By: Chris O’Mahoney
The Supreme Court recently declined to review a ruling from the Third Circuit, which held that the Court of Chancery’s private business dispute arbitration program was unconstitutional because it violated the First Amendment right of public access.[1] The Supreme Court’s decision effectively struck a death blow to the hopes of Delaware officials who viewed the program, which had been adopted and in place since 2009, as a way to further solidify Delaware’s position as the leading state for incorporation in the United States.
In 2009 Delaware granted the Court of Chancery “the power to arbitrate business disputes.[2]” This new state-sponsored arbitration program allowed business entities to resolve disputes that involved amounts-in-controversy of at least one million dollars.[3] A sitting judge presides over this arbitration hearing so long as both parties paid a $12,000 filing fee and a $6,000 a day arbitration cost. The hearings are conducted in a Delaware courthouse during normal business hours and the standard Court of Chancery Rules, governing depositions and discovery, apply to the proceedings unless both parties agree to modify these rules.[4] However, the Delaware statues and rules governing these proceedings barred public access because arbitration hearings were considered confidential and they were not “part of the public docketing system.”[5] Once a decision is reached both parties have the right to appeal to the Delaware Supreme Court.[6]
In coming to its conclusion, the Third Circuit walked through First Amendment jurisprudence and paid particular attention to the “experience and logic test.” A court, when determining if a proceeding satisfies the First Amendment right of public access, looks to the history and “tradition of accessibility” of a proceeding and whether “access plays a significant role” in the functionality of that proceeding.[7] The “experience and logic test” requires examination of the history and functionality of a proceeding. Thereafter, if both experience and logic suggest that a proceeding “qualify for public access,” than the court will open that proceeding to the public.[8]
The Third Circuit, under the experience prong, first looked to whether similar proceedings were historically open to the public. The court determined that the history of arbitration proceedings revealed a “mixed record of openness.”[9] On the one hand the court recognized that the Delaware arbitration process was similar to commercial arbitration services. Both were conducted in private, were flexible in terms of rules, and both actors paid for the arbitration service. However, the court took issue with the Delaware arbitration process because it was government sponsored. The Third Circuit determined that there was a history and tradition of openness to government-sponsored hearings and arbitrations; therefore, even though the Delaware arbitrations shared characteristics of private arbitrations, these proceedings differed from private arbitrations because they were conducted in front of active judges in a courthouse, they resulted in a binding judicial order, and they allowed for a limited right to appeal.[10]
Under the logic prong, the Third Circuit determined whether “access plays a significant positive role in the functioning of the particular process in question” and “the extent to which openness impairs the public.[11] The court determined that public access to these hearings would be beneficial for a number of reasons; openness would give stockholders and the general public a better understanding of how theses disputes are resolved, it would “allay the public’s concerns about a process only accessibly to litigants . . . who can afford the expense of arbitration,” it would expose the parties involved to scrutiny, and it would discourage companies from misrepresenting themselves to competitors and the general public.[12] The Third Circuit determined that the aforementioned benefits of openness far outweighed the concerns the Chancery Court, who believed that private arbitration protected trade secrets and encouraged a “less hostile, more conciliatory approach.”[13] Therefore, the Third Circuit concluded that under the experience and logic test, these proceedings should be open to the general public, and that there is a First Amendment right of access to these proceedings.
