Summary
holding motion to enforce subpoena filed in district court where plaintiff served subpoena was nondispositive, because resolution thereof would not dispose of complaint pending in other district court
Summary of this case from Highfields Capital Management, L.P. v. DoeOpinion
Case No. 99C 214
July 7, 2000
MEMORANDUM OPINION AND ORDER
Magistrate Judge Rosemond entered an order denying Plaintiff Channelmark Corporation's ("Channelmark") petition and motion to enforce subpoena. Subsequently, Channelmark filed an objection to the order. For the reasons set forth below, the court now sustains Channelmark's objection to Magistrate Judge Rosemond's order and grants Channelmark's petition and motion to enforce the subpoena.
Background
Channelmark brought suit in the United States District Court for the District of Minnesota charging Defendants Destination Products and Cott Corporation (collectively "Destination") with fraudulent inducement and other violations. During the course of discovery, Channelmark attempted to depose Shahnawaz Hasan ("Hasan") of American Kitchen Delights ("AKD"), a non-party to the underlying suit. Channelmark sought to obtain information regarding the relationship, business dealings, and any disputes between him and AKD on the one hand and Cott Corporation and Destination Products International (defendants) on the other. The questions posed to Hasan and documents requested by Channelmark counsel concerned dealings in connection with recent threatened litigation between AKD and the defendants. Hasan refused to answer this line of questioning because to do so would violate the confidentiality provision of a March 12, 1998, settlement agreement entered into between AKD and the defendants.
In light of Hasan's refusal, Channelmark filed a motion to enforce the subpoena that this court issued, calling for the deposition of Hasan and AKD and production of various documents. This court referred the matter to Magistrate Judge Rosemond. In spite of finding that the confidentiality provision in question did not preclude Hasan from being deposed, Judge Rosemond concluded that the information Channelmark sought was irrelevant and denied the petition and motion to enforce the subpoena.
According to Judge Rosemond, the confidentiality provision at issue and defendants' interpretation of it is "overbroad." (Order at 8, 9.) Magistrate Judge Rosemond called the confidentiality provision and the defendants' interpretation of it "an obstruction to the discovery process." (Order at 9.) He noted, "[d]efendants should not be able to buy the silence of witnesses with a settlement agreement when the facts of one controversy are relevant to another." (Order at 8 (quoting Wendt v. Walden University. Inc., 1996 WL 84668*2 (D. Minn. 1996)).) However, after reviewing Channelmark's line of inquiry, Magistrate Judge Rosemond concluded that it "bore absolutely zero relevance to any issue in the case," and denied Channelmark's petition. Channelmark then filed the objections to Magistrate Judge Rosemond's order now before the court.
Analysis
Before considering Channelmark's objections, the court must determine the appropriate standard of review. Courts consistently hold that routine discovery motions are nondispositive. See Bobkoski v. Board of Educ. of Cary Consol. Sch. Dist. 26, 141 F.R.D. 88, 90 (N.D. Ill. 1992). Therefore, a pre-trial order regarding discovery of confidential documents or information falls within the scope of Federal Rule of Civil Procedure 72(a). Butta-Brinkman v. FCA Int'l, Ltd., 164 F.R.D. 475, 476 (N.D. Ill. 1995). Pursuant to Federal Rule of Civil Procedure 72(a), Magistrate Judge Rosemond's order denying Channelmark's petition and motion to enforce subpoena will be set aside only if it is found to be clearly erroneous or contrary to law. See Fed.R.Civ.P. 72(a).
Channelmark argues that because the resolution of this motion will have the effect of disposing of all matters pending before the court, this discovery matter should be reviewed de novo. While Judge Rosemond's order would have the effect of disposing of all matters pending before the Northern District of Illinois, it does signal the end of the litigation. Regardless of the outcome on this discovery issue, the parties may still proceed to a trial, on the merits, in a federal court. As such, we will proceed to the merits of Channelmark's objection to Judge Rosemond's order; reviewing it for clear error.
The two cases Channelmark cites which declared pre-trial discovery issues dispositive do not apply here. Both cases involve issues stemming from administrative agency proceedings and in each case, after a ruling on the discovery issue, the matter would return to administrative agency; no district court would retain jurisdiction. See NLRB v. Frazier, 966 F.2d 812, 817 (3d Cir. 1992) (holding that the court reviews a magistrate judge's decision to quash an agency subpoena de novo since all further issues would be addressed in an administrative proceeding);Aluminum Co. of Am., Badin Works, Badin, N.C. v. United States Envtl. Protection Agency, 663 R2d 499, 500 (4th Cir. 1981) (holding that the district court should have reviewed magistrate's order regarding a motion to quash an administrative search warrant obtained by the EPA de novo).
