Business Roundtable has joined the U.S. Chamber of Commerce to support an appeal of a U.S. district court's ruling that threatens the effectiveness of Delaware's business court's innovative handling of disputes between companies.

The case deals with the issue of whether the Delaware Court of Chancery must open arbitration proceedings between disputing parties to the public. In August, U.S. District Court Judge U.S. District Judge Mary McLaughlin of the Eastern District of Pennsylvania agreed with the Delaware Coalition for Open Government that the court's arbitration process was the equivalent of a civil trial and therefore must be open to the public. (Opinion here)

But arbitration is not litigation and eliminating confidentiality would rob the court of its unique effectiveness, BRT and the Chamber argued in a friend of the court brief filed Tuesday, Dec. 18. The brief supports the appeal by the Court of Chancery's five justices to the U.S. Court of Appeals for the Third Circuit.

Arbitration offers businesses an essential alternative to litigation. The required time and expense have increasingly rendered litigation impractical. Businesses need a venue where they can settle their disagreements fairly and efficiently. Arbitration by Court of Chancery judges is particularly promising. It bears all the virtues of traditional arbitration, including flexibility, informality, and cost effectiveness. And it has the added advantage of allowing companies to have their disputes resolved by experienced adjudicators with expertise in business law. Amici’s members have a strong interest in the availability of this forum and in the reversal of the judgment below.

In April 2009 the Delaware Legislature empowered the Chancery Courts to conduct a new arbitration process in the hopes of reducing litigation costs and making the state more attractive to investment. To arbitrate business disagreements -- of more than $1 million -- the parties (one must be a Delaware citizen) must agree to a set of rules that includes confidentiality. Forcing arbitration into the public will render the process nearly useless, the Chamber and BRT argue.

Requiring such arbitration to be conducted in the open will not advance any public interest, but it will impose substantial public cost. Confidentiality is an essential feature of arbitration, as reflected in uniform industry practice. Among other things, confidentiality prevents dissemination of trade secrets and sensitive financial information; prevents testimony from being taken out of context and used unfairly against a company; and allows parties to resolve disputes conclusively without setting precedent that will bind them or others in future cases. If arbitration before Court of Chancery judges were made public, few if any businesses would participate, and therefore no interest of openness would be advanced. But the costs to businesses and the public would be substantial. Businesses would lose the opportunity to adjudicate their disputes in an efficient forum, injuring not just businesses, but also their millions of shareholders and American financial markets generally. States will likewise lose the ability to innovate (and generate much-needed revenue) by adopting similar programs.

Indeed, the amicus brief argues, eliminating the Delaware option would encourage businesses to "go abroad" with their disputes to be settled in foreign arbitration tribunals.

America's high costs of civil litigation are a well-recognized burden on U.S. global competitiveness. Towers Watson reported in January that tort costs in 2010 amounted to $264.6 billion in 2010, which translates to $857 per person. And, since 1950, growth in tort costs has exceeded growth in GDP by an average of approximately 2 percentage points. The American Tort Reform Association's latest "Judicial Hellholes" report demonstrates again how courts in some states can run amok in allowing costly and preposterous lawsuits against business.

Delaware's policy-making branch of government has turned to an innovative arbitration system to help reduce those costs, with no harm to the public good. It's the BRT and Chamber's view that the Court of Chancery's arbitration rules should stand.

News coverage...

• Delaware Online, "Secret arbitrations supported"
• Wilmington News Journal, "National impact could follow Del. 'secret court' ruling"
• Thomson Reuters, "Delaware's business court presses for secret arbitration"
• National Association of Corporate Directors, "Chancellors Appeal Fed Court Ruling on Transparency in Arbitration"