Beware of opponents bearing standard agreements.
When a party to a lawsuit that is asked by its opponent to sign a protective order, the party is almost always told that the agreement is “standard.” When that party shows reluctance to agree to the “standard” protective order, it is often accused of ulterior motives; after all, why object to the order, unless the intent is to violate it? Because these orders have nothing to do with the substance of the litigated dispute, and because they sound so reasonable and innocuous, parties often do not wish to expend precious time, energy and resources fighting the inevitable. This article focuses on the issues commonly created by protective orders in the context of commercial litigation, taken from the perspective of the party seeking the disclosure, and the steps that party can take to minimize the adverse effects.
Protective orders are court orders, usually negotiated and consented to by the parties, that regulate the disclosure of confidential information (documents or testimony) turned over to an opposing party during the discovery process. Generally, they provide that all documents and other information obtained in discovery will not be revealed to others by the receiving party, will not be used for any purpose except the prosecution or defense of the action and will be destroyed or returned to the disclosing party at the conclusion of the lawsuit.
The purpose of a protective order is to encourage speedy and full disclosure by restricting a receiving party’s ability to reveal confidential information obtained in discovery. Nevertheless, a protective order is not supposed to withdraw the entire litigation from public scrutiny.1 There is a strong and fundamental public policy favoring the conduct of proceedings on the public record.2 Litigation proceedings, including pre-trial discovery, are supposed to take place in public unless compelling reasons exist for denying public access. 3 Accordingly, absent a protective order, a litigant may make whatever use it wishes of information obtained through discovery.4 The basic rule is that anything that is relevant or might reasonably lead to the discovery of relevant information is discoverable (with very limited exceptions). As a result, a party in a commercial dispute may have to disclose a significant amount of ordinarily non-public business information.
Protective orders are commonplace in commercial litigation, so much so that courts and attorneys forget the fundamental point – these orders are the exception and not the general rule. A party seeking a protective order must make a showing that there is good cause for the order; namely, that there is confidential information that is going to be disclosed and that disclosure will work a clearly defined and very serious injury to its business.5 Confidential information is not a clearly defined concept, but in a commercial context, it usually means a party’s trade secrets or other highly-sensitive information. Whether information is a trade secret or confidential will depend on a balancing of several factors, including: the extent to which the information is known outside of the business, or by employees and others involved in the business; the extent of the measures that are taken to guard the secrecy of the information; the value of the information to the party and to its competitors; the amount of effort or money expended in developing the information; and the ease or difficulty with which the information could properly be acquired or duplicated by others.6
Moreover, to be a clearly defined, very serious injury, the harm must be a competitive disadvantage resulting from disclosure to competitors of something of commercial value. It does not include embarrassment from publicity, new lawsuits brought by similarly situated parties or harm resulting from the public’s reaction to the substance of the claims themselves.7 Absent a showing of good cause, a court should not issue a protective order, or in other words, the good cause requirement is a real threshold – not a mere balancing of the equities.8
Nevertheless, the courts frequently encourage, and indeed compel, the parties to agree to protective orders so as to avoid disputes over discovery and, in fact, often look askance at any party that dares to object. The insinuation is that the only reason a party would object to a protective order is for the purpose of disseminating confidential information. While courts are sensitive to the fundamental policy of public litigation in cases where there is a clear, direct public interest in the outcome, they have shown less concern in commercial lawsuits, where the direct impact of the outcome on the public is not as evident. In fact, in private commercial cases, the courts often shift the analysis, deciding protective order motions on a “gut reaction” to whether the objecting party has good cause to object. Frequently, courts will direct the parties to negotiate a protective order without a substantive analysis of whether the party seeking confidentiality has met its burden of proof.
