Opinion
5:20-cv-1743-JRA
08-05-2022
RE: Discovery Statement of Dworken & Bernstein Co., L.P.A., Weisman, Kennedy & Berris Co., L.P.A., and Strauss Troy v. Anderson, et al., Northern Dist. of Ohio,
Hon. John R. Adams, Judge
This correspondence responds to this Court's Order entered July 29, 2022 that directed the law firms seeking appointment as lead counsel to submit information that “include a description of what they believe will be the subjects on which discovery is to be sought, the nature and extent of discovery, any potential problems that may arise with discovery, the possible use of experts to aid in discovery or litigation, and the dates by which they believe discovery could be completed.” (Doc. 335.)
A. Threshold First-Filed Issue
This Court's Opinion and Order filed 02/11/22 directed an answer to the question ‘on what basis this dispute may be presented to any court other than this one, the first-filed court.' That addresses a threshold question and the undersigned respectfully provide this court the following.
The first-filed rule empowers a U.S. District Court to enjoin proceedings in a later filed action. Smith v. S.E.C., 129 F.3d 356, 361 (6th Cir. 1997) (“courts often proceed under the rule of thumb that the entire action should be decided by the court in which an action was first filed”). This is not only the rule in the Sixth Circuit, but elsewhere:
“District courts have discretion to enjoin the filing of related lawsuits in other U.S. district courts.” Big Rivers, 804 F.2d at 343. “The Fifth Circuit adheres to the general rule that the court in which an action is first filed is the appropriate court to determine whether subsequently filed cases involving substantially similar issues should proceed.” Save Power Ltd. v. Syntek Fin. Corp., 121 F.3d 947, 950 (5th Cir.1997).In re Amerijet Int'l inc. v. Zero Gravity Corp., 785 F.3d 967, 976 (5th Cir. 2015).
It is both a matter of judicial authority, but also courtesy:
The question, therefore, is which judge should rule on transfer. As Insurers suggest, the Court defers to Chief Judge Connolly. It seems the parties raced to the courthouses on the CM/ECF highway. While parties might jockey for position, federal judges don't. The Court will not rush out an order and risk inconsistent rulings on the same transfer issue. Rather, the Court defers to the Delaware Suit-the alleged first-filed case-for a decision on where the litigation should continue. This is generally in line with the first-filed rule. Collegiate Licensing Co. v. Am. Cas. Co. of Reading, Pa., 713 F.3d 71, 78 (11th Cir. 2013) (“The first-filed rule not only determines which court may decide the merits of substantially similar cases, but also generally establishes which court may decide whether the second filed suit must be dismissed, stayed, or transferred and consolidated.”); NaturesMAX, Inc. v. Quintessential Biosciences, LLC, No. 2:15-cv-551-FtM-38CM, 2015 WL 12826478, at *2 (M.D. Fla. Nov. 9, 2015) (“Because the Utah action is the first-filed action, it is up to the Utah court to determine whether the first to file rule, or one of the exceptions, should apply. Until that decision is made, the Court must defer to the Utah court and stay this action.”); see also Chavez v. Dole Food Co., 836 F.3d 205, 210, 220-21 (3d Cir. 2016) (explaining first-filed rule may be invoked by first-filed court to enjoin second-filed case or by second-filed court to defer, stay, transfer, or dismiss).Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Arthrex, Inc., No. 2:22-cv-226-SPC-MRM, 2022 WL 2542037, *2 (M.D. Fla. June 9, 2022).
“As between federal district courts . . . though no precise rule has evolved, the general principle is to avoid duplicative litigation.” Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817, 96 S.Ct. 1236, 1246, 47 L.Ed.2d 483 (1976). When a federal court is presented with such a duplicative suit, it may exercise its discretion to stay the suit before it, to allow both suits to proceed, or, in some circumstances, to enjoin the parties from proceeding in the other suit. See Kerotest Mfg. Co. v. C-O-Two Fire Equip. Co., 342 U.S. 180, 183-84, 72 S.Ct. 219, 221-22, 96 L.Ed. 200 (1952). We review this decision only for an abuse of discretion. See
Roth v. Bank of Commonwealth, 583 F.2d 527, 538 (6th Cir.1978), cert. dismissed, 442 U.S. 925, 99 S.Ct. 2852, 61 L.Ed.2d 292 (1979). In weighing these three options, courts often proceed, as the court below apparently did, under the rule of thumb that the entire action should be decided by the court in which an action was first filed. See, e.g., West Gulf Maritime Ass'n v. ILA Deep Sea Local 24, 751 F.2d 721, 729 (5th Cir.1985).Smith v. S.E.C., 129 F.3d at 361.
