Dec 26

Qualified Right of Access Ends Chancery Court’s Arbitration Program

Five Delaware Chancery Court judges were sued by a not-for-profit organization that advocates for government transparency. Delaware Coal. for Open Gov’t v. Strine, No. 1:11-1015, 2012 WL 3744718 (D. Del. Aug. 30, 2012). The organization alleged that section 349 of the Delaware Code and Court of Chancery rules 96, 97, and 98, which created a confidential arbitration program, violated the First Amendment of the U.S. Constitution, which protects the public’s qualified right of access to government proceedings. After considering each of the parties’ cross-motions for summary judgment, the U.S. District Court for the District of Delaware ruled in favor of the plaintiff not-for-profit and found that the confidential arbitration program violated the First Amendment. The rationale was that despite its label of arbitration, the proceeding was the functional equivalent of a civil trial.

Delaware’s confidential arbitration program had only a few prerequisites. First, one party had to be a business entity and/or a citizen of Delaware. Second, the parties had to consent to arbitration. Third, if only monetary damages were sought, there was a $1 million threshold requirement but no amount-in-controversy requirement if equitable damages were sought. Fourth, a party could not be a consumer. If the parties satisfied these requirements then they could file a petition to arbitrate. Once the petition was filed, a Chancery Court judge was assigned, without any input from the parties, and an arbitration hearing held within 90 days.

Although a relatively new program, it had earned a reputation for being an efficient and expedited way to resolve corporate disputes, which in large part was attributed to the prestige of the Delaware Chancery Court. The Chancery Court is considered to be the country’s premier court for corporate issues because of the vast experiences of its judges, the depth of Delaware corporate jurisprudence, and the predictability of outcomes in corporate disputes.

In rendering its decision, the court considered the threshold question of whether Delaware implemented a form of commercial arbitration to which the court must apply the “logic and experience” test adopted by the Third Circuit to determine when the public has a right of access to a particular proceeding or record (N. Jersey Media Group, Inc. v. Ashcroft,308 F.3d 198 (3rd. Cir. 2002); or, had Delaware created a procedure “sufficiently like a trial” that the holding in Publicker Industries governed? (Publicker Industries, Inc. v. Cohen,733 F.2d 1059 (3rd Cir. 1984) (court held that the right of public access applies to civil trials).

To determine which holding governed, the court compared and contrasted the Delaware proceeding with traditional arbitration. Unlike a traditional arbitrator, the arbitrator in the Delaware proceeding was a sitting judge acting pursuant to state authority, paid by the state (not the parties), using state personnel and facilities who applied the relevant law and then issued an automatically enforceable order.

Having found that the Delaware proceeding was essentially a civil trial, the court next addressed the level of confidentiality guaranteed by the Delaware program. All memoranda, work product, case files, and communications concerning or relating to arbitration were deemed to be confidential. The judge did not publish his or her rulings or reasoning and the public was not privy to the factual and legal findings of a judge. The court found that the confidential nature of the arbitration program violated the public’s qualified right of access to presumptively open government proceedings under the First Amendment.

The court’s decision does not address exactly how public access to court-conducted arbitrations will have a significant positive impact on the proceedings. The court did note, however, that even if the program falls into disuse, the judiciary as a whole is strengthened by the public knowledge that its courthouses are open and judicial officers are not adjudicating in secret.
An appeal has been filed with the Third Circuit.

Rosalie Valentino, Esq.

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