ADR News from Jim Reiman

4-23-2015Friends and colleagues –

This eMail newsletter is a monthly piece that I send to friends and colleagues. In it, I identify, link, and briefly describe three to five articles, court decisions, or news items that I’ve come across that I hope readers will find of interest concerning the two subjects that occupy my time and thoughts: i) legal and business issues concerning alternative dispute resolution, and in particular mediation and arbitration, and ii) corporate governance, with a focus on executive compensation.

This month’s ADR articles will address confidentiality in mediation and two court decisions holding that contracts’ arbitration clauses are unenforceable. Corporate governance issues addressed include proxy access issues, and a cyber-security lessons for board directors

. More specifically:

Alternative Dispute Resolution

  • The case concerns a sexual abuse judgment and the Archdiocese of Milwaukee.
  • Two Federal Circuit Court decisions affirming decisions not to require arbitration; one because the contract did not provide “constructive notice” of the arbitration agreement, and the second because the dispute at issue was unrelated to the contract requiring all disputes between the parties be arbitrated.

Corporate Governance

  • Proxy access and Rule 14a-8(i)(9), which permits a company to refuse to include in its proxy a proposal from a shareholder which conflicts with a proposal by the company addressing the same matter – the Whole Foods proxy access war.
  • Lessons learned from Wyndham Worldwide Corporation’s victory in its shareholder derivative suit seeking damages arising out of data breaches suffered by the company.

Warm regards –

Jim Reiman

Articles – Alternative Dispute Resolution

Mediation Confidentiality

In the case John Doe v Archdiocese of Milwaukee,, No. 13-3783, the US Seventh Circuit Court of Appeals upheld the confidentiality of a mediation and refused to permit the admission of evidence to support Doe’s claim that he was fraudulently induced to accept a settlement agreement. The case is significant because of the circumstances and particular facts of the case, and should give comfort to those who worry about the confidentiality of statements made during a mediation.

Briefly, Doe, who is deaf, asserts that he was sexually abused as a student in an Archdiocese school. He brought a lawsuit against the Archdiocese and during the course of a mediation agreed to a modest monetary settlement. He subsequently learned that statements upon which he relied when agreeing to the settlement were false, and made claim against the Archdiocese for additional compensation asserting that he had been fraudulently induced to make the settlement.

Wisconsin, like most states, has a statute protecting the confidentiality of the mediation process. The Wisconsin statute provides: “no oral or written communication relating to a dispute in mediation made or presented in mediation by the mediator or a party is admissible in evidence or subject to discovery or compulsory process in any judicial or administrative proceeding.” Wisconsin (and many states) also have exceptions to this general rule. Wisconsin’s exception: “In an action or proceeding distinct from the dispute whose settlement is attempted through mediation, the court may admit evidence otherwise barred by this section if. . .it determines that admission is necessary to prevent a manifest injustice of sufficient magnitude to outweigh the importance of protecting the principle of confidentiality in mediation proceedings.” Doe claimed “manifest injustice.”

The Court, in what I believe to be a highly technical ruling, noted that “the ‘manifest injustice’ inquiry only arises if the proceeding is one that is ‘distinct from the dispute’ whose settlement was attempted through mediation.” It then held that Doe’s action for fraudulent inducement was not a “distinct” dispute, hence it enforced the mediation’s confidentiality and barred Doe’s proffered evidence.

“Clickwrap” v “Browsewrap” Arbitration Agreements

In the case Nguyen v Barnes & Noble,, No. 12-56628, the US Second Circuit Court of Appeals upheld the lower court’s denial of Barnes & Noble’s effort to compel arbitration based upon an arbitration mandate contained in the user agreement of its website. The Terms of Use on the Barnes & Noble website was part of a “browsewrap” agreement, where the website’s terms and conditions of use were generally posted on the website via a hyperlink at the bottom of the screen. The Court held that the plaintiff had insufficient notice of Barnes & Noble’s Terms of Use, and thus did not enter into an agreement with Barnes & Noble to arbitrate his claims. It must be noted that in reaching this decision, the Court distinguished a “browsewrap” agreement from a “clickwrap” agreement.

Explaining both types of agreements the Court stated:

“Contracts formed on the Internet come primarily in two flavors: “clickwrap” (or “click-through”) agreements, in which website users are required to click on an “I agree” box after being presented with a list of terms and conditions of use; and “browsewrap” agreements, where a website’s terms and conditions of use are generally posted on the website via a hyperlink at the bottom of the screen.”

