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"Sitting Judges As Arbitrators: The Delaware Experiment" by Brian Farkas



Sitting Judges as Arbitrators: The Delaware Experiment

by Brian Farkas

Introduction

With varying degrees of unease, scholars and practitioners have recently noted the convergence of arbitration and litigation. Thomas J. Stipanowich, Arbitration: The 'New Litigation', 2010 U. ILL. L. REV. 1 (2010). The increasing presence of binding arbitration provisions in virtually all kinds of contracts, along with the increasing willingness of courts to uphold such provisions, have made the two adjudicative processes ever more similar. "Once promoted as a means of avoiding the contention, cost, and expense of court trial," one scholar has noted, "binding arbitration is now described in similar terms--"judicialized," formal, costly, time-consuming, and subject to hardball advocacy." Id. at 2. Delaware, often considered the country's corporate capital, is seeking to blur the lines even further.

Over the past six months, a legal and ideological battle has been brewing over a controversial new arbitration practice in Delaware's Chancery Court. See Francis Pileggi, Status of Federal Suit Challenging Confidential Arbitration in Court of Chancery, Feb. 18, 2012, Delaware Corporate & Litigation Law. In April 2009, the Delaware legislature enacted a statute that allows sitting Chancery Court judges to hear and resolve confidential arbitrations. The law, entitled Arbitration Proceedings for Business Disputes, provides that the "Court of Chancery shall have the power to arbitrate business disputes when the parties request a member of the Court of Chancery, or such other person as may be authorized under rules of the Court, to arbitrate the dispute." 10 Del. C. §349.

On first blush, this new procedural possibility seems consistent with Delaware's past practices. The state has long been a leader in encouraging alternative dispute resolution, enacting a successful judge-run mediation system in 1996, which was expanded in 2006. See 10 Del. C. § 347 and Court Rules 93 to 95. But the controversy over this new arbitration scheme arises from the fact that, unlike normal commercial litigation, these proceedings are essentially held and decided in secret. Arbitrations typically go before lawyers, businesspeople or retired judges; Delaware is currently the only jurisdiction in the country where companies bring cases for arbitration before a sitting judge. See Joe Palazzolo, A Judge and an Arbitrator Too?, WALL ST. J., Feb. 21, 2012. Records or disputes and judgments are sealed, despite the fact that the judges are public employees.

In October 2011, the Delaware Coalition for Open Government Inc. ("DelCOG"), a nonprofit watchdog organization, sued the five judges on the state's Chancery Court to open the arbitration hearings to the public. See Steve Church, Delaware 'Secret' Court Violates Constitution, Federal Lawsuit Claims, BLOOMBERG NEWS, Oct. 25, 2011. This article will begin by exploring the 2009 Delaware law creating the arbitration program along with the subsequent 2010 court implementation rules. It will then analyze the merits of DelCOG's complaint, the reply brief of the defendants, and the amici filings on behalf of the plaintiffs. This outcome of this lawsuit could have important ramifications for the future of court-sponsored arbitration programs around the country

The Delaware Law

Before discussing the ongoing constitutional dispute, we will first consider the history, purpose and structure of the underlying legislation. Companies have long seen the tremendous value in arbitration to settle disputes with consumers and with other businesses. See, e.g., David Horton, Arbitration As Delegation, 86 N.Y.U. L. REV. 437 (2011). Arbitration can help companies avoid protracted, unpredictable and potentially embarrassing public trials. Id. at 444. The state of Delaware is acutely aware of the needs and concerns of the business community. See Lewis S. Black, Why Corporations Choose Delaware, DELAWARE DEP'T OF STATE DIV. OF CORPORATIONS (2007). Indeed, more than half of the corporations that make up the Fortune 500 are incorporated there. See Delaware Div. of Corporations, http://corp.delaware.gov (Accessed Mar. 10, 2007). Last year the state received about $750 million in franchise tax revenues, almost a quarter of Delaware's annual budget. Understandably, Delaware prides itself on having courts that are both knowledgeable and responsive to developing business needs.

