Opinion
Case No: 2:99 CV 995 TC.
July 13, 2004
ORDER GRANTING MOTION TO COMPEL AND MOTION FOR PROTECTIVE ORDER
The magistrate judge issued an Order regarding a motion for protective order and a motion to compel, both pertaining to requests for production Plaintiffs submitted to Defendants. The Order contained the conceptual decisions of the magistrate judge on the issues raised in the motions and attached an Appendix containing revised production requests intending to make them consistent with the rationale of the Order. The Order requested that the parties provide comments, objections and recommendations to those proposed discovery revisions to ensure the revisions reflected the rationale of the order, and asked the parties to meet, confer and report on related discovery modifications for third parties.
Docket no. 173, filed May 20, 2004.
Motion for Protective Order and Motion to Quash (Motion for Protective Order), docket no. 116, filed February 3, 2004.
Plaintiffs' Notice of Motion and Motion to Compel Defendants to Produce Documents (Motion to Compel), docket no. 143, filed March 25, 2004.
The parties' summary statement (Joint Summary) was submitted June 21st. In the Joint Summary, Plaintiffs found no fault with the court's proposed discovery limitations, but Defendants requested many modifications. The parties also discussed the proposed modifications for discovery to Ernst Young. The clear and focused Joint Summary has been very helpful to the court.
Docket no. 180.
This order considers the parties' input in the Joint Summary and disposes of the motions, adopting the reasoning of the Order. This order will first discuss the Defendants proposed revisions to the production requests to Defendants and then discusses for the first time the text of the somewhat similar discovery requests to Ernst Young.
Production Requests to Defendants
In several instances, Defendants seek to modify the court's revisions of discovery requests to conform to terms discussed between counsel in the "meet and confer" process. This process was so contentious and inconclusive, and the requests and concessions so interdependent, that the court generally does not adopt those revisions, and does not regard them as binding in the scope of overall revisions. In some cases, where Plaintiffs took a position in their motion papers, they have been bound to that position.
Joint Summary at 7 regarding Modified Request No. 2; Id. at 8 regarding Modified Request No. 20; Id. at 9 regarding Modified Request No. 22; Id. at 10 regarding Modified Request No. 23.
Defendants suggest the prefatory wording before the "Requests Pertaining to Original Equipment Manufacturers" be further revised to limit the discovery to transactions actually booked. Evidence of all transactions with the OEMs in this time period, even those not booked, may be admissible and is certainly discoverable. Limitation as Defendants request could lead to information gaps. The entire customer relationship should be available.
Defendants sought to modify the prefatory wording to the requests pertaining to "In-Transit Revenue" to remove any obligation to produce documents created outside the limited period of time claiming this "reasonably circumscribes the universe of documents from which Novell would be required to search." The court disagrees, believing that all documents pertaining to this time period should be produced. Reporting documents are actually more likely to have been prepared after the time period.
Id. at 10.
In two of the requests for documents relating to the "in-transit" revenue allegations, Defendants propose they not produce any documents regarding revenues and shipping product, removing any context for the determination of what was "in-transit" and what was not. The court is not permitting discovery of "all of Novell's revenue channels" but has already made significant limitations on the original requests. The court rejects this attempt to make the production "word" sensitive instead of content sensitive.
Id. at 11, regarding Modified Requests No. 4 and 5.
Opposition Memorandum at 3.
Defendants' argument as reported by Plaintiffs in Plaintiffs' Local Rule 37-1(b) Appendix Regarding Discovery Requests in Dispute Filed in Support of Plaintiffs' Motion to Compel Production of Documents (Plaintiffs' Appendix), docket no. 146, filed March 25, 2004, at 4.
Defendants sought to revise the prefatory wording to the three discovery requests pertaining to general management reporting of revenues and receivables (under the heading "OEM Transactions and In-Transit Revenue") by limiting the time period to 3Q F96 to 2Q F97, rather than 2Q F96 to 2Q F97 as the court proposed. These requests were purposely modified to "require production of a broader period of documents than other requests related to OEMs and `in transit' sales" because the requests are of a more broad and general nature, pertaining to general management reporting of revenues and receivables.
Joint Summary at 12.
Defendants also sought to confine these requests to materials "relating to OEM transactions and the purported `in transit' transactions." Defendants entirely misunderstood the court's objective in its revisions and the purpose of these requests. In order to understand the effect and relationship of the alleged OEM transactions and "in-transit" revenue category, the entire universe of receivables and revenue, for a larger time period, should be understood. Defendants' similar quest to limit a request regarding revenue reporting is likewise rejected.
Id. at 12-13 regarding Modified Requests 27, 28 and 43.
