On Monday morning, the U.S. Supreme Court denied certiorari in Strine v. Delaware Coalition For Open Government, Inc., involving a challenge over the constitutionality of the novel, short-lived program in Delaware that allowed the state's Court of Chancery judges to serve as arbitrators.
The experimental, if controversial, program, implemented in early 2010, barely had time to be tested before it was discontinued in August 2012 when a U.S. District Court held that the program blocks the public’s constitutional right of access to trials. The program, established by Delaware statute in 2009, enabled the sitting Chancery judges to hold confidential arbitrations in expedited fashion with hearings and judgment rendered behind closed doors.
The U.S. Court of Appeals for the Third Circuit affirmed the lower court’s ruling in a 2-1 decision issued October 2013. The Delaware Chancery Court, represented by Mayer Brown partner Andrew Pincus, appealed to the U.S. Supreme Court. Amicus briefs in support of the petitioner were submitted by such groups as the U.S. Chamber of Commerce, NASDAQ and a contingent of large law firms led by Wachtell, Lipton, Rosen & Katz, whose brief argued that the program could help “parties reach settlements and resolve disputes in a more conciliatory manner.”
Brian Farkas, a New York-based business litigation associate at Goetz Fitzpatrick who also teaches at Brooklyn Law School’s Mediation Clinic, has closely followed the procedural history of the case. He has written multiple articles about the issue and organized a symposium in February 2013 titled, “Secret Courts? The Delaware Court of Chancery Arbitration Experiment.” A graduate of Vassar College and Cardozo School of Law, Farkas sat for the oral arguments before the Third Circuit, publishing this detailed account of the proceedings for Alternatives to the High Cost of Litigation, a dispute resolution magazine.
CLI spoke with Farkas to gain the backstory on the early challenge to the program, the arguments for and against it and the implications it leaves behind for business courts including New York’s Commercial Division.
Following is a transcript of the interview which has been edited for length and clarity.
Q: What question was the U.S. Supreme Court asked to decide?
The Third Circuit upheld the district court’s decision largely by applying the “experience and logic test.” Basically, that test determines whether a judicial proceeding qualifies for the First Amendment right of public access when there’s been a tradition of accessibility to that type of proceeding, or, when accessibility plays a positive role in the functioning of the process in question.
The standard is somewhat loose. But in layman’s terms, it asks, does common sense and American tradition dictate that a certain judicial process be open to the public? So, the specific legal question presented to the U.S. Supreme Court here was whether the Third Circuit properly considered the history and reasoning of the openness of civil trials in evaluating Delaware’s arbitration program.
Q: Why didn't the Court accept the case for review?
It seems unlikely that the Supreme Court would have granted cert here. First of all, cert grants are extremely rare. The Court usually receives upwards of 10,000 petitions for a writ of certiorari each year, but only hears argument in about 75-80 cases. So right away, it's unlikely.
Second, it's most common for the Court to grant cert when there's a clear split among the appellate circuits. Here, although the Chancery argues to the contrary, it's not totally clear there was a split that necessitates the Supreme Court getting involved—at least not until another circuit issues a contradictory ruling on the question of qualified right of access to civil proceedings.
Q: Why might the justices have granted cert?
If the justices did surprise us and decided to hear the case, it might be because the First Amendment issue is important enough that it deserves immediate clarity. There is clarity that criminal proceedings are almost always public, but the case law isn't as obvious on the civil side. If it were, this litigation wouldn't exist.
Q: Did the early challenge to Delaware’s confidential arbitration surprise you?
No. The Delaware Court of Chancery is an unusually distinguished court. It dates back to 1792, and it regularly hears corporate cases from some of the largest and most influential companies in the United States. So, any novel or radical program there is bound to attract attention. The case also raises a sexy First Amendment issue—or at least as sexy an issue as you're likely to find in an arbitration case.
Q: So you think this was a “radical” program.
I do. And I don’t say that in a pejorative way. I think this program is an objectively fresh idea, in that a sitting, state-appointed judge can simultaneously act as an arbitrator. While a judge’s work is generally public and reviewable by appellate panels, arbitration is a private process that is intentionally difficult to appeal. Confidentiality and finality are two of the defining features of arbitration.
