Court ordered arbitration programs and other forms of mandatory alternative dispute resolution are being instituted across the United States. In nearly every state, these arbitration programs offer hearings, most often for smaller dollar value claims, conducted before local lawyers and judges. In 2009, however, the Delaware State Legislature enacted a unique program, which provided for the arbitration of commercial disputes by sitting judges. The program was intended to “preserve Delaware’s pre-eminence in offering cost-effective options for resolving disputes, particularly those involving commercial, corporate and technology matters,” and to permit Delaware’s courts to compete with increasingly popular private arbitrations for the business of multinational and international corporations.
Delaware’s program permits parties to request a judge in the Court of Chancery to arbitrate their dispute. The arbitration program requires that both parties consent to arbitrate at the time the action is filed with the Court. The parties and their action must meet certain eligibility criteria in order to participate: 1) at least one party must be a “business entity” and at least one party must be organized under the laws of the state of Delaware, or have its principal place of business in Delaware – one party may meet both criteria; 2) neither party can be a “consumer;” and 3) in an action seeking only monetary damages, the amount-in-controversy must be at least $1 million dollars; if an equitable remedy is also sought, there is no minimum amount-in-controversy. 10 Del. C. §§349(a); 347(a), (b). An award issued by the judge/arbitrator may be appealed by either party to the Delaware Supreme Court. The Supreme Court may only overturn an award, however, in conformity with the Federal Arbitration Act: by a showing of fraud, corruption, that the arbitrator exceeded his/her power or undue means in procuring the award, i.e., partiality, or certain misconduct on the part of the arbitrator. 10 Del. C. § 349(c).
The Delaware Court of Chancery adopted Rules 96, 97 and 98 to administer the arbitration program. In order to initiate a proceeding, the parties file a petition that states the nature of the dispute, the claims made and the remedies sought, and pay a $12,000 filing fee and $6,000 per day of service by the judge/arbitrator. The judge appointed to hear the arbitration holds a preliminary conference and preliminary hearing and, along with the parties, will determine the amount of discovery necessary to permit the parties to prepare for the arbitration and to enable the judge to understand and decide the dispute. The judge/arbitrator has the power to issue a final award in the arbitration and to issue any necessary interim rulings during the course of the action. Upon the issuance of a final award in the arbitration, a final judgment in conformity with the award is entered by the court.
As originally conceived, the entire arbitration proceeding in the Delaware Court of Chancery was to be held outside of public view. All proceedings were to be confidential and not of public record, from the time of filing of the original petition to the issuance of the award by the judge/arbitrator. The original petition, for arbitration and any submissions by the parties are confidential and are not to be filed in the public docketing system. All hearings before the judge/arbitrator are to be attended only by the parties and are not open to the public. Even the award issued by the arbitrator is not made public unless it is appealed to the Supreme Court. Del. Ch. Ct. R. 97(a)(4).
And so Delaware had its state-sponsored arbitration program – a vehicle to serve its corporate citizens whether they chose litigation or arbitration to resolve their dispute – but not for long. In 2010, the Delaware Coalition for Open Government, a non-profit organization, challenged the Delaware Business Arbitration Program by means of a suit against the judges of the Delaware Court of Chancery. Del. Coal. for Open Gov’t, Inc. v. Strine, 894 F.Supp.2d 493 (D. Del. 2012). In short, the Coalition contended that the arbitrations provided for under Delaware’s new program were civil trials under another name, except that the trials were conducted behind closed doors instead of in open court. As such, the Coalition contended, the arbitrations conducted by the State Court of Chancery constituted an unlawful violation of the First Amendment to the Constitution, which granted the public a right of access to trials.
The Federal District Court agreed, holding that, “the Delaware proceeding functions essentially as a non-jury trial before a Chancery Court judge. The court concluded that, “[b]ecause it is a civil trial, there is a qualified right of access and this proceeding must be open to the public.” Id. at 494. Citing case law granting the public a right of access to state civil trials, the District Court considered whether Delaware had created a procedure “sufficiently like a trial” that the public must be allowed access. Id. at 500. The District Court stressed the differences between arbitration and litigation, finding that the “essence of arbitration” is the parties’ voluntary agreement to resolve their dispute through a decision-maker of their choosing, in a process that they can craft to their specific needs. Id. By contrast, litigation follows court procedures and guidelines. The judge reaches a decision with precedential value that is subject to review by a higher court, while the arbitrator’s decision is ad hoc only, and generally is not subject to review for errors of fact or law. While many of the procedures in arbitration and litigation are similar, the District Court concluded that the critical distinction is that the arbitrator’s role is to carry out the aims of the parties’ agreement; that role defines the scope of the arbitrator’s authority. The trial judge, on the other hand, “bears a special responsibility in the public interest . . . to vindicate the policies of the [law] not merely to afford private relief.” Id. at 501-02.
