Project: Corporate Counsel Part II (Unintended Consequences) - Courts A State Of Perfection Delaware Addresses Corporate Counsels' Concerns

Monday, August 1, 2005 - 01:00

The Editor interviews The Honorable Myron T. Steele, Chief Justice of the Supreme Court of Delaware.

Editor: In their interviews on the front page of this Special Section, two leading general counsel comment on civil justice reform issues of the greatest importance to corporate counsel. A primary concern is preemption of the judicial function by AGs and state regulators.

Steele: I can only offer my personal reactions based on my experience as a Delaware lawyer and judge. It is a perspective based on a lifetime of working in a common law system in which cases are decided in context on the basis of facts presented to a court. Our judges spend considerable time involved in efforts to resolve tensions between management, the board, and shareholders based on contextual situations presented to our Courts. The kind of aggressive action by the executive branch that you refer to would be unthinkable in Delaware. It's not the product of the kind of approach that we believe should be applied to resolving the tensions within corporate infrastructures. This is best accomplished by the evolution of the common law through thoughtful resolution of those tensions by an experienced judiciary that is mindful of its responsibilities.

The idea of an elected state attorney general or a state comptroller or any other executive figure in the states taking aggressive action to shape internal corporate governance based on their own political views is completely foreign to us. These actions give the appearance of reflexive reactions to the circumstances of a particular event - without allowing for a reasonable period for contemplation or analysis of the intended and unintended consequences of these actions. I don't know how to measure the ultimate cost versus the benefit of these kinds of actions. Yet, it is arguable that these aggressive moves cannot help but have widespread impact on the behavior of key players in our economic system. They can deter individuals from serving as directors and discourage risk taking. One can only hope that executive branch policymakers fully explore the consequences of their actions.

Editor: Can you envision the Delaware Attorney General following in the footsteps of some of the more aggressive state AGs?

Steele: I don't see it as an issue in Delaware. We have been the leaders among the states in developing a body of common law with respect to corporate governance that is both well-balanced and flexible and it has worked out over time. Involvement by state attorneys general or others in the executive branch in other states in corporate governance is a judgment for them to make, but it is not something on the horizon in Delaware.

Editor: Corporate counsel are concerned that prosecutors are putting pressure on corporate defendants to refrain from indemnifying directors or officers accused of wrongdoing notwithstanding that the corporation may be legally obligated to provide such indemnification.

Steele: Our desire is to encourage best practices in corporate governance. We want the best possible people to be willing, able, and ready to serve as directors of corporations in order to enhance long-term shareholder value. If directors feel that they cannot rely on a corporation's undertaking to advance funds for their defense or to provide indemnification, this can have a chilling effect on efforts to recruit directors.

In Delaware, we are concerned about the longer-term perspective. Before we act, we ask ourselves: Are we really improving the relationships between directors, management, and the shareholders? Are we treating the corporation as the vehicle for which it was intended, that is to build long-term value not just for shareholders but for all those who depend in some way on the corporation? Are corporations going to be able to attract the directors, officers, and employees that will make them long-term wealth builders or are we going to create such a chilling effect on good people that they won't bother to serve. It's our hope in Delaware that AGs in their efforts to deter wrongdoing don't lose sight of the long-term goals.

Editor: Corporate counsel are troubled by the fact that prosecutors frequently ask corporations for documents protected by the attorney-client privilege and work product rule, which in most states is deemed a waiver of the protections they provide. Is this true in Delaware?

Steele: We take a very protective view of the attorney-client privilege and work product rule. But, resolving how and when they apply is done on a case by case basis, because it's done by court rule, not by statute. We are one of the minority of states where a court rule in conflict with a statute prevails. It is a historical quirk in the minds of some people, but our law provides that when a court rule and a statute are in conflict, the court rule governs. We value and do try to preserve the attorney-client privilege and work product protection except where to do so would involve unfair prejudice to a party.

Editor: Another concern is that cases are fleeing court systems in reaction to prosecutorial excess and exposure to excessive damages. Are cases fleeing the Delaware courts?

