Does a Civil Protective Order Protect a Company s Foreign Based Documents from Being Produced in a Related Criminal Investigation?

Transcription

1 Does a Civil Protective Order Protect a Company s Foreign Based Documents from Being Produced in a Related Criminal Investigation? Contributed by Thomas P. O Brien and Daniel Prince, Paul Hastings LLP Introduction In many US federal civil lawsuits (particularly cases involving intellectual property, such as copyrights, patents, and/or trade secrets), sophisticated counsel negotiate an agreement a protective order to, among other things, prevent the unauthorized distribution of their clients proprietary information. Given the broad scope of many civil discovery requests, most of these protective orders include a provision limiting the use of material produced in discovery solely to that litigation. After the parties have agreed to the terms of the protective order, it is endorsed by a US federal judge and it becomes binding on the parties and, often times, third parties. While clients (understandably) still may be anxious about the production of their proprietary information, the vehicle of the civil protective order helps to allay the clients fears that the documents they produce in response to a civil discovery request will not be used against them in another civil lawsuit, or worse, in a criminal investigation. Those fears are amplified with foreign companies which may be outside of the jurisdiction of a US court for purposes of effecting service of a grand jury subpoena (and, therefore, such foreign companies would have no obligation to produce information in response to a grand jury subpoena), 1 but whose foreign based documents may be located in the US by virtue of their production in civil litigation. Put simply, even if civil parties enter into a protective order limiting access to, and use of, a foreign defendant s documents only to that litigation, a foreign defendant may be faced with choosing between: (1) producing the requested documents in the civil litigation notwithstanding the risk of potential criminal exposure in the event that the US government later obtained the defendant s foreign based documents in response to a grand jury subpoena served on the civil plaintiff; or (2) refusing to comply with the discovery request and facing civil discovery sanctions under the Federal Rules of Civil Procedure, such as an adverse inference instruction at trial, a monetary penalty, or, in the most extreme case, termination of the litigation. With increasing scrutiny by the US Department of Justice (DOJ) on intellectual property cases, a foreign company being sued by a competitor in the United States also may become the target of a federal criminal investigation. Whether or not the US government may obtain a defendant s foreignbased documents by serving a grand jury subpoena on a civil plaintiff, despite the existence of a civil protective order, turns on the law of the federal Circuit Court in which the case is pending. The majority of federal US Circuit Courts (including recent decisions by the US Court of Appeals for the Fourth Circuit and the US Court of Appeals for the This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. Bloomberg Finance and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.

2 Ninth Circuit) hold that a federal grand jury subpoena supersedes the provisions of a civil protective order per se. On the other hand, two minority rules have emerged. At least one Circuit Court has articulated that civil parties should be able to rely on the enforceability of their agreements, even against the government, barring some "compelling need" by the government for the requested information. Other Circuit Courts urge that there is a "rebuttable presumption" with respect to the enforcement of grand jury subpoenas unless the person seeking to avoid the subpoena can demonstrate the existence of exceptional circumstances sufficient to do so. This is a significant issue for foreign companies which do business in the United States. Indeed, because of the Circuit split and the Ninth Circuit s application of the per se rule, in White & Case, 2 counsel filed petitions for certiorari with the US Supreme Court (Nos and ); however, on June 27, 2011, the Supreme Court denied the petitions. Given the Supreme Court s decision not to address the issue, the purpose of this article is to summarize the split among Circuit Court authority and to educate foreign civil defendants regarding the risk of criminal exposure stemming from the production of documents in civil discovery, notwithstanding the entry of a protective order. Overview of White & Case The White & Case matter began as an investigation by the Department of Justice (DOJ) into alleged price fixing by several foreign corporations that manufacture liquid crystal display (LCD) panels. After the DOJ s investigation became publicized, multiple civil actions were filed against the foreign corporations under investigation. These parallel civil actions were consolidated into a multi district litigation in the US District Court for the Northern District of California before US District Judge Susan Illston. 