Limited Opposition To Motion For Protective Order

Opposition

Cal. Super. - 4th Dist.May 10, 2018

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 23 26 27 28 K&L GATES LLP 10100 Santa Monica Boulevard Eighth Floor Los Angeles, California 90067 Telephone: 310.552.5000 Facsimile: 310.552.5001 Seth A. Gold (SBN 163220) Kevin S. Asfour (SBN 228993) Attorneys for FTE Networks, Inc. SUPERIOR COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF SAN DIEGO VISTA CAPITAL INVESTMENTS, LLC, Vv. Plaintiff, FTE NETWORKS, INC., Defendant. 302843762 v4 Case No.: 37-2018-00023355-CU-BC-CTL DEFENDANT’S LIMITED OPPOSITION TO PLAINTIFF’S MOTION FOR PROTECTIVE ORDER Date: January 4, 2019 Time: 11:00 a.m. Dept.: C70 Assigned to Hon. Randa Trapp, Dept. C70 RECYCLED PAPER DEFENDANT’S LIMITED OPPOSITION TO PLAINTIFF’S MOTION FOR PROTECTIVE ORDER 10 11 12 13 14 15 16 17 18 19 20 21 22 28 24 28 26 27 28 Defendant FTE Networks, Inc. (“FTE”) submits this Limited Opposition to the Motion for Protective Order (“Motion”) filed by Plaintiff Vista Capital Investments, LLC (“Vista”). I. INTRODUCTION The parties are in agreement that a protective order is necessary to govern discovery in this case. They are at an impasse, however, regarding whether a single-tier or two-tier protection mechanism (which would allow the restriction of certain documents to “attorney’s eyes only” or “AEQO”) is appropriate. As detailed below, the use of a two-tiered protective order is not unusual, and is entirely appropriate in this case. Most importantly: Vista is seeking from FTE discovery concerning confidential transactions and documents related to FTE’s business dealings with third parties. Shortly before this case was filed, David Clark (an officer of Vista), executed a Confidentiality and Non-Disclosure Agreement (“NDA”) with FTE in order to obtain certain sensitive business information from FTE (though of a much narrower scope than Vista is now seeking) for purposes of trying to resolve this matter. Mr. Clark then blatantly violated the NDA, using the confidential information he had obtained to contact multiple third parties and interfere with FTE’s important business relationships. This conduct has already caused substantial damage to FTE (which is the subject of a lawsuit pending in Florida). With Mr. Clark having demonstrated a total lack of regard for his express confidentiality obligations, there is more than adequate justification for a two-tiered protective order in this case. Moreover, FTE’s proposed form of protective order contains adequate safeguards against any potential misuse of the AEO designation-including, of course, allowing the party receiving AEO material to object to the designation. Further, FTE is willing to allow Vista to designate a corporate representative to review the AEO documents (and of course, Vista's lawyers can also do so), as long as that person is not Mr. Clark. For these reasons, the Court should enter the form of protective order proposed by FTE. 302843762 v4 2 RECYCLED PAPER DEFENDANT’S LIMITED OPPOSITION TO PLAINTIFF'S MOTION FOR PROTECTIVE ORDER 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 27 28 II. BACKGROUND OF THIS SUIT This action arises out of a Securities Purchase Agreement (“SPA”) between Vista, on the one hand, and FTE (a publicly traded company), on the other. The SPA entailed a $250,000 loan that Vista made to FTE on or about June 1, 2017. In exchange for the loan proceeds, FTE provided a Warrant and Promissory Note with a face value of $275,000 (i.e., an original issue discount of 10%), which was convertible into FTE stock after 180 days at a price equal to 65% of the lowest trade occurring during the 20 trading days preceding the conversion. On or about February 5, 2018, Vista converted the Promissory Note into stock, and thus received repayment in the form of 41,375 freely tradable shares of FTE, which had a market value of $652,483.00. In other words, Vista received repayment of the full principal of the loan, plus interest at an annualized rate of over 240%. Not content with this windfall, Vista then purported to exercise the Warrant on March 6, 2018, erroneously claiming