Thoughts on challenge to Delaware arbitration procedure

I've been giving some more thought to the recent challenge by the Delaware Open Government Coalition to Delaware's new arbitration procedure.  It's a very interesting issue and won that I think Delaware is ultimately going to lose.  I don't say that because there is anything necessarily wrong with arbitration, though we can have a discussion about the role of arbitration in a common law system. Rather, the idiosyncratic manner in which Delaware set up its arbitration system puts it a juncture between two competing policy interests and on what I expect will be the losing side when a court is asked to balance the interests.

If you have been reading this blog for long, you'll know that I don't like to predict outcomes in cases (or football games) - mostly because I end up looking foolish when it comes out the other way. And it often does.  For example, who could have guessed that the Steelers would have figured out that you only have to throw 50 passes against the Pats' terrible secondary to win?  Anyway back to the law.  In this case, I'm willing to throw my chips in because though there are two sides to this argument, there really is no other way for this to come out in the end.

On the one side we have a statutory preference for arbitration pursuant to the Federal Arbitration Act ("FAA") to resolve contractual disputes that preempts state law prohibitions against arbitration.  This has been endorsed by the US Supreme Court (Southland Corp v Keating):

In enacting § 2 of the federal Act, Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration. ... Congress has thus mandated the enforcement of arbitration agreements.

We discern only two limitations on the enforceability of arbitration provisions governed by the FAA: they must be part of a written maritime contract or a contract "evidencing a transaction involving commerce" and such clauses may be revoked upon "grounds as exist at law or in equity for the revocation of any contract." We see nothing in the Act indicating that the broad principle of enforceability is subject to any additional limitations under state law. (emp. added)

Since Southland, the application of arbitration provisions has expanded beyond maritime contracts and they are now common in commercial contracting. The 3rd Circuit (which includes Delaware) is on board with this preference to pursue contractual disputes in arbitration should the parties so decide (Great Western Mortg Corp v Peacock):

Under the FAA the district court must be satisfied that the parties entered into a valid arbitration agreement. In conducting this inquiry the district court decides only whether there was an agreement to arbitrate, and if so, whether the agreement is valid. 9 U.S.C. § 2. In so deciding, the district court is not to consider the merits of the claims giving rise to the controversy, but is only to determine, as we have stated, whether there is a valid agreement to arbitrate. Once such an agreement is found, the merits of the controversy are left for disposition to the arbitrator. Moreover, there is a strong presumption in favor of arbitration, and doubts " concerning the scope of arbitrable issues should be resolved in favor of arbitration." (emp. added)

It's pretty clear that federal law supports policies that encourage private parties to adopt and/or pursue arbitration of access to a more formal judicial forum. 

On the other side of this argument we have the long-standing Constitutional policy under the First Amendment in favor of open courts and access to trials, both criminal and civil.  In Richmond Newspapers v Virginia, the US Supreme Court addressed the question of public access to criminal trials:

... without more, agreement of the trial judge and the parties cannot constitutionally close a trial to the public. Historically and functionally, open trials have been closely associated with the development of the fundamental procedure of trial by jury, and trial access assumes structural importance in this Nation's government of laws by assuring the public that procedural rights are respected and that justice is afforded equally, by serving as an effective restraint on possible abuse of judicial power, and by aiding the accuracy of the trial factfinding process. 

This right of the public, especially the press, to access criminal trials has been accepted at the Circuit level, including the 3rd Circuit, to extend to civil trials as well.  In determing whether the public has qualified right of access under the First Amendment the court applies a two factor test (Press Enterprise v Superior Court).  The first factor "consider[s] whether the place and process have historically been open to the press and general public."  "The experience factor considers whether there is a 'tradition of accessibility' attendant to a given place and process."  The second factor is the "logic" factor, which "asks whether public access plays a significant positive role in the functioning of the particular process in question."  To the extent there are restrictions to the public's right of access those restrictions need to be narrowly tailored to serve a compelling interest. 

In Delaware, the arbitration procedure adopted is one that occurs using court personel and in the courthouse.  The nature of the matters to be resolved is similar to the matters that have been traditionally resolved by the chancery courts over the years. I think it's pretty clear that in applying the experience factor to the arbitration proceedings that the experience has been that procedings of a similar nature in the courts have been public.  The logic factor similarly weighs in favor of public access - to the extent formal judicial resolution results in common law precedents, public access plays a significant positive role in the process.

And now to the conflicts between arbitration and openness.  As between a Congressional preference for arbitration and a qualified Constitutional right public access to trials, the Constitutional right should trump every time.

Does that mean that one can't arbitrate merger agreements in Delaware?  No.  One can do that - feel free to call the local AAA office and hire a retired chancellor to hear your dispute.  But, it does suggest you can't expect to get confidential treatment of arbitration proceedings where the arbitrator is a sitting judge in the local courthouse in a procedure sponsored by the state. 

 OK, so now I'm sitting on a limb.

-bjmq