Wednesday, January 22, 2014
So, last night Delaware filed a cert petition with the US Supreme Court asking the court to overturn the Third Circuit's ruling with respect to Delaware Chancery arbitration program. I've written about this before (here and even a law review article here). In any event, I'm on record that I believe Chancery arbitration is a bad idea that over the long-term will undermine Delaware's corporate law franchise. In any event, when challenged at the District Court, that court found that confidential Chancery arbitration violated the First Amendment's qualified right of access (District Court Opinion). In a 2-1 opinion on appeal, a panel of the Third Circuit agreed with the District Court (Third Circuit Opinion). In that opinion, the majority appears to have read my law review piece - no need to cite me, I'm not proud. In any event, the majority mimics many of the same arguments that I previously argued about the relative merits of the Chancery arbitration program.
Petitioners make a couple of policy arguments for why it's important why the Chancery arbitration procedure must survive. It's a matter of national competitiveness, otherwise parties will incorporate overseas and take their disputes overseas, too. That's a pretty dubious argument. There is no evidence that any Delaware firm. I looked at a pile of merger agreements to check to see if there was anything to this argument. Prior to adoption of the Chancery arbitration procedure, only a handful of mergers relied on anything other than the public courts to resolve disputes between the parties. There is no evidence that anyone contracted to resolve merger related disputes through international arbitration. It's just not an issue. There is no real competitive challenge to the position of the courts with respect to merger litigation at this point. In rushing to adopt the Chancery arbitration procedure, Delaware is fighting with ghosts.
The second argument for why preservation of the Chancery arbitration procedure is so important is a familiar argument about how the US courts are so inefficient that delayed justice will push parties to seek international arbitration rather than dispute resolution in the US. Gee, I guess, maybe, but are the Delaware courts arguing that the Delaware courts are so inefficient that the inefficiency of the Delaware courts is pushing Delaware corporations overseas? Really. Please. No.
A third argument -- and this one is tied to the question of confidentiality of arbitration procedure - is that if the court were to uphold the qualified First Amendment right of access the procedure would fall into disuse and that confidentiality is central to the success of the procedure. Confidentiality is the only real benefit to arbitration?
Well, honestly, I don't understand how that ties into the argument that the reason why parties are supposedly leaving Delaware is because of the inefficiency of the public courts. Frankly, it doesn't. It shifts the goal posts and makes confidentiality the central contribution of the arbitration procedure. To that I say hogwash.
OK, if the public courts had proven themselves incapable of protecting trade secrets and other commercially sensitive information, I might listen. But, under the Chancery Court' s rule 5.1, parties can seek confidential treatment for sensitive materials. Does Delaware think that its own rules for confidential treatment are inadequate? I don't think so. Anyway, to the extent arbitral confidentiality extend beyond areas that 5.1 typically will protect, then why does anyone in a policy position believe that keeping those kinds of facts (possibly management breeches of fiduciary duties or other bad acts by managers) from the public? I strain to see a policy rationale.
In any event, Delaware might get a day in court on this. I'd be surprised if they do - though as someone recently reminded me if the court wants to make a statement about arbitration (again), this might be a case they will take.
I'll rehash the actual legal arguments in another post later if the case gets picked up.