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recognizing that "the simple fact that the parties to the settlement agreement agreed to its confidentiality does not shield it from discovery"
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05 Civ. 9899 (RCC) (THK).
April 3, 2007
MEMORANDUM OPINION AND ORDER
Plaintiff Conopco Inc. d/b/a Unilever ("Conopco") filed this action in November 2005, alleging that Defendant Dina Wein, various corporate entities she organized, and employees of those entities, perpetrated an extensive fraudulent scheme against Plaintiff and numerous other consumer product companies. Specifically, alleging fraud and federal RICO claims, Plaintiff contends that Defendants, through a variety of misrepresentations and sophisticated ruses, obtained Plaintiff's and other companies' products at substantially discounted prices, purportedly to utilize in promotional and sampling programs intended to expand the companies' markets. Plaintiff alleges that, instead, Defendants diverted the products back into the wholesale market, causing economic harm to Plaintiff and the other victim companies, while unjustly enriching Defendants.
The action was referred to this Court for general pretrial supervision and, accordingly, the Court has addressed numerous discovery disputes among the parties. Presently before the Court is Defendants' Motion to Quash Plaintiff's Subpoena Directed to the law firm Arnold Porter, LLP.
BACKGROUND
Arnold Porter represented Roche Diagnostics Corporation ("Roche") in separate litigation, filed in January 2007, against Defendant Wein and individuals and entities associated with Wein.See Roche Diagnostics Corp. v. Wein, 07-CV-0034 (S.D. Indiana). The allegations asserted by Roche in that action are virtually identical to the allegations in the instant action. Roche alleged that Defendants obtained diabetes products from Roche at an 85% discount, based on Defendants' representations to Roche that the products would be used exclusively for promotional purposes. Instead, it was alleged, Defendants diverted or attempted to divert Roche's products, at high mark-ups, to Roche's own customers. Among the claims asserted by Roche were fraud and RICO violations. (See Complaint in Roche v. Wein, 07-CV-0034 (S.D. Ind. 2007), attached as Exhibit ("Ex.") C to Letter from Rodney A. Brown, Esq. to the Court, dated Feb. 9, 2007 ("Brown Feb. 9 Ltr.").) The District Court of Indiana issued a preliminary injunction in the Roche action, restraining the Defendants from any further sales or distribution of Roches' products. Subsequently, the action was settled, and the terms of the settlement agreement are subject to a confidentiality order.
In its subpoena to Arnold Porter, Plaintiff seeks all documents and pretrial discovery produced in the Roche litigation, transcripts of depositions and court proceedings, and the settlement agreement itself. (See Subpoena, dated Feb. 16, 2007, Ex. B. to Affidavit of Rodney A. Brown in Opposition to Defendants' Joint Motion to Quash Subpoena Served on Arnold Porter, dated Mar. 7, 2007 ("Brown Aff.").) Defendants have moved to quash the subpoena, arguing that (1) this Court has precluded discovery, for the period subsequent to March 2006, relating to Defendants' promotional and sampling programs, (2) the subpoena seeks confidential commercial information related to Defendants' current business transactions, (3) the subpoena seeks irrelevant and duplicative information, and (4) the confidentiality of the settlement agreement should be respected. (See Defendants' Joint Memorandum in Support of Motion to Quash Plaintiffs' Subpoena, dated Mar. 1, 2007 ("Defs.' Mem.").)
DISCUSSION
In effect, Defendants are seeking a protective order that precludes discovery relating to the Roche litigation. Rule 26(c) of the Federal Rules of Civil Procedure permits a district court, upon a showing of good cause, to "make any order which justice requires to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense." "[T]he party seeking a protective order has the burden of showing that good cause exists for issuance of that order." Gambale v. Deutsche Bank AG, 377 F.3d 133, (2d Cir. 2004).
Ordinarily, good cause for a protective order exists when a party shows that disclosure will result in a clearly defined, specific and serious injury. Broad allegations of harm, unsubstantiated by specific examples of articulated reasoning, do not satisfy the Rule 26(c)) test. Moreover, the harm must be significant, not a mere trifle.Schiller v. City of New York, Nos. 04 Civ. 7922 7921 (KMK) (JCF), 2007 WL 136149, at *5 (S.D.N.Y. Jan. 19, 2007) (internal citations and quotation marks omitted).
