Third Circuit Declares Delaware’s Private Arbitration Program Unconstitutional

On October 23, 2013, the US Court of Appeals for the Third Circuit, in a 2-1 decision, determined that the arbitration process provided for in § 349 of Title 10 the Delaware Code and Rules 9698 of the Delaware Court of Chancery, a special program that enables litigants to privately arbitrate certain business disputes before Court of Chancery judges, violates the First Amendment of the US Constitution. According to the Third Circuit, the public has a right of access under the First Amendment to Delaware’s state-sponsored arbitration program.

In Del. Coalition for Open Gov’t v. Strine, 2013 U.S. App. LEXIS 21500, 2013 WL 5737309 (3rd Cir. 2013), the Third Circuit upheld the District Court’s judgment against the Chancery Court’s corporate arbitration program in Delaware. The case began as a dispute between the advocacy group of the Delaware Coalition for Open Government, and Delaware and its court system, concerning the constitutionality of a private arbitration system in Delaware where judges acted as arbitrators. The Coalition moved for judgment on the pleadings in the district court, arguing that the confidentiality of the program violated the First Amendment. The state and court system were later replaced by the named defendant judges, pursuant to Eleventh Amendment immunity. As CPR reported in the October 2012 issue of Alternatives [subscription required], the District Court on August 30, 2012 found that Delaware’s arbitration proceedings were essentially non-jury civil trials, which thus granted the public a qualified right of access to the proceedings. On appeal, the Third Circuit held a “heated” session of oral arguments on May 16, 2013, which Brian Farkas covered in the July/August 2013 issue of Alternatives [subscription required].

Writing for the majority, Judge Dolores K. Sloviter reviewed the lower court’s decision de novo and rejected the lower court’s reasoning, which likened the arbitrations to civil trials. Instead, Judge Sloviter applied the “experience and logic” test, a precedent-derived “examination of the history and functioning of a proceeding.” For the experience prong, the Third Circuit determined that the Delaware program was essentially a “type” of government-sponsored arbitration procedure, which has been historically open to the press and general public. On the logic prong, the Third Circuit determined that public access played a significant role in the functioning of these arbitration proceedings, readily dismissing Delaware’s argument that confidentiality protected disputants from a “loss of prestige and goodwill.” Thus, Judge Sloviter determined that Delaware’s arbitration proceedings qualified for the First Amendment right of public access.

The majority’s opinion was unclear as to whether it declared the entire system, or merely its confidentiality provisions, unconstitutional. While reaffirming the district court’s decision that the proceedings violated the US Constitution, Judge Sloviter reaffirmed the proceedings’ availability after the decision. She suggested that litigants would still have a choice between open Delaware arbitrations, private arbitrations, and public court proceedings. Moreover, Judge Sloviter seemed to express a problem with other aspects of the system, specifically its selective availability to wealthy businesses. Although the program’s selectivity was not expressly determinative of the court’s decision, Judge Sloviter nevertheless observed that public interests had to balance “the interests of rich businesspersons in confidentiality.”

Judge Julio M. Fuentes concurred with the majority opinion, writing to clarify that the decision did not render all provisions of the arbitration system unconstitutional. Judge Fuentes observed that the court would have no problem with the arbitration system but for its confidentiality provisions. He reiterated that “we do not express any view regarding the constitutionality of a law that may allow sitting Judges to conduct private arbitrations if the system set up by such a law varies in certain respects from the scheme before us today.”

In her dissent, Judge Jane R. Roth countered the majority’s view on the issue of confidentiality, interpreting the majority’s opinion as finding Delaware’s entire arbitration system unconstitutional. Judge Roth would have reversed the lower court’s judgment and upheld the Delaware arbitration system. She addressed the majority’s application of the “experience and logic” test, reapplying it and coming to a conclusion in favor of the Court of Chancery. Indeed, according to Judge Roth, when Delaware decided to create an arbitration system, “it was looking at traditional arbitration, in a confidential setting, before arbitrators experienced in business and corporate litigation.”

This decision is significant to both Delaware’s position as a popular venue for the resolution of corporate and business disputes, and to the ability of large organizations, both national and international, to resolve disputes. As former CPR President and  Alternatives publisher Thomas J. Stipanowich has stated, the system was an arbitration trifecta that combined an expert adjudicator—a leader in corporate and business litigation—with an efficient case management system and confidentiality (see http://ssrn.com/abstract=2271359). In addition, a major benefit of the program to business litigants was that the Federal Arbitration Act’s (FAA) deferential standard applied to subsequent judicial review of the final arbitration order.

The Court of Chancery has not announced whether it will appeal to the US Supreme Court.

-          Cynthia Galvez, CPR Legal Intern