In a previous column, I wrote about litigation challenging court annexed arbitration in the state of Delaware.

The dispute arose from a Delaware judicial process allowing private litigants — generally corporations — to submit large disputes for arbitration before a sitting Chancery Court judge after the payment of a substantial fee ($12,000, plus $6,000 per additional day). Cases are arbitrated, with the consent of all parties, pursuant to Chancery Court rules, following the submission of a petition stating the nature of the controversy.

The matter qualifies for the arbitration program by meeting three threshold tests: (1) an amount in controversy of $1 million or more; (2) at least one party being a business entity organized in or doing business in Delaware; and (3) no consumer involvement. Once qualified, the dispute is assigned to a Chancery Court judge for arbitration within 90 days of the petition and the Court of Chancery rules concerning discovery apply. The matters are heard during normal business hours in public courthouses.

Despite the fact that the arbitration is conducted by a sitting judge in the courthouse during the course of his or her judicial duties, the rules specifically state that the matter is private and confidential. There is no record of the arbitration for the public to see unless the award is challenged. Only parties and their representatives are allowed to attend the proceeding: public access is barred. Interestingly, while the judge already has judicial immunity, the rules grant civil immunity to the “arbitrator” for any act or omission.

A federal court constitutional challenge was filed against the Delaware practice, claiming improper utilization of public courts for private arbitrations out of public view and essentially the creation of a second-class justice system for those who cannot afford the price tag. The federal district court granted the challengers’ motion for judgment on the pleadings and ruled that the relevant portions of the Delaware Code and the Chancery Court rules were unconstitutional.

The matter was appealed to the U.S. Court of Appeals for the Third Circuit and that court affirmed the judgment on Oct. 23.

Conducting a de novo review, the Third Circuit reached the same conclusion as to the impermissibility of the private arbitrations in a court setting, but on different grounds. The higher court concluded that the First and Fourteenth amendments prohibit governments from abridging the freedom of speech or press which include a right to public access to trials. It utilized the “experience and logic” test in reaching its conclusion.

One judge concurred but limited his opinion to the confidentiality provision of the statute and rule in question and a second judge dissented.

The respective opinions contained some fascinating observations.

First, that a leading reason for the early use of arbitration in this country was “suspicion of law and lawyers.”

Secondly, there are many benefits of public access to disputes including promotion of the perception of fairness; a community therapeutic value, including an outlet for hostility and emotion; a check on corrupt practices; and enhanced performance of all involved. (The opinion suggested that corporate arbitration can effectively continue in the courts if public access is allowed).

Thirdly, the dissent offered the refreshing admission that the courts (in this case the Court of Chancery) need to effectively compete with new arbitration systems being set up in other states and countries. (I previously pointed out that A Wall Street Journal article on the controversy reported that “more than one quarter of Delaware’s revenue depends on taxes and fees from corporations,” and further reported a fear that “private arbitration was draining business from Delaware and rendering its courts irrelevant.”)

Despite the legal and public policy issues invoked in this case, it appears that competition is the real issue and that the court appears to be fighting to keep other tribunals — including private altrnative dispute resolution providers — from diminishing its market share.

While the decision is of critical importance to Delaware as it seeks to maintain and attract corporate presence there, it is of importance to other states as well. Courts are seeking to expand their “ADR product line” to more effectively compete with private ADR companies. In doing so, they must walk a fine line between offerings which are too timid and consequently not embraced by repeat users, particularly corporations, and those which are too aggressive and thus spawn legal challenges. The Delaware process certainly falls on the aggressive side of the line.

This decision is likely to receive widespread attention as a great deal is at stake. Some heavy hitters, including the U.S. Chamber of Commerce and the powerful Business Roundtable filed amicus briefs. The Chamber’s brief argues strongly for offering confidential arbitration in the public court setting as a way to escape the “trammels and expenses of drawn-out litigation.”

The Third Circuit case is worth following. Whatever further motions may be filed in that court, the case might very well end up in the U.S.Supreme Court.•