Don’t Become Complacent About Confidentiality

The filing of any action, even one that is quickly settled or dismissed, nevertheless poses a risk of exposing a party’s nonpublic information to public view. Many are familiar with efforts to maintain confidentiality at the outset of a litigation, including through a well-crafted confidentiality order. But a recent Delaware Court of Chancery decision reminds us that parties must reinforce those efforts after final disposition of the case or risk the exposure of previously sealed material.

We have spoken before in this blog about how the Delaware Court of Chancery recognizes a “fundamental right . . . to an open court system.” Under Chancery Court Rule 5.1(a), “[a]ll pleadings and other materials of any sort, including motions, briefs, letters, affidavits, exhibits, deposition transcripts, answers to interrogatories, answers to requests for admissions, and hearing transcripts, that are filed with the Register in Chancery, provided to the Court, or otherwise part of the record in a civil action . . . shall be available for public access.” The Court of Chancery will not presume that nonpublic corporate records are entitled to confidential treatment. Instead, there must be “good cause” for confidential treatment, which will not be met simply because the parties have entered into a confidentiality agreement. In other words, a company entangled in litigation must make a record as to why confidential treatment is warranted if it seeks to shield its internal documents and communications from the public eye.

Even if successful, hard-won confidential treatment will not last forever. Under Chancery Court Rule 5.1(g), confidential treatment expires three years after final disposition of the action unless the party seeking to continue confidential treatment files an appropriate motion. The standard for maintaining confidential treatment after final disposition is similar to the standard for obtaining confidential treatment in the first place. Mere assertions that material should continue to be nonpublic or that disclosure would be competitively harmful will not suffice. Instead, Rule 5.1(g) expressly requires the party seeking continued confidential treatment to “file a supporting brief and affidavits providing an evidentiary basis for the particularized harm on which the movant relies for each Document for which continued Confidential Treatment is sought.”

A recent Court of Chancery opinion made clear that failure to meet these requirements can doom a motion to continue confidential treatment. In Osterjung, LLC v. Newmark S11 GP, LLC et al., the plaintiff, a limited partner, filed a direct and derivative action against the general partner asserting a failure to properly calculate earnings and pay distributions. The plaintiff filed the complaint as a confidential filing; six months later, all parties reached a confidential settlement that resolved the case pursuant to a stipulated dismissal with prejudice. Three years later, under Rule 5.1(g), the Court of Chancery notified the parties that any material filed under seal, including the complaint, would soon be unsealed. Both defendants moved for continued confidential treatment.

The Court denied the motion in a terse opinion. The problem? “Defendants’ Motion was not accompanied by any affidavit providing an evidentiary basis for the particularized harm that would result from releasing the filings in this case from confidential treatment.” That is, regardless of the rationale for continued confidential treatment, and despite no party having contested confidential treatment, the defendants’ failure to submit the affidavits required by Rule 5.1(g) exposed previously sealed information to the public.

For companies seeking to shield confidential internal documents from public exposure, this decision is a sobering reminder of the Court of Chancery’s commitment to an open court system and a warning not to become complacent about confidential treatment. Even if a party can convince the court that materials should be sealed while the litigation is pending, those materials generally will not remain sealed indefinitely. To justify the extra protection of continued confidential treatment even after the litigation ends, a company must support its request with evidence, not just arguments.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.