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In order to participate in an arbitration proceeding, the parties needed to consent to do so, either before a dispute arose between them, or when they submitted the dispute to arbitration.
On August 30, 2012, U.S. District Court Judge McLaughlin of the
U.S. District Court for the Eastern District of Pennsylvania,
sitting by designation for the U.S. District Court for the District
of Delaware, ruled 10 Del. Code § 349 and Court of Chancery
Rules 96-98, which established a confidential arbitration
procedure, are unconstitutional in violation of the First
Amendment. Delaware Coalition for Open Gov't v. Hon. Leo E.
Strine, Jr., et al, C.A. No. 1:11-1015, 2012 U.S. Dist. LEXIS
123980 (D. Del. Aug. 30, 2012).
To briefly recap, in April 2009, the Delaware State Legislature
passed 10 Del. Code § 349, granting to the Delaware Court of
Chancery "the power to arbitrate business disputes when the
parties request a member of the Court of Chancery ... to arbitrate
a dispute." The Legislature's rationale in enacting this
law was "to preserve Delaware's pre-eminence in offering
cost-effective options for resolving disputes, particularly those
involving commercial, corporate, and technology matters." Del.
H. R. No. 49 (2009).
In order to participate in an arbitration proceeding, the
parties needed to consent to do so, either before a dispute arose
between them, or when they submitted the dispute to arbitration. 10
Del. Code § 349(a). At least one of the parties was required
to be a business entity, and one party (which could be the same
party) was required to be a citizen of the State of Delaware. 10
Del. Code § 347(a)(2), (3). If monetary damages were sought,
the amount in controversy was required to be more than $1 million.
Moreover, consumers, defined as individuals who purchased or leased
merchandise for personal use, were not eligible for the arbitration
procedure. 10 Del. Code § 347 (a)(4); 6 Del. Code §
2731(1).
To administer the arbitration proceedings, the Court of Chancery
adopted rules detailing the specific procedures to be followed. A
petition would first be filed with the Register in Chancery, and
the Chancellor would appoint a Chancery Court judge to preside.
Within 10 days, a preliminary conference would be had and then as
soon as practicable, a preliminary hearing would be scheduled. An
arbitration hearing was required to occur approximately 90 days
after the filing of the petition.
While the Court of Chancery Rules governing discovery applied to
the arbitration, the parties and the arbitrator could agree to
different rules. An arbitration decision could be appealed to the
Delaware Supreme Court to vacate, stay, or enforce the
arbitrator's award, but the award could be vacated only if
there was a showing of fraud, corruption, or misconduct on the part
of the arbitrator, or if the arbitrator exceeded his powers or
failed to make an award.
Both the law enacting the arbitration procedure and the Court of
Chancery Rules required that the proceedings be confidential.
Specifically, the relevant provision of the Delaware Code provides:
"Arbitration proceedings shall be considered confidential and
not of public record until such time, if any, as the proceedings
are the subject of an appeal. In the case of an appeal, the record
shall be filed by the parties with the Supreme Court in accordance
with its rules ... ." 10 Del. Code § 349(b). It was the
confidential nature of the arbitration proceedings that was
challenged by the Delaware Coalition for Open Government.
In assessing these provisions, the Federal District Court first
detailed the history of the application of the First Amendment to
criminal trials, under which the government was prevented from
denying public access to historically open government proceedings.
Del. Coalition, 2012 U.S. Dist. LEXIS 123980, at *12-14. After
acknowledging that the U.S. Supreme Court has never addressed the
public's right of access to civil proceedings, Judge McLaughlin
noted that every Court of Appeals that has considered the issue has
held that there is a right of access to civil trials. The rationale
is that the "[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 public
attention can discourage witnesses from perjury." Id. at
*16.
Against this backdrop, the Court turned to Delaware's
arbitration procedure. The Court first examined whether
"Delaware had implemented a form of commercial arbitration ...
or has it created a procedure 'sufficiently like a
trial'" such that there was a right of public access. Id.
at *19. The Court determined that it was the latter, as "the
parties submit their dispute to a sitting judge acting pursuant to
state authority, paid by the state, and using state personnel and
facilities; the judge finds facts, applies the relevant law,
determines the obligations of the parties; and the judge then
issues an enforceable order." Id. at *28.
Indeed, one of the factors that made Delaware's arbitration
procedure appealing — the fact that the arbitrator would
be a Chancery Court judge — appeared to be the key factor
that resulted in the Court finding that the arbitration procedure
was in substance a trial. The Court acknowledged that the
Alternative Dispute Resolution Act, which creates court-annexed
arbitration in the federal court system, appeared to allow
magistrate judges to serve as arbitrators, but the Court could not
find any evidence of that actually occurring. Id. at *26. After
noting the differences between arbitrators and judges, the Court
concluded that "[a] judge bears a special responsibility to
serve the public interest. That obligation, and the public role of
that job, is undermined when a judge acts as an arbitrator bound
only by the parties' agreement." Id. at *27.
The Court also rejected the argument that the fact that the
parties to an arbitration could agree to procedures to facilitate
faster discovery and resolution of the dispute distinguished the
arbitration proceeding from a trial, finding that parties to a
civil litigation could agree to similar procedures. Id. at *29.
Having found that the Delaware arbitration procedure was in
substance a civil trial proceeding, it was then a seemingly
foregone conclusion that the Court would determine that the public
has a right of access to the proceedings. Of course, it is not the
case that all civil trial proceedings, whether held in the Court of
Chancery or elsewhere, are fully open to the public. Many
commercial cases involve a party's confidential information.
Consequently, filings in those cases may not be public, and
portions of such trials may exclude the public. Indeed, the Court
acknowledged in a footnote that the First Amendment's right of
access is not absolute and that protected proceedings may be closed
to the public, but noted that "[t]his part of the First
Amendment analysis is not addressed by the parties or considered by
the Court." Id. at *19 n. 7.
In its ruling, the Court found that the "public benefits of
openness are not outweighed by the defendants' speculation that
such openness will drive parties to use alternative non-public fora
to resolve their disputes. Even if the procedure fell 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." Id. at *30. Hence, the Court ruled
that the public's right of access applies to the arbitration
procedure created by the Delaware Legislature, and the portions of
that law and the corresponding Chancery Court rules that render
such proceedings confidential violate that right. Id. at *31.
While only a few matters had been submitted to Delaware's
arbitration procedure (according to court officials, only six thus
far), many practitioners, both in and outside of Delaware, had
counseled clients to consider selecting the Delaware arbitration
procedure as a form of alternative dispute resolution in their
agreements. In addition, parties involved in litigation in the
Court of Chancery regularly considered converting their cases to
arbitration proceedings to enable them to retain the experience of
a Court of Chancery judge while enjoying a more streamlined,
confidential procedure.
The Court of Chancery has indicated that it will appeal the
District Court's decision. Until the issue has been
definitively resolved, parties who have identified the Delaware
arbitration procedure as a dispute-resolution mechanism may wish to
revisit the ramifications of that selection.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.