Fed. court hears appeal over Del. court secrecy

Friday, May 17, 2013

PHILADELPHIA — A federal appeals court is weighing the constitutionality of a Delaware law allowing chancery judges to oversee secret arbitration in high-stakes business disputes.

A three-judge panel of the Third U.S. Circuit Court of Appeals heard arguments Thursday in a lawsuit filed by the Delaware Coalition for Open Government, or DelCOG, which claims the law is unconstitutional. The panel gave no timeframe for its ruling.

DelCOG, backed by The Associated Press, The New York Times and several other major news organizations, claimed in its lawsuit that the secret arbitration conducted by Delaware’s Chancery Court violated the First Amendment rights of citizens to attend judicial proceedings and access court records.

A federal judge last year agreed with the coalition, saying that the chancery judges, who often preside over high-profile business disputes involving some of the world’s largest corporations, cannot preside over binding arbitration proceedings behind closed doors.

“They are, in form and substance, civil trials,” attorney David Finger, representing DelCOG, told the appeals court Thursday.

But Andrew Pincus, an attorney for the chancery judges, suggested that there is little difference between what the chancery judges were being allowed to do and private arbitration, which is traditionally secret.

“This is classic arbitration,” he said. “I don’t think there’s any aspect that differs from a traditional arbitration.”

The judges did not seem convinced.

“It just seems to me that the Delaware model is a very novel model for judge-run arbitration,” said Judge Julio Fuentes, noting that the chancery arbitration involves a sitting judge in a closed courtroom issuing enforceable judgments.

“The problem is when a judge steps in with a robe, and powers of state. … At that point you’re more like a civil proceeding than an arbitration,” Fuentes said.

But Judge Jane Roth, widow of former U.S. Sen. Bill Roth of Delaware, questioned why Delaware’s legislature wouldn’t have the power to allow chancery judges to take on the additional role of arbitrator.

“Why can’t they do it?” she asked, noting that the legislature also has designated the head of the Chancery Court to serve on Delaware’s Board of Pardons.

The dispute involves a law passed by Delaware’s General Assembly in 2009 that allowed secret arbitration in business disputes involving claims for monetary damages exceeding $1 million.

Under the law and court rules, the Chancery Court charges a fee of $12,000 for filing an arbitration petition, and a daily fee of $6,000 for each day after the first day that a judge is engaged in arbitration.

The rules state that the court will not include any petition for secret arbitration on its public docketing system. The petition and any supporting documents are considered confidential unless the arbitration proceedings are the subject of an appeal. The arbitration hearings and related communications involving the judge and the parties also are considered private.

Attorneys for the state argued that secret arbitration made the court more efficient and generated revenue for Delaware, corporate home to thousands of companies.

In response to the filing of DelCOG’s lawsuit in 2011, Chancellor Leo Strine Jr., head of the Court of Chancery, issued a statement saying the law establishing the secret proceedings was designed to ensure that Delaware remains “the most attractive domicile in the world for the formation of business entities.”

But attorneys for the chancery judges deny in court papers that the state is invoking economic concerns to override the First Amendment.

“The question here is whether a First Amendment right should be recognized in the first place, not whether an established right may be overridden because of a state’s compelling interest,” they wrote in their appeals briefs. They noted, however, that if the appeals court agrees that the secret arbitration is unconstitutional, “it would make Delaware, and the United States generally, significantly less attractive as a location for global businesses to incorporate — thereby reducing not only state revenues but also job creation within the state.”

The appeals court judges wondered whether one way to solve the controversy would be to remove some of the secrecy by striking a provision in the law giving the chancery judges the power to issue enforceable judgments and requiring that their decisions be sent to the state Supreme Court for approval, resulting in at least some disclosure about the result of the arbitration.

But Judge Dolores Sloviter noted that the appeals court is not in the business of rewriting state statutes.

“We will take this interesting case under advisement,” Sloviter said at the end of the hearing. “My guess is that you will not get an opinion within 24 hours.”

Tags: , ,