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Standard Investment Chartered, Inc. v. National Association Of Securities Dealers

January 23, 2008


The opinion of the court was delivered by: Shirley Wohl Kram, U.S.D.J.


Defendants National Association of Securities Dealers, Inc. ("NASD")*fn1 and NYSE Group, Inc. ("NYSE"), on behalf of themselves and several individual defendants, seek a protective order preventing plaintiff Standard Investment Chartered, Inc. ("Standard") from disclosing documents that Standard acquired during expedited discovery. On September 26, 2007, the Court issued an Opinion resolving certain threshold issues and requesting additional briefing from all parties. See generally Standard Inv. Chartered, Inc. v. Nat'l Ass'n of Sec. Dealers ("Standard IV"), 07 Cv. 2014 (SWK), 2007 WL 2790387 (S.D.N.Y. Sept. 26, 2007). For the reasons discussed below, the Court grants in part and denies in part NASD's motion, and denies NYSE's motion.


Familiarity with the factual and procedural history of this case is presumed. See Standard IV, 2007 WL 2790387; Standard Inv. Chartered, Inc. v. Nat'l Ass'n of Sec. Dealers ("Standard III"), 07 Cv. 2014 (SWK), 2007 WL 2049730 (S.D.N.Y. July 13, 2007) (denying plaintiff's motion to reconsider decision dismissing suit); Standard Inv. Chartered, Inc. v. Nat'l Ass'n of Sec. Dealers ("Standard II"), 07 Cv. 2014 (SWK), 2007 WL 1296712 (S.D.N.Y. May 2, 2007) (dismissing plaintiff's suit for failure to exhaust administrative remedies); Standard Inv. Chartered, Inc. v. Nat'l Ass'n of Sec. Dealers ("Standard I"), 07 Cv. 2014 (SWK), 2007 WL 1121734 (S.D.N.Y. Apr. 11, 2007) (upholding decision of magistrate judge partially granting expedited discovery to plaintiff). This opinion recites the facts only insofar as they are relevant to the instant motion.

On March 8, 2007, Standard, a member of the NASD, filed a class action complaint challenging the then-pending regulatory consolidation of the NASD and the NYSE (the "Consolidation"). Standard alleged that the Consolidation would disenfranchise certain NASD members, and that the defendants failed to comply with Delaware state law while soliciting support for the Consolidation. Against the defendants' wishes, Standard was granted limited expedited discovery in aid of an anticipated motion to preliminarily enjoin the Consolidation. See Standard I, 2007 WL 1121734, at *1. Shortly thereafter, however, the Court dismissed Standard's complaint for failure to exhaust administrative remedies before the Securities and Exchange Commission ("SEC"). See Standard II, 2007 WL 1296712, at *1.

The Court subsequently directed that "[a]ny party seeking continued protection of documents (or any references to the content of such documents) filed, or sought to be filed, as part of this litigation shall move for a protective order . . . ." See 07 Cv. 2014 (SWK), Dkt. No. 83. NASD made a timely motion for such an order. Standard then filed a motion for reconsideration of the Court's opinion dismissing its claims. The Court denied Standard's motion for reconsideration on July 13, 2007. See Standard III, 2007 WL 2049730, at *1.

In its first opinion addressing NASD's protective order motion, the Court decided several preliminary issues. Applying the test enunciated by the Second Circuit in Lugosch v. Pyramid Company of Onondaga, 435 F.3d 110 (2d Cir. 2006), the Court concluded that the documents submitted with Standard's motion for reconsideration carry both a minimal presumption of public access and a qualified presumption of access under the First Amendment, see Standard IV, 2007 WL 2790387, at *8-*11, while the documents submitted in opposition to NASD's motion to dismiss, and the documents acquired by Standard during discovery but never filed with the Court (the "unfiled documents"), are subject to neither presumption, see id. at *4-*8. Additionally, the Court held that a document obtained from NYSE and submitted with Standard's motion for reconsideration (the "NYSE Document") is subject to both presumptions. See id. at *14. The Court also invited the parties to make further submissions regarding the propriety of the defendants' desired protective order in light of the legal standards enunciated by the Court. See id. at *15.


