Delaware - Courts New Options For Mediating Or Litigating Complex Disputes In The Delaware Court Of Chancery

Monday, November 1, 2004 - 01:00

The Editor interviews The Honorable Donald F. Parsons, Jr., Vice Chancellor of the Court of Chancery of the State of Delaware.

Editor: Please tell us about your background.

Parsons: I graduated from Georgetown University Law Center in 1977. Before that, I received a B.S. degree in electrical engineering from Lehigh. Immediately after law school, I clerked for the Honorable James L. Latchum of the United States District Court for the District of Delaware. Before joining the Court of Chancery, I was a partner in the law firm of Morris, Nichols, Arsht & Tunnell in Wilmington, Delaware. Given my engineering background, I specialized in intellectual property litigation and participated in numerous mediations of patent and other intellectual property matters both as a mediator and representing clients in mediation. Throughout my career, I have been very active in the Delaware legal community. I served as president of the Delaware State Bar Association and chaired its Intellectual Property Law Section.

Editor: I sometimes think of the Court of Chancery as the nation's first business court.

Parsons: Yes, the Delaware Court of Chancery enjoys an international reputation as an outstanding forum for litigating complex corporate and commercial disputes. The Court of Chancery has extensive jurisdiction over corporate matters, some of which date back to 1899, when Delaware first adopted its General Corporation Law. In addition to corporate law cases, Chancery has traditional equity jurisdiction. It hears disputes in which there is no adequate remedy at law, such as cases for injunctive relief, specific performance, and rescission. As a court of equity, Chancery historically has been an important court for trade secret actions, which usually seek injunctive relief. Due to its limited jurisdiction, Chancery hears no criminal cases or tort actions seeking only money damages, and does not entertain claims for punitive damages. There also are no jury trials in Chancery. These are some of the reasons this five-judge Delaware court has developed such an excellent reputation in the corporate world for providing expeditious decisions and prompt relief in even the most complicated cases.

Editor: When did the Court of Chancery first offer mediation?

Parsons: Since 1998, the Court of Chancery has offered parties the option of voluntary mediation under its Rule 174, in order to provide them "convenient access to dispute resolution proceedings that are fair, confidential, effective, inexpensive, and expeditious." The mediator may be the Chancellor or one of the four Vice Chancellors, which gives the parties an opportunity to present their positions to a judge who is actively engaged in resolving complex legal issues. Mediation through a judge, who will candidly express opinions on the risks facing both sides, may help bring about an agreement between parties.

Editor: Tell us about the recent expansion of Chancery jurisdiction to include adjudication and mediation of technology disputes and mediation of other major business disputes.

Parsons: To take advantage of the expertise and reputation of the Court of Chancery, Delaware enacted legislation in 2003, which empowers the Court to mediate and adjudicate technology disputes. A "technology dispute" is broadly defined as: "[A] dispute arising out of an agreement and relating primarily to: the purchase or lease of computer hardware; the development, use, licensing or transfer of computer software; information, biological, pharmaceutical, agricultural or other technology of a complex or scientific nature that has commercial value, or the intellectual property rights pertaining thereto; the creation or operation of Internet web sites; rights or electronic access to electronic, digital or similar information; or support or maintenance of the above."

The statute further directs the Court to liberally interpret "technology disputes" and to adopt rules to facilitate their mediation and adjudication in order to provide an "expeditious and expert forum for the handling of technology disputes" in the Court of Chancery.

The 2003 legislation also gave the Court of Chancery the power to mediate "business disputes" in a broader sense. The statute authorizes the Court of Chancery to define by rule the types of cases eligible for mediation as a business dispute. The statute also expressly encourages Chancery "to include complex corporate and commercial disputes, including technology disputes, within the ambit of the business dispute mediation rules." The court has followed that suggestion.

Editor: What was the impetus behind the expansion of the Court of Chancery's jurisdiction? What have other states done?

Parsons: The new Delaware legislation was developed by a working group of practitioners along with members of the Court of Chancery to respond to a growing trend to provide sophisticated judicial fora for litigating or mediating complex business disputes. As noted in the synopsis of the legislation, these new provisions provide "additional benefits for businesses choosing to domicile in Delaware," and were devised to "keep Delaware ahead-of-the-curve in meeting the evolving needs of businesses, thus strengthening the ability of the State to convince such businesses to incorporate and locate operations" in Delaware.

Several other states have established special procedures for resolving business and technology cases. Maryland, for example, has implemented a business and technology case management program. A key concept of the program is the referral of all cases assigned to it for some form of alternative dispute resolution. In 2002, Michigan passed legislation to establish a "Cyber Court" for business and commercial disputes. The legislation envisions permissive, but not mandatory, ADR.

Editor: What are the prerequisites for mediation in Chancery?

Parsons: Under the Delaware law, there is a separate docket for mediation proceedings. The parties may request that the Court of Chancery (i) mediate the dispute only, (ii) mediate the dispute initially, and if that fails, adjudicate the dispute, or (iii), in the case of a technology dispute, adjudicate the dispute. The mediation proceedings are confidential.

To invoke the Court's mediation jurisdiction, the parties must satisfy the following requirements:

1. The parties must have consented to mediation by the Court of Chancery by agreement or stipulation;

2. At least one party must be a "business entity";

3. At least one business entity must be formed or organized under the laws of Delaware or have its principal place of business in Delaware;

4. No party may be a "consumer" in the context of the business dispute involved; and

5. For disputes involving solely a claim for monetary damages, the amount in controversy may not be less than one million dollars.

