Opinion
Case No. 01-1040-MLB
October 24, 2001
MEMORANDUM AND ORDER
This matter is before the court on defendants' motion to compel (Doc. 56). Defendants request that the following orders be entered:
Tricon is the parent of Kentucky Fried Chicken (KFC), Taco Bell (TBC) and Pizza Hut, Inc. (PHI). Tricon was formed in 1997 when its operations were spun off from Pepsico, the former parent of KFC, TBC, and PHI.
1. that defense counsel be permitted to contact plaintiff's former employees ex parte to inquire about the subject matter of this litigation;
2. that plaintiff produce in unredacted form the documents responsive to Production Request No. 7 and Interrogatory No. 5;
3. that plaintiff produce a list of its Target Job Tax Credit (TJTC) clients;
4. that defendant be permitted to contact plaintiff's current and former (TJTC) clients ex parte concerning issues in this case.
Plaintiff opposes defendants' request for ex parte communications with its clients and former employees and argues that its responses to Production Request No. 7 and Interrogatory No. 5 are sufficient. For the reasons stated below, defendants' motion shall be granted with specific conditions noted.
Background
The genesis of this lawsuit is a federal tax program ("TJTC": Targeted Jobs Tax Credits) which existed from 1978 to 1994. The tax incentive program rewarded employers with an income tax credit for the employment of individuals from targeted groups. The targeted groups included (1) economically disadvantaged youths, ex-convicts, and Vietnam-era veterans, (2) Supplemental Security Income (SSI) and general assistance recipients, (3) eligible work incentive employees, (4) referrals from vocational rehabilitation programs, and (5) certain qualified summer employees, ages 16 or 17. Before an employer could successfully claim the tax credit, the employee had to be "certified" by a local agency, generally an office of the state employment security agency. In addition to requirements not pertinent to this lawsuit, the employer was also required to submit a written request for certification from the local agency on or before the date the employee began work. If the request for certification were untimely, the employer would be ineligible for the tax credit for that employee.
Plaintiff's service insured that its client-employers complied with the prerequisites for tax credit eligibility. As part of its service, plaintiff interviewed new hires to determine whether they met the TJTC eligibility criteria. If the employee were eligible, plaintiff sent a letter request for certification to the local job service office. Plaintiff also secured a "proof of mailing" from the postal service as evidence that the request had been timely submitted. Plaintiff's compensation for its services was based on the number of employees who qualified for the tax credit.
In addition to submitting the request, plaintiff performed other TJTC record keeping and reporting functions for its clients.
The TJTC legislation expired in December 1994. Although local job service offices had a backlog of certification requests from 1992 through 1994, they stopped processing the requests in December 1994. The absence of a local certifying agency to deal with the backlog created a void in the TJTC process which forced employers and the IRS to negotiate about the method of proving credit eligibility of employees hired before the legislation expired. As explained in greater detail below, plaintiff's "proofs of mailing" played a role in IRS approval of defendants' claim for tax credits and are the basis for this lawsuit.
Plaintiff's Lawsuit
Plaintiff filed this action against Tricon, KFC, and TBC for:
1. misappropriation of trade secrets;
2. tortious interference with an existing contract;
3. interference with a prospective business advantage;
4. civil conspiracy;
5. unjust enrichment;
6. conversion;
7. fraud; and
8. fraud by silence.
In support of its claims, plaintiff asserts that in 1997 defendants attempted to claim additional tax credits under the TJTC program. Because defendants' own documentation was weak or nonexistent, plaintiff alleges that defendants wrongfully acquired and used "proofs of mailing" which plaintiff had developed while providing TJTC services for Pizza Hut. Plaintiff alleges that defendants' use of the Pizza Hut "proofs of mailing" and client analysis reports violates confidentiality provisions of its contracts with Pizza Hut and a former employee (Tim Cates) who currently works for Pizza Hut.
Defendants concede the use of Pizza Hut "proofs of mailing" and client analysis reports to develop statistical support for their request for additional tax credits from the IRS. However, defendants strongly dispute that the "proofs of mailing" and client analysis reports are "confidential or proprietary to [plaintiff] and/or [plaintiff's] trade secrets." With this background in mind, the court addresses the pending motion to compel.
Motion to Compel
• Ex Parte Interviews of Former Employees
Defendants seek to conduct ex parte interviews of plaintiff's former employees concerning issues in this case. Plaintiff objects, arguing that ex parte interviews of its former employees are (1) irrelevant, (2) prohibited by confidentiality agreements with its employees, and (3) barred by Chancellor v. Boeing Company, 678 F. Supp. 250 (D.Kan. 1988) (court has inherent authority to prohibit ex parte interviews of opposing party's employees.)
Plaintiff's arguments in opposition to the request for ex parte interviews are not persuasive. First, the information gathered from interviews of former employees would be relevant because it is reasonably calculated to lead to admissible evidence concerning the claims and defenses in this case. Second, based on a review of the confidentiality agreement executed by Tim Cates, the court rejects plaintiff's suggestion that the agreement is so broad as to preclude any discussion of facts and issues related to this case. Finally, the majority rule is that ex parte interviews of former employees who are not represented by counsel are permissible. Aiken v. Business and Industry Health Group, Inc., 885 F. Supp. 1474 (D.Kan. 1995) (J. Lungstrum, explaining why Chancellor is no longer applicable). This court adopts Judge Lungstrum's holding in Aiken and will permit defendants to conduct ex parte interviews. However, because the interviews will be done as informal discovery, the unrepresented former employees shall be advised of their right to decline to be privately interviewed.
• Client Information
Defendants served plaintiff with the following document production request:
Production Request No. 7
All documents showing any and all policies, procedures, or other measures taken by plaintiff to preserve what plaintiff considers to be its trade secrets or its confidential and proprietary information.
