May 30, 2014 Articles

Third Circuit Rejects Delaware Court of Chancery's Confidential Arbitration Program

Court affirms earlier ruling finding confidentiality provisions unconstitutional

by Chad M. Shandler

In a case that has attracted the attention of legal experts from across the country, the U.S. Court of Appeals for the Third Circuit affirmed the U.S. District Court of Delaware's decision that found the confidentiality provisions of the Delaware Court of Chancery's arbitration program unconstitutional. Applying the well-known experience and logic test, the 2–1 majority concluded that the tradition and importance of public access to proceedings like Delaware's government-sponsored arbitration required that such proceedings be open to the public under the presumptive right of access afforded by the First Amendment.

Overview of the Court of Chancery's Arbitration Program
In an effort to maintain its status as the preeminent state in which to resolve business disputes, the Delaware General Assembly enacted a statute in 2009 that granted the Court of Chancery "the power to arbitrate business disputes." Del. Coal. for Open Gov't, Inc. v. Strine, 733 F.3d 510, 512 (3d Cir. 2013), petition for cert. filed, 82 U.S.L.W. 3463 (U.S. Jan 21, 2014 (No. 13-869). Under this statute and the Court of Chancery's corresponding arbitration rules, only certain disputes qualify for arbitration. See 10 Del. Code § 349 (2009); Del. Ct. Ch. R. 96–98. Specifically, at least one of the parties must be a "business entity formed or organized" under Delaware law, neither party can be a "consumer," and the amount-in-controversy must be at least $1 million. 10 Del. Code §§ 347, 349. Qualified parties must consent to arbitration by agreement or by stipulation.  Id. § 347(a)(1); Del. Ct. Ch. R. 97(a).

Arbitration is commenced in the Delaware Court of Chancery by the filing of a petition. The filing fee is $12,000, and the parties must pay $6,000 per day after the first day of arbitration.  Del. Coal. for Open Gov't, Inc., 733 F.3d at 512. Once the arbitration is filed, the chancellor selects a member of the Court of Chancery as the arbitrator. Id. In most cases, the arbitration will begin approximately 90 days after the arbitration petition is filed. The arbitration proceedings are held in a Delaware courthouse during normal business hours.  Id. at 513. Unless the parties stipulate to different discovery rules, Court of Chancery Rules 26–37 govern depositions and discovery. Id. 

The Court of Chancery judge appointed as the arbitrator has the authority to grant "any remedy or relief that [s/he] deems just and equitable and within the scope of any applicable agreement of the parties." Del. Ct. Ch. R. 98(f)(1). Any party has a right to appeal the arbitrator's ruling to the Delaware Supreme Court, which will review the arbitration decision in conformity with the standards enunciated in the Federal Arbitration Act. 10 Del. Code § 349(c). Under these standards, arbitration awards can be vacated only in circumstances where a party can prove that the "award was procured by corruption, fraud, or undue means" or that the "arbitrator was guilty of misconduct." Del. Coal. for Open Gov't, Inc., 733 F.3d at 513 (internal citations omitted).

Confidentiality of Program Challenged by Delaware Coalition for Open Government
Both Delaware's statute and the Court of Chancery's corresponding arbitration rules bar public access to the arbitration proceedings. Under the statute, "arbitration proceedings shall be considered confidential and not of public record until such time, if any, as the proceedings are the subject of an appeal." 10 Del. Code § 349(b). (The Delaware Supreme Court has not adopted rules that would govern the confidentiality of appeals taken from Delaware's arbitration program.) Similarly, Delaware Court of Chancery Rule 97(a)(4) provides that "[t]he Register in Chancery will not include the petition as part of the public docketing system." The Court of Chancery rules further provide that "[a]rbitration hearings are private proceedings such that only parties and their representatives may attend" and that "[a]ny communication made in or in connection with the arbitration that relates to controversy being arbitrated . . . is confidential." Del. Ct. Ch. R. 98(b).

A short time after Delaware's arbitration program was adopted, the Delaware Coalition for Open Government filed a suit in the U.S. District Court for the District of Delaware challenging the constitutionality of the confidentiality provisions of Delaware's arbitration statute and corresponding Court of Chancery rules. The coalition moved for judgment on the pleadings, arguing that Delaware's arbitration program violated the presumptive right of public access to judicial proceedings afforded by the First Amendment. The district court granted the coalition's motion in August 2012.

Delaware District Court Concludes Court of Chancery Arbitration Was Akin to a Civil Trial
The First Amendment provides the public with a right of access when "there has been a tradition of accessibility" to that kind of proceeding and when "access plays a significant positive role in the functioning of the particular process in question." Press-Enter. Co. v. Superior Court of Cal. for Cnty. of Riverside, 478 U.S. 1, 10 (1986). Courts have come to call the examination of the history and functioning of the proceeding at issue as the "experience and logic" test. Del. Coal. for Open Gov't, Inc., 733 F.3d at 514. The presumptive right of public access applies when both experience and logic favor the opening of the proceedings to the public. Id.   Only a compelling government interest can override this right of access. Id.

