Third Circuit rules Delaware arbitration program unconstitutional

A U.S. Court of Appeals panel in Philadelphia (3rd Cir.) ruled Wednesday that the confidential arbitration program in Delaware's Court of Chancery violated the First Amendment standards of openness in court proceedings.

The court ruled in favor of the Delaware Coalition for Open Government, which challenged the state law that created the closed arbitration system.

The Delaware Chancery Court adopted the program in 2009, which allowed certain high stakes business disputes to be resolved via secret arbitration rather than at trial. In a 2-1 decision, the panel found that the public has a First Amendment right of access to the hearings.

With more than half of all publicly traded companies in the United States and 63 percent of Fortune 500 companies formally incorporated in Delaware, the state established the Chancery Court to handle cases involving business disputes. Jeffrey Cane, managing editor of The New York Times' DealBook, called it “the most important court for corporate law in the country”.

To qualify for the government-sponsored arbitrations one of the parties must be a business entity and neither can be considered a consumer. The monetary dispute must involve at least one million dollars.

Judge Dolores Sloviter wrote for the majority that, given the nature of Chancery Court cases, the arbitration proceedings must be public. “The interests of the state and the public in openness must be given weight, not just the interests of rich businesspersons in confidentiality,” she wrote.

Benefits of openness, she wrote, include ensuring that "companies could not misrepresent their activities to competitors and the public"; giving people a better understanding of how Delaware resolves business disputes; and exposing litigants and judges to press scrutiny.

Judge Sloviter used what is known as the "experience and logic" test to reach this conclusion. Under it, courts look at whether there is a tradition of openness in a given proceeding and whether openness serves a meaningful purpose. The opinion explained that the Chancery Court's program is unlike a traditional arbitration — which can sometimes be closed to the public — in part because it is held before a judge and results in a court order. In that way, the proceedings are similar to civil trials, which have a tradition of openness.

Additionally, cases of this magnitude can result in opinions which would be lost going forward with the current model, according to a friend-of-the-court brief filed in January by the Reporters Committee for Freedom of the Press in support of the Delaware Coalition.

“Allowing a court that plays such an essential role in resolving disputes in corporate America to act under a veil of secrecy would run counter to important, well-established public interests,” the Reporters Committee wrote in its brief.

Judge Jane Richards Roth dissented, arguing that arbitration has traditionally been confidential and necessary because of the sensitive financial information, trade secrets and technological developments handled in the cases. She wrote that the parties could suffer the ill effects of the information being released to the public or the company’s competitors.