A. Legal Standard*fn2

Federal Rule of Civil Procedure 26(c) provides that "the court may, for good cause, issue an order to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense . . . ." Protective orders can take a variety of forms in order to fit the circumstances of the case. See, e.g., Blanchard & Co. v. Barrick Gold Corp., 02 Cv. 3721, 2004 WL 737485, at *5-*6 (E.D. La. Apr. 5, 2004) (comparing "narrow" protective order, covering "specific, identified information," with "blanket protective order," which allows protection of entire documents containing sensitive information).

Although the Court has already dismissed Standard's claims, the Court retains jurisdiction to "dispose of material in its files as it thinks appropriate." Gambale v. Deutsche Bank AG, 377 F.3d 133, 139 (2d Cir. 2004); see also id. at 141 ("The court's supervisory power does not disappear because jurisdiction over the relevant controversy has been lost."). Parties must demonstrate good cause to justify the continued sealing of documents even if they were not filed with the court. See, e.g., Foltz v. State Farm Mut. Auto. Ins. Co., 331 F.3d 1122, 1131 (9th Cir. 2003). Moreover, courts have required a party seeking a protective order to demonstrate good cause for protecting filed documents even if the documents made their way into the court's files through unusual or strategic means. See, e.g., Gelb v. Am. Tel. & Tel. Co., 813 F. Supp. 1022, 1034 (S.D.N.Y. 1993) (holding defendant to good cause standard despite lack of any "evidentiary reason or procedural requirement to account for" plaintiff's submission of documents to court and suspicion that "this tactic may have been an effort to gain publicity somewhat prematurely").

The burden of establishing good cause lies with the party seeking the protective order. 8 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 2035 (2007) ("Wright & Miller"); Gambale, 377 F.3d at 142 (quoting In re "Agent Orange" Prod. Liab. Litig., 821 F.2d 139, 145 (2d Cir. 1987)). Rule 26(c)'s "good cause" analysis is informed by the common law presumption of public access. Cf. United States v. Amodeo, 71 F.3d 1044, 1048 (2d Cir. 1995) ("Amodeo II"). There is a strong presumption of public access to "'judicial documents,' that is, such 'items filed with the court that are relevant to the performance of the judicial function and useful in the judicial process.'" See In re Terrorist Attacks on September 11, 2001, 454 F. Supp. 2d 220, 222 (S.D.N.Y. 2006) (quoting SEC v., 273 F.3d 222, 231 (2d Cir. 2001)). "Accordingly, a party seeking a protective order sealing trial, other court hearings, or motions and accompanying exhibits filed with the court must satisfy a more demanding standard of good cause." In re Terrorist Attacks, 454 F. Supp. 2d at 222-23.

Nevertheless, the Second Circuit has also noted that "an abundance of statements and documents generated in federal litigation actually have little or no bearing on the exercise of Article III judicial power. . . . Unlimited access to every item turned up in the course of litigation would be unthinkable." Amodeo II, 71 F.3d at 1048. Courts deciding protective order motions must therefore locate documents on "a continuum from matters that directly affect an adjudication to matters that come within a court's purview solely to insure their irrelevance." Id. at 1049:

Where testimony or documents play only a negligible role in the performance of Article III duties, the weight of the presumption is low and amounts to little more than a prediction of public access absent a countervailing reason. Documents that play no role in the performance of Article III functions, such as those passed between the parties in discovery, lie entirely beyond the presumption's reach, and stand on a different footing than a motion filed by a party seeking an action by the court, or, indeed, than any other document which is presented to the court to invoke its powers or affect its decisions.

Id. at 1050 (internal quotation marks, citations, and alterations omitted).

