Background
In October 2014, Delaware notified Plains All-American Pipeline (“Plains”) that it intended to conduct an audit using its third-party auditor, Kelmar. Plains sued Delaware and Kelmar challenging its authority to conduct the audit, its use of estimation, and its use of an auditor with a financial interest in the outcome of the audit. In August 2016, the federal district court determined that the legal challenge by Plains was largely too speculative to survive because Plains brought suit before Delaware assessed liability based on the audit and before Delaware sought a subpoena to enforce its document request. Plains then filed a Notice of Appeal with the Third Circuit at the end of September 2016.
Appeals Court Decision
On Wednesday, the U.S. Court of Appeals for the Third Circuit disagreed with the district court’s dismissal of Plains’ procedural due process claim as unripe. The Due Process clause of the Fourteenth Amendment provides that no state shall “deprive any person of life, liberty, or property, without due process of law.” Accordingly, a fair process is required for a government agency to take such life, liberty, or property. Procedural due process thus asks whether there has been a deprivation of life, liberty, or property, and if there was such a deprivation, what procedures are required to implement it.
In its complaint, Plains argued that it had a protectable property interest in the money that it will have to spend and the corporate resources that it will have to use, if forced to comply with the audit. Plains also argued that it had a protectable property interest in the confidential business information that it would have to disclose to Kelmar and Delaware during the audit. Further, the audit would deprive Plains of these property interests without adequate procedural safeguards.
Such procedural safeguards were said to be lacking because Delaware has delegated their administrative audit authority to Kelmar and will allow Kelmar to act in a quasi-judicial capacity—Kelmar will decide which documents must be produced; which related entities will be audited; whether or not Plains’ records are insufficient; and whether, and to what extent, estimation will be used. It was also noted that there was no way for Plains to effectively object to Kelmar’s demands. Finally, Plains emphasized that Kelmar has developed its own proprietary estimation procedures—procedures that will largely determine Kelmar’s compensation but that have not been promulgated by any governmental authority.
Whether or not the claim that there had been a violation of due process was ripe for decision specifically depends on (1) the adversity of the parties’ interest; (2) the conclusiveness of the judgment; and (3) the utility of the judgment.
On the first prong, the Court found adversity between the parties’ interest given the nature of Kelmar’s vested interest in the audit, noting that the appointment of Kelmar to conduct the audit “is based on conduct that has already occurred” and is “not based on a contingency.” On the second prong, it noted that a judgment on the procedural due process violation claim would be conclusive since it would affect the legal status of the parties and that no further factual development was needed to address the merits of the claim. Finally, on the third prong, the Court stated that a ruling on the merits would be useful to the parties in the instant case as well as to others that could be affected “given Delaware’s widespread use of private auditors.”
The case has now been remanded to the federal district court so that it may decide, on the merits, whether this arrangement between Delaware and Kelmar is constitutional. The Third Circuit was careful to note, however, that in order to ultimately establish a due process violation, “all that Plains must show is that it was required to submit a dispute to a self-interested party.” Finally, while declining to evaluate whether Delaware’s revised Escheats Law will apply retroactively in this case, the court interestingly noted that although the February amendments resulted in “some meaningful changes… the basic framework of the law remains unchanged…”
Credit
Credit for the article to Jenna Bentley at Borden Consulting Group.