To Seal or Not To Seal: Access To Commercially Sensitive Information In Bankruptcy Proceedings

The public has a general right of access to judicial records. Nixon v. Warner Communications, Inc., 435 U.S. 589, 597–98 (1978)In re Analytical Systems, Inc., 83 B.R. 833, 834–35 (Bankr.N.D.Ga.1987). While sealing is the exception rather than the rule, id. at 835; In re Nunn, 49 B.R. 963, 964 (Bankr.E.D.Va.1985), the decision whether to seal bankruptcy court records lies within the discretion of the bankruptcy court. In re Sherman–Noyes & Prairie Apts. Real Estate Investment Partnership, 59 B.R. 905, 909 (Bankr.N.D.Ill.1986)Hope ex rel. Clark v. Pearson, 38 B.R. 423, 424 (Bankr.M.D.Ga.1984). Section 107(a) of the Bankruptcy Code makes clear that bankruptcy court records are to be open and available to the public except in very limited and exceptional circumstances. In re Analytical Systems, Inc., 83 B.R. 833, 834 (Bankr.N.D.Ga.1987). See alsoWilson v. American Motors Corp., 759 F.2d 1568, 1570 (11th Cir.1985) (“[I]t is the rights of the public, an absent third party, which are preserved by prohibiting closure of public records, unless unusual circumstances exist.”).

In limited circumstances, courts must deny access to judicial documents—generally where open inspection may be used as a vehicle for improper purposes. See, e.g., Nixon, 435 U.S. at 597, 98 S.Ct. at 1311–12 (citing to In re Caswell, 18 R.I. 835, 29 A. 259 (1893) (court can insure that its records are not used to promote public scandal through publication of disgusting details of a divorce), and Schmedding v. May, 85 Mich. 1, 48 N.W. 201, 202 (1891) (court refused to permit its records to be used as sources of business information that might harm litigant’s competitive standing)). Congress, itself, has recognized that under compelling or extraordinary circumstances, an exception to the general policy of public access is necessary. See, e.g., Fed.R.Crim.P. 6(e)(2) (secrecy of grand jury proceedings); 5 U.S.C. § 552(b)(1) (provision of FOIA that exempts from disclosure material affecting the national defense); Fed.R.Civ.P. 26(c)(5)–(8) (sealing of depositions and restrictions on revealing trade secrets or other confidential information). In re Orion Pictures Corp. 21 F.3d 24, 27 (C.A.2 (N.Y.)1994).

There are certain narrow instances under section 107(b)(1) in which the bankruptcy court has discretion to protect entities with respect to commercially sensitive information. Section 107(b)(1) states that “the bankruptcy court shall” offer such protection to an entity when the following two factors are present: (1) there is a request by a party in interest for the court to enter an order protecting such information; and (2) the information is either a “trade secret, confidential research, or commercial information.” In re Taiyo Corp. 1993 WL 13003867, 1 (Bankr.S.D.Ga. 1993). Commercial information has been defined as information which would cause “an unfair advantage to competitors by providing them information as to the commercial operations of the debtor.” Ad Hoc Protective Comm. for 10 1/2% Debenture Holders v. Itel Corp. (In re Itel Corp.), 17 B.R. 942, 944 (9th Cir.BAP 1982).

Commercial information need not rise to the level of a trade secret to qualify for protection under section 107(b). In re Orion Pictures Corp., 21 F.3d at 28 (noting that section “107(b) is carefully drafted to avoid merging ‘trade secrets’ with ‘confidential commercial information’ ”). For purposes of section 107(b), commercial information includes “information which would cause ‘an unfair advantage to competitors by providing them information as to the commercial operations of the debtor.’ ” Id. (citing Ad Hoc Protective Comm. for 10 1/2 % Debenture Holders v. Itel Corp. (In re Itel Corp.), 17 B.R. 942, 944 (9th Cir. BAP 1982)); see also In re Handy Andy Home Improvement Ctrs., Inc., 199 B.R. 376, 382 (Bankr.N.D.Ill.1996); Diamond State Ins. Co. v. Rebel Oil Co., Inc., 157 F.R.D. 691, 697 (D.Nev.1994).  At least one court has found that the meaning of “commercial information” extends beyond the requirement that such information will give an entity’s competitors an unfair advantage. In re Lomas Fin. Corp., No. 90 Civ. 7827, 1991 WL 21231, at *2 (S.D.N.Y. Feb. 11, 1991). Rather, the term includes situations where a bankruptcy court may reasonably determine that allowing such disclosure would have a “chilling effect on [business] negotiations, ultimately affecting the viability of Debtors.” Id.