Though legislators elsewhere in the country have recently turned their attention to tort reform aimed at reducing litigation costs and jackpot verdicts, tort "reform" of another, more malignant kind is gathering steam in California. A policy-making environment favorable to the plaintiffs' bar's agenda has developed, and a long-time objective of this special interest now appears to be achievable: eliminating business's ability to keep information private, including constitutionally protected trade secrets, once litigation has commenced.
Changes to California law are being considered that would have the practical effect of banning virtually all protective orders and confidential settlement agreements. The proposal is couched in terms of protecting the public from "dangerous" business secrets. The concepts that underlie the proposal, however, not only illegitimately endanger the civil liberties of companies located or doing business in California; they in fact will harm California consumers by creating a pervasive anti-business legal environment in the State.
Impairing Litigants' Ability to Maintain Business Privacy. During litigation, plaintiffs often demand that business defendants disclose their trade secrets, other intellectual property, or confidential financial information, contending that such information is relevant to the subject matter of the lawsuit. When this happens, businesses use protective orders and confidential settlement agreements to ensure that the information is only used for litigation purposes and not disseminated to the press, competitors, or other third parties. The net result is that litigation can move forward without undue jeopardy to the competitive advantage of a defendant's business. The proposal, however, would severely undermine business defendants' ability to protect information disclosed during litigation – no matter how sensitive or confidential – if the information merely "indicates allegations" of financial fraud, product defect, or environmental hazard.
The proposal would provide that in any case involving "financial fraud" or personal injuries arising from an allegedly "defective product" or "environmental hazard," a protective order or confidential settlement agreement cannot be entered or enforced to protect any information or documents that "indicate allegations" of those conditions absent extraordinary circumstances. These extraordinary circumstances are limited to where the information is confidential "official information" revealed to a public employee in the course of his or her duties, or where disclosure would violate California's state constitutional right to privacy.
Trade secret and confidential business information can also be protected in extraordinary circumstances, but only if three stringent requirements are met. First, the information must fall within the definition of a trade secret under California Civil Code § 3426.1. Second, entire documents are protected only to the extent that the trade secret information cannot be redacted. And third, the business must show that disclosure of the trade secret would cause "serious harm," namely that if the information were revealed to a competitor, the disclosure would have a "clearly defined and serious competitive and economic harm." Other types of intellectual property that "indicate allegations" of financial fraud, a defective product, or an environmental hazard may never be subject to a protective order or confidentiality agreement.
Even when these extraordinary circumstances are present, the protective order cannot issue unless the court engages in its own review of the information the defendant seeks to protect. First, the defendant business would have to identify each and every document it wishes to keep confidential. Next, the court would independently review the "basis and scope" of the proposed protective order and each and every document identified by the defendant. Finally, the court would have to make a written finding for every document, setting forth its reasons for granting or denying the protective order.
Even if a defendant successfully clears each of these hurdles, however, the confidentiality of the information is not forever assured. If a court issues a protective order after engaging in the required analysis and making the requisite written findings, it would then have to evaluate whether the information "indicate[s] a public risk, hazard, or danger to the health and safety of one or more persons or a serious threat of financial fraud on the public." If such an alleged danger exists, the court either cannot issue the protective order after all, or would have to notify the state Attorney General. The Attorney General is also bound by any protective order, but may ask the court for a reconsideration. In addition, any third party (i.e. plaintiffs' lawyers) can challenge the issuance of the protective order for up to five years, and if thus third-party challenge is successful in establishing that any part of the information was wrongly protected by the court – even one page out of hundreds or thousands – the third party is entitled to its attorneys' fees and costs.
Ambiguous and Overbroad Terms. The proposal would ban the confidentiality of any materials that "indicate allegations" of financial fraud, a defective product, or an environmental hazard, regardless of whether such material is credible, or clearly wild, unsubstantiated speculation. Apart from the proposal's apparent intent to encompass rumor and speculation, the term "indicate allegations" is ambiguous and without precedent in the law. One likely construction is that any materials that are arguably relevant to an action based on financial fraud, a defective product, or an environmental hazard are materials that "indicate allegations" of the same. Thus, if no protection is provided to any information that is arguably relevant to an action based on financial fraud, a defective product, or an environmental hazard, every document produced by a company in a lawsuit where one of these problems is alleged automatically will be excluded from protection. In addition, even the key terms "financial fraud," "defective product," and "environmental hazard" themselves are ill-defined and exceedingly overbroad.
No Protection Even in Frivolous Litigation. Despite widespread concern in the business community that too many tort actions are frivolous, the proposal would still apply and prevent the protection of confidential information that "indicates allegations" of financial fraud, a product defect, or environmental hazard, even if the defendant wins on summary judgment or after trial and even if the court ultimately concludes the action was frivolous or brought in bad faith.
And because protective orders would be denied even if the defendant ultimately prevails, the proposal provides a useful tool for any attorney who wishes to dig through corporate trade secrets or confidential business information. Having filed a lawsuit and obtained a business defendant's trade secrets or confidential information without being bound by a protective order, the attorney would be free to send the information to other attorneys, the press, or competitors. The attorney could also use that information to file additional lawsuits. The ultimate dismissal of the first meritless action would be without consequence because it accomplished its purpose: a fishing expedition through confidential business records.
