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September 01, 2016

Confidential Arbitration Agreements for High-Profile Clients and Senior Executives

Suits by personal service employees can reveal sensitive confidential information if they are not kept out of court, and can involve extortionate demands

Kevin J. Hamilton and Harry H. Schneider Jr.

Arbitration agreements are commonplace today. It is difficult to obtain a credit card, sign up for cellular phone service, or purchase goods online without agreeing to arbitrate all disputes that arise from such transactions. Consumer advocates bemoan this development whereby citizens are required to abandon their right to go to court in favor of a system of “private justice.” Mandatory arbitration, they argue, deprives plaintiffs alleging common injury from pursuing their claims through more efficient class action lawsuits, prevents victims from sharing information obtained in discovery, and insulates defendants from the preclusive effects of prior adjudications of similar claims. Arbitration advocates, on the other hand, applaud the confidentiality, speed, and lower cost of arbitrating, rather than litigating, disputes. Both positions have merit, and neither traditional litigation nor arbitration is inherently superior for every situation.

There is one particular type of dispute, however, in which a well-drafted confidential arbitration agreement is preferred and serves to protect the interests of both parties: claims brought by personal service employees against high-profile clients or executives at the very apex of large businesses that are accompanied by threats to disclose confidential information of a sensational nature unless the claims are quickly resolved. Such clients are uniquely vulnerable to extortionate demands. Such claimants have unique access to personal and private information that can be abused. And both parties have a common interest in avoiding public disclosure of such information that, truthful or not, has the capacity to derail careers and foreclose future employment. For the claimant, unauthorized disclosure of such private information can have a chilling effect on any future employment. Use of a confidential arbitration agreement preserves privacy; allows legitimate claims to be either settled or litigated fairly based on the merits, rather than the threat of public embarrassment; and protects both the client and the claimant from the unwelcome effects of having to “go public” in order to obtain justice.

The Problem

High-profile and celebrity clients are subject to intense media scrutiny. Major sports figures, prominent actors, high-net-worth individuals, and the most senior executives of large corporations all too often are targeted by reporters and photographers seeking insight into their private lives. Privacy has become a casualty of fame and fortune.

Recognizing the problem, many such individuals use strict confidentiality and nondisclosure agreements for those who provide personal services to them and their families. Such agreements allow unfettered access to their private lives without risking public disclosure of personal information. Those confidentiality agreements may provide for liquidated damages, injunctive relief, and attorney fee shifting for the prevailing party. But even the most heavily lawyered and tightly drafted confidentiality agreements are of no use when a dispute arises if the claim can be litigated in a public forum. Courts are increasingly skeptical of efforts to seal files, particularly when sealing serves to protect only the employer’s unilateral interests. Few courts will insulate public filings from public scrutiny simply because one or both parties would prefer disputed matters private when state constitutional provisions require the “open administration of justice.”

For individuals of means, public disclosure of information that the employer had every reason to believe would remain private and confidential can be a powerful incentive to settle a meritless claim for a substantial sum. The mere filing of a complaint recounting private details that are considered to be sensational in the hands of the media creates the potential for staggering damage to one’s public reputation and future career prospects. In most instances, allegations and statements made during the course of litigation are protected by a qualified privilege, leaving the target without a remedy even if the plaintiff is unable to prove the allegations.

For any large retail or consumer-oriented company, the filing of such a complaint against a senior company official poses an additional threat: the loss of millions of dollars in revenue from consumers who hear nothing more than provocative allegations of misconduct and misbehavior. Long before the merits are ever decided, the damage is done. Allegations alone may well alienate millions of otherwise loyal customers. Stock prices may plummet. Investors may reduce their holdings. After months of costly litigation, even a complete vindication in the courts may receive only scant press coverage and, in any event, cannot replace lost revenues or reclaim the company’s reputation. For the individual defendant, the consequences can be even more calamitous. Endorsements may be canceled, opportunities may disappear, and invitations to participate in public events may be withdrawn or not extended.

At some point, threatening totally frivolous claims in return for compensation implicates criminal liability for extortion. But the availability of civil remedies for such conduct is remarkably vague and ill-defined. Overworked prosecutors are rarely interested in investigating such threats, particularly where the threatened disclosure is not patently false or inherently disprovable.

In many cases, threatened public disclosure of private information may motivate a defendant to consider paying extortionate settlement demands as the most effective and efficient way to avoid ruinous collateral consequences. Having the merits of the allegations decided takes a backseat to avoiding assertion of the claim under any circumstance. Indeed, even tangential involvement of a company’s most senior executive may itself compel settlement of an unmeritorious claim simply to avoid the burden, distraction, and disruption occasioned by litigation in open court. Although courts have been quick to recognize the inherent intrusion caused by so-called “apex” depositions and have adopted various methods to protect senior corporate executives from the threat of unnecessary or protracted depositions, those measures provide only limited protections. When a senior executive is directly implicated in the underlying claims, it is virtually impossible to curtail discovery under the apex precedents.

