Del. High Ct. Rules Arbitration Proceeding Can Constitute ‘Prior Action' Under ‘McWane'

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By Michael Greene

April 16 — In a novel ruling, the Delaware Supreme Court April 14 dismissed a lawsuit on the grounds that an arbitration proceeding had been filed first.

The decision appears to be the first time the state's high court has determined an arbitration proceeding can constitute a “prior action” under the McWane doctrine, which allows Delaware courts to dismiss or stay lawsuits in favor of first-filed actions.

Writing for the majority, Chief Justice Leo E. Strine Jr. opined that “there is no principled reason to distinguish an arbitration proceeding from other first-filed actions”

The high court's decision affirms an earlier dismissal by the chancery court in a lawsuit brought by LG Electronics, Inc.

Two Agreements

LG sought to prevent InterDigital Communications Inc. from using evidence in an arbitration proceeding because it allegedly violated a non-disclosure agreement (“NDA”) entered into by the parties. The parties have been arbitrating a dispute over a patent license agreement before the International Centre for Dispute Resolution. While the license agreement did contain an arbitration clause, the non-disclosure agreement did not.

‘McWane' Doctrine Applies

After determining that an arbitration proceeding can constitute a first-filed action, the supreme court concluded that the chancery court had correctly applied the McWane doctrine in dismissing LG's lawsuit.

In doing so, the court rejected LG's argument that it is being forced to arbitrate an issue against its will. Chief Justice Strine observed that the agreement “specifically permitted both parties to seek relief from ‘any court, agency, or tribunal.' ”

“Because the NDA specifically included a ‘tribunal' as one of the forums in which both parties could seek relief, InterDigital was entitled by the terms of the NDA itself to keep the related litigation in one forum, the one chosen by LG,” he wrote.

Accordingly, the majority found because the parties declined to confine disputes over the NDA's to an exclusive forum, LG was not entitled to insist on a judicial forum.

The court additionally found that the chancery court's decision “was also consistent with well-reasoned precedent suggesting that courts should accord respect to arbitration proceedings by hesitating to inject themselves into the process.”

“If courts interject themselves into every procedural dispute, the value of arbitration as an efficient dispute resolution mechanism will be compromised,” Strine wrote.

Dissenting Opinion

In a dissenting opinion, Justice Karen Valihura disagreed with the majority's opinion that the dispute was abitrable. Instead, she found that there was no clear intent by the parties to arbitrate the dispute and that the record simply did not support the conclusion reached by the majority.

She additionally opined that the majority's opinion “upsets the settled expectations that parties depend upon in entering into their contractual arrangements.”

“The Majority's fears that a contrary ruling would doom arbitration as a dispute resolution mechanism and flood the courts with discovery matters related to pending arbitrations are not well-founded. This situation is fairly atypical and, in that sense, does not threaten long-standing practices,” she wrote.

“What is threatened is the party's freedom to freely contract around the general practices. While trumpeting the virtues of arbitration, the Majority does violence to basic principles of freedom of contract and to well-established lines of precedent regarding substantive arbitrability.”

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Kristyn Hyland at khyland@bna.com

The opinion is available at http://www.bloomberglaw.com/public/document/LG_Elecs_Inc_v_InterDigital_Communs_Inc_No_475_2015_BL_105042_Del.