Is “Secret” Business Court Coming Back to Delaware?

Many corporations call Delaware home because of its business friendly legal environment. It is an attractive place to incorporate a business, and it can also provide substantial court decision precedents for corporate disputes, making it more predictable as to what a Delaware court may do in deciding a disputed business matter as compared to states with substantially lesser numbers of such court cases.

One of the benefits Delaware seeks to provide that is currently under scrutiny is confidential commercial arbitration proceedings before the Delaware Court of Chancery. The so-called secret business court was created by statute in 2009, but was later ruled unconstitutional in Delaware Coalition for Open Government Inc. v. The Honorable Leo E. Strine Jr. The case is now pending before the Third Circuit Court of Appeals.

The 2009 law authorizes the Chancellor of the Delaware Chancery Court to appoint a Chancery Judge to serve as an arbitrator in business disputes involving at least $1 million. So long as both sides agree to participate, the proceedings remain entirely confidential and closed to the public. Cases do not even receive a docket number.

While businesses argue that the system provides a cost-effective and efficient means to resolve complex business litigation, open government groups and the media have raised concerns that it interferes with rights of public access to court proceedings.

“Neither Delaware’s desire to facilitate new revenue streams nor the business community’s desire to hide its conduct from public scrutiny justifies subverting the First Amendment,” the Delaware Coalition for Open Government argued in its brief before the Third Circuit. The Court of Chancery judges contend that public oversight is not needed in arbitration, where both parties have consented to the forum and the binding nature of the decision.  The closed and confidential nature of similar arbitration proceedings is respected in other venues, such as in the securities and commodities industries, and in numerous other venues, such as the American arbitration Association, that provide for private arbitrations between consenting parties.

We will continue to track this case and provide updates as they become available.

If you have any questions about this case or would like to discuss the legal issues involved, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work.