Case law construing Rule 26(c) has established several factors informing that Rule's good cause requirement. First, the movant must submit "a particular and specific demonstration of fact, as distinguished from stereotyped and conclusory statements, in order to establish good cause." Wright & Miller § 2035. "'Ordinarily, good cause for a protective order exists when a party shows that disclosure will result in a clearly defined, specific and serious injury.'" Schiller v. City of New York, 04 Cv. 7922 (KMK) (JCF), 04 Cv. 7921 (KMK) (JCF), 2007 WL 136149, at *5 (S.D.N.Y. Jan. 19, 2007) (quoting In re Terrorist Attacks, 454 F. Supp. 2d at 222 (internal quotation marks, citation, and alterations omitted)). "'Broad allegations of harm, unsubstantiated by specific examples or articulated reasoning, do not satisfy the Rule 26(c) test. Moreover, the harm must be significant, not a mere trifle.'" Schiller, 2007 WL 136149, at *5 (quoting Cipollone v. Liggett Group, Inc., 785 F.2d 1108, 1121 (3d Cir. 1986)); cf. Allen v. City of New York, 420 F. Supp. 2d 295, 302 (S.D.N.Y. 2006) (denying protective order motion based solely on "generalized and unsupported claims of harm that might result from disclosure"); Melohn v. Schraub, 90 Cv. 4456 (SWK) (MHD), 1991 WL 33415, at *1 (S.D.N.Y. Mar. 7, 1991) (same).

In addition to the common law presumption of public access discussed to this point, courts have identified a similar, though more demanding, presumption stemming from the First Amendment. See, e.g., Lugosch, 435 F.3d at 124; Gambale, 377 F.3d at 140 & n.4. The First Amendment's "qualified right of access to judicial documents" is "a necessary corollary of the capacity to attend the relevant proceedings." Hartford Courant Co. v. Pellegrino, 380 F.3d 83, 93 (2d Cir. 2004). Once a court has determined that "the more stringent First Amendment framework applies, continued sealing of the documents may be justified only with specific, on-the-record findings that sealing is necessary to preserve higher values and only if the sealing order is narrowly tailored to achieve that aim." Lugosch, 435 F.3d at 124.

B. Preliminary Conclusions

Before assessing the theories that NASD and NYSE have offered in favor of protection, the Court addresses two of Standard's counterarguments, as they apply to nearly all of the categories of documents discussed below.

1. Standard's Delaware Law Argument

In support of its arguments that all of the discovery documents must be disclosed, Standard argues that a protective order "would be contrary to" section 220 of the Delaware Business Corporation Law ("section 220") (see Standard's Surreply 7), which gives Standard "a statutory right to access many of the documents" (Standard's Supp. Opp'n 15). The Court disagrees.

Courts in this district have denied motions for protective orders under circumstances where a statute, narrowly construed, mandates disclosure. See, e.g., Palmiotti v. Metro. Life Ins. Co., 04 Cv. 0718 (LTS) (JCP), 2006 WL 510387 (S.D.N.Y. Mar. 1, 2006) (reversing decision based on magistrate judge's broad reading of statute). Section 220, however, does not mandate broad, immediate disclosure. Instead, the party seeking access to corporate documents must meet several procedural prerequisites, and the court must engage in a fact-specific balancing test, narrower than that which exists under Federal Rule of Civil Procedure 26, to determine if access to the documents is warranted. See Del. Code Ann. tit. 8, § 220 (2007); Disney v. Walt Disney Co., Civ. A. 234-N, 2005 WL 1538336, at *5 (Del. Ch. June 20, 2005). Moreover, the discovery that one can obtain under the statute is limited. See Amalgamated Bank v. UICI, Civ. A. 884-N, 2005 WL 1377432, at *1 (Del. Ch. June 2, 2005) ("Invocation of the statutory right to inspect corporate books and records . . . does not open the door to wide ranging discovery that would be available in support of litigation.") (internal quotation marks and citation omitted); see also Columbia Aluminum Employee Stock Ownership Plan v. Columbia Aluminum Corp., 933 F. Supp. 999, 1001 (E.D. Wa. 1996) (indicating that shareholder's purpose in requesting records must not be contrary to best interests of corporation) (internal citation omitted). Ultimately, while section 220 creates an important tool for shareholders, it allows only limited access and imposes restrictions where such access could be damaging to the corporation. Therefore, assuming arguendo that section 220 is applicable in the instant case, the imposition of a protective order after a careful balancing of interests violates neither the law's letter nor spirit.*fn3

