Exclusion Of In-House Counsel From Discovery Of Sensitive Data

Tuesday, June 1, 2004 - 01:00

Jennifer A. Smith
Vorys, Sater, Seymour and Pease LLP

The need for protective orders arises in a variety of situations - antitrust cases, patent litigation, and intellectual property disputes are typical examples. In such scenarios, highly sensitive information regarding the parties' business plans, strategies, trademarks, and trade secrets are frequently relevant to the pending litigation and are therefore presumptively discoverable. Accordingly, parties need a protective order to keep their secrets intact. When the need for a protective order arises, the parties - and, in the absence of agreement, the court - must decide whether, in the circumstances presented, to employ a basic protective order, a two-tier order or a three-tier order.

Aone-tier protective order is the standard order which designates documents and other discovery materials as "confi- dential" and prevents disclosure of sensitive materials beyond the confines of the litigation, but allows access to all who are involved in the action. A two-tier protective order invokes the concept of "attorneys' eyes only" and permits only opposing counsel to view highly confi- dential material so restricted. The third type of protective order, the "threetiered" variety, has not been in use as long as the other two types; however, it has recently been the subject of intense debate.

What makes the three-tiered protective order different from other protective orders is that the data subject to such an order are deemed to be so highly sensitive that only outside counsel may view them. Because these protective orders prevent trusted - and trustworthy - inhouse counsel from accessing important information that is produced during discovery, it is easy to understand the controversy they cause.

These extremely restrictive protective orders are said to be necessary because lawyers who serve as in-house counsel for a corporate client also serve their corporate employer in a variety of other capacities. These lawyers' roles may include competitive decision-making, directly or indirectly. The problem addressed by three-tiered ordered arises because once the in-house lawyer is privy to confidential information disclosed in the course of litigation, he or she cannot erect a Chinese Wall within his or her own head. Simply changing hats and performing a different role will not erase the information already gleaned through discovery. FTC v. Exxon Corp., 636 F.2d 1336, 1350 (D.C.Cir. 1980); but see Baxter Travenol Laboratories, Inc. v. Lemay, 89 F.R.D. 410, 420- 21 (S.D.Ohio 1981). The risk that information gained in discovery will later affect the in-house counsel's business decisions or her advice to the managers of the corporation is deemed to be too great in many situations to allow inhouse attorneys to access an opponent's sensitive discovery data. Because outside counsel generally are not involved in the executive decision-making processes of the companies they represent, they are typically deemed able to view confidential information regarding trade secrets, marketing plans, or similar competitively sensitive data produced in litigation by their clients' competitors. In assessing whether a three-tiered protective order is necessary, courts must balance the interest in broad and effective discovery as an aid to accuracy in dispute resolution and the competing interest in the protection of information which retains its value only while it retains its confidentiality. Although Rule 26(b) of the Federal Rules authorizes broad discovery into any matter not privileged that is either relevant to a claim or defense of a party or that is reasonably calculated to lead to the discovery of admissible evidence, Rule 26(c)(7) permits a court to order that "a trade secret or other confidential research, development, or commercial information not be revealed or be revealed only in a designated way." Most, but not all, of the cases involving three-tier protective orders arise in this context. In determining whether to issue a protective order that excludes in-house counsel, most courts look first to the leading authority on this issue, U.S. Steel Corp. v. U.S., 730 F.2d 1465 (Fed. Cir. 1984). In U.S. Steel, the Federal Circuit heard an interlocutory appeal from the Court of International Trade ("CIT") which had issued a decision denying U.S. Steel's corporate in-house counsel access to confidential information. The Federal Circuit vacated the decision and set forth the flexible standard that all tribunals follow today when considering three-tiered protective orders. The CIT had distinguished in-house counsel from retained counsel because "a clear and more sustained relationship can be presumed as an outgrowth of the employer-employee relationship." The CIT went on to note that, as a result of such a relationship, in-house counsel was more likely inadvertently to disclose confidential information than retained counsel would be. The CIT then issued a protective order foreclosing in-house counsel's access to sensitive documents based purely on in-house counsel's status as such.

The Federal Circuit disagreed with such mechanical compartmentalization, noting that "like retained counsel . . . inhouse counsel are officers of the court [and] are bound by the same Code of Professional Responsibility, and are subject to the same sanctions. . . . The problem and importance of avoiding inadvertent disclosure is the same for both." Thus, the court held that "status as in-house counsel cannot alone create the probability of serious risk to confidentiality and cannot therefore serve as the sole basis for denial of access." Instead of making determinations concerning access to discovery data based on mechanical categorizations, the Federal Circuit held that "whether an unacceptable opportunity for inadvertent disclosure exists . . . must be determined . . . by the facts on a counsel-bycounsel basis, and cannot be determined solely by giving controlling weight to the classification of counsel as in-house rather than retained." The Circuit noted that the most important factor to be used to determine the risk of inadvertent disclosure would be whether the attorney - in-house or retained - is involved in "competitive decision-making," which the Circuit defined as "a counsel's activities, association, and relationship with a client that are such as to involve counsel's advice and participation in any or all of the client's decisions ([such as] pricing, product design, etc.) made in light of similar or corresponding information about a competitor."

