Opinion
Case No.: 3:15-CV-02324-GPC-KSC
07-21-2017
IN RE: BofI HOLDING, INC. SECURITIES LITIGATION.
ORDER:
DENYING LEAD PLAINTIFF'S OBJECTIONS TO THE MAGISTRATE JUDGE'S ORDER ON JOINT MOTION FOR DETERMINATION OF DISCOVERY DISPUTE No. 2
[Dkt. No. 100-1]
Before the Court are Objections, Dkt. No. 100, to Magistrate Judge Karen Crawford's March 23, 2017 order, Dkt. No. 97, ruling on the parties' Joint Motion for Determination of Discovery Dispute No. 2, Dkt. No. 90. In the March 23 order, the magistrate judge denied Lead Plaintiff's "request for an order permitting it to review and use documents provided by a former employee of defendant subject to a Protective Order and defendant's privilege review" and granted "defendant's request for a Court Order requiring plaintiff to return the documents provided by a former employee of BofI and to destroy any copies in its possession." Dkt. No. 97 (the "March 23 order" or "the order"). Lead Plaintiff filed objections to the magistrate judge's order on April 6, 2017. Dkt. No. 100. The objections have been fully briefed. Defendants filed an opposition on April 17, 2017. Dkt. No. 105. Lead Plaintiff filed its reply on April 28, 2017. Dkt. No. 108.
Upon consideration of the moving papers and the applicable law, and for the reasons set forth below, the Court DENIES Lead Plaintiff's Objections to Magistrate Judge Crawford's March 23, 2017 Order Regarding Joint Motion for Determination of Discovery Dispute No. 2. Dkt. No. 100-1.
BACKGROUND
This discovery dispute arises from Lead Plaintiff's informal investigations into the facts bearing on its securities fraud suit against Defendants.
As part of its pre-discovery informal investigations into its claims, Lead Plaintiff has interviewed a number of Bofl's former employees. One of these employees, upon being approached by Lead Plaintiff's investigator, provided Lead Plaintiff with 1,189 pages of documents associated with her employment at BofI. Dkt. No. 97 at 2. Once received, a contract attorney working for Lead Plaintiff reviewed the documents to determine whether the documents contained privileged or protected information. Id. at 3. The contract attorney concluded that the documents did contain such information. Id. As a result, Lead Plaintiff shipped the documents to outside legal ethics counsel and screened the contract attorney from any future participation in the litigation against BofI. Id. A copy of the documents have remained with outside legal ethics counsel pending the resolution of this dispute. Id.
On October 20, 2016, Lead Plaintiff's outside legal ethics counsel contacted Defendants about the documents. Outside counsel requested that Defendants perform a privilege review of the documents and complete a privilege log of any documents that should be withheld or redacted. Id. After reviewing the documents, Defendants objected, on October 28, 2016, to the release of any of the documents and sought their immediate return. Id. According to Defendants, the documents contain "highly confidential, non-public banking documents" that include customer loan files; sensitive financial information about Bofl's customers, such as federal tax forms, social security numbers, account numbers, financial information and balances; Bofl's code of conduct; various internal lending guidelines marked "Confidential - Internal Use Only"; and internal emails sent and received at BofI. Dkt. No. 90 at 13. On November 4, 2016, Lead Plaintiff informed Defendants that it would not destroy or return the documents until the dispute was settled. Id.
Lead Plaintiff is not in a position to make a statement about the content of the documents given that the sole copy is in the hands of outside legal ethics counsel. See Dkt. No. 90 at 20 (explaining that Lead Plaintiff cannot verify contents of the documents given the protections afforded to the documents).
On December 5 and 8, 2016, the parties conferred regarding the documents. Id. During the meetings, the parties discussed having the documents remain in the sole custody of outside legal counsel until the Fed. R. Civ. P 16 ("Rule 16") conference took place. Id. Ultimately, however, the parties were unable to reach an accord and the Joint Motion for Determination of Discovery Dispute No. 2 soon followed. Dkt. No. 90 (filed January 18, 2017).
On March 23, 2017, Magistrate Judge Karen Crawford denied Lead Plaintiff permission to review the documents subject to a protective order. Dkt. No. 97. The magistrate judge concluded (1) that the court did not have authority under Rule 26(c) to issue the requested protective order because formal discovery had yet to begin and (2) that Lead Plaintiff's position was not persuasive under the legal authority cited, most notably the district court opinion in Brado v. Vocera Comms., Inc., 14 F. Supp. 3d 1316 (N.D. Cal. 2014). Accordingly and in light of the fact that formal discovery had not yet begun, the magistrate judge ordered that Lead Plaintiff return the documents to Defendants and "destroy any copies in its possession." Dkt. No. 97 at 10.
