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.