Id. at 13, regarding Modified Request No. 8.
Just as Defendants sought to limit the prefatory wording to the requests pertaining to "In-Transit Revenue," they seek to limit the prefatory statement to the Requests Pertaining to General Financial Information to eliminate the duty to produce documents reporting the time period in question, so that only documents created during the time period must be produced. The suggestion is rejected for the same reason, that reporting documents are actually more likely to have been prepared after the time period.
Defendants also seek to limit the time period for general financial information to start in 3Q F96 rather than 1Q F96. Because this information is more general, providing a context for understanding the relative importance of mis-stated OEM and "in-transit" revenue, a longer time frame is merited. Plaintiffs allege Novell's financial condition and investor expectations provided the incentive for management mis-statements. The larger scenario will be probative on the scienter that Plaintiffs have alleged.
Defendants also seek to limit the production of documents regarding comparison of actual and projected "financial results" to those related to actual and projected "revenues and profits." This was never argued previously, and the change will not be made at this time. Defendants are correct, however, that the court's proposal would require production of the entire monthly financial review packages, and a corrective revision has been made. Defendants' proposal to limit the source documents to those monthly packages has not been adopted.
Id. at 13, regarding Modified Request No. 7.
See Defendants' position in Defendants' Response to Plaintiffs' Local Rule 37-1(b) Appendix Regarding Discovery Requests in Dispute Filed in Opposition to Plaintiffs' Motion to Compel Production of Documents, docket no. 158, filed April 21, 2004, at 15-16.
Defendants also claim that the court's addition of the words "detailed sales forecasts which list customer names and the potential to achieve those sales" in Modified Request No. 8 broadens Plaintiffs' original requests. However, this specific disputed example arose in briefing, and it is appropriate that such documents be produced as a part of the response to that specific request.
Id. at 14.
Plaintiff's Appendix at 7.
Defendants suggest several changes to Modified Request No. 10 which would, in the court's view, give an inadequate and partial picture of the financial context. A modification has been made as Defendants request because "Plaintiffs did not move to compel subsection (b) and expressly stated that they were deferring their request for production of this category of documents."
Joint Summary at 15, quoting Plaintiffs' Appendix at 10.
Defendants request a revision of the time frame for Modified Requests Nos. 12-15, 18, and 36, which more accurately reflects the original document request. The revision is made. But the request to limit documents to those "created during" rather than "pertaining to" this time frame is denied. Finally, Defendants' "construction" of revenue recognition is not adopted.
Id. at 16.
Defendants propose that discovery regarding Ernst Young not include consulting or tax engagement. This discovery is already limited to material "pertaining to revenue recognition, OEM transactions, `in-transit sales,' accounts receivable, accounts receivable reserves or the affirmative defense of reliance on auditors," so a further carving down of the request is not necessary.
Id. at 16.
Defendants ask that the request for all "documents concerning any engagement or work performed by EY" be limited to FY 97, because this is what Plaintiffs asked in their appendix on the motion to compel. The court cannot find such a limitation in the appendix and feels that the same scope should apply to this request as applies to other requests in this subject area. The same result applies to another request to limit a time period.
Joint Summary at 17, citing Plaintiffs' Appendix at 14-15.
Id. at 18, regarding Modified Request No. 18.
Defendants' suggestion to modify the prefatory statement regarding Modified Requests 24, 38, and 40-42 to those "created during" a time period rather than those "pertaining to" the time period is denied.
Defendants' suggestion to limit requests for financial forecasts; budgets or plans; and comparisons of budgets to actuals to include only "regularly generated periodic" reports is also denied.
Id. at 19-20, regarding Modified Requests Nos. 40-42.
Discovery Requests to Ernst Young
Prior to the Joint Summary, the parties had not directly addressed the discovery requests to Ernst Young. Similarities between the discovery requests to Defendants and those to Ernst Young help substantially in development of the new revised discovery requests to Ernst Young contained in the Appendix to this order. Essentially, the court has applied the similar time and scope limitations to several of the requests to Ernst Young. The scope limitation is not applied to requests related to document retention policies and means. In the absence of a showing of present need for those secondary materials, requests for time and billing records are stricken as overbroad and burdensome.Further Discovery Disputes
Plaintiffs portion of the Joint Summary notes that similar issues are arising in new battlefields because interrogatories were recently served and answered with an objection. The parties are directed to meet and confer regarding these disputes and find some way of resolving them consistent with this order, while preserving, to the extent desired, any objections and each party's right of review.
