In a derivative case that was preceded by a Section 220 action, the Chancery Court determined that documents designated confidential in the Section 220 case and filed under seal needed to be unsealed and publicly disclosed based on a thorough anlaysis of the applicable cases and policy concerns. In Romero v. Dowdell , download file, (see my blog summary and a copy of prior decision in the case here ), Plaintiff requested court approval to unseal and make public in a derivative case, certain documents that had been originally filed under seal and designated in a Section 220 case as “highly confidential”. The parties entered into a Confidentiality Agreement during the Section 220 action which specifically allowed documents to be used in a subsequent derivative action. However, the use of such documents was required to be in a pleading that was filed under seal pursuant to Chancery Court Rule 5(g).
The Confidentiality Agreement provided a mechanism by which the parties could challenge the designation of material as confidential or highly confidential , but pursuant to Rule 5(g)(2), the burden of establishing confidentiality and of filing a document under seal is on the parties seeking such treatment. See blog summary here of July 19, 2005 decision denying the Motion to Dismiss the Section 220 case among the parties.
There is pending a Consolidated Federal Securities Class Action filed against Career Education Corp., the company involved in this case, in the Northern District of Illinois. Discovery in that consolidated case has been stayed pursuant to the Private Securities Litigation Reform Act of 1995 (the “PSLRA”).
The Court recited the legal analysis for determining whether “good cause” exists under Rule 5(g) to shield documents from the public, and it was observed that the Court has repeatedly held that good cause exists to shield documents under Rule 5(g) when those documents contain either trade secrets or third party confidential material or non-public financial information. See One Sky, Inc. v. Katz, 2005 WL 1300767 at *1 (Del. Ch. May 12, 2005). See blog summary and copy of decision here of One Sky.
The Court found that the instant case was on all fours with the recent decision in Stone v. Ritter, No. 1570-N, Slip Op. at 3 (Del. Ch. September 26, 2005 (Opinion on Remand). See my blog summaries of the 2 decisions in that case here and here.
In Stone v. Ritter , Plaintiffs obtained books and records pursuant to a Section 220 demand and later filed a derivative complaint under seal pursuant to the Confidentiality Agreement of the parties, at which time the Court ordered the Defendants to “show cause…as to why the sealed portions of the complaint should not be publicly disclosed”. The Defendants relied on the decision of Vice-Chancellor Lamb in Disney v. Walt Disney Company, No. 234-N, Slip Op. (Del. Ch. June 20, 2005)(Opinion on Remand). For a copy of that opinion download file.
The Stone v. Ritter decision rejected the application to the facts of that case, of Disney v. Walt Disney Company, because that Disney case arose in the context of a Section 220 action while Stone involved a derivative action “in which the stockholder Plaintiffs assert derivative claims based on information obtained using the “tools at hand” under Section 220.
The portion of the Stone case that was quoted by the Court as applicable here is as follows: “reasonable expectations of confidentiality with respect to documents produced in the Section 220 action do not continue unabated in the context of litigation. The test now is under Court of Chancery Rule 5(g) and the Court must determine whether good cause exists for the complaint and other related documents to continue to be filed under seal.” (citing Stone v. Ritter, Slip Op. at 3).
The Court also cited Stone v. Ritter for the determinative analysis as follows: “balancing the interests of companies in protecting proprietary commercial, trade secret or other confidential information against the legitimate interests of the public in litigation filed in the Courts, as well as stockholder interests in monitoring how directors of Delaware corporations perform their managerial duties”.
In conclusion, the Court determined that after reviewing all 76 paragraphs of the 40-paged derivative complaint, there was no basis for continuing to seal any portion of it.
The Court found most of the information drawn from publicly available documents and determined that none of the details comprise trade secrets or third party confidential information or non-public financial information.
Nor was disclosure likely to show sensitive internal deliberations of a Board or any of its committees. The Court also found that the information contained in the minutes of a Board meeting was insufficient to justify treating them as confidential information. Nor did the Court find a basis in the PSLRA or in the Securities Litigation Uniform Standards Act (“SLUSA”) of 1998 to prevent disclosure of information in the complaint.