* Media groups say closed hearings hurt court's integrity
* Appeals court to decide if judges can hear arbitrations
* Business groups say Delaware system benefits shareholders
By Tom Hals
Jan 16 (Reuters) - Major U.S. news organizations have urged a federal appeals court to prevent Delaware from allowing sitting judges to arbitrate business disputes in private, saying the system raised suspicions of preferential treatment for corporations.
The case involves Delaware's Court of Chancery, a premier venue for business and shareholder disputes, and the state's bid to attract more companies to incorporate in Delaware by allowing them to resolve disputes privately before Chancery judges.
The news organizations filed a friend of the court brief on Monday arguing that shutting the public out of the courtroom during high-stake disputes would diminish the court's integrity.
The organizations included Thomson Reuters Corp's Reuters America LLC unit, Wall Street Journal publisher News Corp, New York Times Co, The Associated Press and Bloomberg LP.
"This would lead to fundamental unfairness by creating suspicion that a different set of rules apply to corporations pursuing multimillion-dollar civil claims against each other," the brief, filed with the 3rd U.S. Circuit Court of Appeals in Philadelphia, said.
Delaware's 2009 law allowed its five Court of Chancery judges to oversee business arbitrations involving at least one Delaware corporation with at least $1 million at stake. The hearings were secret, without even a case number appearing on the public docket.
Unlike litigation, parties must agree to arbitration, and the process has become popular for its speed and privacy. Arbitrations are usually overseen by lawyers or retired judges, but some have criticized the quality of arbitrators, a point Delaware tried to exploit with its system.
Delaware's system gained little notice until Skyworks Solutions Inc used arbitration in 2011 to try to back out of an agreement to buy Advanced Analogic Technologies Inc.
That merger dispute prompted a group that promotes government transparency to sue, accusing the court of "secret justice for wealthy companies."
U.S. District Judge Mary McLaughlin in Philadelphia last year shut the procedure down, saying it amounted to civil trials, not arbitration, and the secrecy violated the First Amendment. The Court of Chancery judges, who were the named defendants, appealed to the Third Circuit.
The Chancery judges have argued that McLaughlin erred in finding their system was a civil trial, with its history of public access. The judges argued parties enter Delaware's proceedings voluntarily and set their own rules, and they asked the appeals court to find it was arbitration with a history of secrecy.
McLaughlin's ruling stung Delaware's legal industry, and the corporate law section of the state's bar filed its own brief in December in support of overturning it. Many lawyers who handle corporate disputes hoped the system would usher in a new era of growth. So far, only about seven such arbitration cases have been filed.
In their brief on Monday, the news organizations also said the appeals court must find the arbitrations unconstitutional or risk having large business disputes with a wide-ranging impact disappear from the public view.
"If Delaware's bid for secrecy passes constitutional muster, other states may rush to enact similar procedures, and high-value business arbitrations that affect the public and the markets will proliferate behind closed doors, with the government's endorsement," said the brief. The brief was submitted by the Reporters Committee for the Freedom of the Press and 12 news organizations.
Delaware is home to nearly 1 million corporations and related entities, many of which have no actual presence in the tiny state. Incorporation fees and related income make up around 40 percent of the state's general revenues.
While the arbitration may not have been widely used, it had plenty of support. The U.S. Chamber of Commerce and the Business Roundtable filed their own briefs with the appeals court, pushing for it to revive the proceedings.
They argued that the public is harmed by shutting down the arbitration and forcing large business disputes into costly, drawn-out litigation.
"Businesses would lose the opportunity to adjudicate their disputes in an efficient forum, injuring not just businesses, but also their millions of shareholders and American financial markets generally," said the brief by the business groups, which was filed on Dec. 18.
The briefing in the case is scheduled to wrap up next week. No date for a hearing has been set.
The case is Delaware Coalition for Open Government Inc v The Honorable Leo E Strine Jr et al, U.S. Court of Appeals for the Third Circuit, No. 12-3859