To initiate a mediation, the parties must submit a petition for mediation confirming that these requirements have been met and identifying the issues to be mediated. The petition and all supporting documents are confidential and not of public record. The Court will appoint a mediator (normally one of the Chancery judges), or the parties may request a particular mediator. Generally within two weeks of receipt of the petition, the mediator will conduct a telephone conference to set the date, time, and place of the mediation. The mediator may request a mediation statement and a limited number of exhibits from each side. Absent agreement of the parties, no formal discovery would occur. The filing fee for a mediation is $5,000 with an additional charge of $2,500 for each day of mediation, to be split equally among the parties.

Editor: Is mediation in Chancery an option in many complex corporate, commercial and technology disputes nationwide?

Parsons: Yes. Delaware has been the favored state of incorporation for U.S. businesses for almost a century, and the number of Delaware corporations continues to grow. Currently, there are approximately 600,000 Delaware business entities, including corporations. Almost 60% of Fortune 500 corporations and more than one-half of corporations having shares listed on the New York Stock Exchange are Delaware corporations. Thus, many significant corporate, commercial and technology disputes are likely to involve at least one Delaware company. Each such dispute would be a potential candidate for mediation in the Court of Chancery.

The new mediation process applies broadly in other respects, as well. There is no requirement, for example, that the parties litigate in Delaware to participate in mediation in the Court of Chancery. Indeed, there is no requirement that litigation be pending anywhere before a party may file a petition for mediation in Chancery. That is the situation in one current mediation matter that involves a multi-billion dollar contract dispute. There also is no requirement as to the timing of the parties' agreement to mediate in Chancery. The consent could be contained in a license agreement, for example, that includes an ADR provision requiring mediation in Chancery prior to any litigation. As occurred in one recent case, another alternative is for the parties to agree to mediate in Chancery on a parallel track, while they are still actively litigating in a different forum.

Editor: I understand that the new statute also authorizes litigation of technology disputes in Chancery.

Parsons: Yes, the recent legislation in Delaware makes the Court of Chancery much more available than it had been to hear a broad range of technology disputes. One such case is now before the Court of Chancery for mediation. As noted above, the term "technology dispute" is broadly defined in 10 Del. C. § 346(c) to mean "a dispute arising out of an agreement" that primarily relates to some form of technology, including explicitly intellectual property rights pertaining to technology. A dispute over an IP license agreement, therefore, could be litigated in the Court of Chancery provided the prerequisites listed above are met. Those include consent of the parties, at least one of which is a Delaware company. If only damages are sought, the amount in controversy must be at least $1 million. Consistent with long-standing precedent in the Court of Chancery, neither punitive damages nor a jury trial are available in a "technology dispute" heard pursuant to Section 346. Finally, Section 346 does not limit the existing jurisdiction of the Court of Chancery or any other Delaware Court.

Another example of a "technology dispute" that now could be litigated in Chancery is a breach of contract action for money damages only relating to, for example, a major contract to supply computer software or other technology. The plaintiff would not be required to seek some form of equitable relief to be in Chancery.

The Court of Chancery will handle an action relating to a technology dispute the same way as any other litigation. The filing fee is the same as for filing a class or derivative action, currently $600. The Supreme Court of Delaware would hear any appeal. Presumably, however, in connection with their consent to invoke Chancery jurisdiction, the parties could agree in advance to forego any right of appeal. In that case, the case would be more in the nature of an ADR proceeding.

On September 29, 2003, the Court of Chancery adopted rules to implement the new legislation. New Rule 92 provides that a written agreement to litigate a technology dispute in the Court of Chancery is acceptable if it contains the following language: "The parties agree that any dispute arising under this agreement shall be litigated in the Court of Chancery of the State of Delaware, pursuant to 10 Del. C. 346. The parties agree to submit to the jurisdiction of the Court of Chancery of the State of Delaware and waive trial by jury."

Editor: Does the Chancery mediation procedure complement the IP expertise of the District of Delaware?

Parsons: I believe it does. The Delaware Court of Chancery has long enjoyed an outstanding reputation for handling complex corporate and commercial litigation. The new mediation jurisdiction seeks to build on that foundation.

Similarly, the United States District Court for the District of Delaware is a preeminent forum for patent litigation. Delaware ranks sixth of the ninety-four districts in terms of the number of patent complaints filed since 1995, and seventh in terms of the number of patent cases resolved between 1995 and 1999. Delaware district judges averaged almost twenty-four patent complaints filed per judge, per year between 1995 and 2003, two to three times more than the average in any other district in the country. Likewise, Delaware district judges resolve, on average, more patent cases per year than judges in any other district.

Most patent cases in the District of Delaware are referred to Magistrate Judge Mary Pat Thynge for mediation. Between 1993 and 2003, Judge Thynge mediated 893 cases, of which 203 were patent cases. Due to her expertise and the demand for her services, however, Judge Thynge's calendar often becomes congested. The result is that parties sometimes must wait several months for a mediation conference. The new Chancery Court mediation proceedings provide an additional option for a more expedited mediation. In fact, I have successfully mediated a major patent case this year that had been scheduled for an imminent trial in the District of Delaware.

Editor: How can the parties benefit from the changes you described in Chancery's jurisdiction?

Parsons: Parties should benefit in several ways from the Delaware Court of Chancery's new jurisdiction to mediate and/or adjudicate technology disputes and to mediate other major business disputes. Mediation is more expedient and less expensive than litigation. Mediation also is a more consensual and less confrontational forum for resolving disputes, which helps parties to preserve whatever mutually beneficial relationships they might have and to work out more creative resolutions to their disputes. Finally, the parties can proceed with the knowledge that their conflict will be handled fairly, expeditiously, and above all, competently by judges in a court renowned for its expertise in handling complex commercial litigation.