Constitutional Law

3rd Circuit says Delaware Chancery Court's secret arbitration program trials violated 1st Amendment

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A divided federal appeals court Wednesday said a novel attempt by a highly regarded state court to offer an alternative to private arbitration of corporate matters violates the First Amendment because it involves secret trials.

Upholding a lower court’s determination but applying a somewhat different line of reasoning to arrive at the same result, a majority of the Philadelphia-based 3rd U.S. Circuit Court of Appeals panel held (PDF) that government-sponsored dispute resolution that takes place in court is akin to a trial and hence must be public, Reuters reports.

Writing for the majority, which applied an “experience and logic” test, Judge Dolores Sloviter also suggested that the Chancery Court’s corporate arbitration program, which required that $1 million or more be in dispute, was a special benefit for elite litigants.

“Delaware’s proceedings are conducted by Chancery Court judges, in Chancery Court during ordinary court hours, and yield judgments that are enforceable in the same way as judgments resulting from ordinary Chancery Court proceedings,” she states. “Delaware’s proceedings derive a great deal of legitimacy and authority from the state. They would be far less attractive without their association with the state. Therefore, the interests of the state and the public in openness must be given weight, not just the interests of rich businesspersons in confidentiality.”

A concurrence by Judge Julio Fuentes says that the corporate arbitration program itself is not problematic, if secrecy is eliminated. As originally structured, before a federal district judge nixed the program in a ruling last year, even filings were not a matter of public record.

In dissent, Judge Jane Roth said the state legislature had authorized the voluntary arbitration program to help Delaware Chancery Court retain its pre-eminent position in corporate dispute resolution. The secrecy it involved is permissible, she said, and is supported by the historical use of arbitration.

“Delaware did not intend the arbitration system to supplant civil trials,” she wrote. “Delaware did not intend to preclude the public from attending proceedings that historically have been open to the public. The new system was created to provide arbitration in Delaware to businesses that consented to arbitration—and that would go elsewhere if Delaware did not offer arbitration before experienced arbitrators in a confidential setting.”

The Delaware Coalition for Open Government, which filed the lawsuit, did not immediately respond to a request for comment by Reuters. Mayer Brown, which represented the state, said it is considering an appeal.

The Wall Street Journal Law Blog (sub. req.) also has a story.

Prior coverage: “Judicial Arbitration in Delaware Chancery Court Violates First Amendment, Federal Judge Rules”

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