Confidential arbitration agreements are an answer to these problems. Requiring private resolution of such disputes removes the threat of public embarrassment and unwelcome intrusion into the private lives of the parties and allows the claim to be resolved on its merits rather than by capitulation.

Arbitration Agreements

Arbitration has been used as a recognized and reliable method to efficiently resolve disputes between employees and employers for decades. In the labor context, arbitration agreements are almost universally present in collective bargaining agreements between employers and unions. Nonunion employers, too, increasingly elect arbitration as the preferred means of resolving other employee claims efficiently and without the burden (to both sides) of extraordinarily expensive pretrial discovery and lengthy delays in obtaining a hearing or trial date in state or federal courts.

In November 2015, the New York Times published a lengthy three-part series on arbitration agreements, “Beware the Fine Print.” The articles chronicled the increasing use of arbitration agreements in form contracts, credit card applications, stock broker agreements, e-commerce “terms of use,” and an ever-expanding array of service agreements. The Times articles cast a dark shadow over arbitration, characterizing it as a tool of oppression in the hands of untrustworthy employers and big business, highlighting company-paid arbitrators who favor corporate defendants, and citing egregious examples of perceived injustice and unfairness that resulted in a handful of notorious cases.

The series ignored altogether the potential benefits of arbitration to both parties. Arbitration, fairly administered, is typically much faster, more efficient, and less expensive than the alternative. Arbitrators can more closely monitor and control discovery to allow essential fact gathering while avoiding abuse of the discovery process to bury a defendant in sweeping electronic discovery of millions of records or, by contrast, to overwhelm an underfinanced plaintiff with burdensome discovery requests.

Indeed, arbitration is more employee-friendly than many observers believe. Arbitration typically costs far less than litigation, allows cases to be brought that otherwise could not be affordable to the claimants, moves faster to resolution than does traditional litigation, and provides employees with access to justice in a more approachable forum.

Speed can be a driving factor for an employee who has been fired and seeks a monetary award. Arbitration of employment discrimination cases generally takes less than half the time it takes to litigate them. See Richard A. Bales, A Normative Consideration of Employment Arbitration at Gilmer’s Quinceanera, 81 Tul. L. Rev. 331 (2006).

And the defendant employer is often not the only party interested in protecting the confidentiality of the proceeding. The public nature of litigation can damage the reputation of employees as well as employers. The mere history of having filed a lawsuit against a prior employer is likely to reduce the individual’s employment prospects going forward, particularly in the personal service profession, where employers have a legitimate interest in protecting their privacy but also a genuine need to share their private information with those who work most closely with them, in many instances 24 hours a day. Litigation creates a public record of accusations informed by access to private lives, and neither party benefits from that.

Claimants in employment arbitrations also receive special due process protections. In the mid-1990s, the Task Force on Alternative Dispute Resolution in Employment drafted a Due Process Protocol to provide procedural guarantees in employment arbitration. These included: (1) a jointly selected arbitrator familiar with the law; (2) simple, adequate discovery; (3) cost sharing to ensure arbitrator neutrality; (4) the right to representation by a person of the employee’s choice; (5) remedies equal to those provided by law; (6) a written opinion and award with reasons; and (7) limited judicial review, concentrating on the law. See Task Force on Alternative Dispute Resolution in Employment, A Due Process Protocol for Mediation and Arbitration of Statutory Disputes Arising Out of the Employment Relationship (1995).

It is hardly a coincidence that arbitration has long been the defining feature of collective bargaining agreements. Unions have long insisted on such arbitral forums, not because they were perceived to be unfair, but precisely for the opposite reason: They were perceived to be far more fair and predictable than hostile state courts that were often thought to be controlled or influenced by corporate interests. That concern remains undiminished with elected state court judges forced to run for reelection every two or four years with the attendant fundraising campaigns.

State courts have long expressed strong hostility toward arbitration agreements, even when contained in collective bargaining agreements. The U.S. Supreme Court famously and emphatically resolved that dispute in the three cases known collectively as the Steelworkers Trilogy, which mandated that disputes arising under collective bargaining agreements with arbitration agreements were to be arbitrated, not litigated. Congress, too, weighed into the debate in no uncertain terms by adopting the Federal Arbitration Act in 1925, Pub. L. No. 68-401, 43 Stat. 883 (codified at 9 U.S.C. § 1 et seq.), which required deference to arbitration agreements in almost any context. In addition, many states have overcome judicial hostility toward arbitration with the adoption of similar statutes requiring deference to arbitration agreements.