Defendants are correct that the Court previously limited their obligation to produce documents relating to their other sampling and promotional programs to the period of January 2000 through March 2006. (See Memorandum Endorsed Order, dated June 9, 2006.) When that Order was entered, however, pretrial discovery was at an early stage and Defendants argued that Plaintiff was engaging in a "fishing expedition" in the hope that it would discover fraudulent conduct to support its allegations. In addition, Defendants asserted that it would be extremely burdensome and disruptive to their business if they were required to continue to produce documents about current, ongoing business relationships.
In an attempt to address Defendants' concerns, while taking into account Plaintiff's right to relevant discovery that was calculated to lead to the discovery of admissible evidence, see Fed.R.Civ.P. 26(b)(1), the Court concluded that it was reasonable to require Defendants to produce documents, relating to other sampling and promotional programs, only through March 2006 — three months prior to entry of the Order. That limitation was reiterated in several subsequent orders. Nevertheless, although Defendants had expressed concern about the numerous subpoenas issued to third parties with whom they did business, the Court did not place temporal restrictions on Plaintiff's right to seek documents from those third parties. And, according to Plaintiff's counsel, his subpoenas to third parties sought relevant documents from January 1, 2000 to the present, and no objection was lodged by Defendants to that time frame. (See Plaintiff's Memorandum of Law in Opposition to Defendants' Joint Motion to Quash Subpoena, dated Mar. 7, 2007 (" Pl.'s Mem."), at 3.)
Defendants' concerns about business disruption and burden, which led to the Court's previous Orders limiting party-discovery about Defendants' other promotional programs, to the period from January 2000 through March 2006, do not exist with respect to the outstanding subpoena to Arnold Porter, and are clearly outweighed by Plaintiff's right to patently relevant discovery.
That the information sought is relevant cannot seriously be disputed. The Complaint in this action alleges that Defendants have been involved in a RICO enterprise that has engaged in a pattern of racketeering activity through which Plaintiff and other large companies have been defrauded of millions of dollars. Moreover, as alleged, the threat posed by the enterprise's racketeering activity continues and threatens to continue indefinitely, as evidenced by Defendants' ongoing fraudulent solicitation of other targeted manufacturers. (See First Amended Complaint dated June 7, 20006, Count II, ¶¶ 73-84.) As Plaintiff persuasively argues, the RICO scheme alleged in the Complaint is open and ongoing, and the best evidence of that contention is the January 2007 action filed by Roche against Defendants, in which a fraudulent scheme virtually identical to the scheme set forth in the Complaint in this action continued during the period from approximately December 2005 through December 2006. Any evidence of an ongoing pattern of fraudulent activity by the RICO enterprise is clearly relevant to Plaintiff's RICO claim.
When the Court set the original time parameters for party discovery, there was scant, if any, evidence to support Defendants' contention that the RICO enterprise was continuing to engage in fraudulent conduct. Plaintiff has now uncovered other litigations, brought by Eight O'Clock Coffee, Hanover Corporation, Beechnut, and Roche, in which Defendants are alleged to have engaged in fraudulent schemes similar to the one alleged by Plaintiff. Based upon that discovery, Plaintiff is in the process of filing a motion to amend the First Amended Complaint to assert that Defendants fraudulent conduct is ongoing, and to seek injunctive relief. The request for more current information about Defendants' promotional programs can hardly be considered a "fishing expedition" at this point.
By contrast, Plaintiff and Defendants' business relationship spanned the period of 2003 through 2005.
[A] plaintiff in a RICO action must allege either an open-ended pattern of racketeering activity (i.e., past criminal conduct coupled with a threat of future criminal conduct) or a closed-ended pattern of racketeering activity (i.e., past criminal conduct extending over a substantial period of time). To satisfy open-ended continuity, the plaintiff need not show that the predicates extended over a substantial period of time but must show that there was a threat of continuing criminal activity beyond the period during which the predicate acts were performed.First Capital Asset Management, Inc. v. Satinwood, Inc., 385 F.3d 159, 180 (2d Cir. 2004) (internal citations and quotation marks omitted).
