Delaware Coalition for Open Government, Inc. v. Strine, et al.: Third Circuit Holds Court of Chancery’s Confidential Arbitration Program Unconstitutional

December 2, 2013

Publication| Corporate Transactions| Corporate & Chancery Litigation

In Delaware Coalition for Open Government,  Inc. v. Strine, et al., the United States Court of Appeals for the Third Circuit considered whether the District Court for the District of Delaware correctly ruled that confidential arbitration proceedings conducted by members of the Delaware Court of Chancery under 10 Del. C. § 349 must be open to the public under the First Amendment to the Constitution of the United States. In a divided decision in which each member of the panel wrote a separate opinion, the Third Circuit held that there is a First Amendment right of access to Chancery arbitrations.

Under 10 Del. C. § 349, the Court of Chancery was granted authority to create a program under which sitting members of the Court would act as arbitrators for certain business disputes. The statute limited the categories of cases eligible for arbitration and required the parties to the dispute to agree to participate in Chancery arbitration. Arbitration petitions and submissions in the arbitration proceeding were to be protected from public disclosure, and the arbitration hearings were to be held in private. The arbitrator’s decision was to be entered as a judgment of the Court, with appeal rights limited to grounds similar to those on which a private arbitrator’s decision could be vacated, such as corruption, fraud or misconduct. The Delaware Coalition for Open Government, Inc. sued in the District Court, arguing that the confidentiality of such arbitrations violates the First Amendment. The District Court granted the plaintiff’s motion for judgment on the pleadings striking down the entire statute, and the members of the Court of Chancery appealed.

On appeal, the Third Circuit, in a majority opinion authored by Judge Dolores Sloviter, applied the “experience and logic” test and held that a proceeding is subject to the First Amendment right of public 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. Under the experience prong of the test, the Court noted that there is a long tradition of civil trials and court filings associated with them being open to the public with limited exceptions, but that the tradition as to the openness of arbitration proceedings has been mixed. The Court held that, because Chancery arbitrations take place before active judges in a courthouse, because they result in a binding order of the Court of Chancery, and because appeal rights are limited, the experience prong counseled in favor of making arbitration proceedings open to the press and the public. Under the logic prong of the test, the Court determined that opening Chancery arbitration proceedings to the public would yield numerous benefits (including promotion of informed public discussion, promotion of the public perception of fairness, and checking corruption and fraud) and that the drawbacks did not outweigh the benefits. Accordingly, the Court determined that there is a First Amendment right of access to Chancery arbitrations.

Judge Julio Fuentes joined in the Court’s opinion and wrote a concurring opinion, stressing that in his view the problem with the Chancery arbitration statute was that “they are conducted outside the public view, not because of any problem otherwise inherent in a Judge-run arbitration scheme.” Judge Jane Roth wrote a dissenting opinion, concluding that the experience test weighed against public access because arbitration proceedings historically have been private and confidential, and that the logic test also weighed against public access because “the resolution of complex business disputes, involving sensitive financial information, trade secrets, and technological developments, needs to be confidential so that the parties do not suffer the ill effects of this information being set out for the public — and especially competitors — to misappropriate.”

The members of the Court of Chancery elected not to seek rehearing en banc. It is not known whether the appellants will file a petition for a writ of certiorari at the Supreme Court of the United States.

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