Wednesday, December 10, 2014

Seal Spiel v. Goldman Sachs, No. A133487 (D1d1 Nov. 13, 2014)

This is a magnum opus on the handling of sealed files and a must-read for anyone who litigates complex business cases in state court. Sorry in advance for the overly detailed procedural setup—the last thing I want is for my posts to read like bench memos—but for once, the background is quite germane to understanding the ultimate ruling in the case.

Way back in 2008, sued Goldman Sachs, Merrill Lynch and related entities for engaging in naked short selling of its stock. The parties entered a typical umbrella protective order, permitting them to designate documents confidential or highly confidential, with attendant restrictions. It also required them to engage in good faith to limit their submissions to the court only to confidential materials reasonably necessary for the court’s deliberations.

Three years into the litigation, Overstock moved to file a fifth amended complaint. The proposed complaint was heavily redacted of references to materials deemed confidential under the protective order. Following the procedure in Rule of Court 2.551(b)(3),* Overstock lodged the unredacted complaint provisionally under seal, which put the onus on Goldman to justify continued redaction. Goldman filed numerous motions to seal the amended complaint and various ancillary papers related to the motion to amend. After the court ultimately denied leave to amend—a subject of a later post—The Economist and other media entities moved to intervene to oppose sealing. The court denied intervention and ordered the unredacted proposed complaint filed under seal.

Soon thereafter, Goldman moved for summary judgment. In connection with its opposition, Overstock submitted thirty eight bankers’ boxes worth of documentary evidence, significant portions of which went un-cited in its opposition papers. The opposition evidence included voluminous materials that were designated under the protective order, including materials produced by third parties subject to subpoenas. Goldman and Merrill moved to seal. The media again moved to intervene, which this time was granted.  The trial court granted sealing, but only to three categories of documents: (1) materials containing individually identifying information; (2) irrelevant regulatory materials; and (3) materials that were submitted, but never cited.

The various parties appealed the two orders under the collateral order doctrine, and the appeals were consolidated. The court begins by addressing the three sources of authority addressing the right to access court documents. First, there is a common law right of access. This applies a balancing test akin to the “good cause” standard that governs the issuance a of a protective order in the first place, but which incorporates a presumptive right of access. Second, the First Amendment also affords a ground for public access. The First Amendment test is stringent, but only applies to certain classes of court documents that are material to the merits of an adjudication. And third, the Judicial Council has promulgated sealed records rules—Rules of Court 2.550 and 2.551—which codify the California Supreme Court’s landmark 1999 decision in NBC Subsidiary v. Superior Court, 20 Cal. 4th 1178 (1999). These rules set forth a five-factor test in applying the First Amendment standard. Like that standard, the sealed records rules apply only to certain types of filings, although it is sometimes unclear where the line of demarcation falls. The sealed records rules also include procedures addressing how to move to seal, how to go about submitting materials that someone else might want sealed, and how to move for the unsealing of previously sealed records. The court goes on to address several key issues regarding these rules.

By What Procedural Vehicle Should Media Interests Seek Access?

The court addresses the proper procedure media to follow when seeking access to sealed or potentially sealed materials. That procedure is not intervention under Rule of Civil Procedure § 397. Instead, Rule of Court 2.251(h) expressly provides media and other members of the public with a right to file a motion seeking the unsealing of documents. That, however, does not make them a party to the case, as intervention would dictate. Moreover, if media or interested parties desire to weigh in on the sealing process itself—as opposed to seeking to unseal after the fact—they should do so in an amicus curiae capacity.

What Is the Appropriate Standard of Review?

The court next addresses the standard of review applicable to orders granting and denying sealing requests. As with most issues where good cause is at issue, orders granting or denying sealing under the common law standard are reviewed for abuse of discretion. A similar standard applies to orders denying sealing under the First Amendment standard.

But when it comes to orders granting sealing when the First Amendment standard applies, the situation gets trickier. There is a split of authority. Some cases that suggest that the same abuse of discretion standard applies to such orders. See Oiye v. Fox, 211 Cal. App. 4th 1036 (2012); In re Providian Credit Card Cases, 96 Cal. App. 4th 292 (2002). Other cases, relying on U.S. Supreme Court authority holding that heightened appeallate scrutiny is warranted to protect First Amendment interests, see Bose Corp. v. Consumers Union of U.S., Inc., 466 U.S. 485 (1984), hold that orders granting sealing when the First Amendment is implicated should be subject to plenary, de novo, review. See People v. Jackson, 128 Cal. App. 4th 1009 (2005).

Because of the posture of the case—the only documents addressed in the consolidated appeals are documents for which sealing was denied—the court punts and holds that the abuse of discretion standard applies. Thus, the court’s legal determinations about whether the sealing rules apply are subject to de novo review, but its factual findings underlying the merits of sealing are reviewed only for substantial evidence.

When Do the Sealing Rules Apply?

Next, the court moves on to a crucial issue—when do the sealing rules, and thus, implicitly, the First Amendment standard, apply? The rules themselves explain that they do not apply to discovery disputes.  Relying on commentary in the rules, dicta in NBC Subsidiary, and federal cases addressing similar issues, a prior court of appeal case held that the sealing rules did not apply to exhibits attached to a complaint whose sufficiency was attacked solely on the basis of plaintiff’s standing to sue. See Mercury Interactive Corp. v. Klein, 158 Cal. App. 4th 60 (2007). According to Mercury, even though the exception to the sealed records rules literally included only discovery disputes, it should not be read so narrowly. Thus, the sealed records rules should apply only to evidentiary material “‘submitted as a basis for adjudication.” Because a complaint—and in particular a complaint that is not challenged by a demurrer on the merits—does not serve as the basis for adjudication, the sealing rules did not apply to the exhibits at issue in that case.

The defendants try to frame the debate as coming down to how broadly or narrowly to read Mercury.  According to Goldman and Merrill, Mercury says that the sealing rules apply only when materials are submitted to the court and the court actually relies upon them as a basis for adjudication. The court however, does not read Mercury to go so far. And, in any event, since Mercury didn’t involve documents submitted in connection with a summary adjudication motion, the court finds that it is not entirely instructive.

Moreover, defendants’ argument is not supported by the text of the sealing rules.  The rules refer to materials “used at trial or submitted as a basis for adjudication of matters other than discovery motions or proceeding[.]” Cal. R. Ct. 2.550(a)(3). The disjunctive “or” suggests that the mere submission of materials in connection with a non-discovery dispute merits application of the rules, even if the court doesn’t rely upon them. The court’s construction is bolstered by (1) dicta in NBC Subsidiary; (2) the California state constitution’s edict that statutes providing access to public records be construed broadly; (3) the sealing rules’ timelines that anticipate a expeditious ruling on sealing, often before the merits are even decided. Thus, documents that are merely submitted as a basis for adjudication are subject to the sealing rules, even if the court does not rely upon them.

What About Parties’ Abuse of the Rules?

That all said, as the court explains, documents that are irrelevant to the controversy are not “submitted as a basis for adjudication.” Even when a party physically submits them to the court in connection with the dispute.  Which brings the court to two key practical problems when it comes to sealing: First, some “parties . . . fail to exercise any discipline as to the confidential documents with which they inundate the courts[.]” Second, some “parties . . . indiscriminately insist every document satisfies the rigorous requirements of the sealed records rules[.]” The court finds both issues implicated here.

When it comes to over-submission of confidential documents the court chides Overstock for submitting “a veritable mountain of confidential materials in opposition to defendants’ motions for summary judgment.”  This “document dump” included over 25,000 pages of documents, including hundreds of documents that were never even mentioned in the papers. Invoking the notorious precedent of Nazir v. United Airlines, Inc., 178 Cal. App. 4th 243 (2009)—
a case involving what may well be the most oppressive motion ever presented to a superior courtthe court explains that “[i]nundating the trial court with this deluge of confidential materials was brute litigation overkill.” But Goldman’s sealing motions—which sought the mass sealing of most of the record—were equally “breathtaking in scope.”