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LEGAL STANDARD
Under Federal Rule of Civil Procedure 72(a), aggrieved parties may file objections to the rulings of a magistrate judge in non-dispositive matters within fourteen days. Fed. R. Civ. P. 72(a). In reviewing a magistrate judge's order, the district judge "must consider timely objections and modify or set aside any part of the order that is clearly erroneous or is contrary to law." Fed. R. Civ. P. 72(a); 28 U.S.C. § 636(b)(1)(A); see also U.S. v. Raddatz, 447 U.S. 667, 673 (1980); Osband v. Woodford, 290 F.3d 1036, 1041 (9th Cir. 2002).
Under the "clearly erroneous standard," a court should overturn a magistrate judge's ruling when it is "left with the definite and firm conviction that a mistake has been committed." See Concrete Pipe & Prods. of Cal., Inc. v. Constrs. Laborers Pension Trust, 508 U.S. 602, 622 (1993). A magistrate judge's legal conclusions as to non-dispositive matters are reviewable for clear error. Grimes v. City & Cnty. of San Francisco, 951 F.2d 236, 240-41 (9th Cir. 1991) (citing Maisonville v. F2 America, Inc., 902 F.2d 746, 747-48 (9th Cir. 1990)). "An order is contrary to law when it fails to apply or misapplies relevant statutes, case law, or rules of procedure." DeFazio v. Wallis, 459 F. Supp. 2d 159, 163 (E.D.N.Y. 2006) (internal citations omitted).
Nondispositive decisions issued by magistrate judges under 28 U.S.C. § 636(b)(1)(A) are entitled to "great deference by the district court." U.S. v. Abonce-Barrera, 257 F.3d 959, 969 (9th Cir. 2002). As such and in making its determination, the "reviewing court may not simply substitute its judgment for that of the deciding court." Grimes, 951 F.2d at 240-41.
DISCUSSION
Lead Plaintiff argues that the Magistrate Judge's March 23, 2017 order should be reversed because it is "contrary to law" and suffers from a number of legal errors. Dkt. No. 100-1.
Lead Plaintiff argues that the first legal error arises from the order's conclusion that the court lacked authority to enter a pre-discovery protective order. Citing to this Court's opinion in In re BofI Holding, Inc. Sec. Litig., 318 F.R.D. 129, 135-36 (S.D. Cal. 2016), Lead Plaintiff argues that the magistrate judge erred by failing to invoke its "inherent authority" to issue the requested protective order. Dkt. No. 100-1 at 6.
Next, Lead Plaintiff faults the magistrate judge for misapplying the standard introduced in Brado. Lead Plaintiff argues that the five factors articulated in Brado — namely, (1) the impropriety of counsel's conduct in obtaining the documents; (2) the incentives and disincentives for employees to wrongfully take the documents; (3) prejudice to the opposing party; (4) the truth-seeking function of the court; and (5) the public policy of the Sarbanes-Oxley Act of 2002 — all weigh in favor of Lead Plaintiff's request to review the documents subject to a protective order.
Third and finally, Lead Plaintiff asserts that the magistrate judge's reliance on a handful of "additional factors" in denying Lead Plaintiff's protective order was also "contrary to law." Specifically, Lead Plaintiff challenges the magistrate judge's treatment of (1) the presence of "highly sensitive confidential information" among the misappropriated documents; (2) the "significant additional costs" to Defendants "associated with, at a minimum, conducting a privilege review and redacting" privileged and third-party information; and (3) the magistrate judge's conclusion that the use of the documents "go well beyond" informal investigations. Dkt. No. 90 at 9-10. The Court will address each of these arguments in turn.
1. Brado v. Vocera
Although Lead Plaintiff contends that the magistrate judge made multiple legal errors in issuing its March 23, 2017 order, Lead Plaintiff's objections are grounded in the magistrate judge's treatment of Lead Plaintiff's primary authority, Brado v. Vocera. In the Joint Motion originally submitted to the magistrate judge, Dkt. No. 90, Lead Plaintiff relied heavily on the Brado decision as precedent for the permission and protective order that it sought. The March 23 order, however and as explained in further detail below, did not find that it was appropriate to follow Brado, here. As such, and before addressing each of Lead Plaintiff's "contrary to law" contentions, the Court will first turn to the Brado decision.