3 During civil discovery, plaintiffs requested production of a number of documents from the foreign defendants, including documents held in the defendants offices abroad. A protective order was entered in December 2007 as a result of the civil discovery requests and the defendants reticence about producing competitively sensitive materials to their competitors. The civil protective orders restricted the plaintiffs use of materials produced in the civil litigation to that action alone. 4 In reliance upon this protective order, defendants produced competitively sensitive materials, including the requested documents held in their foreign offices, pursuant to the broad scope of discovery under Rules 26 and 34 of the Federal Rules of Civil Procedure. Two years later, the DOJ moved to modify the civil protective order to copy and review all materials for the purposes of using the foreign defendants document productions in the parallel criminal investigation. The District Court referred the modification issue to a Special Master, who determined that the DOJ s request "expand[ed] the DOJ s subpoena power beyond its current geographical limits" by attempting to reach foreignbased documents that would not have been subject to the Federal Rules of Criminal Procedure but for discovery in the parallel civil actions. 5 The District Court adopted the Special Master s report and quashed the subpoenas, denying the DOJ the right to copy foreign documents and deposition transcripts of the defendants employees (foreign nationals). The Ninth Circuit, one of twelve regional US Circuit Courts, reversed the decision. Addressing the District Court s concern regarding the foreign nature of the documents and the reach of the grand jury subpoenas, the Ninth Circuit stated that "[b]y chance of litigation, the documents have been moved from outside the grasp of the grand jury to within its grasp. No authority forbids the government from closing its grip on what lies within the jurisdiction of the grand jury." 6 Relying upon the reasoning of the Fourth and Eleventh Circuits in cases involving only documents within the US, the Ninth Circuit concluded that

3 subpoenas served on the civil litigants law firms including White & Case should be enforced because of a "per se rule that a grand jury subpoena takes precedence over a civil protective order." The Ninth Circuit also specifically noted a lack of collusion between the government and the civil plaintiffs. In so doing, the Ninth Circuit may have crafted an exception to the application of the per se rule in cases where the government has engaged in bad faith tactics or excessive involvement in civil proceedings. In its petition for a writ of certiorari to the US Supreme Court, White & Case discussed the current three way split among the Circuit Courts over the tension between civil protective orders and grand jury subpoenas, and addressed the rejection of the per se rule by the First, Second and Third Circuits. White & Case then argued that civil protective orders supersede grand jury subpoenas, particularly in cases where, but for the parallel civil action, the foreign based documents would have been inaccessible to the government via a grand jury subpoena. In a Fourth Circuit case decided on June 15, 2011, a party in In re Grand Jury Subpoena made the same argument, specifically alleging collusion between the government and the civil plaintiff and that the government was over reaching for documents to which it was not entitled. 7 The Circuit Court Split As discussed by White & Case, there is currently a three way split among the Circuit Courts concerning the tension between civil protective orders and grand jury subpoenas. The Ninth Circuit, in deciding White & Case, adopted the approach of the Fourth and Eleventh Circuits in holding that there is a per se rule allowing a grand jury subpoena to trump a civil protective order. In contrast, the Second Circuit follows a compelling need rule, which only allows a grand jury subpoena to trump a civil protective order where the protective order has been improvidently granted or where the government has demonstrated a compelling need or extraordinary circumstance justifying access to