December 15, 2011

In Court, but Out of Sight: Chancery Court Arbitration

By Paul Kirgis

In late November, a first-of-its-kind arbitration ended when the mobile phone technology companies Skyworks and AATI settled their dispute over their failed merger. Although there was no award, the arbitration was significant because the arbitrator was a judge on the Delaware Court of Chancery–which just happens to be the court in which the claim was filed.

In 2009, the Delaware legislature enacted a statute, 10 Del. C. 349, that gives the Court of Chancery the power to arbitrate cases upon request of the parties. The statute provides that motions to vacate Court of Chancery arbitrations are taken to the Supreme Court of Delaware and are subject to the FAA vacatur rules. (See the initial post from this blog on the Chancery arbitration scheme here.)

In 2010, the Delaware Court of Chancery issued rules to govern its arbitrations. The rules provide that arbitrations conducted by the court are private, so much so that they are not even docketed. Parties must pay for this secrecy. Under a standing order issued last January, the parties must fork over $12,000 to file an arbitration petition, and then pay $6,000 per day of arbitration (the order does not make clear what a day of arbitration is). These tidy sums are to be deposited in the court’s “Arbitration Fund Account.”

What to make of this secret arbitration conducted by public judges sitting in public courts? The firms involved clearly liked it, citing both the secrecy and greater efficiency over court adjudication. From a corporate law perspective, though, the process raises some serious questions. As Brian Quinn of the M & A Lawprof blog has noted, “[i]f parties increasingly take disputes ‘private’ via the Delaware courts, increased reliance on the confidentiality of the arbitration process might have the effect of degrading the continued development of the Delaware common law.” Further, as the Times has noted, investors have no way of assessing the risks to the companies, since the claims are confidential. And for lower-profile cases than Skyworks-AATI, word may not get out at all, depriving markets of relevant and important information that has historically been public.

At a more fundamental process level, this arbitration scheme is deeply troubling. Effectively, the Delaware legislature has authorized its judges to sell secrecy at the expense of public accountability. Well-off private litigants in big-money disputes (the arbitration threshold is $1 million for money only claims) can get exactly the same decisionmakers as before, but now they can simply opt out of public disclosure.

Finally, the judges who will hear these arbitrations would, presumably, be hearing public cases if they were not arbitrating. This is not moonlighting done on private time (which is frowned upon anyway)–it is an official part of the chancery judge job description. How will those judges prioritize their case loads? Will they give the same time and attention to their run of the mill court cases as they give to the arbitrations that pull $6,000 into court coffers every day?

A group called the Delaware Coalition for Open Government has filed suit in the local federal district court contending that the arbitration scheme is an unconstitutional deprivation of the public’s right to access to trials in violation of the First Amendment.

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