In addition, contrary to Defendants' contention, the subpoena to Arnold Porter does not threaten any of the harms the Court attempted to attenuate by limiting the time period for Defendants' own production of information about their ongoing business transactions. First, the response to the subpoena will impose no burden on Defendants, as they are not being required to produce additional documents. Moreover, Arnold Porter has voiced no objection to complying with the subpoena; it is Defendants who are seeking the protective order, not Arnold Porter.
Nor will the subpoena cause irreparable injury to Defendants by jeopardizing their current business relationships. It is difficult to comprehend Defendants' contention that their business relationship with Roche could be disrupted by requiring Arnold Porter to comply with the subpoena (see Defs.' Mem. at 8; Defendants' Memorandum in Reply to Plaintiff's Opposition to Defendants' Motion to Quash, dated Mar. 13, 2007, at 5), when that relationship has already been disrupted by Defendants' own conduct. The clear evidence of this disruption is the lawsuit brought by Roche for essentially the same fraudulent conduct that is alleged in the instant action.
Finally, Defendants contend that the material sought from Arnold Porter contains proprietary business information, such as pricing and marketing information, that should not be disclosed to Plaintiff. This argument fails for a number of reasons. First, Defendants have already produced the information to Roche, and have produced similar information to Plaintiff. Second, Plaintiff is not in the same business as Defendants, nor is it a competitor of Defendants. The only possible use Plaintiff could make of the information is in support of its claims in this litigation. Moreover, there is a Confidentiality Order in place in this action that is more than adequate to protect Defendants' proprietary information from misuse.
Defendants have raised one issue, however, which has some facial plausibility. They object to the production of the Confidential Settlement Agreement with Roche, arguing that there are strong policy reasons to preserve its confidentiality, which are not outweighed by any legitimate use to which Plaintiff could put the agreement.
As the parties recognize, the Federal Rules of Evidence bar the introduction of settlement negotiations and agreements in evidence in order to prove or disprove liability. Rule 408 provides in relevant part:
Evidence of (1) furnishing or offering or promising to furnish, or (2) accepting or offering or promising to accept, a valuable consideration in compromising or attempting to compromise a claim which was disputed as to either validity or amount, is not admissible to prove liability for or invalidity of the claim or its amount. . . . This rule also does not require exclusion when the evidence is offered for another purpose, such as proving bias or prejudice of a witness, negativing a contention of undue delay, or proving an effort to obstruct a criminal investigation or prosecution.
The Rule furthers "the strong federal policy favoring settlement of disputes." Tribune v. Purcigliotti, No. 93 Civ. 7222 (LAP)(THK), 1996 WL 337277, at *1 (S.D.N.Y. June 19, 1996);accord In re: Initial Public Offering Secs. Litig., No. 21 MC 92 (SAS), 2004 WL 60290, at *5 (S.D.N.Y. Jan. 12, 2004). That purpose is accomplished, however, "not by making settlement information unavailable, but by limiting the abusive use of positions taken during the process. The rule insures that offers of compromise will not have intrinsic evidentiary value . . . The rule thus fosters non-judicial resolution of disputes because compromises made during the settlement process will not later surface to haunt the parties as substantive evidence." Bank Brussels Lambert v. Chase Manhattan Bank, N.A., Nos. 93 Civ. 5298 8270 (LMM)(RLE), 1996 WL 71507, at *3 (S.D.N.Y. Feb. 20, 1996). Moreover, Rule 408 does not prohibit the use of settlement agreements for other evidentiary purposes, such as impeachment.See, e.g., Playboy Enters. Int'l v. On Line Entm't, Inc., No. 00 Civ. 6618 (DGT), 2004 WL 626807, at *5 (E.D.N.Y. Mar. 29, 2004) (noting that evidence of settlement, otherwise excludable pursuant to Rule 408, is admissible for purposes of impeachment); Purcigliotti, 1996 WL 337277, at *1 (settlement discussions may be used for impeachment).