This analysis now provides the bedrock upon which courts build when attempting to balance the interest of the legal system and the parties in broad discovery and the protection against undue risk of disclosing - and thereby damaging or destroying - confidential information. Having dispensed with a per se rule, courts now search for the factors which separate in-house counsel who may participate fully in their clients' litigation from those who may not. The Ninth Circuit's analysis in Brown Bag Software v. Symantec Corp., 960 F.2d 1465 (9th Cir. 1992), is exemplary of decisions which limit access to confidential information.

In Brown Bag, the Ninth Circuit reviewed a protective order issued by the district court for the Northern District of California. Prior to the initial suit in the district court, Brown Bag Software had acquired a computer program from an independent program designer who warranted that he was not then developing a program that would infringe upon Brown Bag's newly acquired copyright in the computer program. The independent computer program designer then sold a later computer program to Symantec. Brown Bag sued Symantec, alleging that the new program infringed upon Brown Bag's copyright and trademark rights in the original program. During the course of the litigation, Symantec moved for a protective order restricting access of Brown Bag's in-house counsel to Symantec documents labeled "attorneys' eyes only." The Northern District of California issued an order which provided that Brown Bag's in-house counsel could only access the documents through an "independent consultant, legal or otherwise."

In Brown Bag, the Ninth Circuit held that the district court's application of the "competitive decision-making standard" was proper because plaintiff's in-house counsel's employment would necessarily entail advising his employer in areas relating to the defendant's trade secrets. The district court had reached this conclusion because plaintiff's in-house counsel was responsible for advising his employer "on a gamut of legal issues, including contracts, marketing and employment," and that plaintiff's inhouse counsel was thus involved in the kind of competitive decision-making that "counsels against disclosure" under U.S. Steel. Another factor the Brown Bag court considered was whether and to what extent the party opposing the three-tier protective order would be impeded by the denial of access to sensitive documents to in-house counsel. The court concluded that the plaintiff could not demonstrate that its ability to litigate would be prejudiced by restricting access to outside counsel; therefore, the protective order remained intact. Other courts have included this as a significant factor to consider when determining whether to grant or deny access to inhouse counsel. Intel Corp. v. Via Technologies, Inc., 198 F.R.D. 525, 531 (N.D.Cal. 2000); Akzo N.V. v. U.S. Int'l Trade Comm'n., 808 F.2d 1471, 1483 (Fed. Cir. 1986), cert. denied, 482 U.S. 909 (1987).

The inquiry courts engage in is a factspecific one; however, when applying the facts of individual cases to the "competitive decision-making" analysis, courts come to surprisingly varied conclusions. For example, one court found that in-house counsel's engagement as a corporation's corporate secretary and member of the Board of Directors created a substantial risk of inadvertent disclosure because the individual "sits in the same room as those who are involved in competitive decisionmaking." Norbrook Laboratories Ltd. v. G.C. Hanford Mfg. Co., 2003 WL 1956214 at *5 (N.D.N.Y. 2003). However, another court held that the fact that one holds the positions of Senior Vice President and Secretary and is in regular contact with executives who are involved in competitive decision-making meetings does not necessarily amount to "advice and participation" as required under U.S. Steel. Matsushita Electrical Industrial Co., Ltd. v. U.S., 929 F.2d 1577, 1580 (Fed. Cir. 1991).

Similarly, many courts have concluded that "requiring a party to rely on its competent outside counsel does not create an 'undue and unnecessary burden,'" Intel Corp., 198 F.R.D. at 529; A. Hirsch, Inc. v. U.S., 657 F.Supp. 1297, 1305 (Ct. Int'l Trade 1987). However, at least one court has held that, in order for in-house counsel to communicate effectively with outside counsel, in-house counsel must have access to the discovery materials that are the subject of a protective order. Solaia Technology LLC v. Jefferson Smurfit Corp., 2002 WL 1964761 at *2 (N.D.Ill. 2002). While there are inconsistencies in the results to date, certain conclusions can safely be drawn. First, the pre-U.S. Steel presumptive disqualification of in-house counsel from access to all sensitive discovery material, based entirely on their employment, can safely be viewed as a dead letter. If disclosure to in-house counsel does not pose a demonstrable threat of inadvertent disclosure of confi- dential information to the client's executives involved in competitive decision making, these attorneys may access con- fidential documents under the protective order and assist their clients in mounting a proper defense or prosecution. The client can thus continue to exercise the important right to counsel of its choosing. However, if the risk of inadvertent disclosure is high and if the potential harm from such disclosure is serious, as opposed to theoretical, in-house counsel will not be permitted to view sensitive materials under an attorneys'-eyes-only protective order.

Jennifer A. Smith is an Associate in the Columbus, Ohio office of Vorys, Sater, Seymour and Pease LLP where she practices in the area of commercial litigation. Ms. Smith has a BA from Vanderbilt University and received her JD from New York University School of Law.