Friday November 21, 2014

Chancellors Appeal Fed Court Ruling on Transparency in Arbitration

The decision by U.S. District Court Judge Mary McLaughlin dealt a blow to both the Chancery Court and the corporations that make Delaware their legal residence.

Chancellors of the Delaware Court of Chancery have appealed a recent decision that declared unconstitutional a state rule allowing Court of Chancery judges to preside over secret arbitrations in business disputes. The decision—by U.S. District Court Judge Mary McLaughlin in Delaware Coalition for Open Government v. Hon. Leo E. Strine Jr. et al.—dealt a blow to both the Chancery Court and the corporations that make Delaware their legal residence. The chancellors are asking the 3rd U.S. Circuit Court of Appeals to reinstate the private arbitration process.

Delaware Court of Chancery 

The Chancery Court started its arbitration program in 2009 to allow sitting judges to mediate business disputes behind closed doors provided the damages being sought exceeded $1 million. There would be no public record of the proceedings, which McLaughlin ruled was comparable to a civil trial. McLaughlin wrote: “In Delaware, the judge and arbitrator are the same, so the judge’s final award results in a judgment enforced by state power. …These orders, and the final arbitration award and judgment, bind the parties much as any court orders would. They are nearly identical to a judge’s orders in a civil trial, but with one important difference. …[T]he judge [sitting as arbitrator] does not publish his rulings or reasoning. The public does not know the factual findings the judge has made or what legal rules the judge is, or should be, applying to these arbitrations.”

The judicial arbitration program was put in place to both expedite and ease the cost of litigation, benefiting shareholders and corporations. It would also help pull in some money to the state. The cost of the arbitration was a $12,000 filing fee and a daily $6,000 service fee. There have been six arbitrations.

Chancellor William B. Chandler III, who headed the court when the program began, says it had distinct benefits. “The use of experienced jurists knowledgeable in the world of corporate and contract disputes, the speed of the program, the reduced costs and the right to appeal made the Chancery program an attractive alternative to the private arbitration system,” he says.

Roger A. Lane, a partner with Foley & Lardner, says it’s difficult to draw firm conclusions on the effectiveness of the Chancery Court program based on the small number of arbitrations filed and the steps necessary that precede a filing.

“I believe, based on anecdotal information, that a good number of corporate practitioners were seriously considering doing so and discussing the issue with their clients,” Lane says. “My sense is that a lot of people wanted somebody else to ‘go first’ and report back anecdotally on the experience, which was starting to happen when the ruling came down invalidating the program.”
In addition, attorneys representing the chancellors argued that privacy is an essential benefit to arbitration and pointed to similarities between the Chancery Court program and secret proceedings offered to business plaintiffs in some overseas courts.

While there may be similarities to other private arbitration proceedings, Chandler, now a partner at Wilson Sonsini, says the arbitration program is quite different from a regular civil trial. “Chancery’s arbitration program was designed according to the model of private arbitration proceedings, which stand in pretty stark contrast to ordinary civil trials in terms of procedural requirements, extensive discovery, motion practice and so forth,” he explains. “The benefits to the program would require a period of experimentation under it, but the fact that so many entities were drafting agreements with the Delaware arbitration program as the ‘default’ in the event of a breach or dispute under the agreement is abundant proof of the attractiveness and benefits of the program.”

If the ruling stands, other ADR forums may have the opportunity to seek out former Court of Chancery judges to join their panels. However, Lane notes, there are a limited number of former justices to draw on.  “One can anticipate that the other (Alternative Dispute Resolution) ADR forums will often be in competition with law firms for that same talent and may find it difficult to compete,” he explains. “In fact, this was one of the reasons why practitioners thought the program, using active judges, could provide unique or near-unique advantages over other ADR forums.”

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