Notwithstanding the reaction of the courts, parties should carefully scrutinize proposed protective orders in the light of the circumstances of the litigation. In addition to being overused, when they are used they are, more often than not, loosely drafted and grossly overbroad. Because they are considered “standard” legal technicalities, preventing something that a party never intended to do anyway, they are often given little, if any attention. The result is a potentially pernicious agreement that can ratchet up litigation costs and serve as a very effective tactical weapon for the disclosing party, fomenting the very gamesmanship that these orders are intended to prevent.
Faced with a situation where some form of protective order is a foregone conclusion, all is not lost, for a great deal can be done in the negotiation and drafting of the order to minimize the improper and adverse effects of the order. Nothing is “standard” in these orders and, notwithstanding the unwillingness of courts to hear why a protective order should not issue at all, they are generally more receptive to these same arguments when made in the narrower context of restricting the order’s breadth. The following are some of the key issues that invariably arise during protective order negotiations and are frequently misunderstood:
Defining the Scope – The central issue, not surprisingly, is what information will be protected by the order? This is usually done by defining certain material as “confidential” – that is, subject to the order and protected from disclosure to third parties. Ideally, a litigant should seek to limit the classes of information that can be designated as confidential, however, for the litigant seeking to facilitate discovery, trying to pre-define what constitutes confidential information will certainly increase disputes and delays, and therefore is rarely a solution. Moreover, conceding that certain subjects are confidential may result in broader protection than could be achieved by law. The solution in most cases is to provide a temporary mechanism, by which a part may temporarily designate material as confidential. That designation should be subject to challenge at any time, either by the receiving party or the court. The protective order must also provide that nothing can be withheld on the basis of confidentiality, except for attorney- client privileged information and attorney work product information (i.e., correspondence with counsel), which must be itemized in a separate log describing each withheld document.
Damages – Protective orders frequently contain clauses expressly providing for damages if a party makes an unauthorized disclosure. Damages clauses should be rejected, though they rarely are. The court always has the power to impose sanctions on a party that is willfully violating a protective order – damage clauses are not necessary to ensure compliance, and are frequently used as negotiating tools to gain leverage and extract further concessions or monetary payments from the breaching party. They can also create unexpected and large liability exposure, particularly for unintended, accidental disclosures, which often occur in complex commercial cases. Therefore, the sole remedy for a breach, apart from any court imposed sanctions, should be an injunction. As a fall-back, damages should, at most, be limited to actual, direct damages resulting from the disclosure and should specifically exclude consequential and other indirect damages, such as lost profits.
Bootstrapping – Another frequent problem occurs when the opposing party attempts to protect information obtained independent of discovery in the lawsuit. The opponent’s aim here is to sweep as much information as possible into the protective order, thereby removing more from the public record. Bootstrapping is a wholly improper use of a protective order, the purpose of which is to facilitate discovery, not act as an overarching method of protecting confidential information. The protective order should apply only to documents and testimony produced in discovery in the instant litigation. It should not apply to information obtained outside of discovery under any circumstances, even if that same information is obtained again in discovery, otherwise the disclosing party could bootstrap prior disclosures into the order simply by producing the information again. Moreover, that the information was originally obtained improperly is irrelevant. Again, the protective order’s purpose is to facilitate discovery, not to remedy all wrongs. There are independent civil and criminal remedies available, such as a claim for fiduciary breach.
Disclosure to Authorized Persons – The people who are permitted to review the confidential information should be as broad as possible to avoid costly obstacles to motion and trial preparation. Authorization should certainly extend to the parties, their attorneys of record and, at a minimum, a group of employees that would include the decision makers and potential witnesses, for these people need access to the information to properly and cost-effectively litigate. For the same reasons, it should also apply to expert witnesses, whether they actually testify or not. Non-party witnesses pose a problem, because normally, the non-party witness is required by the order to sign an agreement to be bound by its terms. Often, receiving parties must agree to disclose the names of any such non-party witnesses, which of course confers a tactical advantage. More importantly, the acknowledgments that third party witnesses are asked to sign very often contain threats, sometimes not-so-subtle, of damages, attorney’s fees, penalties and contempt of court. Language like this is improper and should be objected to, as it can, and sometimes does, spook a third-party witness who does not stand to gain from the lawsuit and doesn’t need to subject himself or herself to potential damages. On at least one occasion, we have seen an opposing party attempt to include a 12-month non compete clause into the order and acknowledgement, which would effectively drive away any expert witness, let alone a witness who happens to work in the opposing party’s industry. Naked tactical maneuvers such as these are improper and have no place in a protective order.