the materials. Rejecting both of these approaches, the First and Third Circuits instead assume a rebuttable presumption where the grand jury subpoena trumps a civil protective order unless the person seeking to avoid the subpoena can demonstrate the existence of exceptional circumstances. No other Circuit Court has decided the issue. The Per Se Rule In White & Case, the Ninth Circuit declined to provide any unique analysis on the issue of competing civil protective orders and grand jury subpoenas, instead explicitly adopting the earlier reasoning of the Fourth and Eleventh Circuits. The Fourth Circuit adopted a per se rule in favor of enforcing grand jury subpoenas after balancing the costs and benefits of enforcing one over the other. In In re Grand Jury Subpoena, 8 the Fourth Circuit considered the competing interests of the grand jury s authority to gather evidence in a criminal investigation and the civil court s goals of liberal discovery and efficient dispute resolution. Balancing these interests, the Court found that the civil protective order, which the Court recognised as not being completely effective in facilitating civil discovery, was outweighed by the grand jury s constitutional and statutory authority and its "right to all relevant evidence." The Court further concluded that a protective order is a "significant impediment to a grand jury investigation," and held that the existence of a valid civil protective order is not sufficient grounds to quash a grand jury subpoena for documents that may be located in the United States. On June 15, 2011, the Fourth Circuit affirmed this decision with respect to the production of foreign based documents in response to a grand jury subpoena. 9 Similarly, the Eleventh Circuit found in In re Grand Jury Proceedings (Williams), 10 that protective orders are "merely a facilitating device and should not be used to shield relevant information from a valid grand jury subpoena." Like the Fourth Circuit, the Eleventh Circuit held that the interests in facilitating grand jury investigations outweigh the interests in efficiently resolving civil cases.

4 The Ninth Circuit thus became the third Circuit Court to apply the per se rule when faced with this issue. In White & Case, however, the Ninth Circuit appears to be the only Circuit Court to create a potential exception to the per se rule where the government and civil litigants collude to obtain discovery materials. This decision appears to rely upon earlier opinions from the Fourth and Eighth Circuits finding that collusion between the government and civil litigants in parallel discovery may render a grand jury subpoena improper and subject to being quashed. 11 The Fourth Circuit s most recent decision regarding the tension between civil protective orders and grand jury subpoenas appears to recognise the collusion exception articulated by the Ninth Circuit, even though the Fourth Circuit may not have found collusion in that particular case. 12 Aside from the collusion exception, which has never been conclusively established, in the Fourth, Ninth and Eleventh Circuits, foreign defendants must consider, at the outset of a civil litigation matter, the potential for future criminal exposure in connection with the production of documents in response to civil discovery requests. In these Circuit Courts, the US government may obtain a defendant s foreign based documents by subpoenaing a civil plaintiff who may be eager to cooperate with the government as a means of exerting pressure on the foreign defendant. Of course, the failure to produce relevant documents in a civil proceeding may result in sanctions, such as an adverse inference instruction, monetary penalties, or the termination of the litigation. The "Compelling Need" Rule Unlike the Fourth, Ninth and Eleventh Circuits, the Second Circuit applies a compelling need rule, emphasising that the parties reliance on protective orders presumptively outweighs the government s need for access to discovery produced in private litigation. In Martindell v. Int l Tel. & Tel. Corp., 13 the Second Circuit concluded that "absent a showing of improvidence in the grant of a [civil] protective order or some extraordinary circumstance or compelling need... a witness should be entitled to rely upon the enforceability of a protective order against any third party, including the government." The Second Circuit later considered the Fourth and Eleventh Circuits per se rule in In re Grand Jury Subpoena Deuces Tecum Dated April 19, In rejecting the per se rule and affirming its earlier holding in Martindell, the Second Circuit expressly found that a protective order does not violate public policy when it prohibits government access to civil discovery documents, even when it facilitates concealment of information relevant to a criminal investigation. Recently, the Tenth Circuit issued a holding that suggests it would adopt the Second Circuit s approach if given a case on point. 