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 them down.

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 arbitration market.

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 expected demand.

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 Amendment.

"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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