The circumstances in Brado were substantially similar to the circumstances here. As part of plaintiff Brado's informal, pre-discovery investigations into its securities fraud claims against Defendant Vocera, Plaintiff interviewed a former Vocera employee. 14 F. Supp. 3d at 1318. That employee, in turn, provided Brado with documents that contained proprietary and confidential Vocera information. Id. Upon learning that Brado had such confidential documents in its possession, Vocera argued that the documents should be returned both because the former employee had misappropriated the documents and because he had breached his confidentiality obligations to Vocera by handing them over. Id. Brado countered by arguing that it should be permitted to use the non-privileged documents subject to a protective order. Id.
Ultimately, the Brado court held that it was proper for the plaintiff to review the documents provided by the former employee, subject to a protective order. Id. at 1323. In reaching that decision, Brado weighed the parties' positions under five factors: namely (1) whether plaintiff's counsel had engaged in any improper conduct to retrieve the documents; (2) whether the employee who misappropriated the documents had any incentives to taking the documents (or, relatedly, adequate disincentives to taking them); (3) whether defendant would be prejudiced by the disclosure; (4) the court's imperative to pursue the truth in resolving the dispute; and (5) public policy considerations favoring whistleblowers. Id. at 1321-23.
The Brado order left it up to the parties to spell out the contents of the protective order. Id. at 1323. The Brado court also did not specify under what legal authority it had authorized the pre-discovery protective order. See id.
The Brado court found that each of these factors weighed in favor of granting the plaintiff permission to use the documents pursuant to a protective order. First, there was no reason, the Brado court explained, to prohibit counsel from using the documents because there was no dispute that plaintiff's counsel had any role in the former employee's misappropriation of the documents. Id. at 1320-21. Second, the former employee was not a named plaintiff and therefore had "no direct interest in th[e] suit." Id. at 1321. Moreover, the court concluded, because the former employee was "not immune to claims for breach of contract or conversion," there was no need to further disincentivize such theft by restricting the use of the documents in unrelated litigation. Id. Third, the Brado court concluded that the defendants would not be meaningfully prejudiced by any disclosure of the documents because both parties agreed that "the issue was largely one of timing rather than substance" and because Vocera assured the Court that it would eventually produce the documents in discovery notwithstanding the confidentiality agreements. Id. at 1321-22. Finally and as to the last factor, the Brado court concluded that the public policy in favor of whistleblowers weighed in favor of the plaintiff. Id. at 1323. In reaching that conclusion, the Brado court emphasized that just as the public policy in favor of whistleblowers, as codified in Sarbanes-Oxley Act, promotes the enforcement of the securities laws, so too does private securities litigation. Id.
The Brado court did not directly analyze the fourth factor. Nonetheless, it implicitly recognized that the fourth factor weighed in favor of the plaintiff when it stated that the documents had weighty "truth-seeking value." See id. at 1323.
2. Legal Authority for Protective Order
Turning now to Lead Plaintiff's specific objections, Lead Plaintiff first argues that the magistrate judge erred by "failing to consider" the Court's "inherent authority" to issue a protective order in this circumstance. Dkt. No. 100-1.
The Order states (at 4) "plaintiff cited to no such authority in seeking a protective order," but that is wrong. The order contradicts this Court's prior ruling [in
BofI]—which is the law of the case—and Brado, where the court issued a protective order governing the use of documents provided by a former employee of the defendant company to an investigator hired by plaintiff's lead counsel in connection with plaintiff's informal investigation of the facts.Dkt. No. 101-1 at 12 (footnotes omitted & brackets added).
The Court disagrees that such a "failure" was "contrary to law." Lead Plaintiff's argument faults the magistrate judge for not invoking the court's "inherent authority" to issue a pre-discovery protective order as laid out in the Court's previous decision in BofI. See generally 318 F.R.D. 129. Lead Plaintiff, however, never asked the magistrate judge to issue the requested protective order pursuant to the court's "inherent authority." In the Joint Motion originally submitted to the magistrate judge, Lead Plaintiff did not identify what binding legal authority it was invoking for the requested protective order. There was no mention of the court's "inherent authority" to issue a protective order or any reference to this Court's previous decision in BofI. The proposed protective order submitted to the magistrate judge, in fact, only cited to Fed. R. Civ. P. 26(c)(7) as authority and also did not mention the court's "inherent authority" to issue a protective order. As such and given that Lead Plaintiff did not even clarify what authority it had invoked for the requested protective order, the Court will not conclude that the magistrate judge erred by failing to supply legal authority for it.