Essentially, the regime developed by the legislature in April 2009 gives businesses incorporated (or having their principle place of business) in Delaware the opportunity to arbitrate in front of Court of Chancery judges. The appeal is to combine the expertise and predictability of the Chancery Court with the potential speed, cost savings and confidentiality of arbitrations. As stated in the "Synopsis" that accompanies the bill, Delaware's lawmakers believed the new law would "preserve Delaware's preeminence" in offering cost-effective methods for resolving commercial, corporate and technology disputes. 10 Del. C. §348, Synopsis. Moreover, the price of this service is relatively reasonable compared to most private arbitrations; the filing fee is $12,000, to be equally divided by the parties, and an additional $6,000 for each day beyond the first, also to be equally divided by the parties. See Del. Court Rule 95(c).

The law itself, 10 Del. C. §349(a), gives the Court of Chancery "the power to arbitrate business disputes when the parties request a member of the Court of Chancery, or such other person as may be authorized under rules of the Court, to arbitrate a dispute." 10 Del. C. §349(a). It is §349(b) that has caused the controversy: "Arbitration proceedings shall be considered confidential and not of public record until such time, if any, as the proceedings are the subject of an appeal. In the case of an appeal, the record shall be filed by the parties with the Supreme Court in accordance with its rules, and to the extent applicable, the rules of the Court of Chancery." 10 Del. C. §349(b). The bill also permits the parties to agree in advance that any adjudication in an arbitration proceeding be final and non-appealable. 10 Del. C. §349(c)(4).

Just as the Court of Chancery promulgated rules to govern the operation of its mediation program in 2006, the Court adopted Rules 95, 96, 97, and 98 in January 2010. These Rules spell out the specific procedures by which parties can have their commercial disputes resolved by judges. Four basic requirements must be satisfied for a given dispute to be arbitrated under the Court of Chancery's new rules. First, all parties must consent to arbitration by agreement or stipulation. Court Rule 95(a). Second, at least one of the parties must be a business entity. Court Rule 96(a). Third, at least one party must be a business entity formed or organized under the laws of Delaware (or have its principal place of business in Delaware). Court Rule 97(c). And fourth, for cases seeking only monetary damages, the rules also require that the amount in controversy must exceed $1,000,000. Court Rule 98(c).

The DelCOG Lawsuit and its Claims

The Delaware Coalition for Open Government's complaint was filed on October 25, 2011 in the federal district court in Delaware. DelCOG essentially makes a facial challenge to the constitutionality of 10 Del. C. § 349 and Court of Chancery Rules 95, 96, 97, and 98, naming the Chancery Court judges as defendants. DelCOG highlights a number of problems with the arbitration scheme, largely centered on the total lack of public access. The group contends the defendants' actions, "under color of State law, constitute an unlawful deprivation of the public's right of access to trials in violation of the First Amendment as applied to the states by the Fourteenth Amendment to the United States Constitution." See Delaware Coal. for Open Gov't v. The Hon. Leo E. Strine Jr., et al., 2011 WL 5042086 (D.Del. 2011).

Citizens cannot determine which companies are in dispute, the subject of the dispute, the result of the dispute, or even how many disputes are being arbitrated before the publicly funded court. "Although the statute and rules call the procedure arbitration," the complaint continues, "it is really litigation under another name. Although procedure may vary slightly, the parties still examine witnesses before and present evidence to the Arbitrator (a sitting judge), who makes findings of fact, interprets the applicable law and applies the law to the facts, and then awards relief that may be enforced as any other court judgment." Id. at *14. The only difference from standard litigation, DelCOG contends, is that now these "procedures and rulings occur behind closed doors instead of in open court." Id. at *22. The complaint asks the federal court to declare 10 Del. C. §349 and Chancery Court Rules unconstitutional, enjoin the defendant judges from conducting any non-public proceedings under the scheme. DelCOG also asks the court to order the Court of Chancery to unseal all sealed documents filed under the scheme so far. Id. at *3.

