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Litigation: Federal judge strikes down confidential arbitration in Delaware’s Court of Chancery

The judge ruled that the First Amendment right of access to trials trumps the “logic and experience” test

A public interest group, Delaware Coalition for Open Government, Inc. (DCOG), filed suit in the U.S. District Court for the District of Delaware challenging the constitutionality of a Delaware statute and its implementing rules that permitted private parties to, in effect, hire a member of the Court of Chancery to arbitrate a dispute. On Aug. 30, 2011, Judge Mary McLaughlin resolved the case by issuing an opinion, in Delaware Coalition for Open Government v. Strine, granting DCOG’s motion for judgment on the pleadings. Judge McLaughlin held that the statute and rules violated the First Amendment: “The Court concludes that the Delaware proceeding functions essentially as a non-jury trial before a Chancery Court judge. Because it is a civil trial, there is a qualified right of access and this proceeding must be open to the public.”

The statute created a mechanism by which parties could elect to have a member of the Court of Chancery confidentially arbitrate a dispute. This option was available only for “business disputes” that involved a Delaware business entity and did not involve a consumer. If the plaintiff sought only money damages, the amount in controversy had to exceed $1 million. A dispute could enter arbitration only if each party consented.

These arbitration proceedings afforded significant advantages over traditional litigation. The implementing rules allowed the parties to follow the traditional rules of discovery, have the arbitrator decide the scope of discovery or agree to the scope of discovery. The arbitration hearing would typically occur 90 days after the parties first filed the petition. Further, the arbitration would be confidential. On appeal, the Federal Arbitration Act governed the Delaware Supreme Court’s review, meaning that the court would not review the case for errors of fact or law. Parties could therefore use this mechanism to obtain a result rapidly, inexpensively and privately.

Implementing rules granted the arbitrator the power to enter orders, both interim and final, to resolve the dispute. The arbitrator could fashion “any remedy or relief that the Arbitrator deems just and equitable and within the scope of any applicable agreement of the parties.” The final order resulting from arbitration would “be entered in conformity therewith and be enforced as any other judgment or decree.” 

Judge McLaughlin discussed two lines of cases that could govern DCOG’s claim. The first line of cases applies the “logic and experience” test to determine whether some governmental proceeding must be made open to the public. Courts applying this test ask whether that type of proceeding has historically been kept open to the public and whether the benefits of public access outweigh the harms. This test has been applied to the questions of whether to make public the records and decisions of a Pennsylvania body that investigates complaints about judicial officers, whether to grant access to an administrative agency’s records and whether to publicize executive branch deportation hearings for citizens suspected of being affiliated with terrorists. In each of these three cases, the application of the logic and experience test resulted in the court upholding statutes that granted confidentiality. If Judge McLaughlin followed this line of cases, then presumably the statute and rules would have had a good chance of passing constitutional muster.

However, a second line of cases interprets the First Amendment to prohibit general restrictions on the public’s right of access to trials. A line of U.S. Supreme Court decisions requires criminal trials to remain open to the public, going so far as to require judges to allow public access even if the judge sought confidentiality as a means of protecting minor victims of sexual offenses. Although the Supreme Court has not extended this principle to civil cases, Judge McLaughlin stated that “every Court of Appeals to consider the issue, including the Court of Appeals for the Third Circuit, has held that there is a right of access to civil trials.” If this line of cases applied, there would be no need for further discussion; the confidential nature of the arbitration would render it unconstitutional.

Judge McLaughlin then posed the pivotal question: “Has Delaware implemented a form of commercial arbitration to which the Court must apply the logic and experience test, or has it created a procedure ‘sufficiently like a trial’ such that Publicker Industries governs?”

The judge’s answer: “In the Delaware proceeding the parties submit their dispute to a sitting judge acting pursuant to state authority, paid by the state, and using state personnel and facilities; the judge finds facts, applies the relevant law, determines the obligations of the parties; and the judge then issues an enforceable order. This procedure is sufficiently like a civil trial that Publicker Industries governs.”

The decision did not discuss whether the court could strike down only that portion of the statute that required confidentiality. Rather, the order declared unconstitutional the entire procedure. The case has been appealed to the 3rd Circuit. 

Contributing Author

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John Reed

John Reed is a partner the Delaware office of DLA Piper, where he concentrates his practice on corporate litigation and counseling. He can be contacted...

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