The court suggests two means to avoid this result. First, it encourages the rigorous enforcement of protective order provisions requiring parties to endeavor in good faith efforts to submit only those confidential materials reasonably necessary to the court’s decision. When violations are egregious, the trial court should not hesitate to levy sanctions. Second, “[w]hen a party submits a tsunami of discovery materials subject to a protective order, the trial court should welcome a well-honed motion to strike to winnow down the material to that which is relevant to the contentions advocated by the proffering party.” Because the public’s right of access extends only to relevant material, the court should endeavor to keep entirely irrelevant confidential materials out of the court’s public file.  And on the flip side, trial courts should “view overly inclusive sealing efforts with a jaundiced eye, and impose sanctions as appropriate.”

So What’s Needed to Get Relevant Files Sealed?

Turning towards the merits of the trial court’s sealing decision, the court provides a helpful primer on what kinds of evidence are sufficient to meet the moving party’s burden. General or conclusory statements about the confidential nature of the material or the care taken to keep them so are not enough.  There needs to be specific explanations about what the documents are and what about them makes them worthy of protection.  While it is appropriate to combine evidentiary declarations with charts showing the applicability of the justifications, there must be specific evidence justifying why the public’s constitutional right of access should be overridden as to each document. A party opposing sealing is further permitted to provide counter-declarations and the trial court has the discretion to resolve any conflicts in the evidence.

How Do the Rules Apply to Goldman’s and Merrill’s Documents?

The court then proceeds to review the documents in dispute and the evidence justifying their sealing. It upholds the trial court’s order denying sealing over various documents, finding that the order was supported by substantial evidence. But the court also finds other documents to be irrelevant to the merits of the motion, and thus not subject to the sealing rules. As to these documents, the trial court should have either struck them from the record or ordered them seal under the lower “good cause” standard that applies to documents outside of the sealing rules. Similar treatment should have been afforded to documents for which evidentiary objections were sustained because such documents cannot serve as a basis for adjudication. 

The court also finds the trial court erred in applying an “all or nothing” approach to sealing by permitting sealing only when an overriding interest was established for an entire document. The sealing rules clearly contemplate sealing part of a document—a position that is supported by a public policy in keeping only the confidential portions of documents out of the public eye. The court thus orders a limited remand for the trial court to determine whether parts of certain documents should have been sealed.

What About Third-Party Documents and Concerns?

The court also addressed sealing requests regarding confidential-designated documents that had been produced by third parties.  It notes that Rule 2.551(b)(3)(A)(iii) requires a party submitting third party documents with written notice and an opportunity to seek sealing. Because plaintiffs failed to provide that notice on several occasions, these materials needed to be removed from the public record or sealed.

As to confidential data regarding Goldman’s and Merrill’s clients, the clients had significant privacy interests in that information. Thus, to the extent that certain data was relevant—irrelevant information should have been struck or sealed for good cause—the court largely should have permitted sealing, particularly as to client-identifying information like account numbers, names, etc. But that wasn’t the case as to two clients who were part of the short selling practices and whose conduct was publicly known. As to these clients, to the extent the information was relevant, there was no justification for continued sealing.

And What Becomes of Some Information that Was Inadvertently Disclosed by the Defendants?

Finally, the court addresses the consequences that fall from the fact that defendants inadvertently filed an unredacted version of one of plaintiff’s trial court brief with the court of appeal. Because most of the information in the brief was either not subjected to affirmed sealing orders or irrelevant, the inadvertent disclosure was largely beside the point. But as to two pieces of data that were properly sealed, but inadvertently disclosed to the public, the disclosure merited unsealing.

Affirmed in part and reversed in part.

*As an aside, for all the griping I do about California procedure being a jungle, Rule 2.551(b)(3)—which addresses what a party who wants to use obtains confidential material obtained in discovery, but who does not itself care about filing it under seal—is pure enlightenment. In a business case most of the documents that get filed in a summary judgment motion come from the other side. Deserved or not, almost every document produced in such a case is invariably designated with some level of confidentiality. But most come nowhere near meeting the standard in the sealing rules. So Rule 2.551(b)(3) lets you file designated docs but puts the burden on the party with the interest in preserving their confidentiality to justify sealing them. Surprisingly, few other courts—including federal courts in Southern Californiahave that kind of rule. There is little more frustrating than having to file a motion to seal someone else's documents.

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