American Home Assurance Companyv.Merck Co. Inc.

United States District Court, S.D. New YorkOct 4, 2004
03 Civ. 3850 (VM) (JCF) (S.D.N.Y. Oct. 4, 2004)

03 Civ. 3850 (VM) (JCF).

October 4, 2004


JAMES FRANCIS, Magistrate Judge

As described in more detail in prior opinions, this case concerns insurance claims for pharmaceutical products damaged while in transit. The insurer, American Home Assurance Company ("American Home"), denied the claims of its insured, Merck Co., Inc. ("Merck"), and filed this action seeking a declaratory judgment that its determinations were appropriate under the relevant policy (the "Transit Policy"). Merck then counterclaimed, seeking payment on its claims.

See American Home Assurance Co. v. Merck Co., 329 F. Supp. 2d 436 (S.D.N.Y. 2004); American Home Assurance Co. v. Merck Co., No. 03 Civ. 3850, 2004 WL 2149103 (S.D.N.Y. Sept. 24, 2004).

Two discovery motions are currently pending. American Home has moved pursuant to Rule 37 of the Federal Rules of Civil Procedure to compel the production of documents and for sanctions for alleged discovery abuses. Merck in turn, has moved under Rule 26(c) for a protective order precluding the production of certain documents. For the following reasons, both motions are denied.

American Home's Motion to Compel

American Home asserts that Merck has failed to produce relevant testing, storage, and handling protocols in violation of my prior orders, and has produced some of the requested documents in an untimely fashion. Initially, American Home alleged that Merck had defaulted in responding to some 39 different discovery demands. When Merck responded that this assertion was vague and conclusory, American Home identified in its reply papers the specific categories of documents at issue. First, American Home contends that Merck failed to provide any stability studies for the COMVAX vaccine. Similarly, it argues that Merck provided no stability studies for thimerosal free RECOMBIVAX. Finally, American Home contends that while Merck produced limited information regarding the VAQTA vaccine, it never produced the final stability study.

Because American Home first clearly articulated its argument in its reply, I have considered Merck's reply papers as well as subsequent submissions by the parties. To the extent that American Home implies that the specified categories of documents are only examples, it has not demonstrated Merck's failure to produce any other information.

Merck responds that the requests for this information do not fall under my prior orders, and any failure to provide the requested documents therefore would not be sanctionable. I need not reach that issue, however, since Merck has established that it never possessed the information in question. Merck never generated freezing data for COMVAX or thimerosal free RECOMBIVAX, which is the information that American Home sought. (Affidavit of Patricia DeHaven dated July 23, 2004, attached as Exh. A to Affidavit of John P. Winsbro dated July 23, 2004 ("Winsbro Aff."); Declaration of Cynthia Morrisey dated July 21, 2004, attached as Exh. B to Winsbro Aff.). Nor has Merck created any "final" stability report related to VAQTA; indeed it has already produced its only data on the stability of VAQTA at freezing temperatures. (Declaration of Curtis Brent Oswald dated July 21, 2004, attached as Exh. H to Winsbro Aff.).

To be sure, Merck produced some information about these vaccines either on the eve of or immediately after depositions as to which the information may have been relevant. However, American Home has failed to demonstrate that it was prejudiced by the poor timing of the production.

Accordingly, American Home's motion is denied. Merck's Motion for a Protective Order

Merck's cross-application for sanctions is likewise denied.

Merck moves for a protective order to prevent American Home from taking discovery concerning the cost and profitability of manufacturing sodium alendronate, a product that is subject of two of the claims currently at issue.

In order to determine whether to issue . . . a protective order under Rule 26(c) of the Federal Rules of Civil Procedure, it is necessary to conduct a three-step analysis. First, the party resisting discovery has the burden of showing that the information requested is confidential and its disclosure would be harmful. Then the burden shifts to the party seeking discovery to demonstrate that the information sought is relevant and necessary. Finally, the court must weigh the need for the information against the harm that would result from disclosure.
Madanes v. Madanes, 186 F.R.D. 279, 288 (S.D.N.Y. 1999) (citingIn re Remington Arms Co., 952 F.2d 1029, 1032 (8th Cir. 1991);Rywkin v. New York Blood Center, No. 95 Civ. 10008, 1998 WL 556158, at *3 (S.D.N.Y. Aug. 31, 1998)).

Merck has cleared the first hurdle. In a competitive industry, costs of production and profit margin are confidential information, potentially subject to a protective order. See Sommer v. Aronow, No. 95 Civ. 9230, 1996 WL 399820, at *3 (S.D.N.Y. July 16, 1996); Palmer v. Reader's Digest Association, Inc., 122 F.R.D. 445, 446 (S.D.N.Y. 1988).

Merck next argues that the information sought is neither relevant nor necessary to the litigation. American Home seeks this discovery on the theory that Merck has overstated the value of its claims. Merck responds that the cargoes of sodium alendronate that were damaged had been sold on the basis of invoices, which establish their value under the terms of the Transit Policy. The valuation section of the Transit Policy reads as follows:

Property which has been sold on the basis of a Commercial Invoice
Valued, premium included, at amount of invoice, including all charges in the invoice, and including prepaid and/or advanced and/or guaranteed freight, if any, plus 10%.
It is nevertheless agreed that the Company shall insure on a basis other than the foregoing provided instructions to do so are received by the Assured prior to any known or reported loss, but in no event to be less than the foregoing.
Property which has not been sold on the basis of a Commercial Invoice on Finished Goods
Property shipped to or for the account of the Assured, or property which has not been sold by the Assured and has been shipped to or for the account of the Assured shall be valued at the Assured's selling price plus freight, as verified through Merck's published price list in effect at the time of shipment.
Unfinished Goods
Valued as agreed at time and place of loss as substantiated through records of the insuring entity, which may be verified by the Company or their designated representative through records of the Assured, which are available upon written request to the Director of Insurance and Risk Management, Merck Co., Inc.
It is understood that used machinery will be valued at Actual Cash Value.

(Transit Policy, attached as Exh. 1 to Affidavit of Burt M. Garson dated July 19, 2004, at 5-6). While Merck relies on the first paragraph of this clause, American Home argues that the valuation for sodium alendronate, as unfinished goods, must be "substantiated through the records of the insuring entity." American Home further maintains that the documentation on which Merck relies did not consist of commercially recognized invoices, since the shipments at issue were transfers between different Merck entities.

It is inappropriate at this stage to reject American Home's legal argument out of hand Although Merck has presented some evidence of past practice supporting its construction of the valuation clause, American Home's interpretation remains plausible. Final determination of this issue is therefore a matter for summary judgment or trial, and ought not be made in connection with a discovery motion. The information sought by American Home is therefore relevant and necessary to its defenses against Merck's counterclaims.

Finally, American Home's need for this information outweighs the potential harm to Merck. As noted, American Home would be hamstrung in its ability to present certain defenses if it is deprived of this discovery. On the other hand, carefully limited disclosure of the information to American Home, which is not a competitor of Merck, presents little danger of economic prejudice. Indeed, if Merck ultimately prevails in its interpretation of the valuation clause, then the cost and profit information would no longer be relevant and would not be revealed at trial.

Merck's motion for a protective order is therefore denied.


For the reasons set forth above, American Home's motion to compel discovery and for sanctions and Merck's motion for a protective order are both denied. Merck shall produce the requested documents relating to sodium alendronate within two weeks of the date of this order.

American Home's application to redepose a witness with respect to this issue is denied without prejudice to renewal if the documents produced do not provide sufficient information.