Federal judge rules against Delaware’s secret arbitrations

Delaware’s Chancery Court cannot hold “secret” hearings instead of trials to settle large business disputes. Delaware Coalition for Open Government filed a federal lawsuit in October 2011 challenging the Chancery Court’s private arbitration. The federal judge hearing the case, Mary McLaughlin of Eastern District of Pennsylvania, ruled in favor of the Delaware Coalition for Open Government that the arbitration cases must be open to the public.


Latest news:

Delaware Chancery Court appeals ban on private arbitration

From The News Journal:

WILMINGTON, Del. (Oct 1, 2012) – The Delaware Court of Chancery is asking the U.S. 3rd Circuit Court of Appeals to reinstate its controversial private arbitration process that critics have called a “secret court.”

Attorneys representing Chancery Court filed a notice of appeal with the U.S. District Court in Wilmington today. The one paragraph notice did not outline the reasons for the appeal.

Backers of secret Delaware arbitrations see grounds for appeal

From Reuters:

WILMINGTON, Del. (Sept 10, 2012) – Advocates of a novel private arbitration system in Delaware that was shot down by a federal court aren't giving up. They are mounting an appeal while also looking at ways to revamp the program so it passes constitutional muster.

Delaware enacted the system, believed to be the only arbitration program in the nation in which sitting judges act as private arbitrators, to bring more legal business to the state. But U.S. District Judge Mary McLaughlin in Philadelphia put a stop to the arbitrations, ruling on Aug. 30 that the proceedings were essentially civil trials and that conducting them behind closed doors violated the First Amendment guarantee of public access to government proceedings.

Delaware Coalition for Open Government is a member of NFOIC. – eds.



The arbitration is "essentially … a non-jury trial"

(August 30, 2012) – McLaughlin wrote that because it is a sitting judge presiding over the Chancery Court’s arbitration proceedings, finding facts and issuing orders, the arbitration process functions essentially as a non-jury trial.

During arguments on Feb. 9, Andre Bouchard, a lawyer representing Chancery Court and the State of Delaware, argued that arbitration differed from a civil trial because the parties have to agree to arbitration, and the judges’ authority is not constitutional but contractual.

However, David Finger, a lawyer for the Delaware Coalition for Open Government, countered that States cannot take private action without still being subject to constitutional law.

McLaughlin said judges could not serve as arbitrators, even if it was by mutual consent of the parties involved. She, citing the First Amendment, wrote, “The question at issue is whether there is a right of access to this proceeding (arbitration) which is violated by the confidentiality requirement of the law and implementing rules.”

Six cases have been arbitrated under the contested law, but there is no public record of five of them. Because the private arbitration are not public, it is unclear how many times the system was used.

— From The New York Times

A 2009 amendment to Delaware’s law

(August 30, 2012) – In 2009, Delaware’s legislature adopted the private arbitrations, hoping to bolster the state as a center for international arbitration by offering cost-effective mechanism for resolving disputes, particularly those involving commercial, corporate and technology matters.

According to legal experts, Delaware appeared to be the first state to adopt a system involving private arbitrations before sitting judges.

Critics attacked the system as overstepping the First Amendment of the U.S. Constitution, which the Supreme Court has held protects the public’s right to attend criminal trials.

In a written statement issued on behalf of the state and the court, a Widener University law professor, Lawrence A. Hamermesh, who also assisted in representing the state, said the state planned to appeal because of the economic importance of providing business with “cost-effective ways to resolve disputes.”

— From Reuters

After the ruling

(August 30, 2012) – John Flaherty, the president of the Delaware Coalition for Open Government, said the decision is a great victory for the rule of law.

Finger said the ruling was a reminder of the importance of transparency in all branches of government.

Several media organizations, including The Associated Press, The New York Times, The Washington Post and the Reporters Committee for Freedom of the Press, submitted a brief supporting the coalition.

The corporate law section of the Delaware State Bar Association, along with the New York Stock Exchange and Nasdaq, submitted briefs supporting the arbitration law.

— From Associated Press

Related articles: