A U.S. District Court has ruled that the use of private arbitration before a Delaware Chancery Court judge is unconstitutional on First Amendment grounds.
In April 2009, the Delaware State Legislature amended the rules governing dispute resolution before the Court of Chancery to allow parties to certain business disputes to request that a Chancery Court judge resolve their dispute in a confidential arbitration proceeding. In January 2010, the Delaware Court of Chancery implemented the legislative amendment by adopting rules for administering such an arbitration proceeding.
This private arbitration, which was "intended to preserve Delaware's pre-eminence in offering cost-effective options for resolving [commercial and corporate] disputes" (Del. H.B. No. 49, at 4 (2009)), has in recent years become an increasingly popular alternative to litigation and other forms of dispute resolution in agreements governing sophisticated business transactions, particularly for parties that desire a sitting judge of a court with considerable corporate law expertise to resolve their disagreements in a confidential, non-judicial setting.
However, on August 30, 2012, Judge Mary A. McLaughlin of the United States District Court for the District of Delaware determined that state-authorized arbitration before a sitting judge of a state court with the power to issue an enforceable order is akin to a civil trial with respect to which the public has a qualified right of access under the First Amendment and, therefore, that the use of confidential proceedings is unconstitutional.
As a result, provisions in transaction agreements adopting this private arbitration as the exclusive form of dispute resolution may be unenforceable. While the ruling is expected to be appealed, clients should carefully review their agreements to determine whether this is the case and, if so, consult with a V&E attorney to amend the applicable provisions before any such dispute arises.
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