Overburdening the Courts. As noted above, the proposal would allow protective orders or confidential settlement agreements only under exceptional circumstances. Even where a protective order is permitted, however, the proposal would require the California courts to "independently examine the basis and scope of the proposed protective order" and review every single document for which protection is sought. Following this document-by-document review, the court would be required to make written findings justifying its decision as to each document – even if the plaintiff agrees that a protective order is warranted. Given that California's state courts are already laboring under a crushing case load, it is unlikely the courts will be able to keep up with these added duties, even if a protective order is requested in only a small minority of civil cases.
Apart from the direct burden of requiring the courts to do a document-by-document review, moreover, the proposal would further burden courts with an increase in the number of litigated discovery disputes. Under present law, defendants are sometimes willing to produce questionably-discoverable information in exchange for the plaintiff's stipulation to the entry of a protective order, and courts become involved in this voluntary discovery process only when a dispute arises between the litigants. Under the proposal's terms, however, every document produced in discovery would be at risk of dissemination and disclosure. As a result, defendants will have a strong incentive to aggressively fight every discovery request in the first instance, resulting in the need for additional judicial intervention.
Exposing Trade Secrets. As noted above, not only would a business have to show that it is seeking a protective order for a bona fide trade secret or confidential business information, but even a protective order may not be issued absent an additional showing that "disclosure of the information to competitors would have a clearly defined and serious competitive and economic harm to the proponent of nondisclosure." Because the proposal would expressly make California's version of the Uniform Trade Secrets Act subject to the foregoing limitations and procedural requirements, businesses operating in California would not receive the same protections afforded trade secrets in the other states following the Uniform Trade Secrets Act. Of course, the proposal not only threatens businesses in California – it threatens any business subject to suit in California. Once a trade secret or other confidential information is disclosed, the effects would be felt nationwide.
County-by County Rules. One additional, troubling aspect is that each county in California would be permitted to adopt its own more restrictive local rules to further limit the availability of protective orders. While the proposal would itself take California out of step with the rest of the country, different and more restrictive local rules in each county would make the risk of suit in California wholly unpredictable. Differing local rules also would lead to forum shopping, as litigants will seek to gain or avoid whatever unique local rules may develop.
Demonstrating Its Potential Impact. One only need to consider a few simple hypothetical situations to understand this proposal's potentially negative impact. Suppose the price of an Internet stock surges at the time of the initial public offering, and then sinks rapidly. A frivolous shareholder lawsuit is quickly filed, and the suit alleges a "financial fraud" that may cause financial loss to a large number of people. In discovery, the plaintiff claims that the defendant's confidential business plan is relevant to the alleged fraud. Under present law, a protective order could maintain the privacy of the business plan. Under the proposal's terms, however, the business plan would "indicate allegations" related to the very "financial fraud" asserted in the action, and no protective order could be entered or enforced. Even after the frivolous action is dismissed in the defendant's favor, the court would be powerless to issue an order to protect the confidential information.
As another example, assume that a plaintiff alleges that a company's product is defectively designed because there is another design already on the market. By virtue of that mere allegation, the defendant company's design documents are discoverable without protective order coverage, because the documents arguably "indicate allegations" of the defective product. And if the defendant attempted to obtain a protective order for the documents as containing trade secret or confidential information, the court would be burdened by the requirement that it review each document in detail – whether hundreds of pages or thousands – and make written findings as to each.
Baseless Justification for "Reform." The proposal's proponents argue that companies routinely misuse protective orders to bury problems without regard to the public risk. This premise is without foundation. In 1992, the Advisory Committee on Civil Rules of the Committee on Rules of Practice and Procedure of the Judicial Counsel of the United States initiated a study of protective order practices in response to proposed federal legislation and concern over possible misuse of such orders. On March 23, 1998, the committee wrote to House Judiciary Committee Chairman Henry J. Hyde, stating its conclusions that:
- there is no evidence that protective orders create any significant problem of concealed information about public hazards;
- much of the information discovered in litigation is information "that no one would have a right to learn" outside that litigation;
- without protective orders, discovery would be more burdensome and costly; and
- rules allowing broader public access would impose "great burdens" on the court system.
In light of the Federal Judicial Council's rejection of the need for legislation to limit the availability of protective orders, one might expect that this new proposal was based on another study of protective orders that reached a different conclusion. Instead, the proposal is only supported by the self-serving assertions of its author, who merely claims that the public has seen the harm that results from secrecy agreements "too many times in the past." In short, there is no objective evidence of routine misuse of protective orders or confidential settlement agreements.
Conclusion. The danger this proposal poses to every business subject to suit in California cannot be understated. Trade secrets, unsubstantiated complaints, and confidential business plans could all be fair game and stripped of court protection. It would also ultimately create a decidedly anti-business civil justice atmosphere, deterring business expansion and economic growth, to the detriment of the California economy and its citizens.
The views expressed here are those of the authors and do not necessarily reflect those of the Washington Legal Foundation. They should not be construed as an attempt to aid or hinder the passage of legislation.