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Will Chancery Court Remedy Your Problems in Another Tribunal?

September 3, 2014
Edward M. McNally
Delaware Business Court Insider

We are often asked to seek an injunction in the Delaware Court of Chancery to prevent a perceived abuse by our client's opponent in another tribunal. Those requests are not always far-fetched. After all, the Chancery Court will sometimes enjoin a litigant from proceeding in another forum in violation of a forum selection clause. And there are other examples of such Chancery Court intervention in other proceedings, such as to prevent vexatious plaintiffs from abusing process by repeatedly filing duplicative, meritless litigation. But those judicial interventions are rare.

Recently, in LG Electronics v. Interdigital Communications, Del. Ch. C.A. 9747-VCL (August 20, 2014), the Chancery Court declined to enjoin a litigant from violating a nondisclosure agreement in an arbitration proceeding. LG Electronics alleged that its opponent in that arbitration, Interdigital Communications, was using information that they had agreed to keep confidential and sought an injunction to prevent Interdigital from using those materials. The Chancery Court dismissed LG Electronics' complaint, however. In doing so, the court invoked the McWane doctrine, which permits a Delaware court to dismiss an action when there is a prior-filed action involving similar issues between those parties in another jurisdiction that is able to afford "prompt and complete justice."

While the facts of the LG Electronics case are unusual, its implications may be more important than its immediate result. In deciding if the McWane doctrine applied, the court first had to decide if an arbitration proceeding was the type of "prior action pending elsewhere" that McWane might permit dismissal. The court held that prior arbitrations did fall within the "prior action" requirement of McWane because doing so satisfied the basic rationales of McWane of avoiding "wasteful duplication" of effort and possibly inconsistent results.

Under that logic, almost any other proceeding may be subject to the McWane analysis and a later-filed Chancery Court proceeding that overlaps with that prior-filed proceeding should also be dismissed. Of course that is a big simplistic. After all, McWane only applies when the prior proceeding also may provide "prompt and complete justice." Nonetheless, the reach of the LG Electronics decision may be further than it seems initially. Attacks on pending administrative proceedings that involve a resolution of a dispute may also be dismissed under that rationale.

It seems reasonable to apply LG Electronics to most arbitrations or even most administrative proceedings. Failing to do so may very well result in unnecessary duplication of efforts or inconsistent results. Moreover, it is often true that administrative adjudications are before tribunals with special expertise whose rulings may be simply better informed than those of many courts. Furthermore, there is usually a statutory right of appeal for administrative decisions. Hence, it is not appropriate for the Chancery Court to intervene in that process.

Applying LG Electronics to prevent the type of evidentiary ruling sought by LG Electronics seems particularly wise. The Chancery Court cannot get dragged into every evidence dispute that allegedly is based on one party's right to exclude that evidence. While LG Electronics relied on a nondisclosure agreement as the basis for its right to exclude certain evidence, what is there to stop a litigant from asserting his or her right to claim a privilege to exclude evidence? That and other rights might generate all sorts of disputes that the Chancery Court might better avoid.

There is one aspect of LG Electronics that is troublesome, however. Part of its rationale is that if the evidence dispute that was before the arbitration tribunal was wrongly decided, "LG can seek judicial review after the award becomes final." That rationale may not be entirely accurate if placed in a different context. There is only a very limited ability to appeal most arbitration awards. Admitting inadmissible evidence is not one of the usual bases for an appeal of the arbitrator's award. In many arbitrations there is just an award without a written rationale. In those cases, prejudicial evidence that has been wrongly admitted by the arbitrator may well be unreviewable in any real way. Is that a reason to depart form the holding of LG Electronics?

The answer is found by considering the usual reasons for arbitration in the first place—that it is faster and cheaper than litigation. If the parties agreed to arbitrate under the normal loose rules of most rule-making bodies governing arbitration, then they should also accept that the proceedings may be less than perfect on what evidence is admitted. Asking the Chancery Court to intervene amounts to trying to get the benefits of a formal judicial process in an arbitration designed to skirt those processes. Instead, the parties that choose arbitration and do not provide for what procedural protections are needed should be left with the result, however imperfect it might be.

In any case, what LG Electronics teaches us is that in agreeing to any form of alternative dispute resolution, do not assume that you can go to court later to get relief from a flawed process. If you want a particular procedural safeguard, get it in the agreement.

Delaware Business Court Insider  |  September 3, 2014