Delaware secret court arbitration unconstitutional

A Delaware law allowing Court of Chancery judges to preside over secret arbitration in business disputes is unconstitutional, a federal judge ruled Thursday.

 

The ruling came in a lawsuit filed by the Delaware Coalition for Open Government, which argued that the secret proceedings violated the rights of citizens to attend judicial proceedings and access court records.

In a 26-page ruling, U.S. District Court Judge Mary McLaughlin agreed that the Chancery Court, which often presides over high-profile business disputes involving some of the world’s largest corporations, cannot conduct secret arbitration.

McLaughlin noted that under the arbitration process, a sitting judge hears evidence, finds facts and issues enforceable orders.

“The court concludes that the Delaware proceeding functions essentially as a non-jury trial before a Chancery Court judge,” wrote McLaughlin, who heard oral arguments in February. “Because it is a civil trial, there is a qualified right of access and this proceeding must be open to the public.”

David Finger, an attorney representing the open-government coalition, said the ruling was a reminder of the importance of transparency in all branches of government.

Gov. Jack Markell and Chancellor Leo Strine Jr. referred requests for comment to Lawrence Hamermesh, a Delaware law professor who assisted in representing the state. Hamermesh said in a prepared statement that state planned to appeal because of the economic importance of providing businesses with “cost-effective ways to resolve disputes.”

The law allowed secret arbitration in business disputes involving claims for monetary damages exceeding $1 million.

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

But court officials disclosed earlier this year that only five secret arbitrations had been held, all lasting only one day and generating only $60,000 in revenue for the court.

Under the law, the court charged $12,000 for filing an arbitration petition and a daily fee of $6,000 for each day after the first day that a judge was engaged.

Because the proceedings were cloaked in secrecy and not even put on the court docket, the public had no way of knowing how often judges were engaged in arbitration. The coalition filed its lawsuit shortly after two companies disclosed in filings with the Securities and Exchange Commission that they were seeking arbitration in a failed merger. Without the SEC filings, the public may have never known about the case.

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.

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