By Tom Hals
The five judges of Delaware's Court of Chancery have delivered
their verdict on a federal judge: She blew it when she ruled
their secret arbitration hearings were unconstitutional and shut
That was the conclusion of Chancellor Leo Strine and his
colleagues in their new, unfamiliar role: appellants to the 3rd
U.S. Circuit Court of Appeals. Their brief was filed on Tuesday.
The judges are defendants in a lawsuit that accuses them of
violating the U.S. Constitution by conducting secret arbitration
hearings in business disputes. These proceedings -- which allow
parties to arbitrate before sitting judges without the public
being allowed in -- were ushered in three years ago through a
state law designed to help the court get a slice of the booming
It hasn't escaped the Court of Chancery's notice that
foreign companies are pretty shy about litigating in American
courts, and to many boosters this system seemed like a great way
to address that. The Chancery proceedings, which only can be
used in disputes with at least $1 million at stake and that
involve at least one party incorporated in Delaware, offered
more than just secrecy. The parties got the added support of a
sitting judge rather than another type of arbitrator to preside.
These Chancery-run arbitrations also promised speed -- final
hearings in 90 days.
The arbitrations got off to a slow start, with only a
handful of proceedings taking place. In August, nevertheless,
the Chancery judges felt the sting of U.S. District Judge Mary
McLauglin, who, in the federal court for the Eastern District of
Pennsylvania, sided with the Delaware Coalition for Open Government, an advocate for government transparency. McLaughlin,
who sits in Philadelphia, found that the novel experiment by
Strine and his colleagues to have an arbitration before a
sitting judge in his courtroom was a First Amendment no-no.
That came as quite a blow to many members of Delaware's
legal community, who saw the arbitrations as a potential game
changer that would launch a new era of growth, just as changes
to the state's laws governing banking and limited liability
companies had done in previous decades. Some proponents conjured
images of a Court of Chancery with 10 or more judges to meet the
The Chancery judges' appellate brief lays out that argument.
"Delaware's ability to maintain those revenue streams depends on
its ability to continue to provide a cutting-edge, stable, and
respected legal environment," said the 69-page appeal.
Rescuing the arbitrations falls to Andrew Pincus of Mayer
Brown's Washington office, who filed the judges' brief. Pincus
is an appellate heavyweight, and most notably won the AT&T
Mobility v. Concepcion case before the U.S. Supreme Court, which
overturned a lower court decision and effectively allowed
consumer contracts to enforce arbitration over class actions.
The district court case in Pennsylvania had been handled by
Andre Bouchard and Joel Friedlander of Bouchard, Margules and
Friedlander of Wilmington, and Larry Hamermesh, a professor at
the Widener University School of Law in Wilmington. Their names
also appear on the appeal, but Delaware Governor Jack Markell's
office said that additional counsel was sought to address the
issues in the latest case, and Pincus was selected after
considering various options. Pincus is being paid by the state.
The Chancery brief asserts that McLaughlin failed to apply
the "experience and logic" test when she decided the secret
arbitrations were unconstitutional. Basically, the test says
that if a proceeding like arbitration is traditionally closed to
the public -- that's the experience part -- and if maintaining
that logically promotes a better proceeding, it need not be
public. Courts have applied the test to find that judicial
disciplinary hearings, deportation hearings and family law
proceedings do not have to be open, according to the brief.
In contrast, McLaughlin did a sort of "if it walks like a
duck" test. She determined that what Strine and the vice
chancellors were doing might be called arbitration but was
actually a civil trial. Because there is a well-established
right to public access at civil trials, she said, she didn't
even need to dive deeper to find a violation of the First
"If the district court had applied the experience and logic
test, it could have reached only one conclusion -- there is no
First Amendment access right to the arbitration proceedings
themselves," said the appeal.
The Delaware open government group's brief is due in 30
days. The coalition is represented by David Finger of Finger &
Slanina of Wilmington, according to court records.
In their brief, as it happens, the Chancery judges also give
a short history through the ages of arbitration, which
apparently dates back to 12th Century England, and all of it was
cl o sed to the public.
Some of those arbitrations took place before sitting judges
in foreign countries, and now the 3rd Circuit has to decide if
the same should happen in Delaware.
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