A Stumble in the March of Adjudicative Privatization: Delaware Chancery Arbitration Scheme Declared Unconstitutional

Last winter, I wrote about the Delaware Court of Chancery’s arbitration scheme, in which the court hired out its Chancery Judges to serve as “private” arbitrators, deciding in secret cases they otherwise would have been deciding in public, with proceeds from the five-figure fees going into court coffers.

The scheme was a grotesque, if predictable, development in the seemingly inexorable march of adjudicative privatization. Heretofore, privatization of the judicial function had been achieved through outsourcing. Chief Justice Rehnquist had been keen to reduce the caseloads of federal judges; one of his legacies was the legitimization of private arbitrators as judicial substitutes for any dispute in which the parties were in privity, regardless of bargaining power or rights implicated. That allowed for whole new classes of disputes to be shifted from the public court system to a coterie of unregulated lawyers and retired judges sitting as arbitrators. The twist on conventional outsourcing was that these “private judges” were allowed to keep all the fees they could collect, since the cases had been removed from the court system entirely.

It was logical that judges would want a piece of this action (without waiting until the vesting of pensions, that is). That’s what the Delaware chancery arbitration scheme promised. It allowed parties in large corporate disputes to choose the secrecy of arbitration–cases were not even docketed under the plan–while still getting the decisionmaking of a Chancery Judge, in exchange for a significant contribution to the Chancery Court’s kitty.  (It’s worth noting that the Court may have overestimated the attractiveness of its plan–reports suggest that only five cases have actually been arbitrated. The number of cases filed has not been disclosed, however, and that is probably a better measure of the scheme’s success, since the Court nets $12,000 for each case filed.)

This week, U.S. District Judge Mary McLaughlin granted judgment on the pleadings to plaintiff Delaware Coalition for Open Government, who had sued the Chancery Court alleging that the arbitration scheme’s secrecy provisions violated the First Amendment’s right of access. Judge McLaughlin concluded that what the Chancery Court was doing pursuant to this scheme was judging, by whatever name, and that it had to be open to the public.

“The court concludes that the Delaware proceeding functions essentially as a non-jury trial before a Chancery Court judge,” she wrote. “Because it is a civil trial, there is a qualified right of access and this proceeding must be open to the public.” (Presumably, this holding permits the Chancery Judges to continue hearing cases in the arbitral format and for the same fees, but with the caveat that all proceedings must be public. If the scheme was undersubscribed before, one suspects, it will be even less attractive now.)

It’s a refreshingly simple conclusion, dispatching the Chancery Court’s chicanery at a stroke. It will, without question, be appealed to the Third Circuit.

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