Although the Delaware District Court recognized that Third Circuit precedent called for application of the experience and logic test to determine whether there is a public right of access to a particular proceeding, the district court declined to apply this test. Instead, relying on El Vocero de Puerto Rico v. Puerto Rico, 508 U.S. 147 (1993), the district court concluded that Delaware's arbitration program was "sufficiently like a trial" such that there was no need to "reiterate" the experience and logic test. Del. Coal. for Open Gov't v. Strine, 894 F. Supp. 2d 493, 500 (D. Del. 2012). Because there is a presumptive right of public access to civil trials, the district court held that the confidentiality provisions of Delaware's arbitration procedures violated the First Amendment. Id.

Third Circuit Applies Experience and Logic Test to Find Delaware's Confidential Arbitration Procedures Unconstitutional
Although the Third Circuit found that Delaware's arbitration proceedings are similar to civil trials in a number of ways, it concluded that the two are not so identical as to fit within the narrow exception articulated by the U.S. Supreme Court in El Vocero.  Del. Coal. for Open Gov't, Inc., 733 F.3d at 515. Thus, the Third Circuit held that the district court erred by not applying the experience and logic test to determine whether the confidential features of Delaware's arbitration program violated the First Amendment. Id.

In analyzing the experience prong, a court is required to consider whether "the place and process have historically been open to the press and general public, because such a tradition of accessibility implies the favorable judgment of experience." Id. (internal citations omitted).  The Third Circuit determined that while "the tradition of openness must be strong . . . a showing of openness at common law is not required." Id. On appeal, the Court of Chancery judges argued that the circuit court's historical analysis should be confined to arbitrations, while the coalition argued that the circuit court should look only to the history of civil trials. The Third Circuit declined to follow either approach. Rather than examining the historical practice of the specific public institution involved, the court decided that it should consider whether "the particular type of government proceeding has historically been open in our free society." Id. (emphasis in original). Opting to analyze the experience prong under this broader historical approach, the circuit court examined the history of openness in both civil trials and arbitrations. Id. 

The court's examination revealed that civil trials have a long history of public access. This finding is consistent with long-standing precedent from the Third Circuit. See Publicker Indus., Inc. v. Cohen, 733 F.2d 1059, 1068–70 (3d Cir. 1984). Accordingly, the court concluded that civil trials and court filings associated with such proceedings have been historically open to the public. Del. Coal. for Open Gov't, Inc., 733 F.3d at 516.

The circuit court conceded that the history of openness with respect to arbitrations proceedings is not as clear. The court's examination of relevant history showed that "arbitrations with non-state action in private venues tend to be closed to the public." Id. at 518. However, the court found that arbitrations held under the challenged statute differ fundamentally from these types of private arbitrations because they are conducted before active judges in a courthouse and result in a binding order from the Delaware Court of Chancery. Id. The court also found that government-sponsored arbitration proceedings such as those conducted in Delaware are "deeply rooted in the way the judiciary functions in a democratic society." Id. Thus, the court concluded that its inquiry into the history of arbitration proceedings "counsels in favor of granting public access to Delaware's [arbitration] proceeding because both the place and process of Delaware's proceeding have historically been open to the press and general public." Id. (internal citations omitted).

Under the logic prong of the experience and logic test, the court examined whether "access plays a significant positive role in the functioning of the particular process in question." Id. (internal citations omitted). Finding that the benefits of public access to arbitration proceedings (such as ensuring accountability and promoting the public's perception of fairness) far outweigh any potential drawbacks to public access, the circuit court concluded that "like history, logic weighs in favor of granting access to Delaware's government-sponsored arbitration proceedings." Id. at 519–20. The Third Circuit therefore affirmed, albeit on different grounds, the district court's decision that the confidentiality provisions of Delaware's arbitration statute and the corresponding Court of Chancery's arbitration rules violate the presumptive right of public access afforded by the First Amendment.

Chancery Judges Ask  U.S. Supreme Court to Review the Third Circuit Decision
In January 2014, the Court of Chancery judges filed a petition for a writ of certiorari asking the U.S. Supreme Court to review the Third Circuit's divided opinion declaring the confidentiality provisions of the Court of Chancery's arbitration proceedings unconstitutional. The coalition has opposed the petition for certiorari on grounds that there is no conflict among the various circuit courts because, inter alia, no other state has adopted state-sponsored arbitration proceedings comparable to those adopted in Delaware. 

U.S. Supreme Court Denies the Chancery Judges' Petition
On March 24, 2014, the U.S. Supreme Court denied the petition for a writ of certiorari filed by the Court of Chancery judges. The high court's refusal to grant certiorari effectively ends the Delaware Court of Chancery's arbitration program in its current form.

Keywords: litigation, commercial, business, Delaware Court of Chancery, arbitration program, confidentiality provisions, unconstitutional, experience and logic test, Third Circuit, public right of access, First Amendment


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