Q: Who initially challenged the program?
The Delaware Coalition for Open Government (DelCOG), a nonprofit government watchdog.
Journalists and media organizations are also pretty staunchly opposed to the program, for obvious reasons. There's a strong feeling against the notion of deciding disputes confidentially, particularly disputes involving Fortune 500 companies that could have ramifications on the public. There's a fear, I think, that stories about product liability or unsavory corporate dealings would go undetected by the press, leaving citizens or investors uninformed. Some of this is certainly true—although we must remember that countless business-related disputes are already going to private arbitration, so many of these stories have always gone unreported.
The difference here is that many journalists feel that once that dispute enters a courtroom, it becomes a matter of public record. David Finger, who is counsel for the challengers to the Delaware program, has made this argument very comprehensively from a policy perspective.
Q: Were concerns with the program only with the First Amendment issue?
No. The business community has been more divided. Some businesses certainly favor the program, for all the reasons the Chancery has put forth—the expertise of these judges, its speed and the potential cost savings. But others aren't so sure. Brian Quinn, a professor at Boston College School of Law, made an interesting argument in an article in the Cardozo Journal of Conflict Resolution that these arbitrations could have the unintended consequence of eroding the value of Delaware law. A huge part of why corporations choose to exist in Delaware is that corporate law there is predictable. It's been honed and developed over decades and decades. If important cases go to arbitration, public precedent on new issues would become sparse.
Q: From a price standpoint, how did the program’s $12,000 application filing fee and $6,000 daily rate compare with other private arbitration rates?
The Chancery's price is certainly competitive, but it's tough to compare directly because we're talking about different services. Leading providers of neutrals like JAMS and the American Arbitration Association (AAA) have much more flexibility in what they offer litigants—early neutral evaluation, mediation, mediation-arbitration, arbitration-mediation, facilitation, a single arbitrator, a panel of multiple arbitrators, neutrals with subject matter expertise, neutrals with process expertise, etc.
Part of the advantage of private ADR is that parties are limited only by their own imaginations in choosing the process that would be most effective at resolving their particular conflict. And of course, different prices are associated with different processes depending on the number of neutrals and their backgrounds. Private neutrals can also set their own rates.
I think the idea behind the Chancery program—which was enacted with fairly brief guidelines—was more limited in scope. Parties could get a single Chancery judge to hear their dispute. But to answer this question differently, there's no doubt that private ADR providers would see increased competition if suddenly state judges, in Delaware or elsewhere, could serve as neutrals even if the fee goes to the court rather than to the individual judge.
Q: Only several cases were actually heard by the program while it was still active. Why wasn’t the program more flooded with demand?
Two reasons. First, the program just didn’t exist for very long before it was stayed with this litigation. It was enacted by legislation in 2009 and then the implementing rules came in 2010. By 2012, it was already being challenged in federal court and was ultimately frozen pending the outcome of the appeal.
Second, because the program existed under the cloud of these constitutional questions, it probably made corporate litigators nervous. Lawyers aren’t exactly known for being risk-takers. So I’d imagine that lawyers and parties elected the “tried and true” methods of either private arbitration or regular Chancery litigation, and decided to wait for the uncertainty surrounding this program to settle down.
Q: You sat for the Third Circuit oral arguments in Philadelphia on May 16, 2013. Tell us a little bit about that experience.
Both attorneys were excellent. David Finger, the attorney for the petitioner, and Andrew Pincus, the attorney for the Chancery, are very clearly experts in corporate law. Finger has a huge amount of experience with the Delaware bar and he knows this case inside and out. And Pincus, of course, is a Supreme Court veteran. He argued and won AT&T Mobility v. Concepcion, 563 U.S. 321 (2011), the major case on class action arbitration which has made it more difficult for consumers to file class actions. So Pincus is very familiar with federal arbitration law, to put it mildly. Watching both lawyers argue to the panel was incredibly engaging.
Q: What kinds of questions did the bench ask?
There was a sharp focus on the mechanics of the Chancery arbitration proceedings. The judges asked very pointed questions about how lawyers interact with the judges. For instance, are they referred to as “judge,” “Your Honor,” or “chancellor” during the arbitration proceedings, or just as “arbitrator”? Do they sit on an elevated bench? Do they wear black robes? Are the hearings held in the same courtrooms as standard Chancery litigation? These questions showed that the Third Circuit panel was trying to see, factually, whether this process was really just litigation by another name, as of course, the DelCOG has argued.