15 These decisions establish the Second Circuit as the most favorable to foreign corporations undergoing parallel civil and criminal investigations. Within this jurisdiction, a foreign corporate defendant may comply with a civil discovery request pursuant to the terms of a protective order with much greater confidence that it will be protected from the subsequent disclosure of its foreign based documents in response to a grand jury subpoena. The "Rebuttable Presumption" The First and Third Circuits have departed both from the per se rule and the compelling need rule. These Circuit Courts instead apply a rebuttable presumption that the grand jury subpoena trumps a civil protective order unless the person seeking to avoid the subpoena can demonstrate the existence of "exceptional circumstances." 16 This presumption is a direct contradiction to the Second Circuit s compelling need rule, which places the burden on the party attempting to enforce the subpoena. Although both the First and the Third Circuits expressly rejected the per se rule approach to competing civil protective orders and grand jury subpoenas, neither has enforced a civil protective order against a grand jury subpoena. Thus, although the approaches are different, the results of the per se rule and the rebuttable presumption rule e.g.,

5 allowing the government to obtain civil discovery materials using a grand jury subpoena appear to be the same. In other words, foreign corporations in these jurisdictions must be mindful of the risks of criminal exposure when considering the production of relevant and responsive materials. Conclusion As outlined above, the jurisdiction in which a case is filed (which may incentivize forum shopping) or pending (and from where the grand jury subpoena issues) may have significant effects on the scope of discovery. The US government may be able to circumvent the restrictions on discovery of a foreign company (in a criminal case) by serving a grand jury subpoena on a civil plaintiff seeking a defendant s foreign based documents. This is particularly significant in District Courts located in the Fourth, Ninth and Eleventh Circuits, where federal courts apply a per se rule regarding the enforceability of grand jury subpoenas as against civil protective orders. As such, foreign corporations and their counsel must be aware of the critical consequences of their responses to civil discovery requests, particularly where a parallel criminal action could proceed. Thomas P. O Brien is a Litigation Partner in the Los Angeles office of Paul Hastings LLP, and Daniel Prince is a Litigation Associate in the Los Angeles office of Paul Hastings LLP. Mr. O'Brien may be reached at thomasobrien@paulhastings.com, and Mr. Prince may be reached at danielprince@paulhastings.com. The authors thank Deborah Kang and Sarah Kelly Kilgore for their assistance. 2 In re Grand Jury Subpoenas, 627 F.3d 1143, 1144 (9th Cir. 2010), petition for cert. filed sub nom. White & Case, LLP v. U.S., No (U.S. Feb. 25, 2011). 3 Both the civil and criminal actions were tried before US District Judge Illston. 4 Significantly, the protective order prohibited any party from disclosing the information to third parties, including persons working in non legal departments of the plaintiff corporations. 5 In re TFT LCD (Flat Panel) Antitrust Litig., No. M SI, MDL. No. 1827, 2010 (N.D. Cal. Mar. 29, 2010) (internal quotation marks and brackets omitted). 6 Id. 7 No , 2011 BL at *12 13 (4th Cir. June 15, 2011) F.2d 1468 (4th Cir. 1988). 9 No , 2011 BL at *12 (4th Cir. June 15, 2011) F.2d 1013 (11th Cir. 1993). 11 In re Grand Jury Subpoenas Dated Feb. 28, 2002, 472 F.3d 990 (8th Cir. 2007); In re Grand Jury Subpoena, 175 F.3d 332 (4th Cir. 1999). 12 In re Grand Jury Subpoena, No , 2011 B at *14 (4th Cir. June 15, 2011) F.2d 291 (2d Cir. 1979) F.2d 1221 (2d Cir. 1991). 15 See SEC v. Merrill Scott & Assocs., Ltd., 600 F.3d 1262 (10th Cir. 2010). 16 In re: Grand Jury, 286 F.3d 153 (3d Cir. 2002); see also In re Grand Jury Subpoena (Roach), 138 F.3d 442 (1st Cir. 1998). 1 Grand jury subpoenas may be served on US nationals or residents in foreign countries pursuant to Rule 17(e)(2) of the Federal Rules of Criminal Procedure and 28 U.S.C. 1783, but there are no regulations regarding non citizens abroad. Courts have declined to find personal jurisdiction over these entities because of the extraterritorial nature of their holdings.