The Court observes that there is no Rule 26(c)(7).
The Court further observes that the Brado decision approved the requested, pre-discovery protective order without invoking any legal authority in support of it. See generally Brado, 14 F. Supp. 3d.
The Court further concludes that even if Lead Plaintiff had asked the magistrate judge to exercise its "inherent authority," the failure to do so would not have been legal error. This is so because a district court's "inherent authority" to issue protective orders is discretionary, not mandatory. See Wharton v. Calderon, 127 F.3d 1201, 1207 (9th Cir. 1997) (reviewing district court's issuance of a protective order pursuant to its inherent authority for abuse of discretion). Accordingly and absent some argument that the magistrate judge's failure to exercise its discretion was "contrary to law," this Court would not have concluded that the magistrate judge's conclusion warranted reversal.
3. The Brado Factors
Lead Plaintiff's next complaint is that the magistrate judge erred by misapplying the standard articulated in Brado. Dkt. No. 100-1 at 12. Lead Plaintiff argues that, contrary to what the magistrate judge concluded, all of the Brado factors weigh in favor of Lead Plaintiff.
As an initial matter, the Court observes that the magistrate judge had no legal obligation to follow Brado. In its objections to the March 23 order, Lead Plaintiff states that the "Defendants and the magistrate judge agree" that Brado "governs this dispute." Dkt. No. 100-1. The reality is, however, that the Brado decision is not binding authority on this Court and, therefore, cannot "govern" this dispute. What is more, it is hardly accurate to characterize the March 23 order as conceding that Brado "governs this dispute" when the order specifically rejected Lead Plaintiff's reliance on Brado. Accordingly, Lead Plaintiff does not stand on solid ground when it asserts that the magistrate judge committed legal error by declining to follow non-binding precedent in this circuit.
Yet even assuming that non-binding precedent can serve as the basis for a "contrary to law" finding, Lead Plaintiff has not demonstrated that such a conclusion is appropriate here. The March 23 order gave due consideration to the Brado decision and the factors that it reiterated. As to the first and second Brado factors, the magistrate judge concluded that it was "unclear" whether Lead Plaintiff's counsel had acted improperly or whether the former employee stood to benefit from the misappropriation of the documents because of the minimal facts before the court. Dkt. No. 97 at 8. With regard to prejudice, the magistrate judge concluded that this case differed from Brado because here, unlike in Brado, there was a dispute about whether the misappropriated documents would be produced in formal discovery. The Brado defendants, the magistrate judge explained, had assured the court that the disputed documents would, eventually, be produced in formal discovery. Defendants, however and as noted by the magistrate judge, gave no such assurances because their position was that many of the misappropriated documents would not be produced in formal discovery on relevance grounds. Id. Finally and with regard to the last Brado factor, the magistrate judge concluded that it, too, did not weigh in favor of Lead Plaintiff because "plaintiff had produced no evidence that the former employee at issue was a "whistleblower" under Sarbanes-Oxley. Id. at 8.
The Court observes that while Lead Plaintiff characterizes this factor, in its objections, as the "public policy favoring enforcement of the securities laws," the fifth factor, as stated in Brado, is the "public policy in favor of whistleblowers." See 14 F. Supp. 3d 1316 at 1323.
In sum, the Court finds that the magistrate judge's application of the Brado factors was not "contrary to law." The magistrate judge compared and contrasted this case with the Brado facts and evaluated Lead Plaintiff's position under the five-factor rubric laid out by that court. That the magistrate judge ultimately concluded that the Brado factors did not weigh in Lead Plaintiff's favor does not mean that the magistrate judge's decision was "contrary to law." Lead Plaintiff's order does not identify any statute, procedural rule, or binding case law that the March 23 order failed to apply or applied incorrectly. Absent such a showing and given that the magistrate judge fulsomely engaged with Lead Plaintiff's authority, this Court finds that Lead Plaintiff has failed to demonstrate that the March 23 Order was "contrary to law" for misapplying the Brado factors.
