Opinion
Case No: 2:04 CV 119 TC.
August 9, 2005
ORDER GRANTING NATIONAL UNION'S MOTION TO COMPEL (DOCKET NO. 223)
Defendant National Union Fire Insurance Company of Pittsburgh, Pennsylvania (National Union) seeks to compel Edward D. Bagley (Bagley), a director of ClearOne Communications, Inc., (ClearOne) and ClearOne to provide responses to requests for production.
Docket no. 223, filed June 17, 2005.
Nature of the Case
ClearOne obtained $3 million in primary coverage directors and officers (DO) insurance from National Union in the fall of 2002. On January 21, 2003, ClearOne disclosed that its financial statements were being investigated and were therefore withdrawn and could not be relied upon. The auditor for those financial statements was Ernst Young. ClearOne hired KMPG to re-audit the books for the years 2001-2002. The KPMG audit is not yet complete.ClearOne defended and settled several lawsuits which included allegations of financial misstatements by ClearOne. National Union seeks rescission of the DO policy because of those alleged misstatements. ClearOne and Bagley seek to enforce the policy and declare it valid, and also allege National Union's denial of coverage was made in bad faith.
Discovery Requests
The disputed requests for production are:
Request No. 19 is from National Union's Second Request for Production of Documents . . ., attached as Exhibit 1 to Declaration of Douglas R. Irvine, docket no. 225, filed June 17, 2005, while Requests Nos. 1 and 12 are from National Union's Third Request for Production of Documents . . ., attached as Exhibit 2 to Declaration of Douglas R. Irvine.
Request No. 19: All documents sent by ClearOne to KPMG and received by ClearOne from KPMG from July 1, 2000 to the present.
Request No. 1: [A]ll correspondence, emails, interoffice memoranda, and all other documents which constitute correspondence between ClearOne Communications and KPMG regarding KPMG's audit of Clearone's financial statements.
Request No. 12: All of the e-mails between [Edward] Dal Bagley and each officer and director of ClearOne Communications between January 1, 2000, and the present time.
National Union's Request to ClearOne
National Union's requests to ClearOne seek communications with KPMG, which audited ClearOne after the financial reporting problems became known. ClearOne claims that production of responsive documents by ClearOne would be duplicative and burdensome to ClearOne because KPMG will eventually produce responsive documents at the completion of KPMG's audit.National Union served KPMG with a subpoena for KPMG's copies of KPMG's responsive documents, but agreed to wait until completion of KPMG's audit for KPMG's production of its work papers, to avoid disruption of the audit. At the time of the agreement, KPMG represented to National Union that the anticipated audit completion date was December 31, 2004. However, KPMG did not finish the audit in December 2004, as expected so National Union does not have the KPMG papers yet.
National Union's Reply Memorandum in Support of Motion to Compel Production of Documents from ClearOne (National Union's ClearOne Reply at 6, docket no. 255, filed July 27, 2005.
At the deposition of KPMG's Rule 30(b)(6) witness in February 2005, KPMG could not state when the audit of ClearOne might be completed. ClearOne recently stated that KPMG's audit would be completed in late July or early August 2005 and that National Union would receive responsive documents at that time. However, National Union has yet to receive any responsive documents from KPMG or ClearOne.
National Union's Memorandum in Support of Motion to Compel at 3, docket no. 224, filed June 17, 2005.
ClearOne's Memorandum in Opposition at 7.
With trial set for November 2005, National Union is entitled to prompt review of the disputed documents requested in discovery. ClearOne should produce the requested documents if KPMG has not completed the audit and produced documents responsive to the subpoena to National Union by August 19, 2005.
National Union's Request to Bagley
Bagley claims he was ignorant of ClearOne's improper recognition of revenue on products shipped to distributors. National Union is seeking to discover the scope and extent of Bagley's involvement with and awareness of discrepancies in ClearOne's accounting of revenues. National Union has therefore requested e-mails between Bagley and ClearOne's directors and officers between January 1, 2000 and the present. Bagley claims that this request is burdensome because of the potential number of e-mails during this time period. However, Bagley has failed to quantify the burden by stating the number of e-mails Bagley would be required to search and only states that "many hours" would be required to search them. This conclusory statement does not establish a burden sufficient to bar the request.
Bagley's Memorandum in Opposition to National Union's Motion to Compel (Bagley's Memorandum in Opposition) at 5, docket no. 249, filed July 13, 2005.
