Settlement Agreements: California Court Won’t Interfere With Texas Judge’s Ruling Allowing Discovery Of Information Subject To Confidentiality Provisions In California Settlement
There Is No Absolute Bar To Discovery Of Information Designated Confidential In A Settlement Agreement.
In 2007, Younan Properties entered into a settlement agreement with its CFO Thompson requiring confidentiality. Thompson had claimed that Younan Properties had engaged in unfair business practices, and wrongfully discharged him. In 2014, investors sued Younan Properties for fraud in Texas, and commenced to depose Thompson in Texas.
Younan Properties sought a preliminary injunction in California to prevent Thompson from violating the confidentiality provisions of the parties’ 2007 settlement agreement. After the trial court denied the request, Younan Properties appealed.
Younan Properties, Inc. v. Thompson, B266507 (2/4 11/21/16) (Epstein, Manella, Collins) (unpublished) affirms the order of the California trial court declining to interfere with Texas discovery orders, based on comity and the lack of a showing appellants were likely to prevail on the merits.
COMMENT: By the time the California Court of Appeal ruled, Thompson had already been deposed in Texas. Therefore, the Court of Appeal invoked the principle that it “may review moot issues if they are of broad public interest and likely to recur or cause another controversy among the parties.” Yet the opinion is unpublished.
An important lesson from this case should be that a confidentiality provision in a settlement agreement cannot absolutely bar court-ordered discovery of relevant information. Information might be relevant in another lawsuit, there may be compelling reasons that override the right to privacy, and principles of comity may even be involved – as they were here.
Arbitration/CCP 1281.2: CCA 4/3 Affirms Order Denying Arbitration In Lawsuit Between Law Firm And Ex-Client Because Ex-Client’s Lawsuit Against Another Law Firm Created Possibility Of Conflicting Rulings
Key Issue: Who Is A Third Party Within The Meaning of 1281.2(c)?
Reger v. Glaser Weil Fink Howard Avchen & Shapiro, LLP, G052352 (4/3 11/22/16) (Aronson, Bedsworth, Ikola) (unpublished) shows how a party with an otherwise valid arbitration clause can be thwarted from arbitrating through the application of Cal. Code Civ. Proc., section 1281.2(c) “when pending litigation with a third party creates the possibility of conflicting rulings on common factual or legal issues.”
Glaser Weil had represented Mr. Coxeter in an earlier lawsuit in which Mr. Coxeter’s business partner Mr. Bisno, alleged to have embezzled funds, paid for his and Mr. Coxeter’s joint defense. Mr. Coxeter separately hired Jackson, DeMarco, Tidus & Peckenpaugh to monitor the litigation because of potential conflicts. (Disclosure: I was a shareholder at Jackson DeMarco till February 2008. The full extent of my knowledge about this case comes entirely from the Slip Opinion). In December 2008, Glaser Weil withdrew as counsel, and Jackson DeMarco became Mr. Coxeter’s counsel of record. In 2015, Mr. Reger, as trustee in Mr. Coxeter’s bankruptcy, sued Jackson DeMarco and Glaser Weil on behalf of Mr. Coxeter’s bankruptcy estate, alleging claims for legal malpractice and breach of fiduciary duty, based on conflicts of interest, and failure to properly advise and defend Mr. Coxeter.
Mr. Coxeter had an arbitration agreement with Glaser Weil, but not with Jackson DeMarco. So Glaser Weil petitioned to compel arbitration. Jackson DeMarco, which did not have an arbitration agreement, joined in the petition. The trial judged denied the petition and joinder, finding that the malpractice claims against Jackson DeMarco constituted third-party litigation under section 1281.2(c) that might result in inconsistent rulings, allowing the judge to exercise his discretion and deny the request for arbitration.
Section 1281(c) may be used to deny a petition to compel arbitration where the following applies: “A party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact.” Here, Glaser Weil did not dispute (1) that the claims against it and Jackson DeMarco arose out of the same related transactions; (2) that there was a possibility of conflicting rulings if one set of claims was litigated and the other was arbitrated. The nub of the dispute was Glaser Weil’s challenged to the trial court’s determination that Jackson DeMarco was “a third party within the meaning of section 1281.2(c)”.
In fact, there was some connection between Glaser Weil and Jackson DeMarco. A former Glaser Weil partner, Mr. Heyman, who later went to work for Jackson DeMarco, had done tax work for Glaser Weil’s first name founding partner, Patricia Glaser. Plaintiff alleged the “undisclosed and preexisting relationship with Patricia Glaser” made it impossible for Jackson DeMarco to exercise independent judgment when monitoring Glaser Weil’s representation of Mr. Coxter. But that was nowhere near enough to establish a commonality of interest between Glaser Weil and Jackson DeMarco such that Jackson DeMarco would not be a “third party”. Jackson DeMarco was not an agent nor an alter ego of Glaser Weil. Also, Jackson DeMarco and Glaser Weil represented Mr. Coxter for different purposes, and owed separate duties to him. Bottom line: “Heyman’s previous representation of Patricia Glaser, even when combined with Reger’s allegation regarding the purported conflict of interest that relationship created, is completely unrelated to the representations at issue in this case and has no connection to Glaser Weil’s retainer agreement and its arbitration provision.”
