Organization Sues Delaware Chancery Court to Compel Open Arbitrations

by Mike Mintz on March 6, 2012 · 0 comments

in Legal News and Trends,Mergers and Acquisitions (M&A)

The Delaware Coalition for Open Government, a group which supports open government, sued the five judges on the Delaware’s Chancery Court to force them to open up currently secret arbitration proceedings in business disputes to the public, claiming that court rules adopted to implement such secret arbitrations violate the constitutional and civil rights of citizens to attend judicial proceedings and access court records.  These court rules were adopted last year.

The Coalition filed its lawsuit shortly after Advanced Analogic Technologies and Skyworks Solutions Inc. disclosed in SEC filings that they were seeking arbitration in a failed merger agreement. If not for the SEC filings, the public may have never known about their dispute.

The attorney for the Coalition charged that it was unacceptable for there to be separate doors in Delaware Chancery Court-one for the public and another for multi-million dollar corporations. The attorney claimed that this dichotomy diminishes public confidence in fairness and equality of the judicial process and that the public has a right to observe judges in action.

The charges made by the Coalition’s attorney were disputed by the attorney for the Chancery Court who argued that the secret arbitrations help both the court and the state-by making the court more efficient and by generating much needed revenue for the state.  If the law allowing for secret arbitrations in Chancery Court is overturned, he argued, corporations will simply go to another forum to have private, secret arbitrations.

The Chancery Court currently charges a $12,000 fee for filing the arbitration petition and a daily fee of $6,000 for each day (after the first day) that a judge presides over an arbitration.  According to the head of Chancery Court, Leo Strine, Jr., the law was designed to ensure that Delaware remained a place where business entities would want to form.  To date, more than half of the listed U.S. corporations form their corporations in Delaware.

Secret arbitrations of a business dispute involving only a claim for monetary damages is allowed for damages exceeding $1 million. A petition for arbitration is not put on the public docket, and all arbitration hearings and related communications are private.

The arbitration proceedings are so secret that the public has no way of knowing how often the judges are engaged in such arbitrations. So far there have only been a handful of such secret arbitrations, but if there are more arbitrations than the current panel of judges can handle, then the attorney for the Chancery Court argued, more judges would be hired.

According to the attorney for the Chancery Court, these secret arbitrations are similar to the private mediations and arbitrations that federal magistrates are allowed to conduct under a 1998 law aimed at reducing case backlogs. If the Delaware law allowing for secret arbitrations is overturned, that could raise questions about the constitutionality of the federal law.  There is one problem with that argument, according to the Coalition’s attorney.  The arbitration in federal court before federal magistrates is not binding and if a party does not like the outcome, he can proceed to trial.  In contrast, the Delaware law allows for binding arbitrations with extremely limited chances of appeal.

Not surprisingly, media organizations filed briefs supporting the Coalition’s position while the New York Stock Exchange, Nasdaq and the Delaware State Bar Association filed briefs in support of the arbitration law.

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