A Word of Caution When Disclosing Confidential Information to A Non-Party Under A Protective Order
In a 2-1 opinion,1 the Federal Circuit recently reversed a decision from the United States District Court for the Western District of Wisconsin finding Defendant Leader Accessories LLC (“Leader”) and its attorney, Mr. Jen-Feng Lee, in contempt for allegedly violating a protective order by disclosing Plaintiff Static Media LLC’s (“Static”) confidential information, and awarding Static sanctions and attorney’s fees.2 The Federal Circuit held that such disclosure was “not a clear violation of the protective order.”3
Static sued Leader for patent infringement of a design patent in the Western District of Wisconsin (the “Wisconsin action”).4 The merits of the Wisconsin action were resolved in favor of Leader with a finding of noninfringement at summary judgment.5 The Federal Circuit appeal concerned only the district court’s contempt finding and award of sanctions and attorney’s fees by virtue of Leader and Mr. Lee’s alleged violation of the protective order.6
The district court entered a protective order.7 With respect to disclosure of confidential and highly confidential information, the protective order provided, in relevant part:
3. All Confidential information and documents, along with the information contained in the documents, shall be used solely for the purpose of this action and no person receiving such information or documents shall, directly or indirectly, transfer, disclose or communicate in any way the information or the contents of the documents to any per-son other than those specified in [¶] 4.
f. outside independent persons (i.e., persons not currently or formerly employed by, consulting with or otherwise associated with any party) who are retained by a party or its attorneys to furnish consulting, technical or expert services and/or to give testimony in this action and have executed the “Written Assurance” . . . .
7. Before any person designated in 4(f) is given access to Confidential or Highly Confidential – Trial Counsels’ Eyes Only information, the individual shall first read this Order and, as is appropriate under the circumstances, either execute a “Written Assurance” [acknowledgment] . . . or otherwise agree in writing to be bound by the terms of this Order . . . .
[Pursuant to a signed Written Assurance, 4(f) independent consultants] shall not copy or use [Confidential or Highly Confidential] information or documents except for the purposes of this action and pursuant to the terms of the Protective Order.8
Shortly after, Static sent a demand letter to another company, OJ Commerce, alleging infringement of the same design patent.9 OJ Commerce’s attorney, Mr. Sam Hecht, contacted Mr. Lee regarding Static’s letter.10 Leader and OJ Commerce ultimately entered into a Joint Defense Agreement (“JDA”) after Static sued OJ Commerce in the United States District Court for the Southern District of Florida (the “Florida action”).11 Both attorneys testified that the joint defense strategy was “for the purpose of common defense . . . to promote the joint interest.”12
Thereafter, Mr. Lee provided Mr. Hecht with the protective order and the Written Assurance.13 Mr. Hecht signed and returned the Written Assurance.14 Mr. Lee then emailed Mr. Hecht two deposition transcripts and corresponding exhibits from the Wisconsin action, including Static’s “licensing and royalty agreements and sales and revenue information.”15 Some of the pages of these documents were marked confidential.16 Mr. Lee’s email disclosures informed Mr. Hecht of confidentiality designations and to “adhere to the protective order.”17 According to Mr. Lee, the purpose of sending the document to Mr. Hecht was for a “more effective joint defense consultation and discussion,” which was ‘more comprehensive” than expert consultations, “encompassing infringement, invalidity, damages, and additional . . . potential defenses.”18
During settlement discussions between Static and OJ Commerce, Mr. Hecht revealed that because of the “JDA with counsel for Leader” OJ Commerce was “fully aware about the actual royalties Static had received.”19 Mr. Lee, however, testified that he had “no reason to expect that Mr. Hecht would use the information in violation of the protective order, given that . . . Mr. Hecht sign[ed] the [Written Assurance] and [was given] repeated reminders about the protective order.”20
Static moved for discovery sanctions and attorney’s fees and to hold Leader and Mr. Lee in contempt. The district court granted Static’s motion.21 Leader and Mr. Lee appealed.22
First, the Federal Circuit held that Static failed to prove by clear and convincing evidence that Mr. Lee knew or should have known that “Mr. Hecht would independently decide to violate the protective order” and “use the confidential information in the Florida action.”23 The Federal Circuit explained that