2. Privilege and Waiver

Another primary issue of contention is the extent to which the documents in question are protected by privilege and, if so, whether NASD waived that privilege through any of its activities during the pendency of this litigation. NASD has premised its good cause showing on, inter alia, the need to protect "confidential deliberative processes" and "closely held commercial information." (NASD's Mot. 1.) Standard decried this argument as a faulty attempt to invoke the deliberative process (see Standard's Opp'n 8) and self-evaluation privileges (see Standard's Opp'n 14-15). In response, NASD disclaimed any reliance on the two privileges, asserting that they "control whether a document must be produced in the first instance, not whether a confidentiality order should be entered covering documents that have already been produced subject to interim confidentiality protections." (NASD's Reply 12-13 (emphasis in original).) Instead, NASD urged the Court to consider "the reasons that these privileges exist" when determining whether good cause exists to issue a protective order. (NASD's Reply 13 (emphasis in original).) Nonetheless, both parties draw heavily on case law pertaining to the invocation and waiver of various privileges when advancing their competing arguments regarding the alleged confidential status of the documents. Therefore, some clarification of the Court's approach to the privilege question is necessary.

Although a valid assertion of privilege constitutes good cause, a court may impose a protective order when no established privilege is applicable. See Kunstler v. City of New York, 04 Cv. 1145 (RWS) (MHD), 2006 WL 2516625, at *8, *11 (S.D.N.Y. Aug. 29, 2006) (collecting cases), aff'd 242 F.R.D. 261 (S.D.N.Y. 2007). Cf. also In re Student Finance Corp., 02 Cv. 11620 (JBR), 2006 WL 3484387, at *11 (E.D. Pa. Nov. 29, 2006) (noting that Rule 26(c) allows courts to "vindicate the purposes of" a privilege even when such privilege is technically inapplicable); Collens v. City of New York, 222 F.R.D. 249, 253 (S.D.N.Y. 2004) (implying that privilege and "good cause" are not synonymous).

Consequently, although NASD has not asserted any formal privileges, the Court remains mindful of the basic rationales offered for protecting confidential business information and internal deliberations of corporate boards of directors.*fn4

Therefore, though NASD's disclosure to Standard is a factor the Court must consider when assessing whether NASD has any continued need for confidentiality, it does not preclude the possibility of a protective order that limits the disclosure and use of the documents to the instant litigation. Similarly, any past disclosures by NASD are relevant to the Court's consideration not because they constitute waivers of privilege but because they may undercut NASD's argument that continuing protection is necessary to prevent injury to the corporation. Cf. Centauri Shipping Ltd. v. W. Bulk Carriers KS, 07 Cv. 4761 (RJS) (HBP), 2007 WL 3378254, at *7 (S.D.N.Y. Nov. 5, 2007); Sherwin-Williams Co. v. Spitzer, 04 Cv. 185 (DNH) (RFT), 2005 WL 2128938, at *14-*15 (N.D.N.Y. Aug. 24, 2005); see also Gambale, 377 F.3d at 144 n.11 (noting futility of issuing protective order for information that has already been publicly disclosed).

3.The Inadvertent Disclosure of Standard's Appellate Brief to the SEC

While the instant motion was under review, an in-house attorney at NASD, unaware of the confidential contents of Standard's opening appellate brief, mistakenly sent the brief to the SEC. (See NASD's Letter 1, Jan. 9, 2008.) The SEC has since agreed to "isolate [all copies of the brief] pending ...

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