Disclosure at Trial –Protective orders often seek to prevent disclosure indefinitely. The provisions of a protective order should govern discovery only and explicitly state that all protection terminates prior to trial. A disclosing party should be forced to seek separate protection of the confidential information through the trial of the action. Otherwise, that party can effectively remove the action from the public record, particularly where the scope of confidential information is very broad. The receiving party can find itself, on the eve of trial, unable to introduce critical information into evidence because it would constitute disclosure. At the least, the receiving party will have to battle repeatedly over each piece of evidence as it is introduced. To avoid this, the order should expressly state that the parties can use the confidential information for any purpose whatsoever arising out of or in connection with the lawsuit. It should specifically include any and all motions, applications, depositions, discovery requests, trials or hearings or submissions. It should also specifically include any and all appeals arising out of or in connection with the litigation.
Foreclosure – Even where disclosure at trial issues are resolved, a key problem, and one that is not easily resolved, is how to handle confidentiality in the event of settlement. The problem frequently occurs in cases where the claims involve repeated or ongoing conduct that affects a large number of potential parties. Here a protective order becomes especially dangerous and it’s drafting difficult. For example, say an institutional lender, a large publicly-held corporation, is sued for wrongdoing arising from the regular conduct of its business, so that information disclosed in discovery in that lawsuit could be used by hundreds of other potential litigants. Here, the protective order becomes the supreme tactical maneuver to cut off liability at the first plaintiff and prevent a rash of lawsuits. An early protective order compartmentalizes the existing lawsuits and inhibits the spread of news to potential newcomers. It also increases the incremental cost of litigation in future lawsuits by preventing knowledge-sharing among and existing and potential litigants. Moreover, such conduct is often discovered by plaintiffs through word-of-mouth of third parties, such as attorneys or accountants, who have other clients with similar circumstances. When combined with a tough, effective damages clause, the protective order, which will usually apply to all attorneys and witnesses to whom the information is disclosed, can severely impede, if not altogether prevent, third party consultants from advising other potential litigants of their potential claims. This is precisely the rationale behind the general rule of litigating on the public record.
This last issue has no easy answer, and must be analyzed in light of the specific situation in the case. The potential risk for the client will depend heavily on the facts, but when foreclosure is a real concern, the litigant should seriously consider pressing the court to proceed without any protective order at all, even at the risk of incurring its ire and mistrust.
- In re Krynicki, 983 F.2d 74, 75 (7th Cir. 1992); Wilk v. American Medical Assoc., 635 F.2d 1295 (7th Cir. 1980). U.S. v. Hooker Chemicals and Plastics Corp., 90 F.R.D. 421 (W.D.N.Y. 1981). ↩
- Krynicki, 983 F.2d at 75; Wilk, 635 F.2d 1295. ↩
- Wilk, 635 F.2d at 1299. ↩
- Wauchop v. Domino’s Pizza, Inc., 138 F.R.D. 539, 545 (N.D. Indiana 1991); Public Citizen v. Liggett Group, Inc., 858 F.2d 775, 790 (1st Cir. 1988), cert. denied, 488 U.S. 1030 (1989). ↩
- U.S. v. International Business Machines Corporation, 67 F.R.D. 40, 46-47 (S.D.N.Y. 1975); Turik v. Yamaha Motor Corp., 121 F.R.D. 32, 35 (S.D.N.Y. 1988). ↩
- International Business Machines Corp., 67 F.R.D. at 46-47. ↩
- Hooker Chemicals, 90 F.R.D. at 426. ↩
- Id. at 425. ↩