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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Rule 5.1 Gets Its First Major Test
When the Delaware Court of Chancery adopted Rule 5.1 in late 2012, the court took great pains to inform the public that Rule 5.1 represented a significant departure from the practices under former Rule 5(g). Notwithstanding this admonition from the court, until the court issued opinions addressing the new aspects of Rule 5.1, particularly what type of information met the "good cause" standard articulated in the rule, there was little guidance to flesh out exactly how the court would apply the new rule.
While there were some shorter opinions and transcripts addressing Rule 5.1, the court did not analyze the rule in depth until Al-Jazeera America v. AT&T Services, C.A. No. 8823-VCG (Del. Ch. Oct. 14, 2013). The court's opinion in the case is instructive in two areas. First, the procedural background to the opinion provides an excellent summary of some of the procedures new to Rule 5.1, including the "challenge procedure." Second, the opinion gives us the first lengthy examination of the good-cause standard in Rule 5.1 and the public policy behind it.
In Al-Jazeera, the plaintiff, Al-Jazeera America LLC (AJA), brought claims against AT&T Services Inc. arising out of AT&T's alleged improper termination and breach of a carriage agreement between AT&T and AJA's predecessor in interest, Current TV. Seeking to make a substantial entry into the cable television market, AJA acquired Current TV, which had an existing carriage agreement with AT&T to carry Current TV on AT&T-operated cable systems. AT&T, however, refused to carry AJA's signal, which led to the lawsuit.
AJA filed its complaint under seal without a prior order of the court, as is now permitted by Rule 5.1. Al-Jazeera and AT&T both redacted information from the public version of the complaint, which Al-Jazeera filed within three days of filing the original complaint as required by Rule 5.1. This public version, however, redacted substantial portions of the complaint. The parties represented that they had redacted information about their relationship, including the terms of the carriage agreement, such as pricing, number of subscribers and other "commercially sensitive provisions."
Upon seeing the heavily redacted public version, a number of members of the press invoked Rule 5.1's challenge procedure to contest the redactions. As required by the rule, AJA and AT&T both filed motions seeking continued confidential treatment, along with a version of the complaint containing fewer redactions. The press continued to challenge the redactions and filed oppositions to the motions filed by the parties. The court then heard argument on the motions for continued confidential treatment.
During the argument, AJA argued that it redacted certain information from the complaint solely to comply with a confidentiality provision in the carriage agreement. The court requested that AJA amend its redactions without reference to the carriage agreement, using only Rule 5.1 as its guide. The court also asked AJA to submit additional information on the harm that would be caused by the disclosure of certain information. After this information was submitted, the court decided whether the revised redactions met the good-cause standard meriting continued confidential treatment.
On the substantive redactions, both AJA and AT&T argued, in varying fashions, that because of the competitive nature of the cable television business, if competitors—be it other networks for AJA or other cable systems for AT&T—were to obtain information about the dispute between the parties, AJA and/or AT&T would suffer substantial economic harm. Both parties used this position to justify heavy redactions to the complaint, at times redacting entire paragraphs or substantial portions of them to remove all material information about the dispute, other than that it existed. Put another way, the public version of the complaint disclosed that the parties disputed their obligations under the carriage agreement but gave no further information regarding the nature of that dispute, other than that it existed.
After discussing the origins of Rule 5.1, including the persistent overdesignation of material as confidential in documents filed with the court, the court noted that Rule 5.1 continues to protect "sensitive business information like price terms, account numbers and the names of companies that place non-winning bids during corporate reorganizations." The court did not, however, agree with AJA and AT&T that the information redacted from the complaint fell within the category of "sensitive business information." While agreeing that the parties could keep pricing information confidential, the court held that "when sensitive information that the parties wish to keep confidential directly impacts the public's basic knowledge of particular court proceedings—where, as here, the supposedly-confidential information represents the nature of the dispute itself—the interest of the public in accessing this information outweighs the economic harm to the parties that disclosure may cause."
Here, the court found that the public's interest in whether a journalistic enterprise like AJA could be denied entry to the American broadcast market, including the alleged reasons why entry is being denied, outweighed any economic harm that might befall the parties if a more complete description of the nature of the dispute were made public. The court held that the parties must disclose most of the information that the parties sought to redact, including AJA's allegations about the true reasons AT&T refused to carry AJA. It is also important to remember that the court did not accept AJA's argument that the confidentiality provisions in the carriage agreement justified redaction under Rule 5.1.
What does the opinion in Al-Jazeera tell us? As mentioned above, it shows how the challenge procedure works, and, not insignificantly, why it is part of the rule. AJA and AT&T sought to shield the nature of their dispute from public view, but the press and the public had an easy means of challenging that attempt. This procedure ensures that the right of public access to court proceedings can and will be enforced by the court. Whether the result in Al-Jazeera is viewed as a change from the former practice under Rule 5(g) is irrelevant. Rule 5.1 applies now and will be applied to prevent overdesignation of pleadings when challenged. The rule simply will not permit parties to redact from public inspection information relating to the core nature of a dispute. The core nature includes the reasons why the dispute exists, not just the existence of the dispute.
On a final note, the Delaware Supreme Court has accepted an interlocutory appeal of the Al-Jazeera opinion, so this is not the last word on the issue. It should be noted that the Supreme Court did approve the adoption of Rule 5.1, but its views on the issue are unknown.