Judge in Philadelphia Hears Arguments Over Secret Arbitration

February 15, 2012

A group advocating open government told a federal judge last week that a Delaware law allowing Court of Chancery judges to preside over secret arbitrations in business disputes is unconstitutional.

Judge Mary McLaughlin heard arguments in federal court in Philadelphia, but she did not immediately rule on the issue.

The Delaware Coalition for Open Government sued last year, claiming the law allowing secret proceedings and court rules adopted to implement it violate the constitutional and civil rights of citizens to attend judicial proceedings and access court records.

Coalition attorney David Finger told McLaughlin there should not be two doors to the court, one for the public and one for “million-dollar corporations.”

“That diminishes public confidence, I would respectfully suggest, in fairness and equality,” said Finger, arguing that, except in very limited circumstances, the public has a right to observe judges in action.

Andre Bouchard, a private attorney representing the Chancery Court, argued the secret arbitration make the court more efficient and generates revenue for the state. He said that if the law is overturned, businesses would instead seek private arbitration elsewhere that could be kept secret.

“What public good comes from opening up a proceeding if nobody’s going to use it?” he asked.

But Finger said the fact that the state makes money off the secret arbitrations is no reason to infringe on the rights of citizens.

“No court has ever held that raising revenue is justification for minimizing the First Amendment,” he said.

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. Chancellor Leo Strine Jr., head of the Court of Chancery, said last year that the law was designed to ensure Delaware remained an attractive place for business entities to form.

Because the arbitration proceedings are cloaked in secrecy and not even put on the court docket, the public has no way of knowing how often the judges are engaged in arbitration. But Bouchard said he had been told by the Chancery Court that there had been six secret arbitration cases so far.

The judge asked what would happen if secret arbitration became so popular that it eventually accounted for half the court’s caseload, and Bouchard said more judges would need to be hired. But he also said that would mean the secret arbitration option was a success.

The coalition filed its lawsuit shortly 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. Without the SEC filings, the public may have never known about the case.

Under the Chancery Court rules, secret arbitration of a business dispute involving only a claim for monetary damages is allowed only if the disputed amount exceeds $1 million. A petition for arbitration is not put on the public docket, and all arbitration hearings and related communications are considered private.

Bouchard argued that the Chancery Court arbitrations are similar to the private mediations and arbitrations that federal magistrates are allowed to conduct under a 1998 law aimed at reducing case backlogs. Overturning the Delaware law could raise questions about the constitutionality of the federal law, he said.

“If it’s unconstitutional, it’s unconstitutional,” replied Finger, who noted that arbitration in federal courts is not binding and that a party dissatisfied with the result can proceed to trial. The Delaware law is different, he said, because judges are making final adjudications in secret disputes with virtually no chance of appeal.

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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