Group Challenges Secret Court Arbitration in Delaware

October 27, 2011

An open-government group on Tuesday, Oct. 25, challenged a law that allows members of Delaware’s Court of Chancery to preside over secret arbitration proceedings in business disputes.

The Delaware Coalition for Open Government claims in the federal lawsuit that a 2009 law allowing the secret proceedings, and court rules adopted to implement the law, violate the constitutional and civil rights of citizens to attend judicial proceedings and access court records.

“Although the statute and rules call the procedure `arbitration,’ it is really litigation under another name,” DelCOG attorney David Finger wrote in the 5-page complaint. “Although procedure may vary slightly, the parties still examine witnesses before and present evidence to the arbitrator (a sitting judge), who makes findings of fact, interprets the applicable law and applies the law to the facts, and then awards relief which may be enforced as any other court judgment. The only difference is that now these procedures and rulings occur behind closed doors instead of in open court.”

Named as defendants are the Court of Chancery, its judges and the state.

Attorney General Beau Biden’s office, which represents state agencies in lawsuits, declined to comment. It instead issued a statement that it attributed to Chancellor Leo Strine Jr., head of the Court of Chancery.

Strine said in the statement that 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.”

“Throughout American history, it has long been recognized that not all aspects of the judicial process are subject to public access, and the courts of this state regularly mediate disputes among citizens, including businesses, and can only do so effectively if the confidentiality of the process is respected,” Strine added.

Strine noted that public access to courts has been historically limited in cases dealing with family matters such as child custody and guardianships. He also noted that state lawmakers approved similar secret arbitration for business disputes in Superior Court last year.

The bills, which passed both chambers of the General Assembly unanimously and were signed by Gov. Jack Markell, were intended “to advance compelling public policy interests related to the our state’s economic vitality,” according to Strine.

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.

Markell spokesman Brian Selander had little comment on the lawsuit, other than to note that the legislation passed unanimously.

Last week, Markell signed an order requiring executive branch agencies in Delaware to adopt a standard policy for handling Freedom of Information Act requests, a move the administration said would make it easier and cheaper for people to obtain public records.

“Delaware’s Freedom of Information Act helps ensure transparency and accountability in government, which is the people’s business,” Markell said in signing the order.

The lawsuit challenging the secret court proceedings was filed barely a month after California-based chip maker Advanced Analogic Technologies and Massachusetts-based semiconductor developer Skyworks Solutions Inc. disclosed in regulatory filings with the Securities and Exchange Commission that they were seeking arbitration in a failed merger agreement.

Under the Chancery Court’s rules, secret arbitration of a business dispute involving only a claim for monetary damages is allowed only if the amount in controversy exceeds $1 million. The rules also state that the court will not include any petition for such arbitration on its public docketing system.

“The petition and any supporting documents are considered confidential and not of public record until such time, if any, as the proceedings are the subject of an appeal,” the rules state.

The arbitration hearings and related communications involving the judge and the parties also are considered private.

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