* Closed hearings hurt court's integrity media says
* Appeals court to decide if judges can hear arbitrations
* Business groups say Delaware system benefits shareholders
By Tom Hals
Jan 16 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
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
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
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
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,
"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 Chancery judges asked the appeals court on Wednesday to
extend the briefing schedule to Feb. 8 from Jan. 25, in part to
address the arguments raised by the news organizations. 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