Andrew Pincus of Mayer Brown, who is representing the Delaware Court of Chancery in its bid to restore the confidential arbitration program, is pictured Sept. 26, 2013. (Photo by Diego Radzinschi)
The Delaware Court of Chancery is said to be mulling options to revive its confidential arbitration program after the U.S. Supreme Court denied the Chancery Court’s certiorari petition, effectively ending the program. Corporate law experts said the program is worth saving and that only a few minor tweaks could make Chancery Court arbitration compliant with federal law.
“There is a big move in favor of arbitration, particularly among multinational corporations,” said Jill E. Fisch, a corporate law professor at University of Pennsylvania Law School. “I don’t think the federal court opinions declaring the program unconstitutional indicated that the program is not fixable. The opinions created a lot of room for modification.”
On Monday, the Supreme Court denied certiorari in the case after the Chancery Court filed a petition seeking to overturn an October 2013 ruling by the U.S. Court of Appeals for the Third Circuit declaring the arbitration program unconstitutional. The high court’s decision not to hear the Chancery Court’s appeal means the Third Circuit’s ruling that the program violated the public’s access to civil trials under the First Amendment will stand.
The program has been shuttered since it was first declared unconstitutional by the U.S. District Court for the Eastern District of Pennsylvania in Delaware Coalition for Open Government v. Strine. It is not known if the Chancery Court will seek to rework the program so Delaware can still offer arbitration while adhering to federal law.
Andrew J. Pincus of Mayer Brown, a Washington, D.C., firm, is representing the Chancery Court. He said in a released statement that it was too soon to determine if the program is fixable, but hinted that Delaware may examine that possibility.
“Although it is premature to determine whether any particular statutory amendment or other change is an appropriate response to the outcome of the court proceedings, Delaware will continue to look for ways to achieve the objectives of the program that was the subject of the litigation,” Pincus said.
Gregory Varallo, director and executive vice president of Richards, Layton & Finger, said Delaware will likely review its options.
“I think it is always a mistake to count Delaware out on anything,” he said.
If Delaware opts to reform the program, the two most likely options are using retired judges to decide cases or eliminating the arbitration’s confidentiality and allowing the public access to the proceedings.
Thomas E. Carbonneau teaches arbitration at Pennsylvania State University’s Dickinson School of Law. He compared the Chancery Court’s case to an arbitration program managed under the North American Free Trade Agreement, or NAFTA. Under the NAFTA program, investors from NAFTA countries may initiate arbitration against another party under the United Nations Commission on International Trade Law. The NAFTA arbitrations were confidential at first, but were later opened up after journalists protested. Carbonneau said that once the arbitrations were available to the public and the secrecy vanished, the journalists lost interest.
“I would recommend that the Delaware Chancery consider the NAFTA example and open it to the public,” he said. “Once NAFTA opened up the arbitration proceedings no one ever went because it was sophisticated and complicated, but it took away complaints about the sequestration of the proceedings.”
Fisch agreed that removing the arbitration’s confidentiality would make it compliant with the federal court opinions, but cautioned that it would make the program less attractive.
“Confidentiality is one of the key features that drive companies to arbitration,” she said. “Nonconfidential arbitration is just not attractive for a commercial dispute.”
However, Carbonneau countered that it is better to have open arbitration than offer nothing at all and lose corporate dollars to international jurisdictions that offer confidential business dispute resolution.
“I guarantee you that no one is going to appear at open proceedings,” he said. “If it is serious, maybe a few journalists will report on it. It’s more essential to keep arbitration available with the unique Delaware judges than preserve the right to confidentiality.”
David L. Finger of Finger & Slanina, who represented the plaintiff, government transparency organization Delaware Coalition for Open Government, said the confidentiality issue will be tough for the Chancery Court to resolve.
“They may try to amend the statute that created the program, but I don’t see how they can get around the issue of confidentiality and the First Amendment, nor do I think they should,” he said.
If the Chancery Court concludes that confidentiality is necessary, Carbonneau and Fisch said the court should consider using retired judges. Both the Third Circuit and district court held that the use of public judges conducting arbitrations in taxpayer-funded courthouses made the program akin to a civil trial.
“Retired judges would make a huge difference and potentially that could be enough,” Fisch said.
“There are a multitude of advantages to retired judges,” Carbonneau added. “They know how to conduct trials, they understand litigation. This could create a real market for former Chancery Court judges to act as private arbitrators once they retire.”
Another option the Chancery Court could mull is tweaking its arbitration procedures so that it resembles more traditional arbitration and looks less like a civil trial, but no one is sure how many changes are needed for arbitration to be acceptable under the federal courts’ opinions.
“The federal court opinions said the program is essentially a civil trial, but never said how much the program needed to be changed to make it less like a civil trial,” Fisch said. “No one knows what the answer is.”
Similarities between the Chancery Court’s arbitration program and a civil trial included sitting judges issuing enforceable rulings and a limited right to appeal. Fisch said that eliminating the enforceability of the Chancery Court’s arbitration award could help.
“The judges were issuing enforceable orders and that was a major problem,” she said. “They could amend the program so that if you want an enforceable order, you have to confirm it in litigation.”
Carbonneau agreed that changes could help the program survive constitutional scrutiny.
“You can abbreviate, alternate or truncate the actual construction of the trial, define the judge’s jurisdiction or have the parties control the agenda,” he said. “Those are differences and they would not be insignificant in certain circumstances.”
Delaware could also decide to abandon the program. Since the program’s 2009 creation through the district court’s 2012 decision invalidating the program, only six disputes were adjudicated through Chancery Court arbitration.
“I don’t think the program was quite the boom they thought it would be,” Finger said.
“There was not a high demand for the court’s ability to arbitrate cases,” he added.
This article first appeared in Delaware Business Court Insider, a Legal sibling publication.