Delaware Coalition for Open Government v. Hon. Leo E. Strine, Jr., et al., D. Del. C.A. No. 1:11-1015 (Aug. 30, 2012).
Do the Court of Chancery’s confidential arbitration proceedings violate the First Amendment’s qualified right of access?
Answer: Yes. As a general rule, proceedings cannot be closed to the public except in limited circumstances. Under Delaware law and the Court of Chancery rules regarding arbitrations, a judge, acting pursuant to state authority, hears evidence, finds facts, and issues an enforceable order dictating the obligations of the parties. Here, Judge McLaughlin concluded that “the Delaware proceeding functions essentially as a non-jury trial before a Chancery Court judge. Because it is a civil trial, there is a qualified right of access and this proceeding must be open to the public.”
On August 30, 2012, Judge Mary McLaughlin from the Eastern District of Pennsylvania sitting by designation in the District of Delaware issued a 26-page opinion granting the plaintiff’s motion for judgment on the pleadings finding that the Delaware Court of Chancery’s arbitration proceedings are unconstitutional in that they prevent the public and the press from attending the confidential proceedings in violation of the First Amendment’s qualified right of access. In particular, the Court concluded that the portions of Section 349 of the Delaware Code and Court of Chancery Rules 96, 97 and 98 which make the proceedings confidential violate the qualified right to access under the First Amendment.
After the action was filed in the District of Delaware by a group calling themselves the Delaware Coalition for Open Government, the judges in the District of Delaware recused themselves so the case was assigned to a judge in the Eastern District of Pennsylvania. In addition to the parties’ briefs, three other briefs on behalf of amicus curiae (including the Corporate Law Section of the Delaware State Bar Association) were filed.
For background on the Court of Chancery arbitration procedures, see prior posts here. In addition, Francis and I wrote an article about the Court of Chancery arbitration procedures that was published in 2010 by the NYU Journal of Law & Business. Judge McLaughlin cited to our article on page 3-4 of her opinion. A copy of the NYU article is available here.
Delaware law provides:
Arbitration proceedings shall be considered confidential and not of public record until such time, if any, as the proceedings are the subject of an appeal. In the case of an appeal, the record shall be filed by the parties with the Supreme Court in accordance with its rules…
10 Del. C. §349(b).
The First Amendment provides that “Congress shall make no law . . . abridging the freedom of speech, or of the press…. U.S. Const. amend. I. While these prohibitions extend to the states through the Fourteenth Amendment and bar government interference with both the speaker and the listener, it was not until 1980 that the United States Supreme determined that the First Amendment protects the public’s ability to attend criminal judicial proceedings. See, Richmond Newspapers, Inc. v. Virginia, 448 U.S. 555, 580 (1980). The Supreme Court has never addressed the issue of whether the public has a right to attend civil proceedings, but every Court of Appeals to consider the issue, including the Court of Appeals for the Third Circuit, has held that there is a right of access to civil trials. See Publicker Indus., Inc. v. Cohen, 733 F.2d 1059, 1061 (3d Cir. 1984). See also, N. Jersey Media Grp., Inc. v. Ashcroft, 308 F.3d 198, 217 (3d Cir. 2002). It is important to note that even when a right to access is recognized, it is not absolute. Proceedings can be closed to the public and the media if the court finds that “closure is essential to preserve higher values and is narrowly tailored to serve that interest.”
Judge McLaughlin highlighted the importance of the decision in Publicker Industries as follows:
In Publicker Industries, the Court of Appeals explained why the reasoning of Richmond Newspapers applied to civil trials. As with criminal trials, the English and American legal systems have historically presumed that civil proceedings are open to the public. Publicker Indus., 733 F.2d at 1068-69; see also Richmond Newspapers, 448 U.S. at 580 n.17 (“Whether the public has a right to attend trials of civil cases is a question not raised by this case, but we note that historically both civil and criminal trials have been presumptively open.”).
Many of the same rationales supporting openness in criminal trials apply equally to civil trials. Disputes among private citizens may not be matters of public concern in the same way as criminal prosecutions. But the actions of those charged with administering justice through the judiciary is always a public matter. Openness of civil trials promotes the integrity of the courts and the perception of fairness essential to their legitimacy. Public dissemination of the facts of a civil trial can encourage those with information to come forward, and public attention can discourage witnesses from perjury.