an entitlement to 97,825 shares of FTE stock with a value of over $2 million. Vista contended that it was entitled to the additional shares on the basis of the anti- dilution clause of the Warrant, but the exercise notice did not cite to any such transaction that would have triggered the clause. The clause provides that if “at any time while this Warrant is outstanding” FTE sells stock at a price more favorable than Vista’s exercise price under the SPA, then Vista’s exercise price shall be adjusted downward to that more beneficial price. Contrary to Vistas contention, however, no transaction had occurred that would trigger the anti-dilution clause-indeed, it soon became clear that Vista’s anti-dilution argument was based upon a contract with a third party that was entered in October 2015, nearly two years before the SPA was even executed. Vista thereafter filed this action, seeking a whopping $9 million in damages based upon its loan of $250,000. III. ADDITIONAL FACTS RELEVANT TO PROTECTIVE ORDER Prior to the filing of this action, FTE had discussions with Vista regarding its alleged entitlement to additional shares of FTE stock, in an effort to explain why Vista’s position was mistaken. (See Declaration of David Lethem filed concurrently herewith (“Lethem Decl”), 12.) As part of these discussions, FTE was willing to share confidential information with Vista, including 302843762 v4 3 RECYCLED PAPER DEFENDANT’S LIMITED OPPOSITION TO PLAINTIFF'S MOTION FOR PROTECTIVE ORDER 10 11 12 13 14 15 16 17 18 19 20 21 5 23 24 26 27 28 information pertaining to financial transactions that FTE had entered into with third parties-but only on condition that Vista sign a Confidentiality and Non-Disclosure Agreement (“NDA”). (Id.) On or about March 28, 2018, Vista’s principal, David Lethem, executed the NDA on behalf of Vista, and FTE proceeded to share confidential information with Vista. (Id.) Specifically, Vista learned about various FTE business transactions and why they were not dilutive events. (Id) Vista also learned from FTE that FTE was seeking additional financing. (Id) The parties’ discussions did not resolve the dispute, and on or about May 10, 2018, Vista filed this action, inexplicably seeking $9 million in alleged damages. It soon became clear why Vista listed the $9,000,000 figure in its complaint: it wanted to extort FTE. Using the confidential information provided under the NDA, Mr. Clark developed a wrongful scheme to interfere with FTE’s ability to secure additional financing, all for the purpose of forcing FTE to pay it substantial monies to settle its case. Specifically-and in blatant violation of the NDA-Mr. Clark used the confidential information to begin contacting FTE’s business partners, such as FTEs auditing firm and FTE’s lenders and investors, claiming that Vista was entitled to an absurd amount of $9,000,000, with the intentional and unjustified purpose of interfering with FTE’s financing efforts. (See id. at § 4, Ex. B.) Mr. Clark had no legal right to use FTE’s confidential information to interfere with FTE’s ability to secure additional financing; indeed, he had no legitimate business reason even to contact FTE’s partners for any reason. Mr. Clark’s wrongful conduct caused significant harm to FTE, including, inter alia, the loss of at least one financing opportunity. (See id. at J4.) FTE has since filed suit against Mr. Clark and Vista in Florida, pursuant to the venue provision of the NDA. (See id. at 5, Ex. C.) IV. THE COURT SHOULD ENTER THE VERSION OF THE PROTECTIVE ORDER CONTAINING AN “ATTORNEY’S EYES ONLY” PROVISION As Vista notes in its Motion, both parties are in agreement that a protective order is necessary in this case,’ but they differ as to whether it should include a mechanism allowing for the designation ' As the parties have been awaiting entry of a protective order, neither party has produced any documents in response to the other’s document requests. Thus, Vista’s accusations that FTE is 302843762 v4 4 RECYCLED PAPER DEFENDANT’S LIMITED OPPOSITION TO PLAINTIFFS MOTION FOR PROTECTIVE ORDER 10 1 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 of certain highly-sensitive