In general form, the first-filed rule permits a district court to enjoin the prosecution of “proceedings involving the same parties and the same issues” in a court of coordinate jurisdiction. E.E.O.C. v. University of Pennsylvania, 850 F.2d 969, 971 (3d Cir.1988), cert. granted, 109 S.Ct. 1660 (1989) (citing Triangle Conduit & Cable Co. v. National Elec. Prods. Corp., 125 F.2d 1008, 1009 (3d Cir.1942), cert. denied, 316 U.S. 676 (1942)).Specialty Ins. Agency, Inc. v. Walter Kaye Associates, Inc., No. 89-1708(CSF), 1989 WL 65618, *2 (D.N.J. June 7, 1989).
The injunction is granted if six elements are present:
1) Subject matter jurisdiction over the case and personal jurisdiction over the parties;
2) The enjoining court is the first-filed suit;
3) The issues are the substantially the same in the first-filed suit, and the enjoined suit(s);
4) The parties in the suits are the substantially the same;
5) The injunction prevents misuse of litigation;
6) The injunction prevents inequitable conduct, such as forum shopping.Specialty Ins. Agency Inc., 1989 WL 65618 at *5.
Here, each of those elements is satisfied. First, this court has subject matter jurisdiction of the dispute, and personal jurisdiction over the parties. The instant litigation has been pending since 2020 and the parties and their counsel, on all sides, actively participated in this case, spending significant amounts of this court's time, effort and attention. Second, the instant case is the first-filed action, commenced before any other suit, including before the Southern District of Ohio action where the parties are now attempting to proceed. Third, the issues in these cases are substantially similar. Fourth, the parties are the substantially the same. The named Defendants track almost identically, and the plaintiffs in each suit are shareholders suing not for themselves but identically to stand as First Energy as Plaintiff. Notably, the counsel who filed the instant action are among the same ones who filed the Southern District action. The defendants and defense counsel are likewise the same. Finally, the fifth and sixth considerations are strongly present. Since this Court is well aware of all of the inaccurate representations made to this court regarding discovery, depositions and mediation and this Court's instructions to Counsel about what needed to occur to judge the fairness of any settlement it won't be belabored in this letter. Suffice it to say, that conduct warrants an immediate injunction to prevent this matter from proceeding further in the Southern District of Ohio or anywhere else besides this court. As this Court summarized:
From this Court's review, Plaintiffs were more than willing to litigate the matter before this Court when the undersigned mandated an expedited discovery schedule. When counsel for the shareholders was asked whether the mediation would include the Southern District of Ohio case, he responded: “Your Honor, the answer is yes and no. The mediation is independent of the Southern District or the Northern District. But it was always our intent to do this in connection with Your Honor, okay.” Doc. 235 at 29 (emphasis added). A review of the transcripts of proceedings before this Court reveals why the parties may desire to have their settlement reviewed by another District. In short, this Court offered an honest assessment when the parties indicated a desire for early mediation. The Court indicated that it would be extraordinary if the parties could demonstrate that a settlement was fair and reasonable despite the following:
■ incomplete written discovery
■ no testimony under oath from any Defendant or other witness
■ incomplete privilege logs detailing withheld documentation
■ an incomplete forensic examination to identify possible missing communications contained on Defendant Charles Jones' personal electronic devices and
■ an inadequate period to review and analyze the documents that were provided.
It is apparent from the parties' actions that the Court's candor caused the parties to seek approval of their settlement from another District. Given that counsel is permitted under the settlement to seek up to $48,600,000 in attorney fees, it is hardly surprising that the parties would seek out what they believe to be a more favorable forum.
An injunction should therefore immediately be issued consistent the first-filed law discussed above, to provide:
It is ORDERED that the named Plaintiffs, the named Defendants, their counsel, and all persons in active concert or participation with them, or having notice of this Order, be and hereby are ENJOINED from proceeding in any other litigation related to this matter; from presenting or going forward on any settlement related to this matter; from issuing any notices to
the public, shareholders, or anyone else related to this matter; from seeking or accepting any attorney fees or costs related to this matter; and from taking any other related action in any court, including but not limited to the action pending in the Southern District of Ohio known as Employees Retirement System v. Jones, #: 2:20-cv-04813-ALM-KAJ; until further Order of this Court.