Bagley's Memorandum in Opposition at 5.
Bagley claims the request is overbroad because subject matter other than revenue recognition will be included in the e-mails to be produced. This may be resolved with a limiting filter on the e-mails to be retained by National Union.
Id.
Bagley also claims that e-mails to and from Flood and Strohm, former officers of ClearOne, have already been produced, making his production cumulative. But National Union is seeking Bagley's communications with persons other than Flood and Strohm as well as e-mails to and from them as well. There are differing theories about whether Flood and Strohm — or only others — knew of the alleged revenue inflation scheme. This makes the Bagley e-mails important. Further, Bagley represents an independent source. "[T]he very real possibility exists that not every e-mail communication between Balgey and Flood or Strohm has been produced."
Bagley does not state who produced these e-mails, but National Union states they were produced by ClearOne, not Bagley. ClearOne's Memorandum in Opposition at 5.
National Union's Reply Memorandum in Support of Motion to Compel Production of Documents from Bagley (National Union's Reply) at 6, docket no. 257, filed July 27, 2005.
National Union's Bagley Reply at 6.
Bagley finally claims the e-mails sought are protected because the e-mails contain privileged or protected information and that a privilege log would be difficult to produce. Any sensitive information may be protected by a Protective Order and privileged information may be logged.
Bagley's Memorandum in Opposition at 5-6.
National Union is entitled to request e-mails between Bagley and any directors and officers of ClearOne. This request is limited, however, to any e-mails between Bagley and directors and officers of ClearOne sent or received between January 1, 2000 and February 6, 2004, the date of filing of this suit. National Union may copy and retain any e-mail or attachment regarding (in any part) financial condition or reports, or revenue recognition.
Expenses
No expenses are awarded. The positions of the parties have been substantially justified. "Making a motion, or opposing a motion, is `substantially justified' if the motion raised an issue about which reasonable people could genuinely differ . . ."
8A Charles Alan Wright Arthur R. Miller Federal Practice Procedure Civ.2d § 2288 (2nd ed. 1994). See also Hutchinson v. Pfeil, No. 98-5043, 1999 WL 1015557, at *3 (10th Cir. Nov. 9, 1999) (unpublished decision).
ORDER
IT IS HEREBY ORDERED that National Union's motion to compel is GRANTED IN PART as provided herein.IT IS FURTHER ORDERED that on or before August 26, 2005:
a. If KPMG has not completed the audit of ClearOne and delivered responsive documents to National Union by August 19, 2005, ClearOne shall produce [Request No. 19:] All documents sent by ClearOne to KPMG and received by ClearOne from KPMG from July 1, 2000 to the present; and [Request No. 1:] [A]ll correspondence, emails, interoffice memoranda, and all other documents which constitute correspondence between ClearOne Communications and KPMG regarding KPMG's audit of Clearone's financial statements.
b. Bagley shall produce all e-mails to and from officers and directors of ClearOne between January 1, 2000 and February 6, 2004. National Union may copy and retain a copy of any e-mail or attachment regarding (in any part) ClearOne's financial condition or reports, revenue recognition, or related subjects.
Protective Order
IT IS FURTHER ORDERED until the parties stipulate to a different form of protective order, counsel may designate any of the e-mails (and attachments) between Bagley and officers and directors of ClearOne containing proprietary or confidential information as CONFIDENTIAL and the parties are ordered not to disseminate such information and shall hold such information in confidence, shall use the information only for purposes of this civil action and for no other action, shall not use it for any business or other commercial purpose, and shall not disclose it to any other person, other than as reasonably required for purposes of this civil action. At the conclusion of this action, including through all appeals, any person receiving such records shall destroy or return to the party producing such information all such records received and certify to the other party such destruction or return. Such return or destruction shall not relieve any person from the continuing obligations imposed upon by this order. If a person receiving such records is subpoenaed in another action or proceeding or served with a document or testimony demand or a court order, that party shall give prompt written notice to opposing counsel and allow opposing counsel an opportunity to oppose such subpoena or demand or court order prior to the deadline for complying with the subpoena or demand or court order. No compulsory disclosure to third parties of information subject to this order shall be deemed a waiver of any claim of confidentiality, except as expressly found by a court or judicial authority of competent jurisdiction. The court's jurisdiction to enforce this order will continue after the termination of this action.