Delaware’s Arbitration System for Business Disputes – Unconstitutional?

The judges of the Delaware Chancery Court have been sued in the US District Court for operating a private arbitration system.  The case of Delaware Coaltion for Open Government v. The Honorable Leo E. Streine, Jr. was filed yesterday, October 25th.

Several years ago the legislature passed a law authorizing the court to conduct private arbitrations entitled “Arbitration Proceedings for Business Disputes” (10-349), and the Delaware Supreme Court adopted rules to run the arbitration program.  Both parties need to agree to enter the system and they have to pay additional arbitration fees.  However, the key to the lawsuit is the proceeding’s confidentiality.  The statute authorizing court arbitration states:

Arbitration proceedings shall be considered confidential and not of public record until such time, if any, as the proceedings are the subject of an appeal. In the case of an appeal, the record shall be filed by the parties with the Supreme Court in accordance with its rules, and to the extent applicable, the rules of the Court of Chancery.

Pursuant to Court Rules only judges and judicial masters who are permanent court employees can act as arbitrators in the program.  R. 96(d)(2)

According to the complaint:

The only difference [between traditional court proceedings and the court’s arbitration proceedings] is that . . . these procedures and rulings occur behind closed doors instead of in open court.           

Such actions amount to a secret judicial proceeding.

The complaint further states that these proceedings violate the presumptive right of access to judicial proceedings and records in civil and criminal cases guaranteed by 1st Amendment to the Constitution as applied to the states in the 14th Amendment.

Press reports indicate that Chief Judge Leo Strine responded to the allegations in a public statement that included the following:

[t]hroughout American history, it has long been recognized that not all aspects of the judicial process are subject to public access, and the courts of this state regularly mediate disputes among citizens, including businesses, and can only do so effectively if the confidentiality of the process is respected.

The court connected arbitration programs I’m familiar with typically occur in open court without confidentiality protection and the loser can appeal ask the trial court for a trial de-novo.  Furthermore, if the appellant either loses the case or fails to improve on the arbitration ruling by a certain monetary amount (usually a percentage), the court imposes penalty on that party.  I’ve never heard of anything like what’s happening in Delaware.   

My super quick look into the matter confirms that several courts have noted a right to access to judicial records and documents, See e.g., Nixon v. Warner Communications, Inc., 435 U.S. 589, 597 (1978) (recognizing a common law right of access to judicial records and documents), but we all know that documents can filed under seal in special circumstances and there are confidentiality interests in special cases, like proceedings involving juveniles.  Outside of a case involving nothing but trade secrets, I have a tough time coming up for a compelling state interest supporting the confidentiality of business arbitration.  And what about the arbitration hearings themselves?  Again, there needs to be a special reason for the court to conduct a confidential hearing, and I don’t see it outside of trade secrets.  And to add to the curiosity, one can appeal the arbitration to the state supreme court, which then makes the proceeding public.  Hmmm.  This case is going to be very interesting to watch and should spurn some great commentary.

If the parties really want to go to an arbitration, why not go to the private market?  I expect that these proceedings are being used as advisory opinions.  They’re binding on the parties, money can/will change hands, but the case law won’t change.  And since we know that Delaware case law is Talmudic when it comes to the law of corporations, who wouldn’t want a “secret” opinion from the most important court in the world with regard to corporations?

 Hat Tip, Verity Winship, Prawfsblog

3 thoughts on “Delaware’s Arbitration System for Business Disputes – Unconstitutional?”

  1. It’s the costs involved with private arbitration, some often eclipsing litigation and the fact that the Delaware Courts are heralded as some of the best (the best in some annual assessments) that make this an atttractive idea to litigants.

    This is also voluntary and I don’t see how it differs from the confidentiality provisions of a sealed settlement.

  2. An interesting question, particularly since the provision applies only to businesses and the arbitrators are sitting judges. I tend to agree with the complaint that these proceedings amount to nothing more than a “secret judicial proceeding,” given its adjudicative nature and the fact that the judge hearing the arbitration likely would have been the one deciding the case anyway. Also, since the justification offered for confidentiality seems to be along the lines of “mediations are confidential, so arbitration should be too,” why is the privilege extended only to businesses? Given that individuals are entitled to confidential mediations, it seems difficult to find a justification for distinguishing between individuals and businesses in the arbitration context.

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