Drafting Appropriate Arbitration Agreements

Appropriately drafted, confidential arbitration agreements provide critical protection for high-profile and celebrity clients, high-net-worth individuals, senior-level corporate executives, and those who work directly with them. Personal assistants, drivers, executive protection personnel, household staff, and others can be required to sign arbitration agreements as a condition of their employment. Several components are essential in arbitration agreements to avoid a public lawsuit over enforceability.

First, the agreement must be supported by consideration. Like any contract, arbitration agreements must be supported by consideration to be enforceable. In many states, the offer of employment can provide sufficient consideration. Where an employment agreement is already in place that does not include an arbitration clause, conditioning a raise, a one-time bonus, a promotion, or increased responsibility may suffice.

Second, the agreement must be fair. Onerous or one-sided agreements are likely to be met with skepticism if enforceability is challenged.

Third, the agreement should allow for both parties to engage in appropriate discovery that is controlled and supervised by the assigned arbitrator. Limiting the volume of written discovery requests and the number of depositions that may be taken will control the scope and extent of discovery without denying either party the opportunity to gather evidence. So long as they are fair to both sides and reasonably calculated to allow either side the opportunity to discover potentially relevant evidence, such provisions are likely to be upheld and enforced. Limiting the time that can be taken to depose a principal can be addressed, for example, by requiring the arbitrator’s approval before a deposition can be taken for more than a couple of hours.

Fourth, the agreement should explicitly permit the filing of prehearing summary judgment motions and authorize the arbitrator to hear and resolve such motions by adopting judicially recognized standards. Absent such a specific provision, arbitrators may not otherwise have authority to entertain such motions or the power to avoid unnecessary hearings where the material facts are not in dispute.

Fifth, the agreement should provide for fee shifting on non-statutory employment claims. For many statutory claims arising under state antidiscrimination laws, attorney fees may be recoverable only by prevailing plaintiffs. Attempting to contract around such provisions to allow for recovery of attorney fees on such claims by prevailing defendants is likely to be held an unenforceable violation of public policy. But the same is not true with respect to non-statutory tort claims. Provisions allowing fee shifting for common-law claims should be included in the arbitration agreement.

Sixth, the agreement should explicitly provide for confidentiality and privacy regarding the arbitration itself, the award, and all proceedings that take place prior to the hearing. Arbitration is not automatically confidential. Standard rules bind the arbitrator, but not necessarily the parties, to keep the matter confidential. Rule 25 of the American Arbitration Association Commercial Arbitration Rules and Mediation Procedures, for example, provides that the “arbitrator and the AAA shall maintain the privacy of the hearings” and empowers the arbitrator to exclude anyone who is not “essential” to the proceedings. Likewise, JAMS Comprehensive Arbitration Rule 26 provides that “the Arbitrator shall maintain the confidential nature of the Arbitration proceeding and the Award, including the Hearing,” and further that “[t]he Arbitrator may issue orders to protect the confidentiality of proprietary information, trade secrets or other sensitive information.” Explicitly and comprehensively providing for the confidentiality of the entire proceeding and all related papers and filings is essential.

The American Arbitration Association has suggested that the following language be included in the arbitration agreement to preserve confidentiality:

Except as may be required by law, neither a party nor an arbitrator may disclose the existence, content, or results of any arbitration hereunder without the prior written consent of both parties.

Seventh, the arbitration clause should be expansive and comprehensive in order to provide for confidential arbitration of “any and all disputes or controversies” arising from or relating to the employment relationship, including the enforcement of the employer’s confidentiality agreement. It is essential to ensure a confidential forum for the resolution of any disputes pertaining to the scope and effect of the confidentiality clause itself.

Eighth, the agreement should explicitly provide that if any provision is deemed unenforceable, the balance of the agreement remains effective and binding on the parties.

A Critical Component

No employer is immune from employee claims arising in the workplace. For those employers who are uniquely vulnerable when an employee’s claim threatens to result in public disclosure of private and personal information, an agreement to arbitrate any such claims in a confidential and private proceeding can make all the difference. Such an agreement can remove powerful leverage that otherwise might require an unmeritorious claim to be settled for nuisance value simply to avoid embarrassment or humiliation. Such an agreement also benefits the employee from publicity that might otherwise inhibit future employment prospects with high-profile employers. An appropriately drafted arbitration agreement can even the playing field and minimize the employee’s ability to leverage the threat of publicity into an unwarranted recovery, while preserving the employee’s opportunity to recover on legitimate claims.

Kevin J. Hamilton and Harry H. Schneider Jr.

The authors are partners in the Seattle office of Perkins Coie LLP.