Practicalities of Privacy and Secrecy in Arbitration

There has been a great deal of discussion lately about nondisclosure agreements (NDAs) in arbitration. The problem is that the discussion often includes misperceptions regarding the “secrecy” of arbitration. In fact, all arbitration is not secret. Instead, arbitration is private, but not necessarily confidential. I wrote about this “privacy paradox” in 2005.

Nonetheless, some parties do include confidentiality clauses and/or NDAs in their arbitration agreements, especially when they are concerned with guarding sensitive information or preventing unwanted publicity. This is especially the case in the context of sophisticated businesses, involving parties who are cognizant of distinctions between privacy and confidentiality in arbitration. For example, parties are wise to include confidentiality clauses in their arbitration contracts when the deal involves business secrets or copyright-protected information, for example.

However, confidentiality clauses may be overly oppressive where they hinder the public’s access to information impacting health and safety. They also are problematic where they impede individuals’ abilities to obtain information regarding prior claims that they may need to prove patterns of discrimination or other violations of law reliant on the information of past practices. Nonetheless, confidentiality clauses are not all good or all bad in arbitration. This article will summarize some of the benefits and drawbacks of arbitral privacy and confidentiality clauses. The key is to consider the pros and cons of privacy and confidentiality for your specific arbitration and plan accordingly. Note also that NDAs are often more expansive than a simple confidentiality clause – which raises additional issues, not fully explored in this short post. Instead, the focus here is to simply parse out where confidentiality and privacy may be beneficial or problematic.

Benefits and Drawbacks of Secrecy

Benefits

Intra-Communal Dispute Resolution

Privacy of arbitration is especially beneficial for resolving disputes among intra-communal parties who share commercial, cultural, or other communal understandings and norms. Close-knit business and cultural communities have long used arbitration systems to resolve their disputes quickly and quietly in closed forums using their own rules and norms. These communities are usually more concerned with privacy than with establishing judicial precedent. Merchant and trade groups are prime examples of communities that have benefited from the privacy of arbitration and may want to include a confidentiality clause or agree to confidentiality at the start of the process.

Promotion of Efficiency in Arbitration

Privacy and confidentiality also may benefit parties by fostering faster and cheaper dispute resolution than parties enjoy in litigation. Public proceedings can be time-consuming, laborious, and expensive. Arbitration, however, may be more efficient partly due to its privacy, and even more so when the parties contract for confidentiality in order to foster free and frank presentations of evidence – where they would otherwise fear “leaks” of business secrets.

Protection of Business and Trade Secrets

Parties may be especially eager to include a confidentiality provision in their arbitration agreements where there may be business or trade secrets revealed in the proceedings. In these cases, it is quite common for all parties to willingly enter into a confidentiality agreement at the start of proceedings.

Drawbacks

Abuse of Closed Proceedings

More powerful parties may take advantage of the closed, or private, proceedings in arbitration. Furthermore, confidentiality clauses or NDAs may prevent parties from subsequently discussing a painful event – such as seen in harassment cases. This cloak of secrecy may also prevent others from proving their claims, where there is a need to show past practices. For example, a sexual harassment claimant may be emotionally vulnerable when asserting sensitive claims in the private atmosphere of arbitration proceedings and may need to vent their feelings about a painful event post-arbitration. Furthermore, subsequent harassment claimants may need access to information about prior claims in order to succeed on their later Title VII claims.

Prevention of Public Access to Information Re: Safety and Bad Behavior

In arbitration, lack of public exposure may allow companies to hide improprieties and prevent the public from learning about safety and fairness concerns. Confidentiality clauses and cloaks of secrecy may prevent the public from learning about defective products, for example.

Repeat Player Advantages

Privacy and confidentiality clauses may work together to augment repeat players’ advantages in arbitration. Many posit that businesses and other powerful parties that routinely arbitrate enjoy advantages in selecting arbitrators and presenting their cases. Corporate employers, for example, generally have legal teams that gather information about arbitrators, whereas employees often lack access to this information. Furthermore, repeat players may then use their power to impose one-sided confidentiality provisions through their form contracts. This may allow powerful repeat players to use privacy and confidentiality to hide violations affecting public interests, such as those involving employment discrimination and manufacturing laws.

Conclusion

Parties often assume too much regarding secrecy in arbitration. They assume privacy and confidentiality are synonymous. This is not true. Arbitration is generally private. However, it is only confidential if the parties contract for such secrecy. The problem is that parties’ mistaken assumptions often lead to shortsighted contracting and a lack of awareness about the consequences of confidentiality clauses. Business parties often are wise to contractually protect secrecy in intra- communal contexts, but consumers and employees may want to steer clear of burdensome confidentiality clauses that may stymie their abilities to vindicate statutory rights or access information regarding companies’ improprieties. The key is to balance all parties’ interests and know the pros and cons of confidentiality for a given context. For more, see See Amy J. Schmitz, Untangling the Privacy Paradox in Arbitration, 54 U. Kan. L. Rev. 1211 (2007) (discussing distinctions between confidentiality and privacy in arbitration).

AN ONLINE COLLOQUIUM ON ETHICS OF NDAS IN ARBITRATION AND MEDIATION

Arbitrate.com and Mediate.com believe that this is an important topic for arbitrators and mediators to confront, so we convened an online colloquium on February 15, 2022, with experts on NDAs to discuss best practices and guidelines for their use. The online colloquium examined the current use of NDAs in arbitration and mediation and discussed how they can be utilized without crossing any ethical lines. We discussed the role of legislation and how much party autonomy should govern NDA drafting and use. And we also attempted to identify best practices that arbitrators and mediators can follow to ensure they balance the interests of their parties with the wider public interest.

We have shared an online recording of the Colloquium below and hope you are able to watch it to further learn about this important topic.

Amy Schmitz

Professor Amy Schmitz is the John Deaver Drinko-Baker & Hostetler Chair in Law at the Ohio State University Moritz College of Law. From 2016-2021 Professor Schmitz was the Elwood L. Thomas Missouri Endowed Professor of Law at the University of Missouri School of Law and the Center for Dispute Resolution.…