Keeping Secrets: How Arbitration Agreements Affect Due Diligence

Welcome to the January 2018 edition of our newsletter!  In this issue, we’ll examine how arbitration — most often private arbitration — can create disclosure hurdles when researching an individual’s background, and offer some tips for filling in some of the gaps.

Employment and Contract Arbitration and its Effect on Due Diligence

Arbitration of disputes between parties are gaining greater levels of prominence, in part due to changes in rules for consumers seeking to dispute claims with banks and credit card companies, and in part because of the role arbitration can play in workplace issues, such as sexual harassment or discrimination claims.  In each instance, on its face, the private nature of arbitration filings would seem to shield the respondent from disclosure of unflattering information.  Generally speaking, the large private arbitration entities, like the American Arbitration Association, have strict rules about the confidentiality of proceedings.  Various state laws also complicate the matter of arbitration confidentiality, such as New York’s Article 75, which does not explicitly provide confidentiality to parties, but for which case-law has created precedent that a state agency that is subject to an Article 75 proceeding can make exceptions to open records requests to maintain the private nature of arbitration.

Putting the Pieces Together: Assembling Fact Patterns When Records Are Kept Private

Depending on the industry, certain exceptions exist within the United States that can help a researcher assemble a portrait of issues raised in arbitration.  Participants in various regulated industries, such as securities dealers and insurance brokers, are subject to self-regulatory organizations which, although not government entities subject to open records laws, maintain records of customer disputes and arbitration matters – in the securities industry, for example, FINRA (formerly NASD) and the National Futures Association (for commodities dealers) each keep fairly detailed records of such disputes, although the level of detail varies due to factors like the age of the dispute.  Other industries, like the legal and medical professions, do not explicitly identify arbitration actions in records of the relevant state regulators, but information about complaints or disciplinary actions – which are subject to open records disclosure – may contain such references.  Additionally, if parties fail to satisfy the terms of arbitration, or if new claims arise outside of arbitration, past agreements can often be referenced in civil litigation case files.

As economies, and the businesses that drive them, have become more global in nature however, one bright spot has emerged for identifying details about disputes in arbitration: other countries.  While the rules around disclosure in the United States are onerous, most other countries – tax havens like Switzerland being an exception – are far less restrictive when it comes to disclosure of information in arbitration actions.  Certain legal information aggregators contain information about various non-U.S., and in some cases multinational, arbitration bodies, from the London Court of International Arbitration to those issued by the World Intellectual Property Organization.

Although arbitration provides a level of opacity when compared with traditional civil litigation, it is not necessarily a “black box” from which no information can be obtained.  It can present a challenging effort for a researcher, but can also be one that reaps rewards for clients seeking information originally meant to be hidden from view.