In a recent column I commented on the apparent growing competition between the courts and private alternative dispute resolution companies for business related arbitration disputes.
The matter was brought to a head in Delaware where private litigants — generally corporations — are allowed to submit large disputes for an arbitration hearing before a sitting Chancery Court judge after the payment of a fee of $12,000, plus $6,000 per day. The matter is heard, pursuant to Chancery Court rules, following the submission of a petition stating the nature of the controversy. If it is determined that the matter qualifies (monetary damages must exceed $1 million, at least one party must be a business entity organized in or doing business in Delaware and no consumer may be involved), the Chancellor assigns a Chancery Court Judge to the arbitration.
Unless otherwise agreed, Chancery Court rules concerning depositions and discovery apply. The arbitration hearing is to take place within 90 days of the petition.
The rules specifically state that the matter is private and confidential: the petition for arbitration is not filed on the court’s public docketing system. Only parties and their representatives may attend the proceeding and any communication made to the arbitrator or to a party is confidential.
While the arbitration is conducted by a sitting judge, presumably already cloaked with judicial immunity, the rules specifically bestow civil immunity to the “arbitrator” for any act or omission.
A constitutional challenge was filed in federal court against the Delaware practice based on the use of public courts for private arbitrations out of public view. The case was moved to the Eastern District of Pennsylvania because of the recusal of all of the members of the U.S. District Court in Delaware.
In a stunning move, the federal court granted the challengers’ motion for judgment on the pleadings and held the relevant portions of the Delaware Code and the Chancery Court rules unconstitutional.
The District Court concluded that the First Amendment protects the public’s right to access “historically open proceedings.” And while the court conceded that the U.S. Supreme Court had not addressed the right of access to civil judicial proceedings, it found that “every Court of Appeals to consider the issue…..has held that that there is a right of access to civil trials. “
In its analysis of how arbitrations compare to civil trials, the court embarked on a detailed Arbitration 101-type examination of the differences between arbitration and litigation, citing numerous scholarly texts and articles. While acknowledging that the American Bar Association’s Code of Judicial Ethics permits a judge to act as an arbitrator or mediator when “expressly authorized by law,” and further that the Federal Alternative Dispute Resolution Act allows magistrate judges to serve as arbitrators, the court concluded that the role of judge and arbitrator were different in significant ways: “A judge bears a special responsibility to serve the public interest. That obligation, and the public role of that job, is undermined when a judge acts as an arbitrator bound only by the parties’ agreement.”
The defendants argued that the Delaware arbitration proceeding is different from a civil trial, but the court reasoned that a number of features “do not transform the Delaware proceeding into an arbitration nor distinguish it from a civil trial.” Among the features which apparently most influenced the court were the facts that (1) the parties do not select the judge who will “arbitrate” the case; (2) the proceedings take place in the courthouse where the judge receives no additional compensation and is assisted by the usual courthouse staff; (3) and the “arbitrator” is a sitting judge and thus the “judge’s final award results in a judgment enforced by state power.”
The federal court specifically addressed the Chancery Court’s concern about losing business by concluding that the “public benefits of openness are not outweighed by the defendants’ speculation that such openness will drive parties to use alternative non-public fora to resolve their disputes.” (Emphasis supplied.)
The Chancery Court judges immediately announced their intent to appeal and issued a statement stating that the United States runs the risk of being at a competitive disadvantage in an increasingly competitive global marketplace if it does not provide more efficient methods of business to business dispute resolution. Without those processes, they claimed, businesses will look to other nations providing the advantage. The notice of appeal was filed in October.
While the immediate impact of the decision is limited to the Delaware Chancery Court arbitration program, the implications could be much wider. A number of fascinating questions arise:
•Does it make any difference if the arbitration is conducted by court personnel other than a sitting judge?
•Does it make any difference if the parties can select the judicial arbitrator?
•Does a confidential mediation conducted by a sitting judge also run afoul of the right to access?
•Are other state’s court annexed ADR processes impacted by the decision?
A great deal lies ahead in connection with the apparent growing battle between the courts and private ADR providers to snare the sought after business segment of arbitration. It just may get to the U.S. Supreme Court before the dust settles.•