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Arbitration Constitutes a First-Filed Action Under 'McWane' Doctrine

April 29, 2015
Brett M. McCartney
Delaware Business Court Insider

Delaware litigators are likely familiar with the teachings of McWane Cast Iron Pipe v. McDowell-Wellman Engineering, 263 A.2d 281, 283 (Del. 1970), which, in a nutshell, advise that a Delaware court will freely exercise its discretion to stay an action pending before it where there is a prior pending action "in a court capable of doing prompt and complete justice, involving the same parties and the same issues." Customarily, the prior pending action has been litigation before a court in another state. The existence of a prior action in another state court is no longer the exclusive factual predicate upon which a Delaware court will stay its hand under McWane. That is because in LG Electronics v. InterDigital Communications, No. 475, 2014 (Del.), the Delaware Supreme Court affirmed the Court of Chancery's 2014 decision dismissing a complaint in favor of a prior pending arbitration being litigated by the same parties. Whether the impact of this decision is limited to its unique facts or has a broader application remains to be seen.

In LG Electronics, 98 A.3d 135 (Del. Ch. 2014), the Court of Chancery addressed a complaint seeking declaratory and injunctive relief relating to a nondisclosure agreement executed by the parties. However, prior to LG Electronics Inc.'s initiation of the Court of Chancery action against InterDigital Communications Inc., InterDigital Technology Corp. and IPR Licensing Inc. (collectively, InterDigital), the parties were engaged in litigation in multiple forums. Those disputes included an arbitration arising from a wireless patent license agreement, which included a mandatory arbitration provision for claims arising from the license agreement. During the pendency of these actions, the parties executed a nondisclosure agreement that governed the circumstances under which settlement discussions between the parties could be disclosed (the NDA). The NDA contained a broad provision permitting the parties to enforce the terms of the NDA in "any court, agency, or tribunal having personal jurisdiction over the party in alleged breach of this agreement."

After executing the NDA, LG filed a brief in the arbitration that argued that its claims should be decided without reference to information allegedly barred by the terms of the NDA. InterDigital subsequently argued to the arbitration panel that the NDA did not preclude the panel's consideration of the disputed information. LG responded to InterDigital's argument by contending that the arbitration panel did not have the authority to determine whether the disputed information was, in fact, barred by the NDA. This series of events led to LG filing the underlying action in the Court of Chancery, seeking a declaration that the disputed information was barred by the NDA and an injunction preventing InterDigital from using the information in the arbitration. The Court of Chancery dismissed LG's complaint, noting the factors set forth in McWane were satisfied despite the prior pending action being an arbitration rather than an action before a court.

LG appealed the Court of Chancery's dismissal of its complaint, arguing that because the NDA did not include a mandatory arbitration provision, the dismissal of the complaint was an abuse of discretion. The Supreme Court disagreed. In a 4-1 decision, the Supreme Court affirmed the Court of Chancery's application of McWane and held that all three factors were present: (1) the existence of a prior pending action; (2) in a court capable of doing prompt and complete justice; and (3) involving the same parties and same issues. The Supreme Court noted that arbitrations are often considered "prior actions" for other purposes, including issue and claim preclusion. In addition, treating an arbitration as a "prior action" also satisfies the principles of McWane, specifically the desire to avoid "wasteful duplication of time, effort, and expense that occurs when judges, lawyers, parties, and witnesses are simultaneously engaged in the adjudication of the same cause of action in two courts," and "the possibility of inconsistent and conflicting rulings and judgments and an unseemly race by each party to trial and judgment in the forum of its choice." The Supreme Court also noted that Delaware's public policy favoring arbitration adds support to the Court of Chancery's decision to not interfere in a dispute pending before an arbitration panel.

The Supreme Court also addressed LG's argument that the NDA did not compel it to arbitrate its claims. As noted above, the NDA included a provision allowing any party to assert claims arising from the NDA in a "court, agency or tribunal." The Supreme Court, like the Court of Chancery, held that the NDA's provision expressly allowed InterDigital to pursue its claims regarding the NDA in an arbitration. The Supreme Court made reference to the parties' failure to confine litigation of claims arising from the NDA to a specific forum. By leaving the provision open to enforcement in a court, agency or tribunal, LG received exactly what it bargained for when InterDigital raised the issue regarding the disputed information subject to the NDA in the pending arbitration. The Supreme Court noted that Delaware precedent allows for arbitrators to resolve procedural issues, such as evidentiary disputes. These findings culminated in the Supreme Court ruling that the Court of Chancery did not abuse its discretion in dismissing LG's complaint.

This decision is important as it is the first time that the Court of Chancery, or the Supreme Court for that matter, has addressed whether an arbitration can constitute a first-filed action under the McWane doctrine. Whether this case is the first of many on this subject is unclear. Arbitrations tend to be creatures of contract and much of the litigation invoking the McWane doctrine involves transactions that do not mandate arbitration, such as mergers and acquisitions that get litigated in multiple forums across the country. Nevertheless, permissive arbitration clauses in contracts may be looked on now with more favor in light of the Supreme Court's upholding an arbitration as a prior pending action despite a subsequent Court of Chancery complaint.

Delaware Business Court Insider  |  April 29, 2015