4. "Additional Factors" in March 23 Order
Lead Plaintiff's objections also take aim at the "additional factors" that the magistrate judge relied upon in denying Lead Plaintiff permission to use the documents subject to a protective order. See Dkt. No. 100-1 ("Nor do the three 'other factors' the magistrate judge considered weigh against affording Plaintiff access to the documents). Those factors were: (1) the presence of "highly sensitive confidential information" among the misappropriated documents; (2) the "significant additional costs" to Defendants "associated with, at a minimum, conducting a privilege review and redacting" privileged and third-party information; and (3) the fact that the use of the documents "go well beyond" informal investigations. Dkt. No. 90 at 9-10.
Lead Plaintiff first argues that the magistrate judge's order was "contrary to law" because it denied Lead Plaintiff access to all of the documents "on the ground that 12% of them purportedly contain 'highly confidential information.'" Dkt. No. 100-1 at 8. "The purported presence of Sensitive Customer Information in 150 pages of the 1,189 total pages of Documents," Lead Plaintiff argues, "does not warrant precluding Plaintiff from obtaining that subset of the Document, as the Sensitive Customer Information can be redacted." Id. at 24-25 (parenthetical omitted).
The Court, however, rejects this argument as enough to demonstrate that the magistrate judge's conclusion was "contrary to law." The magistrate judge did not make an independent determination that the presence of some confidential information in the misappropriated documents justified denying Lead Plaintiff access to all of them. Instead, the magistrate judge emphasized that the presence of such alleged, private third-party information distinguished this case from Brado. Dkt. No. 97 ("First, in Brado, the documents at issue were largely what defendants purported to be "confidential and proprietary information." By contrast, the Documents in this case contain a more significant breadth of customer information . . . .") (citation omitted). Accordingly and since the documents at issue here are, in fact, different in kind from those in Brado, this Court will not conclude that the distinction drawn between this case and Brado was "contrary to law."
Second, Lead Plaintiff contends that the magistrate judge was wrong when it concluded that the Defendants, here, would suffer "significant additional costs" that the defendants in Brado did not face. Dkt. No. 100-1 at 24. "The Order suggests Defendants would thus incur a greater burden [associated with privilege review or redaction] than defendants in Brado faced. Not so: this is, in fact, the exact procedure approved in Brado." Id.
The Court, however, disagrees that such a conclusion was "contrary to law." The magistrate judge's conclusion that issuing a protective order, here, would impose significant additional discovery costs on Defendants flowed directly from the magistrate judge's decision that the presence of confidential, sensitive third-party information distinguishes this case from Brado. Dkt. No. 97 at 9. "[T]he defendants in this case would be subject to significant additional costs associated with . . . redacting any . . . personally identifying information of third parties, and contacting the identified customers to determine whether they object to the disclosure of their private financial information." Id. Lead Plaintiff, moreover, does not dispute the magistrate judge's conclusion that the Defendants would face additional costs associated with protecting the privacy of the third party information contained within the documents. See Dkt. No. 100-1 at 24. Accordingly, the Court declines to conclude that the magistrate judge's reliance on this additional factor was "contrary to law."
Third and finally, Lead Plaintiff argues that the relevance of the disputed documents to Lead Plaintiff's claims and defenses "does not warrant disregarding those documents and, in doing so, disallowing Plaintiff access to information voluntarily provided in the course of Lead Counsel's investigation." Dkt. No. 100-1 at 24. Lead Plaintiff, however, cites to no authority other than Brado to support its argument that this additional determination was "contrary to law." Id. at 24-25. What is more, the magistrate judge's conclusion that the documents at issue "go well beyond 'informal investigations'" was not the court's primary conclusion, but rather an additional factor weighing against applying the reasoning of Brado to the facts of this case. Accordingly and to the extent that magistrate judge was free to distinguish this case from Brado, a non-persuasive authority, this Court declines to find that reliance on this additional factor was "contrary to law."
CONCLUSION
The magistrate judge's order was not "contrary to law" for the reasons cited by Lead Plaintiff. Accordingly, the Court DENIES Lead Plaintiff's Objections to Magistrate Judge Crawford's March 23, 2017 Order Regarding Joint Motion for Determination of Discovery Dispute No. 2. Dkt. No. 100-1 at 1. In reaching this decision, however, the Court does not preclude the parties from revisiting this dispute with the magistrate judge once discovery has begun. As such and in the interest of ensuring the fair and proper adjudication of any future dispute over the production of these documents, the Court further ORDERS that Defendants submit a hard copy of the documents with the Court.
An ENE is currently scheduled for August 9, 2017. Dkt. No. 117. --------
IT IS SO ORDERED. Dated: July 21, 2017
/s/_________
Hon. Gonzalo P. Curiel
United States District Judge