Channelmark contends that nothing in the law prevents discovery of the information it seeks regarding AKD's relationship with Destination Products. Federal Rule of Civil Procedure 26(b)(1) provides for liberal discovery in order to encourage full disclosure before trial. See EEOC v. Rush Prudential Health Plans, 1998 WL 156718, *2 (N.D. Ill. Mar. 31, 1998). The rule states,
"Parties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action . . .The information sought need not be admissible at the trial if the information sought appears reasonably calculated to lead to the discovery of admissible evidence."
Fed.R.Civ.P. 26(b)(1). Courts do allow the discovery of information contained in and related to confidential settlement agreements. See Rush Prudential Health Plans, 1998 WL 156718 at *2 (allowing discovery of terms of a settlement agreement made between defendant and a third party); Wendt, 1996 WL at *2 (allowing plaintiff to depose a witness despite a confidential settlement between the witness and defendant that was meant to silence the witness).
In light of the broad discovery principles set down in Federal Rule of Civil Procedure 26(b)(1) and case law supporting the discovery of confidential settlement agreements, Judge Rosemond correctly concluded that information contained in confidential settlement agreements is discoverable, if relevant to the pending action between Destination and Channelmark.
The issue then is whether the information Channelmark seeks is relevant to the instant litigation. Relevance under Rule 26(b)(1) is construed more broadly for discovery than for trial. "A district court whose only connection with a case is supervision of discovery ancillary to an action in another district should be `especially hesitant to pass judgment on what constitutes relevant evidence.'" Truswal Sys. Corp. v. Hydra-Air Engineering, 813 F.2d 1207, 1210 (Fed. Cir. 1987). At the same time, "where relevance is in doubt, [Rule 26(b)(1)] indicates that the court should be permissive." Id. at 1211-12 (citations omitted).
The court interprets relevancy in the discovery context, "to encompass any matter that bears on, or that reasonably could lead to other matter that could bear on, any issue that is or may be in the case." Oppenheimer Fund Inc. v. Sanders, 437 U.S. 340, 351 (1978). Channelmark argues that the information Hasan has pertaining his past dealings with Destination is relevant to show intent, as part of its fraud in the inducement claim against the defendants. The elements of fraudulent inducement are:
(1) a false statement of material fact; (2) known or believed to be false by the person making it; (3) an intent to induce the other party to act; (4) action by the other party in reliance on the truth of the statement; and (5) damage to the other party resulting from such reliance.Havoco of Am., Ltd. v. Sumitomo Corp. of Am., 971 F.2d 1332, 1341 (7th Cir. 1992). Channelmark alleges that defendants fraudulently induced them by offering to provide Channelmark with financing for the purchase of miscut chicken, when in fact the defendants had no ability or intention to provide this financing. Further, as part of the agreement, the defendants allegedly promised to purchase four million pounds of boneless, skinless chicken breast from Channelmark, but again failed to follow through. Channelmark alleges that it can show the defendants' fraudulent intent by establishing a larger pattern of fraud in the Destination's dealings with other corporations. Hasan's corporation, AKD, is one of these corporations which Destination has allegedly fraudulently induced in a similar fashion.
The question then becomes whether a defendant's business dealings with a corporation that is not a party to the underlying case may be used to show intent in a fraud case. Magistrate Judge Rosemond stated that, "Even if American Kitchens had agreements with the defendants that were similar to those that Channelmark had with the defendants . . . discovery of such matters would not be probative . . ." of any of Channelmark's claims in the underlying action. (Order at 25.) We disagree.
Federal Rule of Evidence 404 is instructive. Under Rule 404, evidence of other crimes, wrongs, or acts may be admissible for purposes such as proof of intent. See Fed.R.Evid. 404. In Jannotta v. Subway Sandwich Shops, Inc., 125 F.3d 503, 517 (7th Cir. 1997), the court held that testimony from five landlords, that were not parties to the case, but who were allegedly defrauded by the defendant in a similar fashion that the plaintiff claimed, was "highly probative of defendant's intent."
Similarly, in United States v. Harrod, 856 F.2d 996, 1002 (7th Cir. 1988), a bank fraud case, the court held that, "other acts evidence provided additional reliable indicia of Harrod's [the defendant] intent." The court also stated that in order for the government to establish the defendant's intent, "it must be able to provide evidence of his past acts and the similarity in their characteristics to the acts charged. Id. at 1003. Therefore, the court allowed evidence of two prior bank fraud schemes that the defendant was a part of but were not included in the underlying case. Id.
Finally, in Unites States v. Harvey, 959 F.2d 1371, 1374 (7th Cir. 1992), the court allowed testimony from a fourth victim that was not part of the underlying fraud action but whose dealings with the defendant followed the same general pattern of the fraud alleged by the plaintiffs. The court reasoned that if the defendant acted in a similar fraudulent manner in other situations then it was more likely that the defendant acted with fraudulent intent in the instance at issue. Id.
