Part One: A Brief Overview of the Delaware Arbitration Program

The following is Part One of a three-part overview of Pepperdine University School of Law Professor Thomas Stipanowich’s article entitled “In Quest of the Arbitration Trifecta, or Closed Door Litigation?: The Delaware Arbitration Program.” The paper is a fascinating read for anyone in the arbitration field. Following the format of Professor Stipanowich’s article, Part One will provide a brief background on the history of the Delaware Arbitration Program and discuss the impetus for its creation. An abstract of the article is available on Disputing’s previous post regarding this paper.

Part One: A Brief Overview of the Delaware Arbitration Program

In the past, arbitration was often the preferred method of resolving business disputes as the process generally saved companies both time and expense. In addition, the confidential nature of arbitral proceedings offers an attractive forum for companies that are eager to protect confidential information and assets. Over time, Supreme Court jurisprudence also paved the way for arbitration’s role in the nation’s legal system to expand.

Despite the positive aspects of arbitration, data from a recent survey found that approximately half of all Fortune 1,000 corporate counsel expressed a desire to avoid arbitration. The survey also found that attorney concerns regarding arbitration include “limitations on judicial review of arbitration awards, the concern that arbitrators may not follow the law, the perception that arbitrators tend to compromise, and lack of confidence in neutrals. Moreover, a growing number of corporate counsel viewed high cost as a barrier to the use of arbitration; this result is resonant with recent broadly expressed concerns about growing costs and inefficiencies in commercial arbitration.”

According to Professor Stipanowich, the Delaware Arbitration Program was created by statute in 2009 in an attempt to address similar concerns. The program was apparently designed to provide the many businesses that litigate in Delaware with an opportunity to avoid lengthy litigation in favor of “a highly desirable process” that includes “(1) a first-rate adjudicator practiced at applying the law to complex factual scenarios, (2) efficient case management and short cycle time and, above all, (3) a proceeding cloaked in secrecy.” The program was also intended to encourage businesses to continue to select the state as a business forum of choice.

The statute that created the Delaware Arbitration Program says, “[t]he Court of Chancery shall have the power to arbitrate business disputes when the parties request a member of the Court of Chancery, or such other person as may be authorized under rules of the Court, to arbitrate a dispute.” The legislation also provides, “[a]rbitration proceedings shall be considered confidential and not of public record until such time, if any, as the proceedings are the subject of an appeal.”

In order to utilize the Delaware Arbitration Program, a number of requirements must be met including, “parties must consent to the process, at least one party must be a “business entity” formed or organized under the laws of Delaware or have its principal place of business in Delaware, no party can be a “consumer,” and claims for monetary damages must be at least $1,000,000.”

According to Professor Stipanowich, the Chancery Court Rules that implemented the Delaware Arbitration Program strongly reinforce the confidentiality requirement,

“[P]etition[s] [for arbitration] and any supporting documents are considered confidential and not of public record until such time, if any, as the proceedings are the subject of an appeal,” and are therefore not to be included in the Chancery Court’s public docketing system. Furthermore, state the rules, [a]rbitration hearings are private proceedings such that only parties and their representatives may attend, unless all parties agree otherwise. . . . Any controversy being arbitrated, whether made to the Arbitrator or a party, or to any person if made at an arbitration hearing, is confidential.

Under the Program, all arbitrator decisions are “automatically transformed into a judgment of the Court of Chancery,” and such decrees remain confidential unless they are appealed to the Supreme Court of Delaware. The goal of efficiency and providing a business-friendly forum, however, was not without its detractors. Not long after it was established, the Delaware Arbitration Program “triggered a constitutional challenge based on third parties’ right of access to court proceedings.”

Although a Pennsylvania judge found that arbitral proceedings conducted pursuant to the Program were essentially closed-door non-jury trials and “subject to public access,” that decision is currently being considered by the Third Circuit Court of Appeals. In his paper, Professor Stipanowich argues that the restricted public access aspect of the Delaware Arbitration Program raises a number of questions regarding “the appropriateness of structuring a program in which sitting judges serve as arbitrators and preside over a procedure that is effectively shielded from public view. It also implicates issues regarding the use of public resources in ostensibly private disputes, and even the way our justice system is funded.”

Part Two in this series will summarize the ongoing constitutional challenge. Stay tuned!