The Delaware Court of Chancery’s four-year-old experiment with confidential arbitration appears to have come to an early end.

By Jacob Gershman

CONNECT

Chancellor Leo Strine. —Associated Press
The Delaware Court of Chancery’s four-year-old experiment with confidential arbitration appears to have come to an early end.

The 3rd U.S. Circuit Court of Appeals on Wednesday struck down the so-called judicial-arbitration procedure as unconstitutional, affirming a lower-court ruling from last year. In a 2-1 ruling, the appeals court said the public has a First Amendment right of access to the court’s arbitration proceedings.

The Delaware lawmakers enacted the arbitration program in 2009. The idea was to take all the advantages of arbitration as a means of settling complex business disputes — such as its speed, its relatively lower cost, and its controlled process — and match it with the expertise of Delaware’s chancellors. Leo Strine Jr. the top judge on the court, and his colleagues are regarded as among the brightest lights of corporate law.

The Delaware Coalition for Open Government, a citizen’s advocacy group, challenged the judicial arbitration as a First Amendment violation.

“The right of access to government-sponsored arbitrations is deeply rooted in the way the judiciary functions in a democratic society,” the Third Circuit said.

The appeals court also discounted concerns raised by the Chancery that opening the doors would effectively terminate the program. The court said that even without the benefit of confidentiality, Chancery arbitration still offers flexibility and speed lacking in a civil trial.

The argument failed to convince Judge Jane Roth, who offered her own history lesson in a dissent. She pointed to the example of how the New York Chamber of Commerce in the 18th century relied on arbitration’s privacy to settle disputes between American and British merchants.

Last year, as WSJ reported, U.S. District Judge Mary A. McLaughlin reasoned that it was “sufficiently” like a trial and therefore should be held to the same standards of transparency under the First Amendment’s “qualified right of access” to courts.

“This program was a dramatic example of a court trying to be innovative in providing a new means of dispute resolution,” Brian Farkas, an associate at Goetz Fitzpatrick LLP who has written about the case, told Law Blog. “The opinion will give courts who are trying to innovate clearer boundaries on what the First Amendment allows.”

He said it was probably unlikely that a court would implement an “open” arbitration program. “Confidentiality is one of the major distinguishing marks between arbitration and traditional civil litigation, where many records become public,” said Mr. Farkas.

The Delaware judges still have the option of appealing the case to the U.S. Supreme Court. The Delaware court is represented by Andrew J . Pincus, a veteran Supreme Court litigator who argued the 2011 case AT&T Mobility LLC v. Concepcion case involving class-action arbitration.

“Given the importance of this issue, we will be evaluating the appellate options after we have an opportunity to further study” the ruling, Mr. Pincus told Law Blog in a statement.

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