The above cases demonstrate that Hasan's subpoena should be enforced. If defendants fraudulently induced AKD in a manner similar to the fraudulent inducement that Channelmark alleges, then the evidence is probative of whether the defendants intended to fraudulently induce Channelmark in the underlying case. Channelmark believes that in 1996, Destination made substantial financial or purchasing commitments to Hasan's corporation, AKD, with respect to a food processing initiative involving pot pies and other products for use in the defendants' private label program. This is similar to the facts of the underlying case where Destination allegedly failed to follow through on its commitment to finance the miscut chicken project and to purchase boneless skinless chicken breasts from Channelmark. Channelmark claims that in both cases, Destination fraudulently induced the seller by agreeing to large financial commitments knowing that they did not have the means to finish the deal.
Channelmark also learned, through third party discovery, that Destination has allegedly reneged on similar substantial food processing commitments with two other companies. Pellegrino Foods and Rosita Foods. Following the reasoning in Jannotta, Harvey, and Harrod, the subpoena should be enforced. Channelmark alleges that defendants fraudulently induced Hasan's corporation, AKD, the same way it did Channelmark.Jannotta, 125 F.3d at 517; Harvey, 959 F.2d at 1374; Harrod, 856 F.2d at 1002. These three cases demonstrate that if true, the AKD incident, along with the two other similar acts involving Rosita and Pelligrino Foods, would be probative of the defendants' intent to fraudulently induce Channelmark in the underlying action. In holding that similar acts by the defendants were irrelevant Magistrate Judge Rosemond's order failed to apply this reasoning to Channelmark's fraudulent inducement claim.
In ruling on an objection to discovery, a court must balance not only the relevance of the discovery sought, but the requesting party's need and the potential hardship to the party subject to the subpoena as well. See Truswal Sys. Corp., 813 F.2d at 1210. When weighing the competing interests involved, the public policy favoring liberal discovery in this case outweighs Hasan and Destination's interest in keeping the information contained in their settlement agreement secret.
Defendants argue that to enforce the subpoena in this case would be contrary to the public policy favoring enforcement of private agreements. They point out that keeping settlement agreements confidential will have the beneficial effect of judicial economy because it encourages settlement rather than going to trial. See Grove Fresh Distrib. v. John Labatt Ltd., 888 F. Supp. 1427, 1441 (N.D. Ill. 1995). However, this public policy argument is based on Federal Rule of Evidence 408. See Lesal Interiors v. Resolution Trust Corp., 153 F.R.D. 552, 562 (D.N.J. 1994). Federal Rule of Evidence 408 "only applies to the admissibility of evidence at trial and does not necessarily protect such evidence from discovery." Morse/Diesel, Inc. v. Fidelity and Deposit Co. of Md., 122 F.R.D. 447, 449 (S.D. N.Y. 1988).
In addition, the public has an equally strong interest in not allowing parties to conceal information that is of legitimate public concern. See Kalinauskas, 151 F.R.D. at 365. The public reaps no benefit by allowing settlement agreements to suppress evidence. Id. at 367. Kalinauskas points out that "this concern grows more pressing as additional individuals are harmed by identical or similar action." Id. at 366. That is exactly what Channelmark alleges has happened here. Channelmark theorizes that Destination continues to perpetrate fraud against unassuming companies.
Finally, the impact of releasing the information regarding Destination's settlement with Hasan is limited to the litigation between Channelmark and Destination. The matter is governed by a protective order. Therefore, the information Hasan discloses will only be used for purposes of this litigation. Additionally, Channelmark is not asking for disclosure of the specific terms of the settlement. Rather, Channelmark merely seeks the factual information surrounding the settlement between AKD and the defendants.
In contrast, the impact of not enforcing the subpoena would be great. To permit parties to silence a witness through enforcement of settlement agreements would allow a defendant to continue a pattern of harmful behavior while being shielded from the legal system. Id. at 366. Public policy weighs in favor of enforcing Channelmark's subpoena because Hasan's testimony is likely to lead to the discovery of relevant evidence. Because the court grants Channelmark's petition and motion to enforce the subpoena, it need not address Channelmark's res judicata argument or its waiver of objection to the subpoena argument.
The cases Destination cites in support of its public policy argument where the court precludes discovery of confidential settlement agreements are distinguishable. See Butta-Brinkman, 164 F.R.D. at 477 (precluding discovery of actual settlement documents which contained information easily obtainable through other discovery requests); Bottaro v. Hatton Assoc., 96 F.R.D. 158, 160 (E.D. N.Y. 1982) (utilizing a standard on a motion to compel production that was rejected by this court in Vardon Golf Co., Inc. v. BBMG Golf Ltd., 156 F.R.D. 641, 650-51 (N.D. Ill. 1994)).
Due to an error in the record, the existence of a pending motion in this case was not brought to the court's attention and did not show up on the court's tracking system. Once it was discovered, the court ruled.