The City of Cambridge Retirement System v. Universal Health Services, Inc.
2017-0322-SG
| Del. Ch. | Oct 12, 2017Background
- Plaintiff City of Cambridge Retirement System, a current and former stockholder of Universal Health Services, sought inspection of UHS books and records under 8 Del. C. § 220 to investigate alleged improper inpatient psychiatric admissions and billing practices reported in a BuzzFeed article.
- Cambridge served a Section 220 demand and a proposed confidentiality agreement; UHS responded with its own confidentiality agreement that included an "Incorporation Condition."
- The Incorporation Condition would deem any derivative complaint that relies on produced inspection materials to incorporate by reference the entirety of the produced books and records, allowing UHS to cite any produced document in response (e.g., on a motion to dismiss).
- Cambridge refused to agree to the Incorporation Condition and sued to compel inspection without that restriction; UHS refused production unless the condition was accepted.
- The Court considered whether Section 220(c) grants discretion to impose such an incorporation-by-reference condition and whether it is appropriate here to prevent selective, out-of-context reliance on produced records.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Court may impose an incorporation-by-reference condition under §220(c) | Incorporation conditions are pernicious; they enable companies to manipulate the produced universe and frustrate meritorious claims | Court has discretion to impose conditions to prevent cherry-picking and to give defendants context to rebut inferences drawn from isolated documents | Court has discretion under §220(c) to impose an incorporation condition and may do so here |
| Whether the risk that a company will selectively withhold inculpatory documents outweighs the benefits of the condition | Risk of withholding in Section 220 is heightened because the stockholder has less ability to test production, so the condition could unfairly harm investigation | Condition promotes judicial and litigant economy and helps prevent misrepresentation of documents taken out of context | On balance, benefits (context, economy, fair adjudication on motions to dismiss) outweigh the risk; condition permitted |
| Effect of incorporation condition on pleading standards and follow-on litigation | Condition could enable premature dismissal or otherwise change litigation dynamics | Condition does not alter Rule 12(b)(6) or Rule 23.1 standards; it simply deems produced records incorporated so the court may consider context | Court: pleading standards remain unchanged; well-pled claims are unaffected; condition helps address improper inferences |
Key Cases Cited
- United Techs. Corp. v. Treppel, 109 A.3d 553 (Del. 2014) (interpreting §220(c) grant of discretion and approving limits such as forum restrictions)
- Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752 (Del. Ch. 2016) (approving incorporation conditions to prevent out-of-context reliance on produced documents)
- Seinfeld v. Verizon Commc'ns, Inc., 909 A.2d 117 (Del. 2006) (noting Court of Chancery may impose post-inspection conditions like confidentiality orders)
- Disney v. Walt Disney Co., 857 A.2d 444 (Del. Ch. 2004) (recognizing routine use of confidentiality orders in §220 proceedings)