Plaintiff responded by stating:
The requested documents not already in defendants' possession will be produced upon the entry of an appropriate protective order and defendants' agreement to pay the reasonable cost and expense in photocopying these documents. Only redacted samplings of (d) . . . will be provided. Plaintiff is aware of the following documents responsive to this request:
* * *
(d) TJTC Support Services Agreements between Plaintiff and its clients;
* * *
Defendants also served Interrogatory No. 5 which asked whether plaintiff ever provided proofs or certificates of mailing to its clients or to third parties for the benefit of its clients. For each instance where plaintiff provided proofs of mailing, defendants requested the name of the client and date the information was supplied. Plaintiff objected that the request was overly broad, unduly burdensome, unlimited in scope, and violated the confidentiality of its clients. Without waiving its objections, plaintiff stated that it provides proofs of mailing to clients who receive Information Document Requests (IDR) from the IRS and offered to provide redacted samples of the documents it provides to its clients.
Based on Production Request No. 7 and Interrogatory No. 5, defendants seek an order compelling plaintiff to provide (1) unredacted copies of the samples provided, (2) unredacted copies of all IDR related documents provided to TJTC clients, and (3) a list of all of plaintiff's TJTC clients. Plaintiff opposes the motion to compel, arguing that the discovery sought is irrelevant because the contract between plaintiff and Pizza Hut is clear and unambiguous; therefore, any evidence or information from plaintiff's other clients is not relevant.
The parties expend considerable effort debating whether plaintiff waived its "lack of relevance" objection. Because the court finds the discovery relevant, the issue is moot.
The court has reviewed the contract between plaintiff and Pizza Hut and is unable to conclude, as a matter of law at the discovery stage, that the contract and the rights thereunder are unambiguous. Thus, discovery directed toward plaintiff's TJTC clients is relevant because it appears reasonably calculated to lead to the discovery of admissible evidence concerning the claims and defenses in this lawsuit.
In addition, the claims in this case are not based solely upon an interpretation of the contract between plaintiff and Pizza Hut but include claims that defendants (1) misappropriated trade secrets, (2) tortiously or negligently interfered with an existing contract, (3) interfered with a prospective business advantage, (4) engaged in a civil conspiracy, (5) converted plaintiff's property, and (6) engaged in fraud and fraud by silence. Plaintiff's dealings with other clients and treatment of its reports and proof of mailings are relevant to these claims. For example, the treatment and handling of the proofs of mailing by plaintiff and its clients may lead to admissible evidence as to whether plaintiff made reasonable efforts to protect disclosure of the proofs of mailing, an element of a "trade secrets" claim. Therefore, defendants' motion to compel information concerning plaintiff's TJTC clients shall be granted.
• Ex Parte Interviews of Plaintiff's Clients
Plaintiff argues that defendants should not be permitted to interview its clients ex parte because of the "strong likelihood that defendants will use this information to otherwise interfere or detrimentally impact [plaintiff's] relationship with its customers." In support of its concerns, plaintiff recites the following telephone message from Matt Preston, Tricon's vice president and assistant general counsel to plaintiff's counsel:
The TJTC program expired in 1994. Plaintiff's brief does not contain an adequate explanation of how defendants' inquiries about past events would affect plaintiff's current business.
Hey Mark, this is Matt Preston. I am the vice-president and assistant general counsel at Tricon. I have Don Phillips here with me who is our senior director of U.S. taxes. Interestingly, we had a complaint filed by our old friend [Management Insights] which appears to be a new complaint covering matters we thought we had substantially resolved in a settlement with [Management Insights] with your name signed to the complaint. Of course we have to believe this is a mistake. If it is not, we are shocked and amazed that a partner of ours would stoop to such lows. We want to talk to you about this but have our assurances that if this in fact is a new litigation, the flood gates of hell have been opened because we thought we had gotten rid of this trouble and moved forward. So, would you please call me at your earliest convenience? I need to know how to staff up on this and move forward. My number here is [deleted]. Thanks.
Preston's "settlement" reference related to a settlement agreement which dismissed plaintiff's earlier lawsuit against Pizza Hut and Tricon on September 5, 2000. Plaintiff filed the present lawsuit on October 6, 2001, but waited until Tricon made its $900,000 settlement payment before serving process for this lawsuit on January 5, 2001.
Based on the present showing, the court is not persuaded that defendants should be prohibited from interviewing plaintiff's TJTC clients ex parte. Although the telephone message reveals Tricon's irritation over being sued, the message also requests an explanation of why a second suit was filed against Tricon. However, to address plaintiff's concerns, the court will require that all ex parte contacts with plaintiff's TJTC clients concerning this lawsuit be made by defendants' outside counsel. Counsel shall not delegate this task to defendants' corporate employees or legal assistants.
IT IS THEREFORE ORDERED that defendants' motion for an order permitting ex parte interviews with plaintiff's former employees is GRANTED. Defendants may conduct ex parte interviews of plaintiff's former employees, but only after informing the former employees of their right to decline to be privately interviewed.
IT IS FURTHER ORDERED that defendants' motion to compel plaintiff to provide TJTC client information is GRANTED. Plaintiff shall provide defendants with (1) unredacted copies of the samples provided, (2) unredacted copies of all IDR related documents provided to plaintiff's TJTC clients, and (3) a list of all of plaintiff's TJTC clients with addresses and phone numbers on or before November 14, 2001. Production of these documents and client information will be subject to the protective order filed in this case. (Doc. 30).
IT IS FURTHER ORDERED that defendants' motion to conduct ex parte interviews of plaintiff's TJTC clients is GRANTED. The ex parte interviews shall be conducted by defendants' outside counsel.