CONFIDENTIALITY AGREEMENTS AND PROTECTIVE ORDERS: INSURER ATTEMPTS TO KEEP CLAIMS HANDLING SECRET
By Mike Abourezk and Marialee Neighbours
Insurers often complain when plaintiffs in bad faith actions refuse to agree to confidentiality agreements. It is true that plaintiffs' counsel often routinely enter into confidentiality agreements with corporate defendants in the mistaken belief that such an agreement will make the free flow of discovery much easier. However, courts which are astute enough to actually apply the rules of civil procedure do not always approve of these agreements.
In fact, confidentiality agreements have been overturned many times even when they were based on a stipulated agreement of both parties. See Jepson Inc. v. Makita Electric Works, 30 F.3d. 854, 858-59 (7th Cir. 1994)(Stipulated protective order was improperly issued; where parties stipulate court must independently determine whether the requirements of 26 (c) are satisfied; no indication that magistrate judge did so).
The Third Circuit Court of Appeals has commented that: "disturbingly, some courts routinely sign orders which contain confidentiality clauses without considering the propriety of such orders or the countervailing public interests which are sacrificed by the orders." Pansy v. Burough Of Stroudsburg, 23 F.3d 772, 785 (3d Cir.1994); See also AETNA Casualty Ins. Co. v. George Hyman Const. Co., 155 F.R.D.113, 115-16 (D.C. Pa. 1994) (proposed stipulation which would allow each party to designate documents as "confidential" did not meet requisite good cause standard of discovery rule; parties failed to show with specificity that disclosure would cause defined and serious injury upon a party or that there was a need to protect a party or third persons from annoyance, embarrassment, or oppression; and the method by which documents were to be afforded protection, i.e., each party self selecting documents resulted in judicial discretion yielding to private judgment).
In another case, a Wisconsin district court held that parties in an employment discrimination action failed to show good cause necessary for issuance of a stipulated protective order. The parties' stipulation broadly stated that they sought to protect information pertaining to all personnel files or confidential personnel related documents called for by plaintiff's discovery requests. Makar-Wellbon v. Sony Electronics, 187 F.R.D. 576, 577 (D.C. Wis. 1999).
In a later case, a Wisconsin district court again held that the court would not enter a protective order despite the parties' stipulation, holding that the court must independently determine if good cause for such an order exists. In that case, the parties did not show that there was a reason for a protective order. David J. Frank Landscape Contracting, Inc. v. LaRosa Landscape, 199 F.R.D. 314, 315 (D.C. Wis. 2001).
Similarly, the Sixth Circuit Court of Appeals has held that a blanket protective order granting confidentiality to all documents that the parties deemed confidential was improper. Procter & Gamble Co. v. Bankers Trust Co., 78 F.3d 219, 227 (6th Cir. 1996). In that case, the Sixth Circuit noted that the district court could not properly abdicate its responsibility to oversee the discovery process. See also Citizens First Nat'l Bank v. Cincinnati Ins. Co.,178 F.3d 943, 944 (7th Cir.1999)(District court went too far in accepting the parties' stipulation that all materials they deemed confidential should be filed under seal. District judge has responsibility to make a good cause determination about such protection under its order); Cumberland Packing Corp. v. Monsanto Co., 184 F.R.D. 504, 505-06 (D.C. N.Y. 1999)(Proposed stipulated protective order failed adequately to protect the public's interest in accessing judicial documents and monitoring the federal courts. As a result, good cause did not exist to approve such an order. The proposed order would have covered all discovery material or trial testimony and evidence. It would have permitted sealing so long as a party believed "in good faith" that it contained proprietary information); see also Miller, Confidentiality, Protective Order and Public Access to Courts, 1991,105 Harv. L. Rev. 427, 492: "Judges must guard against any notion that the issuance of protective orders is routine, let alone automatic, even when the application is supported by all the parties."
Blanket Protective Orders Are Inherently Improper
Frequently, an insurance company will seek a blanket protective order for documents produced in discovery. Blanket protective orders are inherently improper. See San Jose Mercury News, Inc. v. U.S. Dist. Ct., 187 F.3d. 1096 (9th Cir. 1999) (blanket stipulated protective orders are inherently subject to challenge and modification; generally, party resisting disclosure has not made a particularized showing of good cause with respect to any individual document).
In requesting a blanket protective order, an insurer often ignores the fact that it must first meet the particularized showing necessary for such an order. South Dakota Codified Law § 15-6-26(c), which governs issuance of a protective order, provides in part:
Upon motion by party. . . and for good cause shown, the court in which the action is pending . . . may make any order which justice requires to protect a party . . . from annoyance, embarrassment, oppression, or undue burden or expense, including one or more of the following:
(7) That a trade secret or other confidential research, development, or commercial information not be disclosed or be disclosed only in a designated way.
