22 February 2021

Court of Chancery Sheds Light on When Documents Produced Under Section 220 May Remain Confidential

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The Delaware Court of Chancery recently showcased its commitment to maintaining open judicial records and proceedings. In a derivative suit predicated on the widely covered Boeing crashes from 2018 and 2019, in which the Complaint featured materials that had been produced pursuant to a books-and-records inspection demand under Section 220 of the Delaware General Corporation Law, the Court rejected all but one of Boeing’s attempts to shield its internal documents from the public spotlight. Most cases, of course, will not be so charged with public interest. Nonetheless, the Court’s analysis should serve as a reminder that keeping information confidential in Delaware courts may be an uphill battle.

How Rule 5.1 Works

Court of Chancery Rule 5.1 sets forth the circumstances under which information is entitled to confidential treatment. Rule 5.1 took effect in 2013 and has been said to “implement[] the powerful presumption of public access.” Under Rule 5.1, courts will deny a motion seeking confidential treatment unless the moving party shows “good cause.” In fact, courts may deny such a motion even where the parties agree that confidential treatment is appropriate. Good cause exists when the harm resulting from disclosure would outweigh the public interest in open access; however, such a finding must rest on particularized showings of harm, not conclusory assertions or mere embarrassment. This exacting standard applies even if documents obtained through a Section 220 demand were subject to a confidentiality agreement. Examples of categories of information that may qualify as Confidential Information include trade secrets; sensitive proprietary information; sensitive financial, business, or personnel information; sensitive personal information, such as medical records; and personally identifying information, such as social security numbers, financial account numbers, and the names of minor children.

Companies producing documents pursuant to Section 220 should ensure that any complaint incorporating such documents or related information will be filed confidentially under Rule 5.1. Under Rule 5.1, plaintiffs must file the complaint confidentially, and then must serve a proposed public version on the defendants, who have just three days after receiving notice to specify any additional redactions they believe are necessary. If they fail to respond in time, the plaintiff’s proposed version will be filed as the public complaint. Rule 5.1 lays out a similar procedure for other pleadings but, in those cases, the non-filing parties have five days to respond, instead of three.

The parties’ redactions in a public pleading may, however, be subsequently challenged—whether by litigants, third parties, or the court. Additionally, redactions only receive confidential treatment for a presumptive three-year period on the theory that, “over time, information typically grows stale and its sensitivity fades.” At that point, litigants must request that the court extend confidential treatment. Litigants seeking confidential treatment, therefore, face immediate and long-term challenges to their request.

The Boeing Case

The Boeing decision illustrates the point. The underlying case alleges that Boeing’s directors had not properly overseen the safety of the 737 MAX airplanes — a so-called “Caremark” claim (discussed elsewhere on the blog here and here). Here, however, Vice Chancellor Zurn was concerned with Boeing’s Motion for Continued Confidential Treatment regarding certain information that had been redacted in the public Complaint but was then requested by The Wall Street Journal. Boeing contended that the following categories of information were entitled to confidential treatment: “(1) communications with or about Boeing’s customers; (2) the identities and employment details of current and former employees, including potential whistleblowers; (3) business information relating to the Company’s supply chain, competitive strategy, and motivation for certain design improvements; (4) ‘communications concerning sensitive business information by and among Boeing’s executives and directors in the wake of the 737 MAX accidents’; and (5) communications reflecting the Company CEO’s statements to the Board regarding third parties, together with Boeing’s assessment of reports concerning the accidents and related events.”

Boeing raised a number of points that the Court rejected. At the outset, the Court emphasized that its decision was guided by Rule 5.1, not the confidentiality agreement negotiated as part of the Section 220 demand. Boeing also proffered the extensive, detailed media coverage of the crashes as evidence that any further disclosure would simply be lost in the flood instead of furthering public interest. The Court, however, had the opposite mindset. It took “the public’s intense attention” to mean that “even the details are of interest” — especially in light of complaints that Boeing’s response was difficult to unpiece without the facts at issue.

Most of Boeing’s remaining arguments met a similar fate. The Court was particularly forceful with regards to the fourth category of information, which concerned communications among Boeing’s executives and directors immediately following the accidents. Indeed, Boeing’s contention that the sensitive business information contained in these materials warranted confidential treatment left the Court “incredulous.” In its own words, “These communications are at the very heart of this board oversight case. They are essential to the public’s understanding of this litigation, which centers on what the Board knew about the 737 MAX and the crashes, when the Board knew it, and how the Board reacted to that information.” Suffice it to say, the Court was quick to reject Boeing’s “remarkable position.”

Yet the Court did agree that public interest would not be furthered by disclosing the names of whistleblowers. That said, the Court insisted that the “substance of the employees’ concerns must be made public” given their significance to Boeing’s response. Ultimately, this small concession was the only one the Court was willing to make in the face of Boeing’s numerous requests.

Takeaways

The Boeing case is an extreme example of a litigant’s interest in confidentiality giving way to the public’s interest in open access to judicial records and proceedings. But it can still provide some insight in terms of the best ways to secure confidential treatment for sensitive business information. For one thing, despite the Boeing court’s conclusion regarding confidentiality agreements, parties negotiating Section 220 agreements should require plaintiffs to redact certain information in their proposed public complaint. It is true that, once a document is involved in litigation, the Rule 5.1 standard governs. But this sort of agreement allows defendants to avoid producing a rushed response to the proposed public complaint in just three days’ time. On the same note, it allows defendants to be more judicious in determining what is and is not Confidential Information. Indeed, it is advisable for litigants to exercise some restraint in their confidentiality designations, consistent with the Rule 5.1 standard, so the court looks more favorably on their arguments. This is especially true given the likelihood that a heavily redacted document will eventually come before the court in some manner or another. Finally, lawyers and clients alike should be mindful that imposing a redaction is the beginning and not the end of a request for confidential treatment, and that there is always a chance of a future request for information and subsequent disclosure.