Exposure

A U.S. appeals court judge told me a few years ago that private contracts between businesses should call for settling disputes through bench trials rather than by arbitration.

But neither the judge nor I thought to mention a factor that may matter more than the relative quality of justice in courts versus private arbitration. As a recent 2-1 ruling by the Ninth Circuit just reminded us, federal courts strongly favor public access to case records — even if the records include deeply embarrassing documents that a party produced in discovery.

Class case over defect

The dispute arose in a class action case against Chrysler for a defect — in its Totally Integrated Power Module-7 — that sometimes caused cars not to start and to stall. After receiving from Chrysler internal documents relating to the defect, class plaintiffs moved for a preliminary injunction that would require Chrysler to inform people who drove cars with the defective TIPM-7 about the safety concerns.

The district court allowed the plaintiffs and Chrysler to file the internal documents under seal, finding “good cause” for the secrecy.

But as a result of the redactions, the plaintiffs’ brief looks in places like a tantalizing Swiss cheese. For instance:

The court heard argument on the motion for preliminary injunction but denied it without prejudice.

That did not please the non-party Center for Auto Safety. It moved the district court to allow it to intervene for the purpose of seeking to unseal the internal documents. CAS cited the importance of open courts generally and the public’s first amendment right to know what goes on in public courts.

The district court did permit CAS to intervene. But it rejected the motion to unseal without prejudice.

CAS’s appeal

CAS appealed the ruling to the Ninth Circuit, which proved a receptive audience. The panel ruled 2-1 that the district court had used the wrong test for deciding whether to seal (or unseal) documents in the context of a preliminary injunction application.

True, the panel conceded, Ninth Circuit precedent authorized district courts to put sensitive documents under seal on a showing of nothing more than “good cause” unless the parties filed them in connection with a “dispositive” motion. But:

The focus in all of our cases is on whether the motion at issue is more than tangentially related to the underlying cause of action. . . . It is true that nondispositive motions are sometimes not related, or only tangentially related, to the merits of a case, as in Phillips [ex rel. Estates of Byrd v. Gen. Motors Corp., 307 F.3d 1206, 1213–14 (9th Cir. 2002)]. But plenty of technically nondaccispositive motions—including routine motions in limine—are strongly correlative to the merits of a case.

The Center for Auto Safety v. Chrysler Group, LLC, No. 15-55084, sip op. at 12 (9th Cir. Jan. 11, 2016).

The majority’s “more than tangentially related to the underlying cause of action” test disgruntled the dissenter. Circuit Judge Sandra Ikuta accused the majority of “invent[ing] a new rule, namely that a party cannot keep records under seal if they are attached to any motion that is “more than tangentially related to the merits of a case,” Maj. op. at 17, unless the party can meet the “stringent standard” of showing that compelling reasons support secrecy, Maj. op. at 8.” Id. at 23 (Ikuta, J., dissenting). “Because this decision overrules circuit precedent and vitiates Rule 26(c) of the Federal Rules of Civil Procedure,” she wrote, “I strongly dissent.” Id.

Takeaway

The Ninth Circuit’s ruling in Center for Auto Safety loosens the test for sealing and unsealing documents that parties may produce in discovery. (Although we don’t know what the Chrysler memos, emails, and presentation said, we may safely assume that they paint an unflattering picture of Chrysler’s car-making prowess.) You must show a “compelling need” to place or maintain one of your documents under seal if you or your opponent files something that relates “more than tangentially to the merits”.

By making public disclosure of internal documents more likely, Center for Auto Safety renders lawsuits even less attractive than private arbitration as a means for resolving disputes. As the Third Circuit noted:

Confidentiality is a natural outgrowth of the status of arbitrations as private alternatives to government-sponsored proceedings. Indeed, we would be surprised to find that private arbitrations—taking place before private arbitrators in private venues—had historically been accessible to the public.

Delaware Coalition for Open Government, LLC v. Strine, 733 F.3d 510,518 (3d Cir. 2013).

I end up thinking that parties shouldn’t have the ability to keep damaging documents secret in arbitration, at least to the extent the parties use them to contest the merits. The same presumption of openness should apply there as it does in court. That seems especially true in consumer and employment cases, in which a large imbalance exists in resources and bargaining power.