wireless-terms.jsp)As far as the "seven sins" go, I'm not sure if this one commits any of them, even though it is pretty long. When it comes to the arbitration process, Section 2.2 (3) makes it pretty clear that disputes will be arbitrated through the AAA, and by their rules. There are a couple of procedural additions, in terms of venue and notice, but otherwise the clause seems pretty direct. It is interesting that AT&T is willing to cover the costs of filing and the arbitration itself--kind of gives away how much they would prefer arbitration to litigation!