Delaware attorneys this week took aim at a new report from a study group backed by the U.S. Chamber of Commerce that showed Delaware losing its long-held status as the best climate for handling corporate lawsuits, rejecting assertions that the state was losing favor with businesses.
In interviews, attorneys and a top state official scoffed at the notion that Delaware’s adoption of 2015 legislation banning fee-shifting provisions in corporate bylaws had damaged its reputation in the legal community.
“When you read this study, you find that none of the questions asked addressed the well-known strengths of the Delaware court system: promptly and reliably resolving complex corporate and commercial disputes with a high degree of predictability and unquestioned integrity,” Gregory V. Varallo, president of Richards, Layton & Finger, said in an email.
The Chamber’s Institute for Legal Reform earlier in the week had blamed the legislative changes for contributing to a souring in attitudes among some of the general counsel, senior attorneys and other executives at major companies who were asked to rank the fairness of states’ lawsuit environments across 10 categories.
According to the survey, Delaware had relinquished the top spot for the first time in 15 years, falling to 11th thanks to big drops in proportional discovery, overall treatment of tort and contract litigation and damages. Meanwhile, the ILR said, other states had passed Delaware in passing reforms on issues like joint-and-several liability and damages.
“Delaware no longer lives up to its nickname as the ‘First State,’” ILR president Lisa A. Rickard said in a statement. “As the competition between states to enact legal reforms gets tighter, Delaware is losing ground.”
According to Bryan Quigley, senior vice president of communications for the ILR, the fee-shifting ban was of particular concern to companies, which complained that the General Assembly essentially overruled the state Supreme Court after the justices OK’d the so-called “loser pays” provisions for nonstock corporations.
Lawmakers, acting on the recommendation of the Delaware State Bar Association, passed the legislation amid fear that the same conditions would be imposed on stock corporations.
The Chamber aggressively opposed the measure at the time. However, the 2015 survey had already been conducted, and representatives warned that backlash from firms would be felt in the 2017 results.
“I don’t think the fallout from that was really baked into the 2015 survey,” Quigley said in an interview.
“I think this is a wake-up call, and I think Delaware should take this seriously.”
But Delaware sources this week rejected the ILR’s interpretation, arguing that the new law had no effect on the number of companies that choose to incorporate in Delaware.
“That’s irrational,” said Francis G.X. Pileggi, vice chair of commercial litigation at Eckert Seamans Cherin & Mellott. “I don’t think that’s a principled basis to make such a dramatic shift in the rankings. It seems vindictive to me.”
Jeffrey W. Bullock, Delaware’s secretary of state, said in a statement that the state continued to play an outsize role in the nation’s corporate legal system and shrugged off the suggestion that Delaware’s reputation was in jeopardy.
“Delaware’s reputation often puts our state in the crosshairs of high-profile criticism as well, which our policymakers and legal professionals welcome and accept,” Bullock said.
“The Delaware franchise has never been stronger. In Delaware, we value results—not just ratings.”
In fact, according to numbers provided by the Department of State, the number of active corporations in Delaware increased by 7,226 or nearly 2.5 percent to a total of 298,025 in the year after the fee-shifting measure was signed into law by former Gov. Jack Markell.
Matthew J. O’Toole and P. Clarkson Collins Jr., the attorneys who chair the DSBA council tasked with drafting legislative changes to Delaware’s General Corporation Law, did not comment for this story. A request sent to the Carney administration was forwarded to the State Department.
Still, Delaware’s overall score fell just 2.5 points behind South Dakota, which finished No. 1 in the rankings, and Quigley noted that the Delaware Court of Chancery remained highly respected among respondents.
But the perceived impartiality of Delaware’s judges slipped from No. 2 in 2015 to 15th this year, but the biggest drop-off came in the area of treatment of class actions and mass consolidations, where the state fell from first overall to 26th in 2017.
In a statement, Varallo dug into the methodology of the survey. He noted that two of the questions had been changed for this survey and said that results could not be meaningfully compared to years prior. Also, he said, only 108 evaluations out of the 1,321 fielded by the ILR were given for Delaware.
“Put differently, only 8 percent of the survey participants even had a view on the Delaware court system. In addition, the reported margin of error (plus or minus 2.8 percentage points) is more than the difference between Delaware’s ranking and the ranking provided to the highest scoring state,” he said.
“For my clients, the Delaware court system remains the place to be.”