B. Subjects on Which Discovery Should be Sought
In proposing discovery subjects, this court in its Order and Decision of 2/11/22 identified several threshold items to be examined. The undersigned therefore will conduct targeted discovery on those matters. In that same Order, this court highlighted five specific deficiencies in the discovery already conducted, and those will be addressed, as described below.
Additionally, there are four other subjects for discovery attention. First, the challenge being made by the parties to this court's ability to proceed. The first-filed rule is established, and this court is entitled to a factual record on the threshold matter of proper jurisdiction. Second, the related question as to whether a party who has chosen a court for filing an action and pursued that action, may unilaterally evade that court in favor of another forum. This court is entitled to a proper factual record on that issue. Third, whether the parties in this case may refuse to provide materials otherwise discoverable based on a claimed “mediation privilege.” Cursory research indicates they may not. The rationale underlying the mediation privilege does not preclude discovery of facts that exist independent and outside the scope of the mediation process. See Fed.R.Evid. 408 (“This rule does not require the exclusion of any evidence otherwise discoverable merely because it is presented in the course of compromise negotiations.”); Fourth, key questions raised by the Court about discovery in this case have been resisted on the basis that the company is being fully compensated by insurance. However, the law does not support this position because a key goal of shareholder derivative lawsuits is to deter the alleged conduct from occurring the future.
This issue was addressed in In re Salomon Inc. Shareholders' Derivative Litigation, 1994 WL 533595 (S.D.N.Y. 1994), where the court noted the “deterrent and remedial effectiveness of the shareholders' derivative action”. (Emphasis added). See also Carton v. B & B Equities Group, LLC, 2014 WL 4540333 (Dist Nev. 2014) (“Under federal law, ‘a district court has broad equity powers to order the disgorgement of ill-gotten gains obtained through the violation of the securities laws. Disgorgement is designed to deprive a wrongdoer of unjust enrichment, and to deter others from violating securities laws by making violations unprofitable.' [T]he amount of disgorgement should include all gains flowing from the illegal activities.' Whether the person retained the money or used it for other purposes is irrelevant, he or she will be liable for funds retained and funds dissipated. While these penalties may seem harsh, they are intended as a deterrent and as a means for investors to recover damages.”) (Emphasis added).
Focusing this litigation solely on ‘money from insurance' defeats that purpose, especially outcomes where there is no disgorgement of the tens of millions unlawfully obtained by the Director and Officer defendants, with no factual explanation why. Those subject will also be covered in discovery.
Based on all the foregoing, we propose to conduct discovery on at least the following subject areas:
1. The appropriate court to proceed with this litigation, and if appropriate to entertain any proposed settlement. This court is entitled to a factual record on the threshold question of proper jurisdiction.
2. The factual basis for seeking approval of any proposed Settlement in a court other than this one, which is the first-filed forum.
3. All contacts made with the Southern District of Ohio, and any of its personnel, whether formal or informal; the date; the method of contact; the persons involved; the issues discussed; all communications exchanged; relating to the present action or the method of seeking settlement approval tin that court, rather than in this court.
4. The total amount of available insurance funds, verified by certified declarations by each carrier. Also, the justification for foregoing recovery of $40 million of additional available insurance. Foregoing $40 million raises a serious issue considering that the payment of a $230 million fine has not extinguished liability in a securities fraud class action lawsuit, a civil racketeering suit by the State of Ohio, a regulatory investigation, a class action by ratepayers, and an investigation by the Federal Energy Regulatory Commission.
5. A review of the Company's accountants', PricewaterhouseCoopers, working papers, permanent files and all audits undertaken during the relevant period and an examination of whether claims arising out of same are released without compensation by the proposed settlement. No proposed settlement should compromise those claims, without proper evaluation, particularly if the auditors (who have not been deposed) would indicate that facts were concealed or misrepresented by the released individual defendants.
6. A review of the Company's engagement with an Ohio management consulting firm, Clearsulting, LLC; an examination of the reason claims against that firm were not pursued; and an examination of whether those claims are released without compensation by the proposed settlement.
7. An analysis of the Company's likelihood of success on the merits against the individual defendants.
8. The extent of the liability of the Company for the alleged wrongdoing of the individual Defendants.
9. An analysis of the allocation of damages among each of the Defendants. Further, whether the parties evaluated the financial responsibility and culpability of the individual Defendants and appropriately allocated damages among them.
10. The names of each Director chosen not to run for re-election, and the factual basis used in selecting each person, especially whether their elimination related to the issues in this lawsuit.