The District Court went on to identify the elements of the Delaware arbitration program that are sufficiently like a trial to require that the public be granted access to the proceedings: 1) a sitting judge presides over the arbitration – this distinguishes the Delaware proceeding from court-ordered arbitrations where local lawyers serve as arbitrators; 2) the judge conducts the proceeding in the Chancery courthouse, assisted by the court staff; 3) the judges are not compensated privately for their work as arbitrators; judges and staff are paid their regular salaries by the state; 4) the judge, acting as an arbitrator, hears evidence, finds facts, applies the relevant law and issues a final award with the force of law. The District Court concluded that the Delaware arbitration procedure is sufficiently like a trial, and that the, “public role of [a judge] is undermined when a judge acts as an arbitrator bound only by the parties agreement.” Id. at 502. Therefore, the court determined that the confidentiality provisions of the statute and the Chancery Court Rules were unconstitutional.
The Chancery Court judges immediately appealed the District Court ruling to the United States Court of Appeals for the Third Circuit, supported by amici curia (“friends of the court”) briefs from the Chamber of Commerce of the United States of America, the Business Roundtable and the Corporation Law Section of the Delaware State Bar Association. The Appellate Court reached the same conclusion as the lower court, however by taking a different path. Del. Coal. for Open Gov’t, Inc. v. Strine, 733 F.3d 510 (2013).
The Court of Appeals held that the proper test to be applied in determining the constitutionality of the confidentiality provisions of the Delaware arbitration program is the “experience and logic” test. Under that test, a proceeding qualifies for the First Amendment right of public access when “there has been a tradition of accessibility” to that type of proceeding and when “access plays a significant positive role in the functioning” of the process. Id. at 514.
Under the “experience” prong of the test, the Court of Appeals held that, for the type of proceeding that Delaware has instituted – “a binding arbitration before a judge that takes place in a courtroom” – the history of openness is comparable to the history of access to the civil trial because, “both the place and process of Delaware’s proceeding have historically been open to the press and general public.” Id. at 518. Under the logic prong of the test, the Court of Appeals addressed the positive role that public access to the Delaware arbitrations would play including: 1) allowing the public and shareholders to understand how Delaware resolves major business disputes; 2) allaying public concern about a process only accessible to litigants in business disputes who are able to afford the fees; and 3) exposing the behavior of the litigants, lawyers and the Chancery Court judge to the scrutiny of their peers and the press. Id. at 520. The Court of Appeals rejected claims by the Chancery Court judges that confidentiality is necessary to prevent the “loss of prestige and goodwill” that corporate parties might suffer in open proceedings, finding that exposure of litigants to public scrutiny discourages perjury and misrepresentation. Id. Finally, the Court of Appeals confirmed the lower court decision that there is a First Amendment right of access to Delaware’s government-sponsored arbitrations. In the concurring opinion, the court clarified that the Court of Appeals did not intend to declare Delaware’s entire arbitration program unconstitutional. Rather, sitting judges of the Chancery Court are permitted to engage in arbitrations, but with the same public access as any other Delaware court proceedings.
The Chancery Court judges sought review by the United States Supreme Court, warning in its petition that the Appellate decision risked the 40% of Delaware’s revenue that comes from “corporate citizens” attracted by the state’s efficient, expert courts. The Supreme Court was unmoved, denying certiorari in March 2014, effectively upholding the decision that the Delaware Business Arbitration Program is unconstitutional insofar as it fails to make arbitration proceedings open to the public.
In conclusion, the Chancery Court argued before the Court of Appeals that striking down the confidentiality provisions would “effectively end” the Delaware Business Arbitration Program. The Program, however, also boasts other benefits that remain: 1) access to judges experienced in corporate and business litigation; 2) efficient case management for moderate fees; 3) timely hearings; and 4) enforceable awards. Whether the Delaware legislature and courts will determine that a state-sponsored alternative to private arbitration is viable, without the privacy provisions, remains to be seen.