Affirmed.
COMMENT: The case relies on section 1281.2(c) of the California Arbitration Act, and makes no reference to the Federal Arbitration Act. If interstate commerce had been involved, and Glaser Weil has been able to invoke the Federal Arbitration Act, the result would have been somewhat different. The Court would have been unable to deny Glaser Weil’s petition to arbitrate, because presumably it had a valid arbitration clause, and it would not matter that there was another lawsuit pending. However, the Court would likely still have denied Jackson DeMarco’s joinder in the petition, because Jackson DeMarco did not have an arbitration agreement. Good luck to my former colleagues at Jackson DeMarco on the ultimate outcome of the dispute.
Arbitration, Enforceability, Consumers: MarketWatch Reports Trump University Could Be Sued In Court Because It Didn’t Have Arbitration Clause With Students
Obama Administration Has Sought Change In Law To Prevent Educational Institutions Getting Federal Funds From Requiring Students To Sign Pre-Dispute Arbitration Clauses.
Jillian Berman reports on July 22, 2016 in MarketWatch that students were able to sue Trump University in the courts because the students were not required to sign pre-dispute arbitration clauses.
In contrast to Trump University, Berman reports: “ About 98% of students enrolled in for-profit colleges receiving federal financial aid were subject to an arbitration clause, according to a report published earlier this year by the Century Foundation, a progressive think tank.”
Meanwhile, the Obama Administration has pushed to finalize rules to prevent colleges that receive federal financial aid from requiring students to sign pre-dispute arbitration clauses as a condition for enrollment. The rules are scheduled to take effect in 2016.
QUERY: How easily can the executive branch undo this change in rules after January 20, 2017?
Mediation and Arbitration Confidentiality: Acquaint Yourself With The EU-U.S. Privacy Shield If You Are Involved With Data Transfers From The EU To The US
The European Commission Has Deemed The Privacy Shield Framework Adequate To Enable Data Transfers To US Under EU Law.
On July 12, 2016, the European Commission adopted the EU-U.S. Privacy Shield. I am blogging about this because it relates to transfer of data from the EU to the U.S., and this impacts legal matters affecting the privacy rights of EU citizens, including mediations, arbitrations, and litigation in which a data transfer from the EU to the U.S. is required. Also, the Privacy Shield provides for binding arbitration as one of several dispute resolution mechanisms for resolving privacy issues.
The International Trade Administration of the US Department of Commerce has created a website with information about the EU-U.S. Privacy Shield Program, intended to protect data flows from the EU to the US, and thus to protect the privacy of EU persons. The protections offered by the Privacy Shield Program are more stringent than protections offered by an earlier Safe Harbor program. Click here for a link to FAQs about the Privacy Shield program.
United States companies that join the Privacy Shield Framework can benefit from an “adequacy determination”, meaning a determination that they have joined and committed to a framework deemed adequate by the European Commission to comply with EU data protection requirements when transferring personal data (e.g., names, addresses, telephone numbers) from the EU to the US.
No doubt the push to satisfy EU concerns about the privacy of EU citizens was motivated, at least in part, by Edward Snowden’s revelations concerning the NSA surveillance of intelligence available in Internet communications. Snowden’s choice to disclose secret information about US surveillance triggered a debate on privacy and surveillance.
The EU-U.S. Privacy Shield provides a number of dispute resolution routes, in case a citizen of the EU believes his or her privacy rights have been violated. These routes include contacting the company directly, going to an independent dispute resolution provider, submitting to EU Data Protection Authorities (DPAs), and binding arbitration. In the case of national security issues, an ombudsman independent from US intelligence services is to be available.
Arbitration “is available to an individual to determine . . . whether a Privacy Shield organization has violated its obligations under the Principles as to that individual, and whether any such violation remains fully or partially unremedied.” In short, the purpose of arbitration is to provide an equitable, rather than a monetary remedy, for an individual whose privacy rights have been violated. “Once invoked, the individual forgoes the option to seek relief for the same claimed violation in another forum, except that if non-monetary equitable relief does not fully remedy the claimed violation, the individual’s invocation of arbitration will not preclude a claim for damages that is otherwise available in the courts.” See Arbitral Model, Annex II, pp. 12 to 16 of 128.
Because the binding arbitration dispute resolution mechanism exists to protect privacy, it would make little sense if the Privacy Shield did not protect the confidentiality of the arbitration proceeding itself. In fact, “Materials submitted to arbitrators will be treated confidentially and will only be used in connection with the arbitration.” Furthermore, individual-specific discovery “will be treated confidentially by the parties and will only be used in connection with the arbitration.”
Recommended Reading: The High Cost Of An Inexpensive Forum: An Empirical Analysis Of Employment Discrimination Claims Heard In Arbitration And Civil Litigation
Mark D. Gough’s Study Seeks To Correct For Systematic Differences In Case Characteristics Between Arbitral And Court Forums.
