By Tom Hals
WILMINGTON, Del., Sept 10 (Reuters) - Advocates of a novel
private arbitration system in Delaware that was shot down by a
federal court aren't giving up. They are mounting an appeal
while also looking at ways to revamp the program so it passes
Delaware enacted the system, believed to be the only
arbitration program in the nation in which sitting judges act as
private arbitrators, to bring more legal business to the state.
But U.S. District Judge Mary McLaughlin in Philadelphia put a
stop to the arbitrations, ruling on Aug. 30 that the proceedings
were essentially civil trials and that conducting them behind
closed doors violated the First Amendment guarantee of public
access to government proceedings.
Many Delaware lawyers saw the arbitrations as a potential
source of new business as well as a way for the state's legal
industry to head off competition from alternate dispute forums
in New York and overseas. Arbitrating big disputes such as joint
venture disagreements has become particularly popular with
non-U.S. businesses because it can resolve them quickly and out
of the public eye.
Members of Delaware's bar argued that their system adopted
the best features of existing arbitration programs -- quick
hearings with customized procedures -- along with a big local
advantage: the Court of Chancery's five judges would act as
The litigation challenging the arbitrations was brought by
the Delaware Coalition for Open Government, which argued that
the public has a right to access proceedings that are overseen
by judges on the public payroll. Judge McLaughlin agreed,
writing that "the judiciary as a whole is strengthened by the
public knowledge that its courthouses are open and judicial
officers are not adjudicating in secret."
An attorney for the Chancery judges -- the defendants in the
case -- said they will seek to overturn McLaughlin's decision at
the 3rd U.S. Circuit Court of Appeals. So me Delaware lawyers
said McLaughlin's opinion provided an opening for the appeal:
The judge suggested the Chancery proceedings might pass muster
if they could more clearly be seen as exercises in commercial
arbitration rather than as civil trials, and if advocates could
demonstrate that secrecy benefited the parties.
The appeal could try to distinguish the Chancery arbitration
from civil trials by emphasizing the customized nature of
proceedings, which allow the parties to craft their own rules
regarding discovery and other procedures.
The appeal notwithstanding, Delaware lawyers are already
contemplating ways to recast the law, and one lawmaker said
there would be support in the Delaware General Assembly.
"We want to stay competitive. We want Chancery Court to have
the best tools possible," said Lincoln Willis, a Republican
member of the state's House Judiciary committee. "It's really
important for employment and it is a significant generator of
Among the changes under review: To answer the concern over
secrecy, the final hearings in the arbitrations could be made
public. Also, the system could rely on retired Chancery Court
judges, instead of sitting ones.
"At worst, there are a few tweaks there that make it free
from a constitutional claim," said Mike Kelly, of McCarter &
English in Wilmington. "The general principle of arbitration has
got to be favored. There's too much litigation in this country."
However, some of the retired Chancery judges already act as
private arbitrators. T hat might make it hard to distinguish
Delaware's program from what is now available through
organizations such as the American Arbitration Association.
Since Delaware launched its arbitration program in 2010,
there have been an estimated seven arbitration cases filed. Some
have settled and at least one is thought to have led to a
ruling, although it is hard to know for sure, given the system's
The arbitrations gained prominence last year when
semiconductor maker Advanced Analogic Technologies Inc disclosed
that it took a disputed merger with rival Skyworks Solutions Inc
into the process. The two settled.
For Delaware, law is big business. Two-thirds of the
companies in the S&P 500 call Delaware home, in part thanks to
its corporate law, which gives corporate directors wide latitude
so long as they maintain their fiduciary duties to shareholders.
The Chancery Court is the keeper of that law, making it one of
the most prominent business courts in the country.
But the court's boosters fear that role might be slipping
away, and Chancery arbitration was aimed at bringing it back.
"If certain businesses are not offered the opportunity to
use the Delaware Court of Chancery to resolve their disputes
confidentially," stated an amicus brief filed by the Nasdaq and
New York Stock Exchange, "they may choose other dispute
resolution venues, which may be outside the United States."
The legal team of the two exchanges included William
Chandler, who until last year was the chief judge, or
chancellor, on the Chancery Court.
The Chancery arbitration system had promised to bring in
money for the state. Filing a case cost $12,000 compared to less
than $1,000 for filing a public civil lawsuit.
The Chancery arbitration could be used by two consenting
businesses with a dispute worth at least $1 million and could
get a final hearing in 90 days in front of one of the sitting
The law also required at least one party be incorporated in
the state, potentially expanding a rich source of fees for
Delaware. Corporations and other entities paid $759.7 million
last year for the right to base themselves in Delaware,
amounting to 21 percent of the state's general budget revenues.
Attorneys said they have been recommending that clients
write into contracts that disputes must be resolved in Chancery
For example, data analysis firm Teradata Corp's agreement
last year to acquire Aster Data Systems for $263 million
included a clause that any legal proceeding stemming from the
agreement would go to binding arbitration in the Chancery Court,
according to a regulatory filing.
Supporters said that despite the legal setback, they expect
that Delaware Chancery arbitrations, in some form, will likely
take root in the coming years.
"In five years, we could see substantial growth in the
number of these cases, said Gregory Varallo, of Richards, Layton
& Finger in Wilmington, "It could even rival the number of
public business cases."
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