Protecting Arbitration Documents In Federal Courts

Sunday, April 3, 2011 - 01:00

The confidentiality of information exchanged during alternative dispute resolution (ADR) processes, such as arbitration and mediation, is recognized as one of the many reasons why parties choose to resolve a dispute using ADR rather than litigation. The common and increasing use of arbitration may give the parties a false sense of security, however, about the confidentiality of documents used in the arbitration process. Unsuspecting parties may find that documents used in arbitration can be subject to later disclosure in a related federal court action.


The basic question is whether the law should protect documents used in a private and confidential ADR process against later discovery by others to assist in a related federal court action. The law might either allow discovery or exempt such documents from discovery under a "privilege" against disclosure. In order to resolve the question about privileging ADR documents, one must consider two policy positions. First, the American legal tradition relies on the principle that the public is entitled to every person's evidence. The opposing policy position contemplates that the adversarial litigation system is not always the best way to resolve a dispute. The growing trend toward using ADR to resolve disputes, both outside the court system and in connection with pending litigation, indicates that cooperation between parties may lead to superior results. And parties are encouraged to use ADR when they know that documents used in ADR processes are privileged.

The need for judicial economy prompted Congress to pass the Alternative Dispute Resolution Act of 1998 (the ADR Act), authorizing federal district and bankruptcy courts to adopt Local Rules that encourage at least one form of ADR process as an alternative to trial. The ADR Act requires each federal district court to authorize use of ADR processes in civil actions, to provide for confidentiality of ADR processes and to prohibit disclosure of confidential dispute resolution communications. Many ADR processes are conducted, however, outside the federal court system.

The Federal Mediation Privilege

Confidentiality is recognized as a hallmark of the mediation process; thus, if mediation is to be successful, parties must communicate and exchange documents freely without the fear that other parties will use their communications and documents against them in future litigation. Therefore, even before the ADR Act, courts with mediation (as opposed to arbitration) programs provided confidentiality protections through their plans and orders. Breaches of such confidentiality obligations led to sanctions. Most states have adopted statutes granting broad protections to mediation communications (all states - as opposed to federal courts - afford at least some protection to ADR programs).

What about mediations conducted outside the court system? The confidentiality of documents used in mediation will likely be protected in federal court, at least to some degree. A seminal case, Folb v. Motion Picture Industry Pension & Health Plans, 16 F.Supp.2d 1164 (C. Dist, CA, 1998), is recognized as having established a federal mediation privilege. Applying Federal Rule of Evidence 501, the sole Federal Rule on evidentiary privileges, the U.S. District Court for the Central District of California relied on a four-part analysis, citing:

1. the imperative need for confidence and trust among participants in mediation;

2. the important public goals served by promoting conciliatory relationships among parties to a dispute, reducing litigation costs and decreasing the size of federal and state court dockets, thereby increasing the quality of justice in cases that do not settle;

3. the modest loss of likely evidentiary benefit, because most mediation-related evidence not otherwise discoverable would never exist were it not for the confidentiality of the process; and

4. the consistent body of state law adopting such a privilege.

Federal Rule of Evidence 408, which covers settlement negotiations, may also provide some protections, as may common-law (i.e., nonstatutory) principles created by the courts. Although not entirely certain, absent legislative action by Congress, a federal evidentiary privilege likely applies to documents used in mediation proceedings.

Is There A Federal Arbitration Privilege?

The courts are now debating whether a similar federal evidentiary privilege applies to documents used in arbitration proceedings. In Kimberly-Clark Worldwide, Inc. v. First Quality Baby Products, LLC, Case No. 09-CV-1685 (M.D. Pa.), the district (trial) court recognized the federal mediation privilege and held that certain documents used in mediation proceedings were privileged. The district court also held, however, that other documents used in arbitration proceedings were discoverable. The U.S. Court of Appeals for the Federal Circuit agreed to hear an interlocutory appeal of the district court's discovery order concerning the issue of whether documents generated as part of an arbitration can be protected from discovery under the same theory that protects documents prepared in the course of a mediation.

The case is a patent infringement suit brought by Kimberly-Clark against First Quality that remains pending before the United States District Court for the Middle District of Pennsylvania. First Quality sought discovery of certain documents produced by Kimberly-Clark during several ADR proceedings between Kimberly-Clark and a third party. Kimberly-Clark objected, asserting that the documents were privileged under the federal mediation privilege. First Quality sought an order compelling discovery of those documents. The district court held that documents used in the arbitration proceedings were discoverable. In a separate order, the district court certified its discovery order for permissive appeal.

The Federal Circuit granted permission for an interlocutory appeal of the district court's discovery order. An interlocutory appeal intervenes between the commencement and the end of the suit and is deemed necessary for the suitable adjudication of the merits, although it does not decide the entire dispute. Federal appellate courts typically apply the final judgment rule, 28 U.S.C. § 1291, which states that courts of appeals lack jurisdiction over nonfinal judgments (the object of this restriction is to prevent piecemeal litigation). In this case, the district court characterized its order as involving a controlling issue of law about which there is substantial ground for difference of opinion and for which an immediate appeal may materially advance the ultimate termination of the litigation.

The Federal Circuit had to exercise its own discretion in deciding whether it would grant permission to appeal the interlocutory order certified by the district court. The Federal Circuit determined that granting the petition in these circumstances was warranted. Kimberly-Clark Worldwide, Inc. v. First Quality Baby Products, LLC, Misc. No. 957, 2011 WL 63986, *1 (Fed. Cir. Jan. 10, 2011) (nonprecedential). Thus, the federal appeals court will consider the merits of the district court's order compelling the patent owner to produce documents related to an arbitration and, in so doing, whether the patent owner can protect the documents from discovery under a mediation-type privilege.

Kevin R. Casey, Co-chair of Stradley Ronon's Alternative Dispute Resolution Practice Group, has been certified as both an arbitrator and a mediator by the U.S. District Court for the Eastern District of Pennsylvania. He has participated in various ADR procedures as a party representative and as a neutral. Additionally, Casey is chair of the firm's intellectual property practice group and is ranked as one of the leading IP attorneys in Pennsylvania by America's Leading Lawyers for Business, The Client's Guide.

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