Stock Exchanges Speak Out in Favor of Secret Arbitration

Delaware is one of the most popular places for corporations to incorporate, largely due to its business-friendly legal environment. However, one of the state’s lesser-known benefits is currently in legal limbo.

In 2009, Delaware created a “secret” business court, which allows for arbitrations to be conducted in private. The law specifically 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.

However, the statute creating the court was later ruled unconstitutional in Delaware Coalition for Open Government Inc. v. The Honorable Leo E. Strine Jr. The U.S. Court of Appeals for the Third Circuit held that arbitration amounted to a civil trial, which must be publicly accessible.

The suit pits the business industry against open government groups. While corporate interests argue that the system provides a cost-effective and efficient means to resolve complex business litigation, government transparency advocates and the media maintain that the secrecy of the proceedings interferes with rights of public access to court proceedings.

The U.S. Supreme Court may get the final say on the issue, as the state of Delaware has asked the justices to grant certiorari. The state also now has at least two high-profile supporters. Late last month, the United States’ two largest stock exchanges, NASDAQ and the NYSE Euronext, filed amicus briefs in support of the confidential arbitration proceedings.

“Amici believe that Delaware’s confidential, expedited arbitration procedure is an important and beneficial ADR process that ensures that major United States and foreign companies choose to conduct business and list securities in the United States,” the brief argues.

Given that the Supreme Court grants certiorari in such a small percentage of cases, the Third Circuit ruling could very well stand. We will be closely following the status of the appeal and will provide updates as they become available.

If you have any questions about this case or would like to discuss how to best protect your company’s intellectual property, please contact me, Robert Levy, or the Scarinci Hollenbeck attorney with whom you work.