Delaware chief judge says courts will again consider arbitration program, defends old system

Delaware Supreme Court Chief Justice Leo E. Strine announced in his State of the Judiciary Address this month that the court is “working on a different approach” to an arbitration program that will replace its rejected predecessor.

The initial program failed in 2011 after a federal district court declared it unconstitutional, saying it infringed upon the public’s First Amendment right to access court proceedings. Strine did not provide many details about the proposal, but some experts are worried that the plan could attempt to unreasonably restrict access again. The new program should be up for approval from Delaware’s General Assembly by January 2015, Strine said.

Arbitration programs allow parties in civil cases to settle their disputes outside of court, in front of neutral decision makers and away from public view. The process is unlike a trial because the rules of evidence do not apply and the arbitrators need not adhere exactly to the law. Oftentimes, arbitrations make the legal process more efficient and less costly.

The Delaware program that failed was unlike traditional arbitrations because rather than having the parties pay retired judges or experts to serve as decision makers, the state used sitting Chancery Court judges. Large corporations often take cases to Delaware’s Chancery Court, where most of them are technically incorporated, because the state courts handle disputes involving corporations from around the world.

The old arbitration program gave corporations the benefit of avoiding public scrutiny, while using court resources and its judges’ expertise. Critics said the secrecy was especially problematic because many of the disputes were corporate quarrels of great public interest.

But Strine said he wants his proposal to entice entrepreneurs from around the world to form corporate entities in Delaware.

“Those entities will have the advantages not only of our well-developed corporate law, but of our state’s proven ability to help them resolve commercial disputes swiftly and expertly,” Strine said.

In 2011, the Delaware Coalition for Open Government challenged the old arbitration program’s constitutionality, and the U.S. District Court in Delaware struck it down the next year. It found that big-business matters are of great public interest and cannot be given a cloak of secrecy when the process involves sitting judges.

The U.S. Court of Appeals for the Third Circuit affirmed that decision in October 2013 and in March 2014, the U.S. Supreme Court declined to hear an appeal of the case.

In his address, Justice Strine displayed regret over the Third Circuit decision, saying that the judges’ reading of the law would actually “invalidate long-standing dispute resolution procedures used in their own federal court system.”

Now Strine wants to create a program that’s compliant with federal law to supplement the rejected program.

“Consistent with our history, Delaware is not wallowing in defeat,” Strine said.

John Flaherty, president of the Delaware Coalition for Open Government, says the court will have a hard time writing a constitutional proposal.

“They have a high bar to overcome,” Flaherty said. “If they’re trying to create an arbitration program that’s secret, I don’t think that’s going to work – at least, one that’s run by the courts won’t work.”

Thomas J. Stipanowich, an attorney who has done extensive research on Delaware’s arbitration procedures, says he remains perplexed about why there is an overwhelming need to use Chancery Court judges as arbitrators.

“Is it really worth it? Using those court resources?” said Stipanowich, who also is academic director of a dispute resolution institute at the Pepperdine University School of Law.

He says there are a number of constitutional ways to do what the Delaware program was attempting to accomplish.

“If you’re a business with a corporate dispute and you want the expertise of a chancery judge, hire a retired judge,” Stipanowich said. “Many retired judges are creating a second career in arbitration. Then you don’t have all this business about bringing the state court resources into the process.”

When the state operates arbitrations, the public and press have the right to be in the room, listening to the proceedings, Stipanowich says. One of the main issues with the Delaware’s failed arbitration process is that, over time, it started to look more and more like litigation, he said.

“This is not a normal procedure. It takes place in the courthouse, but it’s in a secret room and it isn’t listed anywhere. Normal arbitration processes are at least listed on the docket,” Stipanowich said. “The confidentiality is a real problem.”

All states allow for some form of alternative dispute resolution, but the hybrid system seems to be unique to Delaware, according to experts.

Flaherty says confidentiality and the use of Chancery Court resources don’t mix. The court cannot allow taxpayers to support an arbitration program that shuts them out of the proceedings, he said.

“Whatever they decide to propose to the General Assembly needs to be constitutional and publicly accessible. The public has the right to be there and the proceedings cannot occur behind closed doors,” Flaherty said. “If the new proposal follows that logic, I don’t think it will be a problem.”

The Delaware Coalition for Open Government does not have plans to combat the proposal at this time, but Flaherty says that Delaware won’t get away with having a “secret court” again.

“We don’t want to prejudge the situation, but we’ll give whatever he proposes a good look,” Flaherty said. “It has to meet constitutional muster.”