In their Combined Reply Brief In Support Of Their Motion For Judgment On The Pleadings, the defendants argue strongly against DelCOG's analysis of the legislation. See Delaware Coal. for Open Gov't v. The Hon. Leo E. Strine Jr., et al, Defendants' Opening Brief in Support of Their Motion for Judgment on the Pleadings, 2011 WL 6401166 (D.Del.). They begin with a policy argument to counter the compelling argument for public access put forth by DelCOG: the commercial disputes that the plaintiff seek to make public would likely never become public anyway, the defendants argue. "Privacy is a well-recognized value in commercial dispute resolution, and parties who wish to arbitrate their disputes privately [will] choose other arbitral fora to do so," the brief contends. "The only certain effect of requiring public access would be to deprive Delaware entities and their contractual counter-parties of a uniquely attractive domestic forum for the private arbitration of high-stakes commercial disputes." Id. at *5. In other words, the parties who seek commercial arbitration in front of the Chancery Court are not choosing between litigation and court-sponsored arbitration. Their next best alternative would simply be private arbitration--even further removed from the public eye. Thus, there can be no public benefit from public access to a proceeding that is never utilized.

Beyond that policy argument, the defendants claim that DelCOG has faultily assumed that arbitration "is the functional equivalent of a civil trial." Id. at *7. In fact, they argue the confidential character of the proceedings in question is "consistent with the long history of arbitration, including federal court-sponsored arbitration pursuant to the Alternative Dispute Resolution Act of 1998." Id. at *8. In Capital Cities Media, Inc. v. Chester, , the United States Supreme Court noted that, in considering public access, the history of the proceeding should weigh heavily -- "whether the particular type of government proceeding had historically been open in our free society" and when the government may "close government proceedings which historically have been open." 797 F.2d 1164 (3d Cir. 1986). The Third Circuit applied this same analysis in N. Jersey Media Group v. Ashcroft, a case considering deportation hearings, noting that the operative question is "whether the place and process have historically been open to the press and general public." 308 F.3d 198, 206 (3d Cir. 2002).

If commercial arbitrations are not historically open to the public, then the Delaware scheme merely continues that status quo. In short, a First Amendment right of public access will "not attach in situations where public access defeats the purpose of the proceeding." For example, in the case of In re Boston Herald, Inc., the First Circuit noted that "a strict disclosure requirement could well discourage eligible defendants from availing themselves of their right to counsel by forcing them to choose between privacy and [Criminal Justice Act] assistance." 321 F.3d 174, 188 (1st Cir. 2003). Similarly, in United States v. Gonzales, the court held that "Without an assurance that the information revealed at CJA hearings and in documents submitted to the court will not be disclosed, a defendant and his or her counsel would be discouraged from fully disclosing the information to the court." 150 F.3d 1246, 1259 (10th Cir. 1998). And finally, in Cincinnati Enquirer v. Cincinnati Bd. of Educ., the court commented that "[a]llowing public access to resumes of candidates could very reasonably cause many candidates to withhold their applications or even harm unsuccessful candidates who apply." 249 F. Supp. 2d 911, 917 (S.D. Ohio 2003). The defendants argue that no court has ever held that "public access is socially beneficial even if it means that participation in the newly open process is greatly diminished, if not non-existent." Id. at 922. Doing so would essentially ignore legislative judgment, they assert, in favor of a judicially-created mandate that might harm public policy.

Along those same lines, DelCOG's brief ignores the fact that government officials across the country already conduct arbitrations. Under the Alternative Dispute Resolution Act of 1998, all arbitrators (including court attorneys and magistrate judges) are empowered to conduct arbitration hearings, administer oaths and affirmations and make awards. See 28 U.S.C. § 655(a). They are given the authority to "perform quasi-judicial functions and are entitled to the immunities and protections that the law accords to persons serving in such capacity." 28 U.S.C. § 655(c). The doctrine of arbitral immunity "rests on the notion that arbitrators acting within their quasi-judicial duties are the functional equivalent of judges and, as such, should be afforded similar protection." See Pfannenstiel v. Merrill Lynch, Pierce, Fenner & Smith, 477 F.3d 1155, 1158 (10th Cir. 2007). Thus, the defendants point out that non-public governmental arbitration proceedings are already common and have been for some time. (A written agreement to arbitrate in the Court of Chancery triggers the applicability of the Federal Arbitration Act). The only difference under the Delaware scheme is that the government employee filling the role of arbitrator happens to be a sitting state judge.

