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Delaware Judges Can’t Do Secret Arbitrations, Court Rules

Delaware’s Chancery Court, the country’s leading venue for securities litigation, can’t be used for secret arbitration proceedings in business disputes, a federal appeals court ruled.

The arbitration program set up by the state, which allowed publicly funded judges to make decisions behind closed doors on business cases, violates the public’s constitutional right to access to the courts, the U.S. Court of Appeals in Philadelphia said today in a 2-1 decision.

“Logic weighs in favor of granting access to Delaware’s government-sponsored arbitration proceedings,” the appeals court said. “It would ensure accountability and allow the public to maintain faith in the Delaware judicial system.”

The decision voids a program Delaware established in 2009 with the objective of bringing more work to its judges in cases where more than $1 million is at stake. Delaware is the corporate home to more than half of the publicly traded companies in the U.S. and 63 percent of Fortune 500 companies, state officials say.

Delaware Chancery Court’s Chief Judge Leo Strine “is not commenting,” Ramona Monsen, a member of the court’s staff, said after the decision was made public.

Conventional Trials

More than a year ago, U.S. District Judge Mary A. McLaughlin in Philadelphia ruled that Delaware’s secret arbitration proceedings were similar enough to conventional civil trials that the secret proceedings violated the public’s right of public access to the courts under the First Amendment of the U.S. Constitution.

The Delaware Coalition for Open Government, a citizen watchdog group, challenged the use of “state-empowered judges” to hear evidence and hand down decisions in secret. Media outlets including the New York Times (NYT), Associated Press and Bloomberg News filed court papers supporting the challenge.

Lawyers for Delaware’s judges countered that arbitrations weren’t comparable to civil trials and allowed lower-cost and faster adjudication of disputes.

While the appeals court disagreed with McLaughlin that the hearings are tantamount to civil trials, it ruled open access is required because both “the place and process” of the proceeding has historically been available to the press and public.

‘Democratic Society’

“The right of access to government-sponsored arbitrations is deeply rooted in the way the judiciary functions in a democratic society,” Circuit Judge Dolores Sloviter wrote for the majority.

Circuit Judge Jane Roth, a Delaware resident, dissented, saying, “historically, arbitration has been private and confidential,” and resolution of complex business disputes involving sensitive data “needs to be confidential” to prevent access by competitors.

The non-jury Delaware Chancery Court, founded in 1792, is known for providing fast-track trials on complex business disputes heard by sophisticated judges. It traces its history to decision-making by the British kings’ chancellors.

Under the program, arbitrations aren’t included on public court dockets and remain confidential unless they’re the subject of an appeal.

Chancery officials charge a $12,000 arbitration filing fee and an additional $6,000 charge for each day a judge works on the matter, according to court filings.

First Challenge

The state’s arbitration push went unnoticed until Skyworks Solutions Inc. (SWKS), a semiconductor maker, filed to arbitrate a dispute in Delaware in 2011 over a $260 million acquisition of rival Advanced Analogic Technologies Inc. The requests became public through the companies’ filings with the U.S. Securities and Exchange Commission, prompting the Delaware coalition to challenge the program.

Business groups, including the Nasdaq Stock Market and New York Stock Exchange, urged the court to maintain the closed arbitration process, saying companies should be allowed to resolve their disputes in private as long as all sides agree.

The case is Delaware Coalition for Open Government Inc. v. Strine, 12-3859, U.S. Court of Appeals for the Third Circuit (Philadelphia). The lower court case is Delaware Coalition for Open Government Inc. v. Strine, 11-cv-01015, U.S. District Court, District of Delaware (Wilmington).

To contact the reporters on this story: Sophia Pearson in federal court in Philadelphia at spearson3@bloomberg.net; Phil Milford in Wilmington, Delaware, at pmilford@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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