There are numerous cases interpreting this language as it appears in the corresponding Federal Rules of Civil Procedure. Uniformly, courts hold that protective orders should be granted only if moving party first establishes that specific information to be covered by order falls within protected categories and then demonstrates that disclosure will be harmful. Iowa Beef Processors, Inc. v. Bagely, 601 F.2d 949, 952 n.5 (8th Cir. 1979); Centurian Industries, Inc. v. Warren Steurer & Assoc., 665 F.2d 323, 325 (10th Cir. 1981).
As stated by the Eighth Circuit Court of Appeals in General Dynamics Corp. v. Selb Mfg. Co.:
Fed. R. Civ. P. 26(c) requires that "good cause" be shown for a protective order to be issued. The burden is therefore upon the movant to show the necessity of its issuance, which contemplates "a particular and specific demonstration of fact, as distinguished from stereotyped and conclusory statements ***."
481 F.2d 1204, 1212 (8th Cir. 1973), citing Wright and Miller, Federal Practice and Procedure Civ. § 2035, 264-65.
Those who seek to avoid disclosure of commercial information by a protective order bear a heavy burden of demonstrating that disclosure will work a clearly defined and very serious injury. Citicorp v. Interbank Card Assoc., 478 F.Supp.756, 765 (D.C. N.Y. 1979). A protective order inhibiting liberal discovery must issue only on a specific showing that the information is such that its disclosure should be restricted and that the party disclosing it will be harmed by disclosure. Johnson Foils, Inc. v. Huyck Corp., 61 F.R.D. 405, 409 (D.C. N.Y. 1973). For instance, courts have held that an attorney's affidavit that merely alleges that discovery will reveal a secret formula or trade secrets is insufficient to warrant a protective order. Rosenblatt v. Northwest Airlines, Inc., 54 F.R.D. 21, 23 (D.C. NY 1971).
If the moving party fails to demonstrate the manner in which it will be placed at a competitive disadvantage by disclosure of the information, then it is not entitled to a protective order. Essex Wire Corp. v. Eastern Electric Sales, 48 F.R.D. 308, 311-12 (D.C. Pa. 1969).
Courts Favor Access To Discovery Conducted By Other Parties In Collateral Litigation
Of course, issuance of a protective order means that other litigants and courts will not have the benefit of the discovery conducted in that particular case. Often, when a judge agrees to issue a protective order or seals evidence, the next court has to duplicate many months of work, conduct numerous hearings and review hundreds of pages of discovery materials-time already expended by another judge.
In addition, it is only by comparing documents and evidence produced in discovery that plaintiffs can adequately prepare their cases. In the absence of the ability to compare discovery, it is very common for corporate defendants to deny that they have access to various documents and the plaintiff has no means to prove otherwise.
For these reasons, courts favor allowing access to discovery conducted by other parties in collateral litigation. It makes the administration of justice more efficient. Any other result would require that "each litigant who wishes to ride a taxi to court must undertake the expense of inventing the wheel". Ward v. Ford Motor Co., 93 F.R.D. 579, 580 (D. Colo. 1982). See also Wauchop v. Domino's Pizza, Inc., 138 F.R.D. 539, 546-47 (D. Ind. 1991) (Federal Rules of Civil Procedure should be construed to foster the just, speedy, and inexpensive determination of every civil action . . . collaborative use of discovery material fosters that purpose); Baker v. Liggett Group, Inc., 132 F.R.D. 123, 126 (D. Mass. 1990)(To routinely require every plaintiff to go through a comparable, prolonged and expensive discovery process would be inappropriate.); Patterson v. Ford Motor Co., 85 F.R.D. 152, 154 (W.D. Tex. 1980)(The sharing of discovery information between plaintiffs may reduce time and money which must be expended in similar proceedings, and allows for effective, speedy, and efficient representation.); Cipollone v. Liggett Group, Inc., 113 F.R.D. 86, 87 (D. N.J. 1986)(Maintaining a high cost of litigation for future advisories is not a proper purpose under Rules 1 or 26.); Wilk v. American Medical Ass'n, 635 F.2d 1295, 1301 (7th Cir. 1980)(That the expense of litigation deters many from exercising that right is no reason to erect gratuitous road blocks in the path of a litigant who finds a trail blazed by another.); U.S. v. Hooker Chemicals & Plastics Corp., 90 F.R.D. 421, 426 (W.D. N.Y. 1981)(Use of discovery fruits disclosed in one lawsuit in connection with other litigation and even in collaboration among plaintiffs attorneys, comes squarely within the purposes of Federal Rules of Civil Procedure.); Foltz v. State Farm Mut. Ins. Co., 331 F.3d 1122, 1131 (9th Cir. 2003)("This court strongly favors access to discovery materials to meet the needs of parties engaged in collateral litigation.").