In a dissenting opinion, Judge Roth argued that Delaware’s Legislature was not looking to “ . . . preclude the public from attending proceedings that historically have been open to the public” rather the arbitration procedures were created to “ . . . provide arbitration in Delaware to businesses that consented to arbitration . . .”[14]
Those who support the Delaware arbitration system argue that the Third Circuit was incorrect in its holding because it misinterpreted Supreme Court case law regarding public access to governmental proceedings, and subsequently broadened the interpretation of the First Amendment.[15] Additionally supporters point to other state and federal laws, which provide confidential, government-sponsored arbitration, that very closely resemble Delaware’s arbitration program. Therefore, the Third Circuit’s decision, and the Supreme Court’s decision to deny certiorari, will inevitably cast doubt on the legitimacy of those programs.[16]
Proponents of Delaware’s arbitration process argue that the Supreme Court’s decision not to grant certiorari will have a wide-ranging ripple effect on both Delaware, and the nation as a whole. Generally speaking, businesses prefer the arbitration process, as opposed to litigation, because it is oftentimes faster, far less expensive, and it is private.[17] Additionally, those who supported the program agreed that confidentiality was a “common-sense aspect of arbitration” because it allowed companies to protect sensitive financial information. Furthermore, Delaware argued that losing this program would eventually make Delaware a less attractive destination for corporations; which could be potentially problematic in Delaware because corporations make up 40% of the state’s revenue. Andrew Pincus, a Mayer Brown attorney who argued on behalf of Delaware, stated “We believe that our nation and Delaware have lost an important opportunity to provide cost-effective options to resolve business-to-business disputes to remain competitive with other countries around the world.”[18]
However, those who were against Delaware’s arbitration procedure strongly disagree with the policy argument raised by the Court of Chancery. The Delaware Coalition for Open Government agued that the Supreme Court did not need to address the arbitration process because it did not have “national implications” like Delaware suggested it did.[19] David L. Finger, who challenged the arbitration plan, stated “[b]ecause of the unique features of the Delaware statute, this issue is not likely to occur in other cases. There is no real and embarrassing conflict of opinion and authority between the circuits, or with any other court.[20]” Furthermore, those who supported the Third Circuit’s decision believe that many of the arguments proffered in support of the arbitration process hold little merit. As for the argument related to corporations arbitrating overseas, instead of Delaware, there is almost no statistical evidence to suggest that corporations have taken arbitration disputes outside of Delaware.[21]
In the aftermath of the Supreme Court’s denial of certiorari[22] the Delaware arbitration process, as it was crafted in 2009, is not left without options. As Judge Fuentes wrote in a concurring opinion, “. . . not all provisions . . . relating to Judge-run arbitration proceedings are unconstitutional.”[23] Judge Fuentes suggested that the Delaware Legislature create alternatives that do not limit public access, because there was nothing inherently wrong with the idea of a judge-run arbitration process.[24] Therefore, if the Delaware Chancery Court wants to maintain its judicial arbitration process, it would have to conform with the Third Circuit’s holding in Strine. It is inarguable that the Court of Chancery is well equipped to handle complex business arbitrations. So long as these arbitrations are open to the public, businesses could still receive the expertise and knowledge that these respected judges can bring to the bargaining table.
[1] Delaware Coalition for Open Government, Inc. v. Strine, 733 F.3d. 510 (3rd Cir. 2013), cert. denied 82 USLW 3463 (2014).
[2] H.B. 49, 145th Gen. Assemb. (Del. 2009).
[3] Strine, 733 F.3d at 512.
[4] Id. at 513.
[5] Tit. 10, § 349(b); Del. Ch. R. 97(4).
[6] Id.
[7] Strine, 733 F.3d at 514 (citing Press-Enterprises Co. v. Superior Court, 478 U.S. 1, 10 (1986)).
[8] Strine, 733 F.3d at 514.
[9] Id. at 518.
[10] Id. at 518.
[11] Id.
[12] Id. at 519.
[13] Id. at 519-20.
[14] Id. at 526 (Roth, J. dissenting).
[15] Mark Kantor, Supreme Court to Consider Cert Petition Friday Regarding Delaware Business Arbitration Program, CPRADR, (Mar. 20, 2014), https://www.cpradr.org/news-publications/articles/2014-03-20-update-supreme-court-denies-cert-in-delaware-chancery-arbitration-program-case
[16] Jeffery Mordock, U.S. Supreme Court Denies Certiorari in Chancery Arb Case, The Legal Intelligencer, (Mar. 25, 2014).
[17] Brent Kendall, Supreme Court Declines to Revive Delaware Arbitration Program, Wall Street Journal, (Mar. 24, 2014, 2:38 PM), https://online.wsj.com/news/articles/SB10001424052702304179704579459200411054082?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702304179704579459200411054082.html.
[18] Tom Hals, Delaware loses final bid to revive ‘secret courts,’ Reuters (Mar. 24, 2014, 10:44 AM), https://www.reuters.com/article/2014/03/24/us-delaware-supreme-court-idUSBREA2N0TS20140324.
[19] Jeffery Mordock, U.S. Supreme Court Denies Certiorari in Chancery Arb Case, The Legal Intelligencer, (Mar. 25, 2014).
[20] Id.
[21] Brian J. M. Quinn, DE arbitration seeks SCOTUS review, Law Professors Blogs Network, (Jan. 22, 2014), https://lawprofessors.typepad.com/mergers/2014/01/de-arbitration-seeks-scotus-review.html.
[22] 82 USLW 3463 (2014).
[23] Delaware Coalition for Open Government, Inc. v. Strine, 733 F.3d. 510, 521 (3rd Cir. 2013) (Fuentes, J. concurring). cert. denied 82 USLW 3463 (2014).
[24] Id. at 522.
