(Reuters)—Delaware's push to expand the state's legal industry was dealt a blow on Thursday when a federal judge ruled its high-profile Court of Chancery judges could not preside over arbitration proceedings that are closed to the public.

The court's five judges were sued by the Delaware Coalition for Open Government, a group that promotes government transparency, for holding what the group said amounted to "secret" hearings to settle large business disputes.

The federal judge hearing the case, Mary McLaughlin of the Eastern District of Pennsylvania, ruled that the arbitration cases amounted to nonjury trials and must be open to the public.

"Openness of civil trials promotes the integrity of the courts and the perception of fairness essential to their legitimacy," she wrote in a 26-page opinion. She said public access encouraged those with information to come forward and discouraged perjury.

Delaware's Legislature adopted the private arbitrations in 2009 as a way to bolster the state as a center for resolving business disputes at a time when private arbitration is becoming increasingly popular.

The Court of Chancery, long a preferred venue for major business and shareholder disputes, recently blocked Martin Marietta Materials Inc.'s $5 billion hostile tender offer for Vulcan Materials Co. About two-thirds of the S&P 500 companies are incorporated in the state, in part to gain access to the Court of Chancery.

According to legal experts, Delaware appeared to be the first state to adopt a system involving private arbitrations before sitting judges.

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Critics attacked the system as overstepping the First Amendment of the U.S. Constitution, which the Supreme Court has held protects the public's right to attend criminal trials.

The ruling on Thursday seemed to surprise John Flaherty, the leader of the group that filed the lawsuit. "Oh my gosh, that's a great victory for the rule of law," he told Reuters.

Larry Hamermesh, an attorney for Leo Strine, the court's chief judge, said the defendants would appeal, given the importance of developing better ways to resolve legal fights.

"In an increasingly competitive global marketplace, the United States cannot afford to be at a competitive disadvantage in providing efficient ways for businesses to resolve their disputes," said Mr. Hamermesh, who is also a professor at Widener Law School.

The law provides for two companies in a dispute worth at least $1 million to go the Chancery Court and get a private hearing on an expedited basis. Court documents, hearings and even the names of the companies involved remain sealed.

Delaware hoped to compete against traditional private arbitration, which is overseen by a lawyer or retired judge agreed upon by both parties, by offering up its well-respected Chancery judges. Backers of the law said they hoped it would help make Delaware a center for international arbitration.

Judge McLaughlin said judges could not serve as arbitrators, even if it was by mutual consent of the parties involved.

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"A judge bears a special responsibility to serve the public interest. That obligation, and the public role of that job, is undermined when a judge acts as an arbitrator bound only by the parties' agreement," she wrote.

Because the private arbitrations are not public, it is unclear how many times the system was used. At a February hearing before Judge McLaughlin, an attorney for the defendants said six cases had been filed.

"Who knows how many cases are involved?" said Mr. Flaherty, who is known in the state for fighting to open government records. "It could be 10 cases or 100."

The law creating the system passed without a dissenting vote in the state's Legislature, and the arbitrations only gained prominence last year when Advanced Analogic Technologies Inc. took a disputed merger with Skyworks Solutions Inc. into the state's arbitration process.

Attorneys who have taken cases through the system told Reuters they were recommending clients build it into contracts. They praised it for the speed of the proceedings as well as the secrecy and ability of the parties to craft their own procedures.

Judge McLaughlin rejected arguments that the openness of the court system was driving the growth of arbitration. Even if public courts "fell into disuse, the judiciary as a whole is strengthened by the public knowledge that its courthouses are open and judicial officers are not adjudicating in secret."