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May 03, 2023

The Presumption of Public Access: From Internal Investigations to Arbitration Agreements, Delaware Courts Disfavor Confidentiality

The Delaware Court of Chancery recently reminded litigants of the “fundamental

The Delaware Court of Chancery recently reminded litigants of the "fundamental right . . . to an open court system." Minnie Sarwal v. Nephrosant, Inc., C.A. No. 2023-0222-BWD (Del Ch. May 11, 2023). The Court's ruling in Sarwal, as well as another recent decision, serve as a strong reminder that litigants should not presume information will be kept confidential, no matter how sensitive it may be. If a party cannot demonstrate a particularized harm from disclosure that outweighs the public interest in accessing the information, the Court of Chancery will not permit confidential treatment.

Sarwal sought advancement and indemnification from defendant Nephrosant, a Delaware corporation that she claimed "steadily achieved success" from her leadership, but later ousted her under the guise of an internal investigation. According to Sarwal's complaint – which was filed publicly, without redactions – in early 2022 the Board of Nephrosant removed her as CEO and shortly after established a Special Committee to investigate employee complaints about Nephrosant's main product. Nephrosant filed its Answer and Verified Counterclaims ("Counterclaims") to Sarwal's complaint under seal. As required by Court of Chancery Rule 5.1, Nephrosant also filed a public version, redacting the information that Sarwal designated as confidential. The document redacted allegations about the Special Committee's investigation, including the Committee's conclusions and Sarwal's alleged misconduct during the investigation in violation of her fiduciary duty to the company.

Shortly after filing its Counterclaims, Nephrosant filed a notice to challenge the confidential treatment of the allegations it had redacted in its public filing of its Counterclaims. Sarwal made several arguments to support continued confidential treatment of the redacted information. She argued that (1) Nephrosant included the redacted information "intending for the allegations to cause [her] great professional and personal embarrassment once published"; (2) the redacted allegations did not pertain to viable claims; (3) the relevant acts were "stale" because they occurred one year prior; and (4) public disclosure was improper because it could affect Nephrosant's ability to obtain funding.

Under Court of Chancery Rule 5.1(a), the party moving for confidential treatment always bears the burden of establishing good cause for confidential treatment. That burden can be substantial, especially when the relevant information is necessary to understand the dispute. The Court in Sarwal cited Delaware cases that strongly favored public access to information, noting that "when parties seek the benefits of litigating in a public court, they also assume the responsibility to disclose previously non-public information in order to satisfy the public's right of access to court documents." This is especially true, noted the Court, when the information is necessary or material to understanding the nature of the parties’ dispute. Such information will only be treated as confidential if a party provides a "strong justification."

The Court of Chancery rejected Sarwal's claim that the allegations would cause embarrassment to Sarwal, holding that this alone was not cause for confidential treatment, as well her argument that the underlying claims were not viable. And Sarwal's argument that the factual allegations were "stale" because they occurred one year prior did not weigh in favor of confidential treatment because older information is less likely to cause harm, not more likely to do so. Lastly, the Court discussed Sarwal's argument that publicly disclosing the redacted information would harm Nephrosant because it would negatively affect its ability to gain funding. This was a peculiar argument, noted the Court, because Sarwal was claiming that public disclosure would harm Nephrosant, the very party advocating for public disclosure. Even assuming the harm was "sufficiently concrete to justify confidential treatment," it still would not outweigh the public's interest in understanding the nature of the dispute between the parties. The Court noted that nearly all actions involving allegations of fiduciary breaches involve at least some potential harm to the company, but this does not permit parties to conceal the nature of their claims and defenses.

Sarwal v. Nephrosant is consistent with an earlier February 21, 2023 decision, Soligenix, Inc. v. Emergent Product Development Gaithersburg, Inc., C.A. No. 2022-0880-PAF (Del. Ch. Feb. 21, 2023), which applied the same principles to arbitrations. Soligenix arose out of an arbitration proceeding between companies Soligenix and Emergent. When Emergent prevailed, Soligenix brought an action to vacate the arbitration award. Soligenix filed its complaint under seal, along with a redacted public version, according to information Emergent deemed confidential. The Court rejected each of Emergent's arguments for confidentiality, holding that held that arbitration agreements are not inherently confidential and that parties may not prevent public access by private contract. In addition, the Court noted that good cause requires "tangible evidence of concrete damage," and that Emergent did not attempt to establish good cause in any particularized way.

Sarwal and Soligenix demonstrate that the Delaware Court of Chancery continues to take a strong position in favor of public disclosure, even for sensitive information or information related to private proceedings. Practitioners are well advised to recognize that even personally embarrassing or other non-public information may not be protected, even in the face of an agreement between the parties.

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