The court thereupon held that for a “browsewrap” agreement to be enforced, there must be “actual notice” of the contract’s terms. Finding no such actual notice in the Barnes & Noble case, the court denied enforcement of the terms’ arbitration clause.

Unrelated Arbitration Agreements

In the case Douglas v Regions Bank,, 4602014 WL 3057091, the US Fifth Circuit Court of Appeals upheld the lower court’s decision that an arbitration clause contained in a checking account agreement could not be used to compel arbitration of a dispute wholly unrelated to such checking account. The case contains an excellent statement of the current law and reasoning of the courts when considering the applicability of arbitration agreements to particular disputes.

Articles – Corporate Governance

 Proxy Access Rules: The Whole Foods Debacle

Whole Foods is in the midst of a proxy access battle with an activist investor, the result of which will give guidance to both boards and investors. Briefly, an activist Whole Foods investor requested that the Company include in its 2015 proxy materials a proposal that would allow a shareholder or group of shareholders to nominate a stated percentage of the company’s board. Whole Foods requested the SEC to grant no-action relief and agree that Whole Foods may exclude the investor’s proposal pursuant to Rule 14-a8(i)(9) because the company planned to include its own, competing proposal. The SEC initially agreed and granted the no-action request.

On January 16th, however, the SEC Chair Mary Jo White issued the following statement: “The Commission’s proxy rules enable shareholders to submit proposals for inclusion in a company’s proxy materials for a vote at a shareholder meeting, subject to certain procedural and substantive exclusions. One of the exclusions, Exchange Act Rule 14a-8(i)(9), allows a company to exclude a shareholder proposal that “directly conflicts” with a management proposal. Due to questions that have arisen about the proper scope and application of Rule 14a-8(i)(9), I have directed the staff to review the rule and report to the Commission on its review.”

Additionally, the SEC advised: “In light of Chair White’s direction to the staff to review Rule 14a-8(i)(9) and report to the Commission on its review, the Division of Corporation Finance will express no views on the application of Rule 14a-8(i)(9) during the current proxy season.”

Bottom line, Rule 14a-8(i)(9) has effectively been suspended for this proxy season. Moreover, Whole Foods postponed its annual meeting scheduled for March 10, citing uncertainty over how shareholder board nominations would be treated by federal securities regulators.

For more information and analysis of the events, see:

Security Breaches – The Wyndham Case Lessons

In the case Palkon v Holmes,, 2:14-cv-01234, the plaintiff, a dissident shareholder, sought to compel the board of directors of Wyndham Worldwide Corporation to bring a lawsuit on the company’s behalf relating to “breaches of the company’s online networks, during which hackers accessed the personal and financial information of a large number of customers.” Per the Court: “At the heart of Plaintiff’s Complaint is an assertion that Defendants failed to implement adequate data-security mechanisms, such as firewalls and elaborate passwords, and that this failure allowed hackers to steal customers’ data. He further claims that Defendants failed to timely disclose the data breaches after they occurred.”

The US District Court for New Jersey ruled in favor of the company and its board, finding that the “Board had a firm grasp of Plaintiff’s demand when it determined that pursuing it was not in the corporation’s best interest” and that the business judgment rule therefore applied. Underpinning the Court’s decision was the Board’s active engagement in its cyber-security policies:

“The Board’s familiarity with the factual underpinnings of Plaintiff’s demand did not begin with its arrival. Board members had already discussed the cyber-attacks at fourteen meetings from October 2008 to August 2012. ‘At every quarterly Board meeting, the General Counsel gave a presentation regarding the Breaches, and/or [WWC’s] data-security generally.’ (Compl. ¶ 63). Similarly, WWC’s ‘Audit Committee discussed these same issues in at least sixteen committee meetings during this same time period.’” (Id.).
Bottom line – the business judgment rule will be upheld and provide protection for both the corporation and the board against derivative shareholder actions IF the company has appropriate policies and procedures in place and the board is engaged in the review and oversight of such policies and procedures.

Bottom line – the business judgment rule will be upheld and provide protection for both the corporation and the board against derivative shareholder actions IF the company has appropriate policies and procedures in place and the board is engaged in the review and oversight of such policies and procedures.

While a fast read of the case is worthy of one’s time, a good discussion and analysis may be found in an article by Shamoil Shipchandler, Daniel Meyers and David Bell published in the National Law Review.