Federal Court Bars Arbitrations by Delaware Court of Chancery Judges

by Pepper Hamilton LLP

[authors: James H. S. Levine, James G. McMillan and M. Duncan Grant]

In April 2009, the Delaware General Assembly enacted a statute allowing sitting judges on the Delaware Court of Chancery to preside over private arbitrations to resolve business disputes involving Delaware entities. On August 30, 2012, a federal district court judge ordered a halt to all further proceedings, finding that the Delaware statute and related court rules violate the First Amendment to the United States Constitution. In Delaware Coalition for Open Government v. Strine, Judge Mary McLaughlin, sitting by designation in the United States District Court for the District of Delaware, found that the First Amendment guarantees a qualified right of public access to civil trials, and that the Delaware statute violates that right because the arbitration proceeding it establishes is more similar to a civil trial than to a private means of alternative dispute resolution.

Judge McLaughlin thus confronted an issue of growing importance in alternative dispute resolution – the extent to which a court may permissibly restrict access to proceedings. The Delaware statute allowed parties to business disputes to elect to arbitrate, rather than litigate, before a judicial officer of the Court of Chancery, provided that certain threshold requirements were met. Upon filing of a petition for arbitration, the chancellor would designate a member of the court to serve as arbitrator, with the authority to make rulings during the course of proceedings and to issue a final award. The arbitration proceedings were conducted privately, outside the public view. Filings, including the arbitration petition, were not made available on the court’s public docketing system, hearings were closed to the public, and arbitrators’ final awards were not disclosed to the public.

The Delaware Coalition for Open Government challenged the statute in federal court, arguing that the Chancery Court arbitration proceeding is the functional equivalent of a civil bench trial, to which the public has a qualified right of access. The court’s judicial officers argued that the proceeding is more closely akin to an administrative proceeding, to which public access may be restricted. Judge McLaughlin agreed with the plaintiff, finding that the Chancery Court arbitration proceeding is essentially a civil trial, and that conducting the proceeding in private, outside the public view, violates the First Amendment. Quoting Third Circuit precedent, she found that open judicial proceedings benefit the public by promoting “informed discussion of governmental affairs” and by providing “an outlet for community concern, hostility and emotion.” In addition, she noted that open proceedings contribute to a “public perception of fairness.”

Supreme Court precedent establishes a First Amendment right of public access to criminal proceedings. Judge McLaughlin thus concluded that the First Amendment ensures public access to “historically open government proceedings” – including civil trials. Although the Supreme Court has not specifically addressed the question, several courts of appeals, including the Court of Appeals for the Third Circuit, have held that the right of public access extends not only to criminal cases, but also to civil judicial proceedings. Judge McLaughlin found that civil trials are “fundamentally different” from certain executive-branch administrative proceedings that historically have been kept private.

The Chancery Court judges argued that the court’s arbitration procedure differs from civil litigation because the parties to the arbitration must consent to participate, may agree to streamlined procedures and discovery rules, are encouraged to explore settlement and non-adversarial resolution, and waive nearly all post-arbitration rights to appeal. Judge McLaughlin found that those characteristics do not sufficiently distinguish Delaware’s arbitration procedures, noting that parties to civil litigation can likewise agree to alternative dispute resolution and limitations on discovery and appeal.

Focusing on Chancery Court judges acting as arbitrators, Judge McLaughlin stated that “judges in this country do not take on the role of arbitrators.” By comparison, she found that many court-supported arbitration programs in other jurisdictions make use of neutral attorneys and retired judges, rather than sitting judges, as arbitrators. She expressed particular concern about the use of public resources in a private, closed proceeding, stating that under the Delaware process, the arbitrator is “a sitting judge acting pursuant to state authority, paid by the state, and using state personnel and facilities.” Judge McLaughlin found that, because a sitting judge “bears a special responsibility to serve the public interest,” acting as an arbitrator, bound only by a private agreement between parties, undermines a judge’s public role and interferes with her obligations to the public as a judicial officer.

Judge McLaughlin was unmoved by the Chancery Court judges’ argument that opening the court’s arbitrations to the public will drive parties to use other, non-public means of dispute resolution. She found that the public benefits of openness outweigh the loss of the particular forum, because “the judiciary as a whole is strengthened by the public knowledge that its courthouses are open and judicial officers are not adjudicating in secret.” She concluded by finding that there is a constitutional right to public access to arbitrations conducted by Court of Chancery judicial officers, and that the Delaware statute and rules are invalid because they deny that right.

The possible ramifications of Judge McLaughlin’s decision remain largely unknown at this time. It is unclear whether the ruling will affect the validity of decisions previously rendered through the Chancery Court arbitration process. The District Court’s order states that no further proceedings shall be permitted, presumably putting a halt to any currently active cases. The decision raises other questions as well: Will the decision result in the public disclosure of cases previously adjudicated through the program? What effect, if any, will the decision have on other states’ court-supported arbitration processes? In the short run, the Chancery Court judges have indicated that they will appeal the decision to the Court of Appeals for the Third Circuit. Meanwhile, the future of the Chancery Court’s arbitration program, as well as a similar procedure recently established in the Delaware Superior Court, and other, similar arbitration processes in other jurisdictions, remains in a state of flux and uncertainty.



DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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