The heavy burden of persuading the Commercial Division of New York State Supreme Court to seal court records containing sensitive business information could be eased under a proposed new rule.

In releasing the new rule for public comment earlier this week, the Administrative Board of the Courts stated that it is “designed to clarify and highlight for courts and parties that the protection of proprietary sensitive business information in commercial disputes is an appropriate goal of, and ‘good cause’ for, sealing of selected documents or portions of documents filed in the course of litigation.”

The new Commercial Division rule would incorporate the existing general rule governing the sealing of court records set forth in Rule 216.1 of the Uniform Civil Rules for the Supreme Court and County Court – with one critical addition to explicitly recognize the need to safeguard sensitive business information as “good cause.” The proposed new Commercial Division Rule 11-h, with the supplemental language bolded below, would provide:

Rule 11-h. Sealing of court records:

(a) Except where otherwise provided by statute or rule, a court shall not enter an order in any action or proceeding sealing the court records, whether in whole or in part, except upon a written finding of good cause, which shall specify the grounds thereof. Good cause may include the protection of proprietary or commercially sensitive information, including without limitation, (i) trade secrets, (ii) current or future business strategies, or (iii) other information that, if disclosed, is likely to cause economic injury or would otherwise be detrimental to the business of a party or third-party. In determining whether good cause has been shown, the court shall consider the interests of the public as well as of the parties. Where it appears necessary or desirable, the court may prescribe appropriate notice and opportunity to be heard.

(b) For purposes of this rule, “court records” shall include all documents and records of any nature filed with the clerk in connection with the action. Documents obtained through disclosure and not filed with the clerk shall remain subject to protective orders as set forth in CPLR 3103(a).

In proposing the new rule to the Administrative Board, the Commercial Division Advisory Council observed that under Rule 216.1 as it has been construed by the courts over the years, “litigators in commercial cases have found it particularly difficult to place under seal many kinds of commercial information, even information that is not directly relied upon by the court or litigants and which is only marginally, or not at all, information of public interest.” The Advisory Council observed that for twenty-five years since it adoption, Rule 216.1 has been interpreted as setting the bar quite high for litigants seeking to seal court records. This stringent standard, the Advisory Council reported, was designed to remedy a trend in the late-1980s and early-1990s in which defendants regularly sought to seal court records as a condition of settlement. This sealing strategy was employed frequently in product liability and toxic tort cases that, by their nature, might prompt copycat actions, the Advisory Council noted. In its memorandum supporting the new rule, the Advisory Council stated that at the time Rule 216.1 was adopted, sealing court records in such cases “was seen as problematic by the media because of the possibility that important information potentially necessary to protect the public health and welfare was being concealed.”

While the courts interpreting Rule 216.1’s “good cause” standard came to recognize as a relevant factor the issue of whether disclosure of records could cause competitive harm in the marketplace, the Advisory Council observed that the competitive harm factor currently is not being applied liberally.

The Advisory Council identified two reasons why proprietary or sensitive business information should be subject to a more liberal application of the good cause standard. First, the Advisory Council stated, the type of case typically litigated in the Commercial Division – disputes arising out of business transactions, commercial real estate, internal affairs of business organizations and breach of contract – “do not affect the public health and welfare the way product liability and toxic tort cases may.” Second, the Advisory Council maintained, the disclosure of proprietary and sensitive business information “could harm a commercial entity’s competitive standing.” The Advisory Council concluded that sealing such information “in commercial cases where there is little or no legitimate public interest involved, is a practice that should be recognized in the Commercial Division.” In posting the new rule for public comment, the Administrative Board underscored the Advisory Counsel’s observation that “the public disclosure of business data such as price information, historical company information, and confidential documents – often of marginal relevance to a case – has adversely and unnecessarily impacted New York’s attractiveness as a commercial litigation forum.”

The Administrative Board’s memorandum requesting public comment on the proposed rule is available here.

Comments on the proposed rule should be emailed to rulecomments@nycourts.gov or forward to John W. McConnell, Esq., Counsel, Office of Court Administration, 25 Beaver Street, 11^th Floor, New York, New York 10004. Comments must be received no later than December 15, 2016.

For more information on this advisory, please contact:

William S. Gyves
(212) 808-7640
wgyves@kelleydrye.com

Proposed Rule Would Promote Sealing New York Commercial Division Records Containing Sensitive Business Information