documents as “attorney’s eyes only” (“AEQO”). As set forth below, there is good cause to include such a provision in the order, and Vista’s arguments against doing so are incorrect and misguided in a number of respects. First, the AEO documents concern FTE’s confidential dealings with third parties, and as detailed in Section III, above, Mr. Clark has already demonstrated that he has no regard for confidentiality obligations-even when set forth explicitly in an NDA. Again, Mr. Clark executed the NDA in order to obtain sensitive business and financial information from FTE, in connection with the parties’ pre-suit settlement discussions. The NDA--just like the protective order now proposed by Vista-expressly restricts the use of confidential information, stating that “Recipient shall use the Confidential Information solely for the Purpose [i.e., to facilitate settlement discussions].” (See Lethem Decl., § 2, Ex. A.) Nonetheless, upon receiving FTE’s confidential information, Mr. Clark promptly breached the NDA and misused that confidential information to contact third parties, interfere with FTE’s business, and cause damage to FTE, prompting FTE to file suit in Florida. Thus, Mr. Clark has proven that he simply cannot be trusted with FTE’s most sensitive documents. FTE repeatedly explained this during the parties’ meet-and-confer discussions regarding the form of the protective order; Vista has simply chosen to ignore these facts in its Motion, incorrectly stating that “FTE has failed to articulate a sound basis why such a second-tier is required.” Second, Vista’s suggestion that two-tiered protective orders are only appropriate in “trade secret disputes involving competitors” is incorrect.> Courts have entered two-tiered protective orders in other types of cases where disclosure of certain highly confidential information to a party “bogging down this litigation” because FTE “has yet to produce a single document” are inaccurate and hypocritical. ? Equally misplaced is Vista's suggestion, in a footnote, that a protective order containing an AEO provision would result in violations of the California Rules of Professional Conduct. (See Motion, p. 5, fn. 6.) First, the requirement of Rule 1.4(a)(3) that an attorney “keep the client reasonably informed about significant developments relating to the representation” does not require that every single document produced in discovery be handed over to the client. Indeed, this Rule is based on virtually identical language in ABA Model Rule 1.4(a)(3), the official comment to which expressly confirms that “court orders governing litigation may provide that information supplied to a lawyer may not be disclosed to the client.” 302843762 v4 5 RECYCLED PAPER DEFENDANT’S LIMITED OPPOSITION TO PLAINTIFF'S MOTION FOR PROTECTIVE ORDER 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 could pose a risk of harm. See, e.g., Planned Parenthood Golden Gate v. Superior Court, 83 Cal. App. 4th 347, 353-54 (2000) (acknowledging that trial court entered two-tiered protective order with AEO provision to protect contact information of abortion clinic staff and volunteers) (overruled on other grounds in Williams v. Superior Court, 2 Cal. 5th 531, 557 (2017)); see also Flagship Theaters of Palm Desert, LLC v. Century Theaters, Inc., 198 Cal. App. 4th 1366, 1387 (2011) (acknowledging that trial court in antitrust action entered two-tiered protective order with AEO provision). Indeed, several California Superior Courts have promulgated “model” protective orders that are available for use in civil cases and which include a two-tiered designation system allowing for AEO protection (without restriction to trade secret disputes). Third, Vista appears to assume that the mere inclusion of an AEO provision in the protective order will necessarily result in all documents produced being restricted to attorneys. That is not the case. Rather, the form of protective order proposed by FTE contains two tiers of protection. The higher “AEO” tier is only to be used with respect to information that a party “considers in good faith is be of a particularly sensitive nature such that disclosure