Amici curiae Support for DelCOG

Beyond DelCOG, many public watchdogs and journalists have taken notice of this suit. The Reporters Committee for Freedom of the Press, New York Times, Washington Post, Associated Press, and American Society of News Editors and Maryland D.C. Delaware Broadcasters Association jointly submitted an amici curiae brief on behalf of the plaintiffs. These groups claim to have "a strong interest in upholding the public's right to access, monitor and report on the proceedings of this nation's court system." The brief argues that: "Parties concerned about the confidentiality of information... related to private arbitration do not have to consent to the jurisdiction of the Chancery Court. But when they do invoke the authority of a publicly funded court, the rules governing confidentiality change, and a presumption in favor of openness attaches to the records at issue."

This policy argument has been given support by courts, including the United States Supreme Court. In Nixon v. Warner Commc'ns, Inc., the Court agreed that "It is clear that the courts of this country recognize a general right to inspect and copy public records and documents, including judicial records and documents." 435 U.S. 589, 597 (1978). There should be, the majority noted, a "presumption . . . in favor of public access to judicial records." Id. at 602. When parties seek to restrict access and seal the records of a dispute, courts have held that they must establish the "compelling need for secrecy and demonstrating that alternatives to sealing the record are inadequate." See Press-Enterprise Co. v. Superior Court, 464 U.S. 501, 510 (1984). The Chancery Court's rules allow for a blanket sealing of records without any showing of a compelling need for secrecy. This seems to fail the common law presumption in favor of openness.

The amici brief points out that many courts have resisted efforts to keep court filings out of the public view. In a sua sponte challenge to parties' agreement to seal the entire docket sheet relating to their private arbitration, a U.S. District Court in Pennsylvania rejected the very argument advanced by the Chancery Court in this matter: that neither the "confidentiality procedures of the American Arbitration Association [nor] the federal policy of encouraging arbitration trump the clear law and policy standards established by the United States Supreme Court and the Court of Appeals for the Third Circuit for maintaining open and accessible records of legal matters for public scrutiny." Zurich Am. Ins. Co. v. Rite Aid Corp., 345 F. Supp. 2d 497, 507 n.3. (E.D. Pa. 2004).

As journalists, the amici note that "Settlement agreements often reveal serious questions about health, safety and other important [public] issues." As such, "there is a significant public interest in disclosure of the information in order to alert consumers to potential dangers posed by products and services they use." The public's interest in monitoring courts' conduct is compelling, particularly with regard to private settlement agreements submitted to a court for approval or enforcement.

For example, the brief points to three historical instances where sealed court documents impeded effective reporting. In 1999, sealed court documents prevented journalists from reporting on rollover deaths in Ford Explorers equipped with faulty Firestone tires. See Matthew L. Wald & Keith Bradsher, Judge Tells Firestone to Release Technical Data on Tires, N.Y. TIMES, Sept. 28, 2000, at C2. A 2002 Pulitzer Prize-winning investigative report by The Boston Globe revealed that the Archdiocese of Boston confidentially settled child molestation claims against at least 70 priests over the preceding 10 years and thus shielded from public view the scope of the relatively unknown issue. See Matt Carroll et al., Scores of Priests Involved in Sex Abuse Cases: Settlements Kept Scope of Issue out of Public Eye, BOS. GLOBE, Jan. 31, 2002, at A1. A Seattle woman sued two local laboratories in 1991, claiming they misread her Pap smears and failed to diagnose her cervical cancer. Such misdiagnoses were common at the two labs in question, but secret court settlements had hidden the extent of the problem. Barry Siegel, Dilemmas of Settling in Secret, L.A. TIMES, Apr. 5, 1991, at A1. In short, where private settlement agreements are subject to court supervision, these journalistic organizations argue that strong public interest weighs against sealed court documents.

