Delaware Business Litigation Report

Chancery Declines Confidential Treatment to Nonparty’s Claimed Sensitive Business Info

American courts have long recognized that the public enjoys a First Amendment right of access to judicial proceedings and records.  While forceful, the right is only presumptive, and the public’s interest in access may be overcome with an adequate showing of need.

In the Delaware Court of Chancery, these principles are embodied in Rule 5.1, which was adopted in 2012 to address perceived excesses in “under seal” filings under former Rule 5(g). As the court explained in its memorandum about the adoption of Rule 5.1, the rule’s “overarching purpose” is “to protect the public’s right of access to information about judicial proceedings.”  Accordingly, Rule 5.1 begins with the general proposition that all papers filed with the court, all hearing transcripts and exhibits will be available for public access. The rest of the rule principally outlines procedures for filing papers with the court confidentially, and for challenges to confidentiality.

Rule 5.1 provides a balancing test for determining whether information should be afforded confidential treatment. Those seeking to prevent public access bear the burden of showing “good cause,” which the rule defines as existing “only if the public interest in access … is outweighed by the harm that public disclosure of sensitive, nonpublic information would cause.” Examples of “confidential” information set forth in the rule include trade secrets and otherwise “sensitive” proprietary, financial, business or personal information.

Until last month, only a handful of written decisions construed Rule 5.1. The most recent decisions concern discrete issues under the rule and its procedures, as in Smashburger Master v. Prokupek, 2015 WL 8669602 (Del. Ch. Oct. 28, 2015) (concerning the potential to lose confidential treatment by not filing a public version); Theravectys SA v. Immune Design, 2015 WL 757665 (Del. Ch. Feb. 18, 2015) (same); Reid v. Siniscalchi, 2014 WL 6486589 (Del. Ch. Nov. 20, 2014) (discussing diminished confidentiality interests due to the passage of time); Flaa v. Montano, 2014 WL 1911419 (Del. Ch. May 14, 2014) (holding under subsection (f)(2) that an objection was waived when a party moved to continue confidential treatment and the person who challenged the filing did not respond). The others consider somewhat more fully the type of information that may pass muster under Rule 5.1’s “good cause” standard, as in Al Jazeera America v. AT & T, 2013 WL 5614284 (Del. Ch. Oct. 14, 2013) (reasoning that proprietary information such as customer numbers and fees may be kept confidential, but the nature of the dispute may not); Sequoia Presidential Yacht Group v. FE Partners, 2013 WL 3724946 (Del. Ch. Jul. 15, 2013) (denying continued confidential treatment to allegations of forgery, destruction of evidence and witness tampering); Heron Bay Property Owners Association v. CooterSunrise, 2013 WL 3871432 (Del. Ch. Jun. 27, 2013) (affording continued confidential treatment to a business’s form agreement that took time and expense to develop and that derived economic value from being kept confidential); Horres v. Chick-fil-A, 2013 WL 1223605 (Del. Ch. Mar. 27, 2013) (denying confidential treatment to affidavit with allegations of sexual harassment and a form franchise agreement, but treating names of alleged victims and witnesses as confidential).

While the rule applies to papers filed with the court, Rule 5.1 does not address all procedures potentially appropriate to protect confidential information used in litigation, such as closing a courtroom or maintaining the confidentiality of trial exhibits. In this regard, the standard form confidentiality stipulations used in the court generally provide that the parties will confer in good faith on potential procedures to protect discovery material deemed confidential prior to any proceeding in which the material will be used.

The most recent decision construing Rule 5.1, ADT Holdings v. Harris, 2017 WL 4317245 (Del. Ch. Sept. 28, 2017), arises in this gap and highlights the issues faced by nonparties whose potentially sensitive information might be used in Court of Chancery litigation against their wishes.

Background

In ADT, on the eve of trial, nonparty Legrand Home Systems, Inc. (Legrand) filed an unopposed motion to prevent certain information from becoming part of the public record. Legrand asked the court to seal certain exhibits and close the courtroom for any testimony or attorney argument regarding them. The claimed “confidential” information included the fact of a business relationship between Legrand and plaintiff Zonoff, Inc. and the 2013 joint development agreement between them.

The Court Denied the Motion Under Rule 5.1’s 'Good Cause' Standard for Failure to Make a Particularized Showing of Harm

The court began by acknowledging the public’s “fundamental” right of access to judicial proceedings and explaining that Rule 5.1 reflects the Court of Chancery’s commitment to this principle, making clear that most information presented to the Court should be available to the public.

As an initial matter, the court held that the Rule 5.1 burden and “good cause” standard applied to non-party Legrand’s unopposed motion. The lack of a formal opposition from any parties or non-parties did not lower the standard. The court reasoned that the public’s presumptive right of access served as the opposition and required the court to assess independently whether Legrand made the requisite showing. Nor did Legrand’s nonparty status lessen its burden. Although Legrand did not decide to litigate over these issues in a public forum, the court reasoned that “an everyday reality of doing business is the possibility that a business partner may end up in litigation in a public court.” Further, subsection (b)(3) of the rule provides that any “party or person” who seeks confidential treatment bears the burden to establish “good cause,” which supported that the same burden should apply to non-parties.

Thus, Legrand was required to show “good cause” for confidential treatment overriding the public’s right of access by making a particularized showing of substantial harm from disclosure.  Legrand’s motion, however, was “cursory and conclusory” regarding the potential for harm from public disclosure and fell short of satisfying the standard. Turning to the specific exhibits at issue, the Court explained why each was undeserving of confidential treatment. The 4-year-old joint development agreement was “unremarkable” and a “common form.” Its somewhat dated payment terms and pricing information were not sufficiently sensitive, and there was no showing that they were “specifically negotiated” versus based on “standard rates.” The agreement’s appendices contained only “generic descriptions of the [software] coding process,” rather than “lines of code or innovative product features.” A “standard form” escrow agreement providing for “an industry-standard software escrow” and that did not “contain any technical information” met a similar fate. Finally, the court found that Legrand and Zonoff’s “standard, arms’-length relationship … from over four years ago” was not so highly sensitive that its disclosure would cause competitive harm.  Moreover, the existence of the parties’ relationship and the terms between them were “important facts” relevant to understanding “a contested transaction at the heart of the case.” The court and the public would need “a high-level” understanding of the relationship to appreciate the case. Accordingly, the court denied Legrand’s motion.

Key Takeaway

ADT reinforces that any person seeking an order from the Court of Chancery for confidential treatment bears the burden to demonstrate that, in the circumstances of the case, specific confidentiality concerns outweigh the general public’s First Amendment interest in open judicial proceedings. Under ADT, a nonparty is subject to the same “good cause” standard for confidential treatment applied to parties. Notably, however, the rules and the standard confidentiality orders do not provide deadlines to give notice to a nonparty that its potentially sensitive information might be used at trial or a hearing. Nonparties who have little familiarity with a dispute may face tight timeframes in which to confer with the parties (if possible) and object. For this reason, a nonparty hoping to protect its business information might find itself at a relative disadvantage compared to a party. To avoid having to retain counsel in haste and submit last-minute papers that may not adequately support the request for confidential treatment, nonparties concerned that their sensitive confidential information might be used in a Delaware court proceeding would be well advised to engage Delaware counsel in advance, seek reasonable notice of the parties’ intent to file or otherwise use sensitive information, closely monitor the trial schedule, obtain a copy of any pretrial joint exhibit list and prepare in advance to explain and support by affidavit the potential harm from public disclosure.

Delaware Business Court Insider | October 18, 2017

Share