[b]efore disclosing the deposition transcripts to Mr. Hecht, Mr. Lee did exactly what was required to ensure that Mr. Hecht would abide by the protective order. Mr. Lee had Mr. Hecht sign the Written Assurance, and with each disclosure, Mr. Lee reminded Mr. Hecht of the obligations the protective order imposed on his use of the confidential information.24
Moreover, “Static conceded at oral argument that it would be erroneous for the district court to hold Leader and Mr. Lee in contempt for Mr. Hecht’s disclosure.”25 Thus, there was no sufficient basis to hold Leader and Mr. Lee in contempt, and therefore the district court abused its discretion in finding contempt.26
Second, the Federal Circuit concluded that, under the Taggart standard,27 “it was improper to hold Leader and Mr. Lee in contempt because, when read in context, there is a fair ground of doubt as to whether the protective order barred Mr. Lee’s disclosure to develop a joint defense strategy.”28 The Federal Circuit focused on the meaning of the term “use” against the backdrop of the order’s stated purpose, and explained:
That the protective order exists to prevent injury, damage, or competitive disadvantages resulting from public disclosure of the information suggests that a “use” entirely internal to protective order signatories—developing a joint defense strategy—would not violate its terms, even though the information would be used to develop a strategy beneficial to both the Wisconsin action and the Florida action. In other words, “use” here implies disclosure to the public or those not signatories to the protective order. The reasonableness of this interpretation is supported by decisions holding that the use of information gained by an attorney under a protective order in one case may appropriately be used by the same attorney to develop a strategy applicable to a second action.29
Thus, “it is unreasonable to view the protective order as clearly prohibiting the disclosure of confidential documents to develop a joint defense strategy when the recipient is also a signatory to the protective order. . . . It was objectively reasonable to interpret the protective order as prohibiting only the public disclosure of documents or disclosure to a third party not bound by the protective order. That is not what Mr. Lee did here.”30
Accordingly, the Federal Circuit “reverse[d] the district court’s contempt order and its corresponding award of sanctions and attorney’s fees[,]” holding that “[b]ecause . . . there was a lack of evidence supporting the district court’s finding of contempt, the award of sanctions and attorney’s fees similarly cannot stand.”31
Judge Reyna dissented from the majority’s opinion, which, in his view, “denie[d] deference [to the district court] to resolve the question differently.”32 According to Judge Reyna, “the district court’s decision regarding sanctions for violation of a discovery order [should be reviewed] under the law of the regional circuit, here, the Seventh Circuit.”33 And the Federal Circuit “cannot, under Seventh Circuit law, reverse the imposition of sanctions for a violation of a discovery order unless it is clear that no reasonable person could concur in the trial court’s assessment.”34
Judge Reyna explained that, in the present case, “Appellant and the nonparty shared and discussed Appellee’s confidential information to formulate a joint defense strategy that would be used in both cases, not solely this action. . . . [O]n this record, it would be unreasonable for Appellant to believe that Appellant could make the disclosure and that the nonparty would not use that information, or the joint defense strategy formulated based on the disclosed confidential information, in the second litigation. Indeed, in [his] view, Appellant was in violation of the protective order independently of whether the information was eventually used in the second litigation.”35
Accordingly, Judge Reyna concluded that “the district court did not abuse its discretion in determining that Appellant violated the protective order.”36
Going forward, practitioners should be careful when disclosing confidential information to a non-party pursuant to a protective order. In some instances, it may make sense to seek consent from the parties before disclosing the confidential information to the non-party, or to seek a protective order that requires a party to give its adversary notice and an opportunity to object prior to making a third-party disclosure. In other instances, it may be beneficial to move to modify the protective order before disclosure. In any event, exercising caution before disclosing confidential information could avoid such discovery disputes.