Steele: No. We are a state that offers litigants a level playing field. We believe that this is one of the reasons that the U.S. National Chamber of Commerce in each of the last four years found Delaware to be the number one civil court system in the country. We do not have a track record of excessive jury verdicts in commercial litigation in our Superior Court. In the Court of Chancery, there are no punitive damages. There simply isn't an empirical basis for people to feel that it is risky to litigate here. We have many judges who are seasoned business lawyers. This is true of all those on the Court of Chancery. A majority of the Superior Court judges come from sophisticated practices. Paramount in our minds is the desire to offer a level playing field to those that litigate in our court system.

Editor: Another issue raised by corporate counsel is that judges do not adequately instruct juries as to the standards to be applied in sentencing or assessing damages.

Steele: In Delaware the courts receive requests for instructions from the parties. The parties have an opportunity to put before the court exactly how they would like the jury to be instructed and the judge's job is to see first whether there are sufficient facts in the case to justify giving that charge. Every judge has a large book of pattern jury instructions. The judge looks at the general instruction for that type of case and then fits the law with the facts of the case; appellate review is available to determine whether the trial judge has done that correctly or not. There is hardly a month that goes by when people are not raising questions in the Supreme Court about the correctness of jury instructions. Our law says that a jury is entitled to a correct statement of the law that is neither misleading nor confusing. If parties don't get that, there will be a new trial.

Editor: Corporate counsel find that in some states the ability to appeal may, as a practicable matter, be denied because appeal bonds are so high.

Steele: Our current rule is that the amount of an appeal bond is discretionary. We rely on the ability of a thoughtful judge to set the appeal bond in an appropriate amount. We don't have an automatic cap regardless of the verdict below. We don't have a rule that fixes the amount of the bond based on the amount of the lower court judgment either. This is typical of Delaware; we go right down the middle, but with enough flexibility to look at the facts on a case by case basis. Before our Supreme Court right now, having been reviewed by our Rules Committee made up of representatives from the bar and the bench, is a request to put a cap on the amount required for an appeal bond.

Editor: Another reason cited by corporate counsel for fleeing court systems is unnecessary expense attributable to inability to get early decisions at an appellate level with respect to dispositive issues. Does Delaware allow interlocutory appeals?

Steele: We have an interlocutory appeal process. A party can request the trial judge in our Court of Chancery or Superior Court to recommend that the Supreme Court decide an issue on an interlocutory basis that may be dispositive or otherwise significantly affect the trial. The Supreme Court has the discretion to take the appeal. There is no one on the Supreme Court who is not familiar with the impact of taking or not taking an interlocutory appeal. The Supreme Court includes three former members of the Court of Chancery and the former President Judge of the Superior Court and our fifth member is a very experienced former litigator. We are not at all reluctant to look at an issue raised in an interlocutory appeal application and recognize when it might be case dispositive, and then decide it would save the parties time, money, and angst if we were to accept and promptly decide that issue on an interlocutory basis.

Editor: Another issue that troubles corporate counsel is the burden of excessive discovery and the "gotcha" quality of penalties imposed on perceived failures to comply, particularly with respect to e-discovery.

Steele: There is a very real practical limit in Delaware on imposing excessive discovery burdens on a party. Our budget office - the folks who review our requests for funds to operate - demand that we meet performance standards. They demand that we produce documentation showing that our court process is efficient. If we become inefficient in their eyes, we won't have money appropriated to run the courts. This means that we always have our eye on how our cases proceed. It would be counterproductive for us to allow a case to flounder because the judge doesn't have tight control over the discovery process, particularly in the Court of Chancery and the Superior Court. Therefore, very tight discovery orders are entered and a very strong case has to be made for additional discovery - basically, a showing that your client would be denied justice or be unfairly prejudiced by not getting additional discovery. Our court rules in both the Superior Court and the Court of Chancery, although not identical to the federal rules, are patterned on them. Rule 11 is generally used by our trial judges to prevent abuse of the discovery process by applying sanctions to a party for failure to comply with the discovery rules or interrupting the necessary logical flow of the proceedings. These sanctions are rarely applied and when they are, the trial judge has to make a very careful finding of fact about why the sanctions are appropriate and that finding is reviewable on appeal.