Back on August 19, 2014, I posted about Mark D. Gough’s study of arbitration outcomes arising from his research comparing employment discrimination cases heard in arbitration and civil litigation. At the time, I couldn’t find his study on-line. Good news: it is now available on-line. And here’s a citation: Mark D. Gough, The High Costs of an Inexpensive Forum: An Empirical Analysis of Employment Discrimination Claims Heard in Arbitration and Civil Litigation, 35 Berkeley J. Emp. & Lab. L. (2015).
I was most curious to see how Dr. Gough compared cases in litigation with cases in arbitration, because there are a lot of variables to take into account: “claim amount, award amount, winning party, employee salary, alleged discriminatory action, whether a motion for summary judgment was filed, defendant size, and the attorney’s fee arrangement, among other variables.”
Given that employees win less often and obtain smaller awards in arbitration than in litigation, might this be explained by the fact that the arbitration cases are weaker, that summary judgment is used more often in litigation to winnow out weak cases, that arbitration claims are smaller, that the arbitration clauses are less likely to be individually negotiated, or some combination of factors?
After making heroic efforts to compare apples to apples, Dr. Gough’s bottom line is that in contemporary employment discrimination cases, arbitration outcomes “are starkly inferior to outcomes reported in litigation.” After taking into consideration whether cases survived summary judgment, how the plaintiff’s attorney evaluated the case, plaintiffs’ salaries, employer size, and the discriminatory claims, Gough concludes that inferior outcomes in arbitration cannot be explained by systematic differences in case characteristics between the two forums. Thus, the difference is not in the cases, but in the forums. While the arbitral forum may be relatively “inexpensive”, Dr. Gough’s study concludes that mandatory arbitration in employment discrimination cases costs employees dearly.
Judges, arbitrators, employers, and employees can draw their conclusions. Employers who have embraced arbitration and employees who have challenged mandatory employment arbitration clauses in courts have already drawn their conclusions.
International Arbitration And Confidentiality: What Confidentiality Should One Expect In International Arbitration?
Confidentiality May Seem A Self-Evident Feature Of International Arbitration – In Which Case, You May Be Surprised.
At the 41st Annual IP Conference held in Santa Barbara, I was asked an excellent question yesterday about dealing with confidentiality in international arbitrations. Unfortunately, this is not a subject about which I had devoted enough thought. However, Camilla Mickelson Lous, an attorney with the Norwegian law firm Steenstrup Stordrange, has obviously thought long and hard about this. It is the subject of her excellent April 14, 2014 on-line article entitled: “Hush! Let’s Arbitrate – Discourse And Practice On The Question Of Confidentiality In International Commercial Arbitration.” While I recommend reading the article in its entirety to anyone interested in the subject, I will give you a few of the highlights.
Ms. Lous points out that there is “a notable presumption that confidentiality is a self-evident feature of international arbitration.” However, as important as confidentiality may be to the parties, it shouldn’t be taken for granted.
Preliminarily, there is a difference between confidentiality and privacy. While arbitral hearings may generally be “private”, i.e., they are not open to the public, it cannot be said that confidentiality, as a state of secrecy, necessarily permeates the arbitral process. Participants could be free to communicate outside the arbitration about the existence of the arbitration, communications in the arbitration, and the arbitration award, absent well-defined confidentiality safeguards.
Looking for examples of confidentiality protection in England, Australia, the US and Sweden, Ms. Lous identifies different approaches
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England: Arbitral matters are presumed to be confidential.
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Australia: Confidentiality is not an essential attribute of arbitration, especially where matters of public interest are concerned, though the parties may contract for confidentiality.
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US: Neither the Federal Arbitration Act nor the Uniform Arbitration Act contain confidentiality provisions. The parties may contract for confidentiality.
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Sweden: No obligation of confidentiality exists, though a “duty of loyalty” may exist between the parties to an arbitration. If the parties want confidentiality, they must contract.
Though the rules of international arbitral institutions may regulate confidentiality, there is no uniform approach. WIPO Arbitration Rules 75 to 77, address confidentiality of the existence of the arbitration, disclosures made during the arbitration, and maintenance of confidentiality by the arbitration center and the arbitrator. It makes perfect sense that WIPO would have rules addressing confidentiality, because the “World Intellectual Property Organization” exists to protect the “IP” in “WIPO”, and intellectual property is often valuable because it is confidential.
The UNCITRAL Model Law on International Commercial Arbitration leaves the question of confidentiality to the parties and the arbitration rules they choose.
While confidentiality cannot be taken for granted in international arbitration, there are some things a party can do: (1) include a confidentiality clause in the original contract; (2) get individual confidentiality agreements from third parties; (3) if confidentiality is a concern, pay attention to the choice of law and seat of arbitration; (4) request protective orders from the arbitrator; (6) go to national courts to enforce protective orders (sometimes a self-defeating option).
Bottom line: do not take the obligation to maintain confidentiality for granted in international commercial arbitration.
While I found Ms. Lous’ article to be genuinely illuminating, I can’t help but remember Laurel and Hardy’s immortal words: “Well, here’s another nice mess you’ve gotten me into.”
HAT TIP to the attorney in the audience who asked me about confidentiality in international arbitration yesterday!