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Experience and Logic?: The Strine Decision

The Strine Decision

On October 23, 2013, the Third Circuit Court of Appeals declared the Delaware Chancery Court’s arbitration system unconstitutional. ((Delaware Coalition for Open Government, Inc. v. Strine, et al., 12-3859, 2013 WL 5737309 (3d Cir. Oct. 23, 2013).)) The arbitration system at issue was codified in the Delaware Code ((10 Del. Code Ann. Tit. 10, § 349 (2009).)) as well as the Rules of the Delaware Court of Chancery. ((Del. Ch. R. 96-98.)) Delaware’s program, established in 2009 ((Sophia Pearson and Phil Milford, Delaware Judges Can’t Do Secret Arbitrations, Court Rules, Bloomberg (Oct. 23, 2013), available at http://www.bloomberg.com/news/2013-10-23/delaware-judges-can-t-do-secret-arbitrations-court-rules.html.)) provided for arbitration by a Delaware chancery judge and closed to the public in cases involving at least one corporate entity and an amount in controversy of at least one million dollars. ((Strine, 2013 WL 5737309, *1.)) These so-called “secret arbitrations” proved problematic because they were “conducted in a Delaware courthouse during normal business hours” but were closed to the public. ((Id.)) Ultimately, the Third Circuit found that the Chancery Court’s arbitration system violated the First Amendment right of public access to trials, which applies to civil, as well as criminal, trials and some of their proceedings. ((Id. at *2 (citing Richmond Newspapers, Inc. v. Virginia, 448 U.S. 555, 575; Publicker Indus., Inc. v. Cohen, 733 F.2d 1059 (3d Cir. 1984) ).))

The Strine court determined that the Delaware Chancery Court arbitration proceedings should be open to the public under the “experience and logic test,” both prongs of which weighed in favor of the right of public access to the arbitrations as set up by the Delaware Chancery Court. ((Id.))

Judge Roth’s Dissent and Possible Appeal

Judge Roth’s dissent argues that Delaware’s arbitration system is, in fact, constitutional. She focuses on the arbitration’s importance to Delaware as a corporate home and the role of arbitration in corporate litigation rather than the constitutional issues. Judge Roth goes so far as to suggest that Delaware Chancery Court’s system “creates a perfect model for commercial arbitration.” ((Id. at 4 (Roth, J., dissenting.) )) She applies the experience and logic test strictly to arbitrations (rather than looking at arbitrations as well as civil trials), which she argues have traditionally been confidential and closed to the public.

Delaware is considering an appeal and may rely on the Judge Roth’s argument that the experience and logic test should apply to Delaware’s system as a system of arbitration rather than civil proceeding and would likely emphasize Judge Roth’s determination that arbitrations have traditionally been private. ((Steven M. Davidoff, Appeals Court Throws Out Confidential Arbitration in Delaware, DealBook (Oct. 23, 2013), available at http://dealbook.nytimes.com/2013/10/23/appeals-court-throws-out-confidential-arbitration-in-delaware/; Martha Neil, 3rd Circuit says Delaware Chancery Court’s secret arbitration program trials violated 1st Amendment, ABA Journal (Oct. 23, 2013), available at http://www.abajournal.com/news/article/3rd_circuit_says_delaware_chancery_courts_secret_trials_violated_1st_amendm/.))

Public Opinion and Possible (Constitutional) Alternatives

Many agreeing with the Delaware Coalition for Open Government’s position will likely declare the Strine decision a victory, because it prevents corporate litigants from being “able to cloak the judicial process with an arbitration veneer in order to buy premium treatment behind a wall of secrecy.” ((Paul Kirgis, Third Circuit Rejects Delaware Chancery Arbitration Scheme, ADR Prof Blog (Oct. 24, 2013), available at http://www.indisputably.org/?p=5118.)) Others, however, may not be as satisfied if they take issue not only the secrecy of the system, but also with corporate entities’ ability to “buy premium treatment.”  Litigants meeting the system’s requirement can pay (a $12,000 filing fee plus $6,000 for every day after the first day) for a chancery court judge to adjudicate their claim without the confines of the law, the Federal Rules of Civil Procedure, or the limited remedies otherwise available in court. But litigants who fall outside of the arbitration system requirements, primarily customers and, in the case of public corporations, shareholders, are left with vastly more expensive, lengthy, and public courtroom litigation, limited by procedure and remedy. ((Steven M. Davidoff, The Life and Death of Delaware’s Arbitration Experiment, DealBook (Aug. 31, 2012), available at http://dealbook.nytimes.com/2012/08/31/the-life-and-death-of-delawares-arbitration-experiment/.)) Thus, opponents of the now-unconstitutional system may argue against arbitrations run by the Chancery Court itself, especially in the courthouse during normal business hours. As a result, although members of the court may be ideal arbitrators with the requisite expertise to resolve corporate disputes outside the formal judicial system, an easy fix would be for the Chancery Court to develop an external system in which non-chancery court judges serve as arbitrators. As Judge Sloviter’s majority opinion acknowledges, the Delaware Coalition for Open Government only challenged arbitration by a member of the court. ((Strine, 2013 WL 5737309, *1 n.1.))

However, Judge Fuentes’s concurring opinion argues that Delaware’s system is not unconstitutional “because of any problem otherwise inherent in a Judge-run arbitration scheme,” and, as a result, argues that “[n]othing in today’s decision should be construed to prevent sitting Judges of the Court of Chancery from engaging in arbitrations without those confidentiality provisions.” ((Id. at *12 (Fuentes, J. concurring).)) If, as Judge Fuentes suggests, the element of privacy alone makes the Delaware system unconstitutional, the remaining components, including the role of the chancery court judges, may be perfectly acceptable through a constitutional lens. ((Id. at *11, (Fuentes, J. concurring).)) And, consequently, there may be significant room for the Delaware Chancery Court to continue to experiment with and develop a broader range of constitutionally acceptable arbitration systems, even if the public is uneasy about their implications for litigation on the rest of the Chancery Court’s docket. Thus, it remains unclear if the Third Circuit and perhaps even the same panel would uphold another system which addressed at least Judge Fuentes’s concern about secrecy but did not address other potential problems, constitutional or otherwise, such the involvement of the Chancery Court and its judicial officers.

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Marcy Blattner

Vol. 3 Associate Editor