In response to plaintiffs' first set of interrogatories, defendants collectively served 76 objections on June 8, 2004, and did not agree to provide a single response to any interrogatory. Defendants' rationale is the same that was rejected by this Court in the Order. As an example, Novell states that it "further objects to [Interrogatories 1-9] to the extent that it seeks information that is relevant only to claims and allegations that have been dismissed with prejudice by the Tenth Circuit.
Joint Summary at 4, n. 9.
ORDER
IT IS HEREBY ORDERED that:
1. The motion for protective order and the motion to compel are GRANTED in part as provided herein on the basis of the conceptual decisions contained in the May 25th Order which is adopted and incorporated herein by this reference;
2. The modified requests for production contained in the Appendix attached to this Order shall be answered by Defendants on or before August 27, 2004;
3. The modified requests for production to Ernst Young contained in the Appendix attached to this Order shall be answered on or before August 13, 2004;
4. The subpoena supported requests for documents to the OEMs shall be answered for the time period 3Q 1996 to 2 Q 1997.
4. Following the production of documents relating to "in-transit" revenue, Plaintiffs may take the depositions of Wes Swenson, and Ted Glahn;
5. Following the depositions of Wes Swenson, and Ted Glahn, Plaintiffs may apply for leave to take further discovery on "in-transit" revenue;
6. The subpoenas served on non-parties Tech Data Corporation, Merisel, Inc., and Ingram Micro, Inc., shall not be answered until Plaintiffs have leave to take further discovery on "in-transit" revenue; and
7. The parties shall meet and confer regarding the objections to interrogatories served June 28, 2004.
Motion for Protective Order and Motion to Quash (Motion for Protective Order), docket no. 116, filed February 3, 2004.
Plaintiffs' Notice of Motion and Motion to Compel Defendants to Produce Documents (Motion to Compel), docket no. 143, filed March 25, 2004.
Attached to Declaration of Kent W. Easter (Easter Declaration), docket no. 119, filed February 3, 2004, as Exhibit F.
Attached to Easter Declaration as Exhibits G, H, K, L, M, and O.
Joint Summary at 21.
APPENDIX to Order Granting Motion to Compel and Motion for Protective Order
The production of privileged documents, which should be appropriately listed in a privilege log, is not required.The underlined titles above each group of requests are for convenience and are not substantive.
REQUESTS TO DEFENDANTS Requests Pertaining to Original Equipment Manufacturers
The following document requests shall at this time be limited to those documents which pertain to transactions with original equipment manufacturers in the period 3Q F96-2Q F97.
DOCUMENT REQUEST NO. 1:
Documents concerning Novell's accounting policies, procedures or guidelines, including, but not limited to, its revenue recognition policy and documents concerning Novell's compliance with or deviation from any such policies or procedures.
DOCUMENT REQUEST NO. 2:
Documents concerning policies and procedures for approving or disapproving of any contracts or agreements, whether written or oral, with customers.
DOCUMENT REQUEST NO. 20:
Documents concerning Novell's sales to and/or returns and/or exchanges from its original equipment manufacturer customers, including, but not limited to:
(a) complete customer or sales order files;
(b) documents concerning sales to the customers, including, but not limited to, purchase orders and invoices;
(c) documents concerning shipping of products to and/or from the customers, including, but not limited to, packing lists, bills of lading and shipping orders;
(d) documents concerning terms of sale, including, but not limited to, prices offered, price protection, promotional or special terms, discounts, rights of return, payment terms or credit terms offered;
(e) documents concerning contracts, including, but not limited to, side letters or side-agreements, amendments, letters of intent and memoranda of understanding, and drafts thereof;
(i) documents concerning contract negotiations;
(f) documents concerning payments;
(g) documents concerning royalty deals;
(h) notes, memorandum, correspondence and analyses regarding the customers
(i) documents concerning the approval or disapproval of any contracts or agreements, whether written or oral, including, but not limited to, memorandum, notes and email;
(j) documents concerning the customers' ability to sell Novell product;
(k) documents concerning returns or credits, including, but not limited to, return merchandise authorization and credit memos
(l) contract revenue order forms;
(m) documents in Novell's possession concerning the customers' product sales, including, but not limited to, royalty or point of sale (POS) reports;
(n) documents in Novell's possession concerning the customers' inventory of Novell product;
(o) documents in Novell's possession concerning the customers' business plans;
(p) documents in Novell's possession concerning the prices that the customers charged their customers for Novell product;
(q) documents concerning stock rotation or stock balancing arrangements; and
(r) Distribution Inventory Reports and Pull Side Reports.
DOCUMENT REQUEST NO. 22:
Documents concerning the revenue recognition approval or denial process for all revenue recorded during the Relevant Period.
