Federal appeals court upholds ruling rejecting secret business court arbitration in Delaware

WILMINGTON, Del. – Delaware’s effort to strengthen its reputation as the centre of business incorporation in the United States and home to one of the world’s most respected business courts has run into a First Amendment roadblock.

A federal appeals court panel ruled 2-to-1 on Wednesday to affirm a decision declaring that a 2009 state law that allowed Delaware’s Court of Chancery judges to preside over secret arbitration in high-stakes business disputes was unconstitutional.

“The benefits of openness weigh strongly in favour of granting access to Delaware’s arbitration proceedings,” Judge Doris Sloviter wrote for the panel majority.

Judge Jane Roth, widow of the Delaware’s late Republican U.S. Sen. Bill Roth, disagreed with Sloviter and Judge Julio Fuentes, who issued a separate concurring opinion. Roth noted Delaware’s effort to remain the pre-eminent home to U.S. corporations and business law and said the court’s secret arbitration “creates a perfect model for commercial arbitration.”

“Confidentiality is one of the primary reasons why litigants choose arbitration to resolve disputes — particularly commercial disputes, involving corporate earnings and business secrets,” Roth wrote.

The decision came in a lawsuit filed by an open-government group that challenged a law allowing secret arbitration in business disputes involving claims for monetary damages exceeding $1 million. Under the law and court rules, the court charged a fee of $12,000 for the filing an arbitration petition, and a daily fee of $6,000 every day after the first day a judge is engaged in arbitration.

Supporters of the law said the secret arbitration made the Chancery Court, which routinely decides disputes involving some of the biggest names in business, more efficient and more attractive.

They said the law also offers businesses a chance to settle disputes outside the public eye while generating revenue for Delaware, which is the legal home for more than 1 million business entities, including more than half of all U.S. publicly traded companies and roughly two-thirds of the Fortune 500.

But the Delaware Coalition for Open Government, backed by The Associated Press, The New York Times, The Washington Post, and several other major news organizations, filed a lawsuit in 2011, arguing that the secret arbitrations violated the constitutional and civil rights of citizens to attend judicial proceedings and access court records.

In response to the lawsuit, Chancellor Leo Strine Jr., head of the Court of Chancery, issued a statement saying 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.”

The lawsuit 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.

Because the arbitration petitions are not included on the court’s public docketing system and all related documents are considered confidential unless an appeal is filed with the Delaware Supreme Court, the public has little way of knowing how often judges are involved in such proceedings. But in response to a query from The Associated Press, court officials disclosed that six arbitration cases had been filed as of April 2012.

Following Wednesday’s ruling, Democratic Gov. Jack Markell’s office issued a statement by Andrew Pincus, one of several attorneys hired by Delaware to defend the law. The state was supported in its efforts by the U.S. Chamber of Commerce and the Business Roundtable, an association of chief executives from the top U.S. companies.

“We feel strongly that it is important to our nation and our state to provide cost-effective options to resolve business-to-business disputes to remain competitive with other countries around the world,” Pincus said. “Given the importance of this issue, we will be evaluating the appellate options after we have an opportunity to further study the three opinions.”