“The most popular way of getting more streamlined resolution is arbitration. A major advantage of arbitration is that it is completely private. But there are some systemic drawbacks of arbitration for trade secret disputes.
I am willing to put the case into any shape you choose.
– Lord Ellenborough, 1816
It’s a challenge to resolve business disputes when emotions run high, which includes almost all trade secret cases. So, I was especially pleased when, in a hard-fought litigation where I had been appointed as a “referee” to resolve discovery disputes, both lawyers eventually reached out to tell me how much they appreciated my involvement in the case, which had settled.
What was it about this variation on typical legal combat—where a private party is selected to rule on some important aspects—that they found so satisfying? First, they had saved their clients a lot of time, and probably money, compared to the cost of dealing with unpredictable court calendars. And second, they felt that the decisions they received were thoughtful, balanced and practical, reflecting an understanding of the relevant business environment.
The Arbitration Advantage
So-called “private judging” can be particularly useful in trade secret cases between companies. Confidential information of both sides can be more reliably protected. Important context gets the attention it deserves, which is often just not possible for a judge who handles a caseload of several hundred matters. And decisions can be informed by the special background and experience of the person selected to do the job.
The most popular way of getting more streamlined resolution is arbitration, in which the dispute is handed over to a trusted private party hired to hear the evidence and render a decision. A major advantage of arbitration is that it is completely private. When the dispute involves exchanging important confidential information of both companies, this feature can be compelling.
Arbitration also allows the parties to pick the decision-maker, rather than take their chances with the court system. This is about more than just choosing a reliable and experienced former judge or senior lawyer. You can select for specific attributes like industry or technical background, or specialty in an area of law. And whoever is chosen, the arbitrator will be able to devote substantially more time and attention to the matter than the typical judge.
So why don’t companies in trade secret disputes always choose arbitration? There are some systemic drawbacks. One of those is that the decision of the arbitrator (or panel of three arbitrators) is almost always final, without the possibility of meaningful review through the court system. While that expediency can be an advantage in many cases, it also can create risks in trade secret disputes, where the range of possible outcomes can be large and unpredictable.
In one recent case from Texas, an arbitrator awarded $6 million to the founder of a company who had invested only a small fraction of that amount. On appeal from that decision, the court explained that it was powerless to do anything about it, even if the arbitrator had been mistaken about the law.
Besides offering only limited review of decisions, arbitration also typically restricts the kind and amount of available discovery—that is, the ability to get information from the other side in advance of trial. This can be a serious problem for a trade secret owner. Misappropriation rarely happens in broad daylight, and usually the facts are known only to the defendant. Although reasonable suspicion of theft is enough to make a claim, the plaintiff usually needs discovery from the defendant in order to prove what actually happened.
Whether because of this asymmetry of available proof, or some other aspect of arbitration that both sides find wanting, seldom do both companies in a trade secret dispute agree to arbitrate if their contract doesn’t require it. It is just too difficult to identify a mutual interest once a major disagreement emerges. Instead, one side or the other (and occasionally both) sees it to their advantage to stick with litigation.
But even within the framework of existing court procedures, there may be some opportunities to enhance efficiency in the interests of both sides. For example, in the case that I referred to at the beginning, I was acting as a “discovery referee” (also known in some courts as a “special master”). Basically, the judge in the case, with the approval of the parties, had outsourced the management of all pre-trial disputes over the exchange of information: document requests, depositions and the like. As with arbitration, private referees have more time to consider those specific disputes and to propose a resolution to the judge. Although more costly than using normal court procedures, a referee can move the discovery process much more quickly and efficiently, which is usually in the interest of both companies.
Several states, most notably California, even allow an entire civil case to be handled through trial by a private person, usually called a temporary judge, whose ruling can be appealed through the court system just like any other case. Unlike arbitration, however, this form of judging is private only in the sense that you get to pick (and pay for) the decision-maker; all the filings and hearings will be subject to the same rules on public access as apply to the courts.
The vast majority of trade secret disputes are resolved by an agreement of the parties, without a trial. In an upcoming article, we’ll look at the most effective way to make that happen: mediation, in which an experienced professional helps the combatants find success, often in ways they never would have discovered on their own. Mastering mediation is an art of its own.
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One comment so far.
Paul F. MorganJanuary 27, 2019 11:21 am
Yes, it is also too bad patent attorney special masters handlng discovery disputes and settlement talks are not used more in patent suits. It does not have arbitration disadvantages. I had a great experlence with one.