More importantly, Rule 408 pertains only to evidentiary issues at trial, and does not govern pretrial disclosure of settlement agreements. Rather, Federal Rule of Civil Procedure 26(b)(1) sets the standard for pretrial disclosure, and requires only that the information sought be relevant and calculated to lead to the discovery of admissible evidence. See Johnson Matthey, Inc. v. Research Corp., No. 01 Civ. 8115, 2003 WL 24136087, at *3 (S.D.N.Y. June 16, 2003); Rates Tech. Inc. v. Cablevision Sys. Corp., No. 05 Civ. 3583 (DRH) (WDW), 2006 WL 3050879, at *3 (E.D.N.Y. Oct. 20, 2006); Bank Brussels Lambert, 1996 WL 71507, at *3; Purcigliotti, 1996 WL 337277, at *1. "Thus, admissibility is not a prerequisite to discoverability, and the scope of relevance under Rule 26 is broader than under the Rules of Evidence." Initial Public Offering Secs. Litig., 2004 WL 60290, at *4; ABF Capital Mgmt. v. Askin Capital, No. 96 Civ. 2978 (RWS), 2000 WL 191698, at *1 (S.D.N.Y. Feb. 10, 2000) ("Prevailing authority within this Circuit holds that the discovery of settlement-related information is governed by [Rule 26(b)(1)], and that no heightened showing of relevance need be made in order to justify disclosure of a settlement agreement.");cf. Newman Assocs. v. J.K. Harris, No. 04 Civ. 9264 (RJH) (MHD), 2005 WL 3610140, at *2-3 (S.D.N.Y. Dec. 15, 2005) (holding that there is no privilege that precludes the discovery of settlement agreements, and that production of statements made in the context of settlement discussions would not undermine the policy of encouraging settlements, because the settlement discussions were no longer ongoing, and there were no other specific circumstances outweighing the relevance of the material). Moreover, the simple fact that the parties to the settlement agreement agreed to its confidentiality "does not shield it from discovery." LaForest v. Honeywell Int'l Inc., No. 03 Civ. 6448T, 2004 WL 1498916, at *7 (W.D.N.Y. July 1, 2004) (citing Tribune Co., 1996 WL 337277 at *3 and Weissman v. Fruchtman, No. 83 Civ. 8958 (PKL), 1986 WL 15669, at *19 (S.D.N.Y. Oct. 31, 1986)); accord ABF Capital, 2000 WL 191698, at *2.
Latching on to a passing statement Plaintiff's counsel made in correspondence with the Court — "to the extent the Roche action was settled pursuant to a confidentiality agreement, discovery in this regard is particularly relevant in assessing Defendants' culpability — whether Defendants returned product to Roche and whether Defendants paid monies to Roche" (Letter from Rodney A. Brown to the Court, dated Mar. 2, 2007, at 2) — Defendants contend that their settlement agreement with Roche is not relevant because Plaintiff's intended use of the agreement to establish liability is impermissible.
The Court disagrees. The litigation with Roche, and its resolution, are clearly relevant to this action. As discussed, Plaintiff contends that Defendants perpetrated an elaborate scheme of fraud against Plaintiff and numerous other companies, and the allegations asserted against Defendants in the Roche complaint are virtually identical to those asserted in this action. It is premature to conclude at this point that the settlement agreement cannot be used for any purpose at trial. For example, Plaintiff argues that there is a strong likelihood that it can be used for purposes of impeachment, as Defendants contend that they make full disclosure of their sampling programs, and the Roche litigation may demonstrate otherwise. In any event, even if the settlement agreement is ultimately inadmissible, the disclosure of the terms of the settlement agreement could certainly lead to the discovery of admissible evidence.
The Court therefore concludes that Defendants have failed to show good cause for quashing the subpoena to Arnold Porter.
The Roche settlement agreement and any proprietary business information produced by Arnold Porter shall be covered by the Confidentiality Order in place in this litigation.
CONCLUSION
For the reasons set forth above, Defendants' motion to quash the subpoena issued to Arnold Porter is denied.So Ordered.