to a client representative would likely have the potential for causing competitive harm or giving a competition advantage to others.” (See Liddiard Decl., Ex. B., 2.) In other words, any application of an AEO stamp is to be determined on a document-by-document basis. Fourth, under the form of protective order proposed by FTE, if the receiving party of a document marked AEO disputes that it is entitled to such protection, it can simply object to the designation. If the parties are unable to reach agreement following such objection, then the party who applied the AEO designation has the burden of demonstrating to the court that the document is entitled to that level protection. (See id. at 9 9.) Fifth, and finally, contrary to the assertion in Vista’s Motion, FTE did not reject the “compromise” of having each party designate one company representative who would be entitled to access AEO information. FTE, in fact, agreed to this approach-provided that Vista designate a 3 See, e.g, Los Angeles Sup. Ct. (www. lacourt.org/division/civil/pdf/FormProtectiveOrder2HighlyConfidential.doc); Alameda Sup. Ct. (www.alameda.courts.ca.gov/dept1 7/Model%20Protective%200rder%20-%20Complex.pdf); San Mateo Sup. Ct. (www.sanmateocourt.org/documents/complex_civil_litigation/spo_double.pdf). 302843762 v4 6 RECYCLED PAPER DEFENDANT’S LIMITED OPPOSITION TO PLAINTIFF’S MOTION FOR PROTECTIVE ORDER A N N na 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 representative who is anyone other than Mr. Clark (for the reasons detailed above). Vista, in turn, insisted that it would only agree to the “compromise” if it could designate Mr. Clark as its representative, which would wholly defeat the purpose of the AEO designation in the first place. V. CONCLUSION The Court has broad discretion to enter an appropriate protective order, and the use of a two- tiered level of protection is neither unusual nor problematic. There is good cause for the use of such an order in this case, and of course, to the extent a party objects to the use of an AEO designation on any particular document, the designating party will have the burden of demonstrating such protection is warranted. For all of these reasons, the Court should enter the form of protective order proposed by FTE. Respectfully submitted, K&L GATES LLP Dated: December 20, 2018 By: eth A. Gold evin Sv Asfour Attorneys for Defendant FTE Networks, Inc. 302843762 v4 7 RECYCLED PAPER DEFENDANT'S LIMITED OPPOSITION TO PLAINTIFF'S MOTION FOR PROTECTIVE ORDER 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 24 28 PROOF OF SERVICE I'am employed in the county of Los Angeles, State of California. I am over the age of 18 and not a party to the within action; my business address is K&L GATES LLP, 10100 Santa Monica Boulevard, Eighth Floor, Los Angeles, CA 90067. On December 20, 2018, I served the document(s) described as: DEFENDANT’S LIMITED OPPOSITION TO PLAINTIFF’S MOTION FOR PROTECTIVE ORDER on the interested parties in this action by delivering a true copy thereof as follows: Dylan Liddiard WILSON SONSINI GOODRICH & ROSATI 650 Page Mill Road Palo Alto, CA 94304 dliddiard@wsgr.com Mazen Sbaiti SBAITI & COMPANY PLLC 1201 Elm Street, Suite 4010 Dallas, TX 75270 MAS@sbaitilaw.com X| BY MAIL: I placed the document enclosed in a sealed envelope(s), addressed as indicated above, in the mail for collection and processing at Los Angeles, California with postage thereon fully prepaid. Iam “readily familiar” with this firm’s practice of collection and processing correspondence for mailing. It is deposited with the U.S. Postal Service on that same day, with postage fully prepaid, in the ordinary course of business herein attested to (C.C.P. § 1013(a)). XI EMAIL (Courtesy Copy): I served the document(s) in PDF format upon all counsel of record in this action at their respective email address(es) indicated above. I declare under penalty of perjury under the laws of the State of California that the above is true and correct. Executed on December 20, 2018, at Los Angeles, California. Arlene Zamora (/ 302843762 v4 8 RECYCLED PAPER DEFENDANT’S LIMITED OPPOSITION TO PLAINTIFF’S MOTION FOR PROTECTIVE ORDER