In order to determine if there is a public right of access to a particular proceeding or record, courts in this Circuit must apply the “logic and experience” test. However, Judge McLaughlin noted that there is a threshold question that must be addressed: “[h]as Delaware implemented a form of commercial arbitration to which the Court must apply the “logic and experience” test, or has it created a procedure “sufficiently like a trial such that Publicker Industries governs?”
The Court discussed the difference between arbitration and litigation noting that “[a]rbitration differs from litigation because it occurs outside of the judicial process. The arbitrator is not a judicial official…. Because they are outside the judicial system, arbitration decisions are ad hoc, lacking any precedential value.” The Court went on to note that “[t]he chief advantage of arbitration is the ability to resolve disputes without aspects often associated with the legal system: procedural delay and cost of discovery, the adversarial relationship of the parties, and publicity of the dispute. As the product of private agreement between the parties, historically, arbitrations have been conducted outside the public view.”
The Court next compared arbitrators to judges noting that “[b]ecause arbitrations offer a private system of remedies that parallels the courts, a judge and arbitrator share many of the same attributes…. But an arbitrator and a judge perform very different functions. This distinction is more than just semantic. Arbitrators act as a ‘private extraordinary Judge, chosen by the Parties to give Judgments between them.’ They are empowered by the parties’ consent and limited by the scope of that consent. They serve the parties. Judges, on the other hand, are empowered by their appointment to a public office. They act according to prescribed rules of law and procedure. They serve the public…. [And a] judge bears a special responsibility to serve the public interest. That obligation, and the public role of that job, is undermined when a judge acts as an arbitrator bound only by the parties’ agreement.”
In analyzing the Court of Chancery arbitration proceeding, the Court found that even though it is labeled an arbitration, it is essentially a civil trial. The Court stated:
In a usual arbitration proceeding, if one party refuses to comply, the other can enforce compliance only by pursuing enforcement through a court. In Delaware, the judge and arbitrator are the same, so the judge’s final award results in a judgment enforced by state power. The judge can also issue interim, interlocutory, or partial orders and awards. Del. Ch. Ct. R. 98(f)(2). These orders, and the final arbitration award and judgment, bind the parties much as any court orders would. They are nearly identical to a judge’s orders in a civil trial, but with one important difference. Because the Delaware proceedings and awards are confidential, the judge does not publish his rulings or reasoning. The public does not know the factual findings the judge has made or what legal rules the judge is, or should be, applying to these arbitrations. In the Delaware proceeding, the parties submit their dispute to a sitting judge acting pursuant to state authority, paid by the state, and using state personnel and facilities; the judge finds facts, applies the relevant law, determines the obligations of the parties; and the judge then issues an enforceable order. This procedure is sufficiently like a civil trial that Publicker Industries governs.
Because the Court found that Delaware had created a procedure “sufficiently like a trial such that Publicker Industries governs”, the Court concluded:
The public benefits of openness were well described by the Court of Appeals, and this Court does not dwell on them except to note that they are clearly applicable to the Delaware proceeding. These benefits accrue to civil disputes among corporate citizens as well as to those between individuals, both of whom can participate in the Delaware procedure. Diverse business disputes may be submitted to the Chancery Court, and open proceedings can serve to educate the public about important legal and social issues. Public scrutiny discourages witness perjury and promotes confidence in the integrity of the courts. Public confidence that court proceedings are fair is protected when the public can access those proceedings and understand the reasoning supporting judicial findings and rulings.
While this decision is a serious blow to all of those who supported and utilized the Court of Chancery confidential arbitration procedures either directly through arbitrations, or indirectly by including provisions in contracts and agreements referencing the parties intent to utilize the Court of Chancery arbitration procedures, I seriously doubt that this is the end of the road for arbitrations in the Court of Chancery. An appeal is promised. By all accounts, the judges and the lawyers who practice before that Court within and without of Delaware are a resilient and resourceful lot. So keep your tray tables in an upright and locked position and your seat belts fastened…the journey continues…
Supplement: This decision promptly generated copious commentary in both the mainstream media and the blogosphere. For example, Prof. Steven Davidoff provides scholarly insight through his online persona as The Deal Professor for The New York Times.