11. The identity of all persons giving or receiving bribes and/or payments, including those referred to in the DFA; the amount and circumstances of same; and the use of those monies including their current location.
12. The justification for placing, on the Company, the financial responsibility for pursuing potentially culpable individuals at the heart of the illegal conduct when those individuals are parties to this action, engaged in discovery, and are subject to having their misconduct determined by the trier of fact.
13. Whether the Company intends to pursue potentially culpable individual defendants for harm caused to the Company. Is such recovery blocked by releases in any Settlement? Is it blocked or impaired based on the failure to pursue those claims in the present matter--where those claims have been made against those persons, and those persons are properly defendants in this pending action?
14. The extent of and reasons for the broad, non-mutual release of the individual defendants.
15. Whether prior to the mediation, Plaintiffs were able to identify any individuals that gave and/or received bribes and/or the payments detailed in the Deferred Prosecution Agreement.
16. The compensation received from FirstEnergy by the individual Defendants and their financial ability to contribute to the settlement fund.
17. A proper review of the over 26,000 documents withheld from discovery based upon claims of privilege; identifying the nature of each document so ‘privilege' claims can be properly evaluated.
18. The precise nature and extent of the ‘corporate governance reforms', being proposed in Settlement including who will oversee and monitor the implementation of the reforms.
19. The basis for the decision to not to include in any Settlement, a claw back of compensation paid to alleged wrongdoers.
20. Whether complete data has been recovered from the individual Defendants' personal electronic devices, especially the devices used by Defendant Charles Jones.
21. The extent of the investigation and conclusions reached by the Special Litigation Committee following its review of the facts surrounding this litigation and the extent to which, if at all, the attorney-client or work product privileges apply.
To the extent that discovery reveals additional subjects that should be explored, those subjects should be included as well.
C. The nature and extent of discovery needed.
The nature of discovery needed includes both written discovery and depositions. Complete written discovery includes clear responses to interrogatories and document requests. Complete discovery also requires privilege logs that catalog any material withheld from production and the privilege being asserted, to enable counsel to assess the propriety of the documents withheld from production and present the court with a clear, articulate response against any material which are believed to not be privileged..
A complete document production also includes production of native document file types and all available metadata.
Hundreds of thousands of documents have already been produced in this litigation. The undersigned counsel expect to review the state of the current productions and determine what additional documents should also be produced. We have the personnel to devote significant effort to a comprehensive review of the current production in an expedited time period.
The undersigned have sufficient personnel to promptly conduct the depositions promised this court by the parties in their filings See, Doc. 182 and Doc. 190. Case 5:20-cv-01743-JRA, filed 11/22/21 and 12/03/21 at PageID ##'s 3251-3257 and 3338-3346. These will commence immediately following the document and written discovery work-up. As suggested below, it would likely be helpful to conduct the depositions in the Courthouse to quickly address all problems.
D. Potential problems that may arise with discovery.
Given the Court's willingness to closely monitor and remain actively involved in the discovery process, the undersigned anticipate that when potential problems arise, they can be resolved quickly. For example, conducting potentially contentious depositions at the courthouse with availability of a quick decision by the Court would alleviate many problems and allow the deposition to proceed without prolonged interruption.
An initial potential problem with discovery may be around access to the current document database generated on behalf of Plaintiffs. But, again, close involvement of the Court should ensure that this potential issue is quickly resolved.
E. The possible use of experts to aid in discovery or litigation.
The undersigned counsel envision that several different types of experts should be used in the discovery. These include:
1. A data and records forensic expert or experts to evaluate the sufficiency of the production (specifically, the inclusion and availability of metadata) and whether data was properly extracted from personal electronic devices.
2. A forensic fraud examiner to assist in tracing financial transactions and identifying transaction or events that necessitate further discovery.
F. Completion date.
The undersigned have the experience and staff to undertake the discovery outlined above and estimate it will take four to six months to complete the discover and provide the court with a detailed initial report. Accepting that a final completion date is difficult because of variables on how quickly the discovery is received, how well the document database is assembled and maintained, and the scheduling of depositions in a matter involving a large collection of attorneys, we suggest a regular, periodic progress report to the court every 30 days.
Very Respectfully Submitted, Patrick J. Perotti, Esq. (#0005481)
Dworken & Bernstein Co., L.P.A.
R. Eric Kennedy (#0006174)
Daniel P. Goetz (#0065549)
Weisman, Kennedy and Berris
Richard S. Wayne (#0022390)
Robert R. Sparks (#0073573)
Strauss Troy