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Commercial Litigation

Third Circuit rules that private arbitrations in the Delaware Court Of Chancery are unconstitutional

October 25, 2013

Commercial Litigation

Third Circuit rules that private arbitrations in the Delaware Court Of Chancery are unconstitutional

October 25, 2013

Back to Fish's Litigation Blog

 

On Wednesday of this week, the United States Court of Appeals for the Third Circuit, in a 2-1 decision, held the Delaware Chancery Court’s arbitration proceedings violate the First Amendment’s right of access to civil trials. 

Background

In 2009, Delaware’s Legislature enacted a statute (and the Delaware Court of Chancery promulgated implementing rules) allowing parties to submit their business disputes to private arbitration in the Court of Chancery.  To qualify for arbitration, at least one of the parties must be a Delaware entity, neither party can be a “consumer,” and the parties must be seeking monetary relief only—in the amount of at least one million dollars.   Both the statute and rules governing Delaware’s arbitration proceedings provide for strict confidentiality.  For example, arbitration petitions are not included in the public docketing system, attendance at the proceeding is limited to “parties and their representatives,” and all “materials and communications” produced during the arbitration are protected from disclosure in judicial or administrative proceedings.

It is no secret that Delaware adopted its confidential arbitration proceedings to compete with the private arbitration system.  Indeed, in its pleadings in this matter, Delaware points to the potential threat of losing adjudications to arbitrators in New York, London, and Singapore as the motivation for implementing its court-sponsored procedure. The threat of private, confidential arbitrations to public adjudications has increased steadily since the passage of the Federal Arbitration Act in 1925.  Such threat has been aided by the Supreme Court’s finding of a “strong presumption in favor of arbitration” where contracting parties opt for private ordering over public adjudication.  Moreover, arbitration proceedings are attractive to business because they can be kept confidential, thus protecting parties from potentially embarrassing disclosures, as well as protecting the parties’ patented information, trade secrets, sensitive proprietary information, and sensitive business and financial information.

Prior to a 2011 merger between Court Skyworks Solutions, Inc. and Advanced Analogic Technologies Incorporation, little attention was given to the implications of the Court of Chancery’s arbitration proceedings.  However, that merger agreement included a provision stating that “the parties hereto agree that any and all disputes arising under or related in any way to this Agreement or the Transactions shall be resolved solely in arbitration before the Court of Chancery of the State of Delaware.”  One of the parties later sought specific performance of the merger agreement via arbitration, which led to the filing of this lawsuit.

The Third Circuit’s Opinion

Judge Sloviter, writing for the majority, explained that a proceeding qualifies for the right to public access under the First Amendment when “there has been a tradition of accessibility” to that kind of proceeding, and when “access plays a significant positive role in the functioning of the particular process in question.”  She concluded that the Court of Chancery’s arbitration proceedings are sufficiently similar to a trial, where there is a right to public access because they are conducted before active judges at a state courthouse.  Both the “place and process” of the Court of Chancery’s arbitration proceeding “have historically been open to the press and general public.”

Judge Fuentes issued a concurrence to clarify that only the confidentiality provisions of the statute were unconstitutional.

Judge Roth issued a dissent stating that she would uphold the statute in its entirety because arbitration has been historically treated as confidential.  She did not address the fact that the Court of Chancery’s arbitration proceedings are sponsored by the government.

The Future of Government-Sponsored Arbitration in Delaware

Although counsel for the Court of Chancery argued that opening arbitration proceedings to the public would effectively end the program, Judge Sloviter did not necessarily agree.  She said that the disputants might still opt for arbitration to access the Chancery Court judges in a proceeding that could be faster and more flexible than regular Chancery Court trials.  And Judge Fuentes noted that “it is likely that the Delaware Legislature has at its disposal several alternatives should it wish to continue to pursue a scheme of Judge-run arbitrations.”

If Delaware decides to terminate the arbitration proceedings, there is no evidence that the State will lose is edge as the preferred venue for resolving business disputes.  Since the arbitration laws have been enacted, only a handful of cases have gone through the arbitration process.  And there is no evidence of a flight of business cases away from Delaware while this litigation has moved forward.  Id.

While it remains to be seen what Delaware will do in response to this small setback, which could include seeking a hearing en banc from the Third Circuit and petitioning the Supreme Court for certiori, given its long corporate history, there is no doubt that Delaware will continue to take action to preserve its status as the preeminent forum for resolving business disputes.

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Delaware Chancery Court

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