Renting Judges for Secret Rulings in Delaware

Back in 1974 William Cary wrote a widely cited article about Delaware in the Yale Law Review, where he stated:

“a pygmy among the 50 states prescribes, interprets, and indeed denigrates national corporate policy as an incentive to encourage incorporation within its borders, thereby increasing its revenue.”

Today, the problem is larger, as Delaware continues what a more recent observer calls “a political tradition of self-serving venality.” Delaware is an offshore centre inside the United States: offering a range of lures to get out-of-state and international companies to incorporate themselves there, to take advantage of lax corporate governance regulation, secrecy, state-level tax rules and others. In the race to the bottom between U.S. states, Delaware is a clear ‘winner’ in many fields, not least in the area of financial secrecy.

For a short primer on how Delaware has done this, see Rogue State: the Case Against Delaware, exploring the rather anti-patriotic attitude of the (self-declared) “First State,” which is also one of America’s smallest. In small jurisdictions, of course, it’s far easier for large corporate or criminal interests to get the legislation changed in their favour, without interference from pesky things such as stakeholders and democracy.

Now, a very important opinion article this past week in the New York Times, entitled “Renting Judges for Secret Rulings,” explores the latest battle in Delaware’s fight to get a few locals rich, at the expense of everyone else.

To compete, Delaware passed a law in 2009 offering new privileges to well-heeled businesses. If litigants had at least $1 million at stake and were willing to pay $12,000 in filing fees and $6,000 a day thereafter, they could use Delaware’s chancery judges and courtrooms for what was called an “arbitration” that produced enforceable legal judgments.

Instead of open proceedings, filings would not be docketed, the courtroom would be closed to the public and the outcome would be secret. The Delaware Supreme Court could review judgments, but that court has not indicated whether appeals would also be confidential.”

Our emphasis added: that weasel word ‘compete’. As a reminder: this process has nothing whatsoever to do with competition between firms in a market. This is the race to the bottom.

In 2012 a Federal judge overturned the law, but Delaware is once again campaigning to get it reinstated. And there are well-oiled voices, of course, calling for this. As the article continues:

“To defend their rent-a-court system’s “conciliatory atmosphere,” conducive to “business relations,” Delaware’s chancery judges invoked the history of privacy in arbitration. This translates into giving control to litigants to make their own rules, use state judges and prevent the public from knowing anything.”

This is a version of the ‘efficiency’ arguments so beloved of tax havens around the world. Get those pesky stakeholders and that troublesome democratic scrutiny out of the way, and things will happen just so much more smoothly.

All of which not only raises big questions about growth-sapping inequality, but also raises the question of what all that democratic scrutiny and accountability is for. Most people would, once they thought about it, describe them not as mere irritants in the money-making machine, but essential trappings of a democracy.

At the end of the day, this is the same old problem of anti-democratic forces free-riding off the benefits provided by others – which we TJN exists to oppose:

“The Delaware legislation is a dramatic example of rich litigants using their resources to close court systems that taxpayers support and constitutions require.”

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