The amici brief concludes with a quote from Judge Frank Easterbrook of the U.S. Court of Appeals for the Seventh Circuit: "Judicial proceedings are public rather than private property... What happens in the halls of government is presumptively public business. Any step that withdraws an element of the judicial process from public view makes the ensuing decision look more like fiat." See Union Oil Co. v. Leavell, 220 F.3d 562, 568 (7th Cir. 2000).

Conclusions

The DelCOG suit has launched an important debate about the proper role of judges in conducting private arbitrations. As mediation and arbitration become increasingly ingrained methods of commercial dispute resolution, perhaps it makes some sense for commercial courts to offer these solutions to businesses. See Demetrios G. Kaouris, Is Delaware Still A Haven for Incorporation?, 20 DEL. J. CORP. L. 965, 969 (1995) (noting that Delaware must constantly innovate its corporate policies in order to retain its "crown" as a center for commercial incorporation and litigation). Indeed, as most civil attorneys can attest, court systems already facilitate private negotiations between disputing parties--albeit in a less formalized scheme than Delaware. See Edward F. Sherman, The Impact on Litigation Strategy of Integrating Alternative Dispute Resolution into the Pretrial Process, 15 REV. LITIG. 503 (1996). Law clerks, court attorneys, and civil judges routinely meet with attorneys to work out settlements. Id. at 508. While those meetings are not binding (and occur in the course of ongoing public litigation), they are usually held in back offices or judicial chambers, reaching resolutions outside of the public eye. Perhaps Delaware is unusual in the extent to which it is developing and formalizing this service, making it available wholly independent from litigation. But the defendants in this case make a policy claim that courts should be permitted to experiment with new methods of adjudicating disputes.

On the other hand, while Delaware's aim in providing these arbitral services is clear, not everyone agrees that the program will serve the state in the long run. Brian J.M. Quinn, an assistant professor at Boston College Law School, has argued in the Wall Street Journal that "Delaware's legal 'product,' what it has to 'sell' corporations, is a body of business law that has been forged in public view and is refined and certain." Quinn notes that one of the primary reasons companies incorporate in Delaware is the predictability and openness of the Chancery Court system. "Once that body of law starts developing in the dark, that product will degrade. I understand why Delaware is doing this, [but] over the long term, they may wish they hadn't."

Regardless of whether this new arbitration program attracts more businesses to Delaware or dilutes the state's core appeal, the core legal question remains: Should public judges be able to act as arbitrators of confidential proceedings? That will be up to U.S. District Judge Mary McLaughlin of Middle Pennsylvania, who heard arguments in the case on February 12 after the Delaware federal court recused itself from the matter. The decision, expected in the late spring, will likely set an important precedent for other states considering court-based arbitration programs.

Although the oral arguments failed to reveal the court's disposition towards the case, there might be room for a reasonable compromise. Perhaps the Chancery Court could release merely the names of the parties, or even just the underlying issues in their arbitral cases, without divulging the outcome (or transcripts) of the individual arbitrations. Justice Brandeis famously wrote that "It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments." New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (Brandeis, J., dissenting). Though Brandeis was referring to Oklahoma's particular licensing scheme for ice manufacturing in the 1930s, the same could be said of Delaware's new arbitration program. Given the state's unique history of innovation in dealing with commercial disputes, perhaps some compromise could be reached to allow this arbitration program to procedure while still addressing the legitimate concerns of the public about access to information.


Brian Farkas is a second-year student at the Benjamin N. Cardozo School of Law in New York City, focusing in Intellectual Property and Information Law. He is Editor-in-Chief of Cardozo's Journal of Conflict Resolution. A graduate of Vassar College, Brian writes regularly for The Law Student Connection on issues of Intellectual Property, Media Law and Dispute Resolution.

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This page contains a single entry from the blog posted on May 16, 2012 1:54 PM.

The previous post in this blog was "No Going Back: Why The Secular Marriage Model Must Resist The Call To Assimilate Religious Divorce Law" by Marcus Almond.

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