Editor: Are defendants given adequate opportunity to present defenses in class actions or is the process rushed, as it is in so many other states?

Steele: I sat for six years on each of the Superior Court and the Court of Chancery and I do not recall a party in any case believing that they had insufficient time to present meritorious defenses. Just as I said that you can get discovery expanded if you can make the case that you would be unfairly prejudiced, the same test would be applied to the time necessary to respond in a class action context. There is no rush to judgment here, but there is an efficient mechanism for resolving all the disputes between the parties. The parties will be given enough time to accomplish everything that that they can show they need to accomplish in order to receive a fair hearing.

Editor: There is concern that judges need to judge and that legal issues are too frequently decided by juries .

Steele: It's very clear, and all of our trial judges know, that issues of law when presented to the court on which there is no genuine dispute of material fact have to be decided by the judge. The jury's role is to apply the facts to the law given to them by the judge. Our judges do not give the jury legal issues where there is no factual dispute to resolve.

Editor: Concern is also expressed that courts are not tough enough on lawyers who abuse court processes.

Steele: Through Rule 11 and other mechanisms, our judges have the tools to keep lawyers on track and to make sure that they are prepared and do not abuse the process. Our judges are not at all reluctant to exercise that authority.

Editor: Concern was expressed that the process used in some states for selecting judges produces inferior judges who may have an agenda influenced by their supporters.

Steele: That is not a concern in Delaware. If a vacancy occurs, anyone who is interested can apply. The applications go to what is called the Judicial Nominating Committee, which is appointed by the Governor. It is made up of nine people that come from across the state. The Committee is gender and ethnically balanced. Usually five are lawyers and four are laypeople. The applicants are then subject to a background check. This is followed by personal interviews of the persons that the Committee believes merit interviews.

The Committee is then obligated by the Governor's Executive Order to submit for screening by the Judicial Election Committee of the Delaware State Bar Association a minimum of three and a maximum of five names for each vacancy. The Judicial Election Committee has twenty-five members and, interestingly, they are all litigators likely to come before the new judges. They have a discussion about the nominees and then send a report to the Governor. The Governor then picks the nominee from the list and the name goes to the Senate where there is first a hearing before the Senate Executive Committee where any member of the Senate can ask questions and then, after another background check, it goes to the floor for a full vote of the Senate where the nominee can be questioned again. The questioning is very detailed, focusing on the nominee's ability, experience, temperament and, probably most importantly, whether he or she will enhance the reputation of the Delaware judiciary. Also, to provide political balance, our constitution provides that no political party can have a majority of more than one on our constitutional courts.

Editor: It was also felt that judges are given insufficient training.

Steele : The screening process I just described assures that experienced people will be selected. You don't want a mechanic working on your car who has never before worked on one and you don't want a judge on the bench who has never tried cases or is unfamiliar with the subject matter. New judges don't get a case until they have sat with other judges for a period of time. We also send a number of our general jurisdiction judges from our Superior Court almost routinely to the National Judicial College's three- to six-week program for new judges. Our judges are required to take CLE the same as all lawyers. We have two CLE in-house conferences every year that are mandatory for all our judges and we also encourage them, and give them the funds, to go to CLE courses that they select in the course of the year.

Editor: Many corporate counsel are concerned about the quality of jurors.

Steele: Our jury pool comes from voter registrations and motor vehicle licenses. It's very much ad hoc and random except to the extent that the people called as jurors were sufficiently responsible to want to vote or get a driver's license. Parties can ask for a "special jury" of people with more formal education, but parties rarely do. Generally, people are satisfied with service on our regular juries and the quality of the experience it affords them. There are two intractable problems. One is parking and the other is that people sit around for a long time. The latter problem is a function of the fact that people facing a criminal trial wait to take a plea until just before the trial. Otherwise complaints from jurors or litigants about them are few. We have a one-trial, one-day service system that seeks to make jury service less onerous and thus, hopefully, produces a contented and thoughtfully dedicated jury venire.