United States: Delaware District Court Strikes Down Delaware Chancery’s Confidential Arbitration Procedures As Unconstitutional

Delaware Corporate Litigation

Yesterday, the United States District Court for the District of Delaware held that arbitration procedures enacted by the Delaware legislature and established by the Chancery Court Rules to streamline and expedite lawsuits were unconstitutional because they permitted state court proceedings to be conducted without access to the public.

The Delaware Coalition for Open Government (the "Coalition") had sued the four Vice Chancellors and the Chancellor of the Delaware Court of Chancery challenging a confidential arbitration proceeding established by Delaware law and implemented by the Delaware Court of Chancery. The Coalition argued that the confidential arbitrations that are closed to the public and press and that do not appear on the Court's docket violate the First Amendment's qualified right of access. [full opinion available here]

Ruling on the parties' cross-motions for judgment on the pleadings, the Delaware District Court agreed with the Coalition and struck down the Delaware law establishing the confidential arbitration proceeding in the Court of Chancery and the Court's enabling rules.

In April of 2009, the Delaware State Legislature amended the rules governing the resolution of disputes in the Court of Chancery. The Amendment gave the Court of Chancery "the power to arbitrate business disputes when the parties request a member of the Court of Chancery, or such other person as may be authorized under rules of the Court, to arbitrate a dispute." 10 Del. C. 349(a). Access to this "judicial" arbitration, however, mandates that the parties (at least one of which must be an entity and a citizen of Delaware) consent to proceed in accordance with a set of rules designed to achieve a prompt resolution (the process contemplates a merit hearing within 90 days of the submission of the arbitration petition). The Court's rules also contemplate an expedited schedule and lightning-speed discovery, including depositions and document exchange, all on the terms agreed upon by the parties and the Court. Notably, none of the pleadings, motion, or notices are filed with the Court's Registrar or ever appear on the Court's official docket–indeed everything is submitted directly to the chambers as confidential. Even the very pendency of any such arbitration is entirely concealed from the rest of the world, unless, and only if, one of the parties ultimately appeals the judge's decision to the Delaware's Supreme Court. Interestingly, while the Court of Chancery's jurisdiction is constitutionally limited to matters of equity, and its exclusive jurisdictional purview is over all disputes involving the internal affairs of Delaware entities rather than such causes of action where money damages are sufficient, judicial arbitration in the Court of Chancery is not confined by any subject matter jurisdiction limits.

The Delaware law and the Court of Chancery's Rules governing this judicial arbitration require that the proceeding be conducted out of the public view, be considered confidential, and not be of public record. In fact, any communications must remain between the parties and the arbitrator–the Chancellor or one of the Vice Chancellor who is presiding over the dispute.

The First Amendment provides that "Congress shall make no law . . . abridging the freedom of speech, or of the press." U.S. Const. amend. I This prohibition extends to the states through the Fourteenth Amendment and bars government interference with both the speaker and the listener. In Richmond Newspapers, Inc. v. Virginia, 448 U.S. 555, 580 (1980), the trial court denied public access to a murder trial. In five separate opinions, seven of the eight Justices found the practice of exclusion to be unconstitutional. Although the Supreme Court has never (yet) addressed access to civil judicial proceedings, every Court of Appeals to consider the issue, including the Court of Appeals for the Third Circuit, has held that there is a right of access to civil trials. Relying on extensive precedents, the District Court reasoned that "the English and American legal systems have historically presumed that civil proceedings are open to the public." The District Court went on to state that "[o]penness of civil trials promotes the integrity of the courts and the perception of fairness essential to their legitimacy. Public dissemination of the facts of a civil trial can encourage those with information to come forward, and the public attention can discourage witnesses from perjury." Indeed, the Court of Appeals for the Third Circuit summarized six benefits of the open system: (1) promotion of informed discussion of governmental affairs by providing the public with the more complete understanding of the judicial system; (2) promotion of the public perception of fairness which can be achieved only by permitting full public view of the proceedings; (3) providing a significant community therapeutic value as an outlet for community concern, hostility and emotion; (4) serving as a check on corrupt practices by exposing the judicial process to public scrutiny; (5) enhancement of the performance of all involved; and (6) discouragement of perjury."

The Defendants argued that the District Court should apply the logic and experience test–the Third Circuit test governing the public right of access to a particular proceeding or record. The Coalition, on the other hand, argued that this "judicially-sponsored" arbitration is essentially a bench trial and the case law that uphold the public's access to judicial proceedings should control here under the established precedent for judicial proceedings. The District Court agreed with the Coalition.

The District Court held that despite its name, Delaware's "judicial" arbitration is not like ordinary arbitration. Namely, arbitration is different from litigation because the arbitrator is not a judicial officer. Here, that line was crossed, as Judges are empowered by their appointment to a public office and they must act in accordance with prescribed rules of law and procedure. The District Court specifically noted that "[e]ven with the proliferation of alternative dispute resolution in courts, judges in this country do not take on the role of arbitrators."

Because the District Court found the Delaware judicial arbitration to be "essentially a civil trial" it held that the right to access applied to the Delaware proceedings created by Section 349 of the Delaware Code. As such, the portions of that law and the Chancery Court Rules 96, 97 and 98, which make the proceeding confidential, violate that constitutional right.

Delaware issued a statement that it intends to appeal the District Court's ruling.

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