Joining two other circuits, the Third Circuit clarified its own prior authorities by holding that Section 107 “displaces” common law and more broadly protects trade secrets and confidential information than common law.

The April 16 opinion by Circuit Judge Cheryl Ann Krause came to the appeals court when the bankruptcy judge in Delaware certified a direct appeal.

The Sealing Dispute

The appeal came to the Third Circuit following confirmation of a chapter 11 plan in 2017. During the case, the debtor commenced an adversary proceeding against a competitor alleging interference with contract and antitrust violations, among other claims. While the adversary proceeding was pending, the parties submitted a stipulated protective order allowing a party to seal documents by designating them as confidential, if the party believed in good faith that they contained trade secrets or proprietary information.

If the other party disagreed, it could mount a challenge, giving the producing party the burden of showing it was properly classified. In the adversary proceeding, the debtor used some of the sealed documents in an unsuccessful motion for a preliminary injunction.

Seeking to use some of the sealed documents in a related proceeding in state court, the debtor moved in bankruptcy court to unseal the documents, invoking common law as the proper standard for lifting a seal. The competitor contended that Section 107 was the standard.

Siding with the debtor, the Delaware bankruptcy judge interpreted existing Third Circuit precedent to mean that the documents should be disclosed because the competitor had not overcome the common law presumption of openness.

However, the bankruptcy judge said he had “some sympathy” for the competitor’s argument and said it would be “presumptuous” of him to distinguish Third Circuit precedent. So, he certified a direct appeal to the Third Circuit and stayed his order in the interim.

Common Law and Section 107

Turning to the question of whether Section 107 or common law controls sealing in bankruptcy cases, Judge Krause said that the common law right of access precedes the U.S. Constitution, arose in the 1600s in England and turns on whether the document is a judicial record. She added that “the common law right of access is distinct from the First Amendment right of access, with which it is often confused.” The First Amendment right, she said, “is even more robust” and extends “much higher” protections for access to judicial proceedings themselves.

“Against the backdrop of this longstanding common law presumption of public access,” Judge Krause said that “Congress has passed legislation protecting access to certain categories of documents, including in 11 U.S.C. § 107.”

Section 107(a) provides that “a paper filed in a case under this title and the dockets of a bankruptcy court are public records and open to examination by an entity at reasonable times without charge.” Judge Krause said that subsection (a) creates a presumption that records are subject to public inspection.

On motion, Section 107(b) provides that

the bankruptcy court shall, and on the bankruptcy court’s own motion, the bankruptcy court may — (1) protect an entity with respect to a trade secret or confidential research, development, or commercial information; or (2) protect a person with respect to scandalous or defamatory matter contained in a paper filed in a case under this title.

Judge Krause said that Section 107 “certainly resembles” common law and sometimes has been described as codifying common law. She said that the certified appeal would allow the court to decide for the first time “whether the common law public right of access and § 107 are coextensive and, if not, whether § 107 displaces the common law in bankruptcy proceedings.”

Section 107 Supplants Common Law

Although “common law yields to statute,” Judge Krause said there is a “longstanding rule” that statutes “invading” common law are to be read with a presumption favoring the retention of long-established principles. For a statute to abrogate common law, she quoted the Supreme Court as saying that “the statute must ‘speak directly’ to the question addressed by the common law.”

By its terms, Judge Krause said that Section 107 “speaks directly” to the question of sealing under common law. The “only remaining question,” she said, “is whether § 107 diverges from the common law such that it displaces, rather than merely ‘codifies,’ that doctrine.” She found divergences in “two major respects.”

Permission for sealing trade secrets or confidential information in Section 107(b)(1), Judge Krause said, “is broader than the information that could be protected under the common law doctrine, which requires the proponent of sealing to show not only a protected category of information — which would include trade secrets or other confidential commercial information — but also that the disclosure of this information ‘will work a clearly defined and serious injury to the party seeking closure.’” By using the word “shall,” Judge Krause said that Section 107 means the bankruptcy court has no discretion compared to common law, which “permits courts to exercise their discretion.”

The differences led Judge Krause to “hold . . . that § 107 does not ‘codify’ . . . in the sense that it brings with it all of the common-law soil in which that decision is rooted, but rather differs from and displaces the common law standard for sealing judicial records in bankruptcy cases.” The holding, she said, aligns with “similar conclusions” in the First and Eighth Circuits.

However, Judge Krause “emphatically” rejected the competitor’s idea “that § 107’s protection for confidential commercial information permits sealing of records whose disclosure would work no harm at all.” Rather, she said, “the categories of information protected by § 107(b) entail that their disclosure would cause competitive injury.”

“To be clear,” Judge Krause said, “there still must be a substantial risk that disclosure would detrimentally affect the producing party’s competitive standing — a showing that differs from the common law doctrine in degree, rather than kind.”

Judge Krause affirmed in part, reversed in part and remanded for the bankruptcy court to “evaluate [the competitor’s] requests to seal through this objective lens and . . . not simply credit a party’s assertion of competitive injury.”