DOCUMENT REQUEST NO. 23:
Documents concerning the credit approval or denial process for all revenue recorded during the Relevant Period.
Requests Pertaining to In-Transit Revenue
The following document requests shall be limited to documents created during or regarding activities during the period 3Q F96 — 2Q F97.
DOCUMENT REQUEST NO. 4:
Documents maintained or created by, or on behalf of, Wes Swenson concerning revenues, shipping product, and/or in-transit sales and in-transit revenue, including shipping paperwork and distributor revenue spreadsheets.
DOCUMENT REQUEST NO. 5:
Documents maintained or created by, or on behalf of, Ted Glahn concerning revenues, shipping product, and/or in-transit sales and in-transit revenue, including shipping paperwork and distributor revenue spreadsheets.
DOCUMENT REGUEST NO. 21:
Documentation concerning (a) storage of product in trailers, trucks, or at freight forwarders' or shippers' warehouses, (b) rental of trailers, and (c) agreements with shippers and freight forwarders for storage or holding Novell product for longer than the time reasonably required to transport it to the intended recipient.
Requests Pertaining to OEM Transactions and In-Transit Revenue
The following document requests shall be limited to documents pertaining to the period 2Q F96 through 2Q F97.DOCUMENT REQUESTS NOS. 27 and 28:
Documents concerning accounts receivable reserves and meetings related thereto, including, but not limited to, notes, correspondence, view graphs, reports, spreadsheets and presentation materials, and drafts thereof.
DOCUMENT REQUEST NO. 43:
Documents concerning or relating to instances where revenue was recorded prior to shipment.
Requests Pertaining to General Financial Information
The following document requests shall be limited to documents created during or reporting with respect to the period 1Q F96 through 2Q F97.
DOCUMENT REQUEST NO. 7:
Documents concerning comparisons of Novell's actual financial results to projected results, including without limitation, responsive materials contained in monthly financial review packages, or similar packages distributed to upper management and memos prepared by the sales or finance department.
DOCUMENT REQUEST NO. 8:
Documents prepared or maintained by, or on behalf of, each regional sales department and each regional sales director, and detailed sales forecasts which list customer names and the potential to achieve those sales.
DOCUMENT REQUEST NO. 10:
Documents concerning monthly, quarterly and annual accounting reports, summaries or analysis, including, but not limited to:
(a) final consolidated and consolidating financial statements;
(b) schedules, reports, summaries or analysis supporting the consolidating and consolidated financial statements or the disclosures thereto;
(c) analyses, summaries or reports of reserves for doubtful accounts receivable;
(d) analyses, summaries or reports of Days Sales Outstanding (DSO);
(e) analyses, summaries or reports of excess or obsolete inventory;
(f) analyses, summaries or reports of sales order backlog;
(g) analyses, summaries or reports of inventory turn;
(h) analyses, summaries or reports of reserves or allowances for price protection, marketing credits or sales credits;
(i) analyses, summaries or reports of sales returns and allowances; and
(j) analyses, summaries or reports of all other reserves, including warranty and general reserves.
DOCUMENT REQUEST NO. 11:
Recurring accounting journals, including any other differently named materials containing substantially similar information to that described:
(a) final monthly trial balances;
(b) final monthly detailed general ledgers;
(c) final monthly A/R aging reports, sorted by customer name;
(d) final monthly A/R subledgers or reports, sorted by customer name, including reconciliation to the general ledger;
(e) final monthly cash receipts reports;
(f) final monthly credit memo registers;
(g) monthly shipping logs; and
(h) monthly receiving logs.
The following document requests shall be limited to documents pertaining to the period December 31, 1995 through F97 and pertaining to revenue recognition, OEM transactions, "in-transit sales," accounts receivable, accounts receivable reserves or the affirmative defense of reliance on auditors.
DOCUMENT REQUEST NO. 12:
Documents concerning communications with Ernst Young, LLP ("EY"), including, but not limited to, all documents concerning any independent audit or review of Novell's financial statements, any disagreement with EY, all documents given to or received from EY, and all reports, letters or forms relating to any audit, review, consulting or tax engagement.
DOCUMENT REQUEST NO. 13:
Documents concerning any engagement or work performed by EY, including, but not limited to, any documents provided to or received from EY,
DOCUMENT REQUEST NO. 14:
Documents concerning meetings of the audit committee or communications with the audit committee or between members of the audit committee, including, but not limited to, notes, correspondence, view graphs, reports and presentation materials, and drafts thereof.
