The U.S. Supreme Court decided last Monday to not hear a case involving the State of Delaware's effort to create a state-sponsored program where sitting judges could confidentially arbitrate business disputes. Lower courts held that the program was unconstitutional because that confidentiality, one of the program's defining advantages, violated the First Amendment's requirement for open public access to the courts. The Supreme Court's decision is a potential blow to Delaware's reputation as a friendly destination for corporate legal matters, and confirms the need for businesses to seek legal counsel to ensure they get access to arbitration that fits their needs.
Delaware had created the program in 2009 in an effort to enhance its reputation as a favorable corporate jurisdiction. To participate in the program, at least one party must have been a business entity formed or organized under Delaware law. Arbitrations were to be run by Delaware's Court of Chancery, and active Chancellors would have presided over arbitration hearings at the Chancery Court. Decisions would have been binding and subject to limited appeal – just like private arbitrations. Another perceived advantage of the arbitration program was confidentiality of the proceedings, which proponents of the program rightfully thought would assist companies in maintaining the value of their competitive information during the arbitration process. In light of the significant number of companies incorporated in Delaware – and the draw of having experienced Chancellors hear disputes – the program had the potential to draw a significant number of cases for litigants willing to pay the $12,000 filing fee and daily arbitration fees of $6,000.
Strict confidentiality, however, proved to be the program's downfall. Both the U.S. District Court for the District of Delaware and the Third Circuit Court of Appeals held that the program was unconstitutional because it violated the First Amendment. Relying on Supreme Court precedent, both lower courts noted that the First Amendment guarantees a qualified right of public access to civil judicial proceedings if a tradition of accessibility to that type of proceeding exists, and if public access plays a significant positive role in the functioning of the process in question. The lower courts then found that civil trials and state-sponsored arbitration both had a history of public access and thus, by cloaking its state-sponsored arbitration proceedings under a veil of confidentiality, the Delaware program ran afoul of the First Amendment's guarantee of public access. Although we cannot to read too much into the reasoning behind the Supreme Court's decision to not hear the case, by refusing to hear Delaware's appeal of the lower court decisions, the Supreme Court effectively refused to revive Delaware's program.
The high court's decision has two important implications for businesses. First, businesses should not view the Supreme Court's decision as a blow against the trend towards broader enforcement of arbitration agreements. Indeed, on the same day the Supreme Court let the Delaware arbitration decision stand, it declined to hear a challenge to a significant Arkansas State Supreme Court decision compelling arbitration of a dispute between the legal document preparation company, Legalzoom, and one of its customers. Second, by refusing to hear Delaware's appeal, the Supreme Court confirmed that the best and perhaps only guarantee of confidentiality in dispute resolution is private arbitration, because binding, confidential, state-sponsored arbitration like that contemplated by the Delaware program is likely unconstitutional.