Appeals Court Nixes Delaware's Secret Arbitration Scheme
The U.S. Court of Appeals for the Third Circuit ruled Wednesday that Delaware's judges can't preside over secret arbitrations, handing a remarkable win to small firm lawyer and free speech champion David Finger.
Siding with Finger's client, the Delaware Coalition for Open Government (DelCOG), the Third Circuit determined that a confidential arbitration program adopted by the Delaware Court of Chancery violates the right of public access to civil trials under the First Amendment. The 2-to-1 ruling, which affirms a lower court judge, spells doom for the state-sponsored arbitration scheme, at least in its current form. Delaware's legislature enacted the program in 2009 in hopes of making the state an even stronger magnet for corporate litigation, promising the expertise of the Chancery Court without public scrutiny.
"Delaware's [arbitration] proceedings are conducted by Chancery Court judges, in Chancery Court during ordinary hours, and yield judgments that are enforceable in the same way as judgments resulting from ordinary Chancery Court proceedings," Judge Delores Sloviter wrote on behalf of the two-judge majority. The secret arbitrations "would be far less attractive without their associations with the state. Therefore, the interests of the state and the public in openness must be given weight, not just the interests of rich businesspersons in confidentiality," she wrote. (Read more on the ruling from our affiliate Delaware Business Court Insider.)
As we explained when we named him Litigator of the Week for winning at the district court, Finger has a vested interest in seeing Delaware become a litigation hub. He's a third-generation Delaware lawyer who's practiced in the state his entire career, and his grandfather founded the Delaware firm Richards, Layton & Finger. But Finger is also an outspoken critic of government secrecy, so he eagerly signed on to represent DelCOG in its constitutional challenge in October 2011. Prior to taking the case, he assisted the nonprofit with Freedom of Information Act Requests and agreed to sit on its board.
The case has pitted Finger and his firm, Finger & Slanina, against pillars of the tight-knit Delaware legal community. All five Chancery Court judges were named as defendants. They're represented by Widener University law professor Lawrence Hamermesh, who is widely considered the foremost expert on Delaware corporate law. For the Third Circuit argument, the defendants brought on a titan of U.S. Supreme Court bar, Andrew Pincus of Mayer Brown.
"I've always felt this case was a no-brainer, but as I waited for the decision, I started to get a bit worried," Finger told us in an interview. It wasn't clear after oral argument which way the panel would rule, Finger said.
"I think the importance of the arbitration process in Delaware corporate law has always been overstated," Finger said. "The Court of Chancery will continue to be the preferred venue for corporate litigation and the preferred place of incorporation because of its rich body of corporate law—which helps corporations in understanding what their obligation are—and the excellence of the judiciary which continues to interpret and apply those laws."
In a statement, Pincus said he and his clients were disappointed in Wednesday's ruling, but encouraged by the dissent. "We feel strongly that it is important to our nation and our state to provide cost-effective options to resolve business-to-business disputes to remain competitive with other countries around the world," Pincus said, adding that further appeals may be in the offing.