Q: Despite affirming the lower court, did the Third Circuit leave the door open at all to future such experiments?
The Third Circuit absolutely left the door open for further experimenting by courts. Senior U.S. Circuit Judge Dolores Sloviter’s majority opinion doesn’t directly hold that the idea of judicial arbitration is prima facie unconstitutional. U.S. Circuit Judge Julio Fuentes, in his concurring opinion, explicitly wrote, “we do not express any view regarding the constitutionality of a law that may allow sitting Judges to conduct private arbitrations if the system set up by such a law varies in certain respects from the scheme before us today.”
And then, of course, Circuit Judge Jane Richards Roth dissented entirely and would have upheld the program. So yes, the Third Circuit’s affirmation of the district court leaves wiggle room for future experimenting.
Q: What does that signify?
That’s probably a good thing. Let’s remember that there isn’t a clearly “liberal” or “conservative” position on this, which is part of what makes the case so interesting.
Mixing dispute resolution into litigation is a good thing, especially in an era of painful judicial budget cuts. Not only can alternative dispute resolution (ADR) be budget-relieving, it can also offer a substantially better quality of justice for many parties. Court innovation is something that everyone should get behind. The Third Circuit was wise to leave a large crack in the door, even if this specific program ran afoul of the First Amendment.
At the broadest level, and setting aside for a moment the rhetoric of “open courts” and “closed courts,” this case would allow the Supreme Court to clarify the extent to which courts can mix litigation with dispute resolution.
Here's a program that allows a state-appointed judge to act as an arbitrator. That means that the state-appointed judge hears cases confidentially, doesn't release the moving papers or ultimate decision to the public, and issues an essentially non-appealable ruling.
Q: Do you think New York's Commercial Division would ever experiment with such a program?
It's not clear that New York's Commercial Division or other business courts would ever try such a bold program. Having said that, I do think that courts here would feel more liberty to at least experiment with judicial involvement in ADR processes if the Supreme Court grants cert and does reverse.
Delaware certainly recognizes the unique value of its judges' experience in corporate law. Other states might like to experiment with judges as arbitrators, mediators or early-neutral case evaluators. With that in mind, the implications for court-based ADR are significant, far beyond the specific First Amendment doctrine that the Supreme Court would address.
Q: What other obstacles would stand in the way here in New York?
Even if the Supreme Court did reverse the Third Circuit, programs like this would still be a tough sell politically. New York is the media capital of the world. Many of the most important cases in the country unfold here across every industry and every area of law. Media organizations and journalists would surely fight efforts to "close" proceedings.
In Delaware, the challenge brought by DelCOG was aided by an amicus brief by many serious journalistic organizations like The New York Times and The Washington Post. It's easy to envision similar efforts, perhaps even stronger, unfolding in New York.
Q: In a March 13 Letter to the Editor in the New York Times in response to an op-ed written by Prof. Judith Resnik on the Delaware program, you write, “we shouldn’t fault judges for trying something creative” and that “court innovation has never been more important, whether in sophisticated business courts or in local small-claims courts.”
Along those lines, are courts like New York's Commercial Division being innovative enough?
First of all, New York has an incredible brain trust of national and international advocates for dispute resolution and court innovation. People like Judith Kaye, Edna Sussman, and Franco Ferrari have all been instrumental in increasing the city’s reputation and prowess in arbitration. And similarly, Lela Love, Brad Heckman, and Dan Weitz have all done the same to normalize and strengthen court mediation. So we're lucky in New York to have these leaders to advise the court system on smart uses of ADR.
New York's Commercial Division specifically has been a leader in alternative dispute resolution initiatives, especially recently, with the recent proposal of a pilot mandatory mediation program and the creation of a dedicated Commercial Division justice to hear cases arising out of international arbitrations
In short, there are many more ways to support ADR than judge-directed arbitration. Business courts or complex litigation parts can show their commitment to dispute resolution in all sorts of ways. While there's certainly more work to do, New York's Commercial Division is becoming a wonderful example of that.