DOCUMENT REGUEST NO. 15:
Documents concerning any meetings of Novell's board of directors or any committee of the board of directors, including, but not limited to, notes, correspondence, view graphs, reports, board packages and presentation materials, and drafts thereof
DOCUMENT REQUEST NO. 18:
Documents concerning communications with consultants, including, but not limited to, notes, correspondence, view graphs, reports and presentation materials, and drafts thereof.
DOCUMENT REQUEST NO. 36:
Documents concerning any transactions by or on behalf of any Defendant in "put" warrants.
The following document requests shall be limited to documents pertaining to the period 4Q F96 and 1Q F97.
DOCUMENT REQUEST NO. 24:
Documents concerning statements regarding sales or quarterly financial results which Defendants made to analysts, investors, shareholders, portfolio managers, brokers, stock traders or the media, including, but not limited to, notes, correspondence, view graphs, reports, press releases, presentation materials, conference call transcripts and documents created in preparation for conference calls, and drafts thereof.
DOCUMENT REQUEST NO. 38:
Internal audit reports dealing with revenue recognition, OEM transactions, "in-transit sales," accounts receivable, accounts receivable reserves or the affirmative defense of reliance on auditors.
DOCUMENT REQUEST NO. 40:
Any financial forecast or projection.
DOCUMENT REQUEST NO. 41:
Periodic (annual, monthly, weekly, etc.) financial budgets or plans.
DOCUMENT REQUEST NO. 42:
Periodic (annual, monthly, weekly, etc.) comparisons or analysis of budgets to actual results.
REQUESTS TO ERNST YOUNG
Time Period: All requests herein refer to the period from December 31, 1995 through FY97 (the "Relevant Period") in response to these requests, unless otherwise specifically indicated, and shall include all documents and information that relate to such period, even though prepared or published outside of the Relevant Period. REQUEST NO. 1:Documents concerning your document destruction, retention and alteration policy in effect during the Relevant Period, including, without limitation, any such policies concerning electronically-stored documents and email.
REQUEST NO. 2:
Documents concerning the preservation, search for, collection, maintenance, destruction or alteration of any and all documents (including email and other electronic data) concerning Novell that were undertaken with respect to this action, including, without limitation, all such action taken after this action was filed but prior to this request.
Scope of Discovery: The following document requests shall be limited to documents pertaining to:
(a) revenue recognition;
(c) "in-transit" revenue or sales;
(b) OEM transactions;
(d) accounts receivable or accounts receivable reserves;
(e) the affirmative defense of reliance on auditors;
(g) periodic (annual, monthly, weekly, etc.) financial budgets or plans;
(h) periodic (annual, monthly, weekly, etc.) comparisons or analysis of budgets to actual results;
(i) policies and procedures for approving or disapproving of any contracts or agreements, whether written or oral, with customers;
(j) storage of product in trailers, trucks, or at freight forwarders' or shippers' warehouses, rental of trailers, and/or agreements with shippers and freight forwarders for storage or holding Novell product for longer than the time reasonably required to transport it to the intended recipient; and
(k) instances where revenue was recorded prior to shipment.REQUEST NO. 3:
Documents concerning any professional services performed by you for Novell or the Individual Defendants, including, but not limited to:
(a) Audits;
(b) Consulting;
(c) Reviews;
(d) Tax;
(e) Assurance, accounting and attestation; and
(f) Agreed upon procedures.REQUEST NO. 4:
Audit documentation and engagement workpapers concerning all professional services performed by you for Novell or the Individual Defendants, including, but not limited to:
(a) Audits;
(b) Consulting;
(c) Reviews;
(d) Tax;
(e) Assurance, accounting and attestation; and
(f) Agreed upon procedures.
REQUEST NO. 5:
Documents constituting or concerning communications to, from, or relating to Novell or the Individual Defendants, including, without limitation, correspondence files and written communications electronically preserved.
REQUEST NO. 6:
Communications with the SEC concerning Novell or the Individual Defendants including, without limitation, documents produced to the SEC and transcripts of testimony taken by the SEC.
REQUEST NO. 7:
Documents concerning Novell or the Individual Defendants kept or maintained by all personnel who provided professional services for Novell or the Individual Defendants.
REQUEST NO. 8:
Electronically-stored documents concerning Novell, or the Individual Defendants, including, but not limited to, email and instant messages.
REQUEST NO. 9:
Documents concerning any inquiry or investigation by any governmental, administrative or regulatory entity, including, but not limited to, the SEC, regarding possible or actual false or misleading statements, inside-dealing or insider trading by any Novell employee, including, but not limited to, the Individual Defendants.
REQUEST NO. 10:
Documents concerning Novell or the Individual Defendants.
REQUEST NO. 11:
Documents concerning Novell's customers.