Parallel Criminal Investigations

Two years later, however, after litigants refused to voluntarily provide the DOJ copies of the protected material, the DOJ sought to modify the protective order and ultimately served grand jury subpoenas on several law firms representing the foreign defendants. The subpoenas demanded copies of all civil discovery, including foreign documents and deposition testimony originating outside the United States. In quashing the subpoenas, the district court noted that the foreign discovery was brought into the United States by the defendants solely because they were compelled to do so in a civil action that ensued directly from the DOJ's public disclosure of its grand jury investigation. Allowing the government's request to obtain copies of these materials would expand the DOJ's subpoena power beyond its current geographical limits.

On appeal, however, the district court's decision was reversed, and the firms were ordered to turn over the materials. The Ninth Circuit explained that “[b]y a chance of litigation, the documents have been moved from outside the grasp of the grand jury to within its grasp. No authority forbids the government from closing its grip on what lies within the jurisdiction of the grand jury.” In re Grand Jury Subpoenas, 627 F.3d at 1144.

Under this landscape, and with the improbability of the U.S. Supreme Court addressing this issue in the near future, the safeguards offered to litigants by civil protective orders are limited. Even the expansive protections afforded by the Second Circuit have restrictions. The heightened standard articulated in Martindell ( Martindell v. International Tel. and Tel. Corp., 594 F2d 291, 295 (2d. Cir. 1979)) only applies if a party has “reasonably relied” on the protective order. See In re Ethylene Propylene Diene Monomer (EPDM) Antitrust Litig., 255 F.R.D. 308, 318 (D. Conn. 2009).

In all other cases in the Second Circuit, “[w]hether to lift or modify a protective order is a decision committed to the sound discretion of the trial court.” SEC v. TheStreet.com, 273 F.3d 222, 229 (2d Cir.2001). In addition, in circuits that embrace the ” per se ” rule, the “ collusion exemption” has proven to be a hollow doctrine; it is a standard that has never actually been met. To meet the standard, a litigant would have to show that the government directed a civil litigant to request specific documents in order to subvert limitations on discovery in criminal cases. In re Grand Jury Subpoena, 646 F.3d 159, 166 (4th Cir. 2011). But the reality is that the government does not need to engage in collusion to reach its goal, as plaintiffs inherently have an incentive to seek broad discovery. The government need only wait, since “what the government knew or could have predicted regarding [a litigant's] independent behavior in [a] Civil Litigation is irrelevant to the propriety of the government's actions.” Id.

Lessons Learned

The disparate treatment of protective orders among the circuits has a significant effect on litigants' strategies in responding to discovery demands in civil actions where parallel criminal investigations have already been, or could potentially be, initiated. In the Second Circuit, a civil deponent who can reasonably rely on a protective order to prevent disclosure of potentially harmful testimony has a great advantage over a deponent who must choose between possible self-incrimination and the damaging adverse inferences that can follow from the assertion of Fifth Amendment rights. Similarly, in the context of document discovery, civil defendants in the Second Circuit can feel somewhat secure in producing foreign or otherwise confidential documents under a protective order, while defendants in circuits that embrace the “per se” rule may be forced to risk sanctions or default in civil cases in order to limit the risk of criminal exposure.

For companies in the global marketplace, the differing standards are particularly significant. Some commentators have suggested that this inequity invites forum shopping, both for prosecutors who could demand production of all civil discovery, including foreign materials otherwise beyond their reach; and for the civil plaintiff, who could use the threat of potential disclosure of otherwise unreachable materials as leverage to force a more favorable settlement. See Stanley A. Twardy Jr. and Doreen Klein, Grand Jury Subpoenas That Reach Around the World, American Bar Association (Mar. 13, 2014, 7:45 p.m.).

The holdings in the Fourth and Ninth Circuits potentially enable the DOJ to circumvent well-established methods for seeking foreign-based discovery such as Mutual Legal Assistance Treaties, letters rogatory, and informal diplomatic requests. Instead, the decisions of these Circuits invite the DOJ to exploit the broad discovery permitted in U.S. civil cases that are often filed following the announcement of a criminal investigation.

As explained by the U.S. Chamber of Commerce in its amicus brief in White & Case, litigants are presented with a difficult choice; either fully defend the civil action at the risk of providing the government with criminal discovery, or risk severe adverse consequences, such as sanctions, struck pleadings or dismissal of the civil action in order to avoid disclosing incriminating information that normally lies beyond the grand jury's reach. The likely result is a sizable increase in the cost of litigation. Litigants who can no longer rely on the safeguards of civil protective orders will have to take an increasingly aggressive position in motions to limit discovery requests, or elect to review foreign-based documents abroad, rather than risk bringing those documents into the United States.

In addition, in jurisdictions that limit enforcement of protective orders, there is an increased incentive for plaintiffs to file frivolous lawsuits. Defendants may be more willing to settle such cases rather than risk the threat of having documents and deposition testimony subpoenaed in a concurrent criminal investigation. See Brief of amici curiae Chamber of Commerce of the United States of America and DRI-the Voice of the Defense Bar in support of Petitioner, White & Case LLP v. United States, No. 10-1147.

Conclusion

Since it is unlikely that the Supreme Court will resolve this issue in the near future, tensions will persist regarding civil protective orders and grand jury subpoenas. For companies, especially multi-nationals, there are no easy solutions. Companies are best served by retaining, at the earliest hint of trouble, outside counsel experienced in navigating through complex parallel civil litigation and criminal investigations. Litigation strategy should be formulated with an eye toward any potential criminal or regulatory defense, even before a company is served with a subpoena or investigative demand. Protective orders may afford some protection depending on where an action is pending, but a comprehensive strategy for navigating discovery is now more important than ever.

The Fourth Circuit has suggested that litigants seek “to delay discovery until a pending grand jury investigation has been completed.” In re Grand Jury Subpoena, 836 F.2d 1468, 1476 (4th Cir. 1988). Where that is not possible, a litigant might consider proactively moving to limit the scope of discovery, or at least limiting potentially incriminating testimony. Fed. R. Civ. P. 26(b)(1). And despite its high standard, parties must also be increasingly on the lookout for evidence of collusion as a means of attacking a grand jury subpoena. See Twardy and Klein, Grand Jury Subpoenas That Reach Around the World; Civil Procedure ' Protective Orders ' Ninth Circuit Holds That Grand Jury Can Subpoena Protected Foreign Documents. ' In Re Grand Jury Subpoenas (White & Case LLP), 627 F.3d 1143 (9th Cir. 2010)., 124 Harv. L. Rev. 2099, 2106 (2011). Still, in the end, litigants may have to be prepared to accept a greater cost, including possible civil sanctions, in order to limit the increased risk of criminal exposure that is now attached to bringing foreign documents into the United States.

Jonathan B. New, a member of this newsletter's Board of Editors, is a former federal prosecutor and a partner in the New York office of BakerHostetler, where he focuses his practice on white-collar criminal and regulatory matters. Brian F. Allen is a litigation associate.

As we saw last month, companies engaged in civil litigation that are also targets of related criminal investigations may find that confidential materials produced during civil discovery could become subject to subpoena in the criminal matter, even if they would normally have been outside the government's reach. We conclude our discussion herein.

The White & Case Conundrum

The White & Case matter began when news reports revealed that the Department of Justice (DOJ) had initiated a grand jury investigation into several foreign manufacturers of liquid crystal display (LCD) screens. Within days of the announcement, dozens of class-action complaints were brought against the manufacturers. The class-actions were all consolidated in a multi-district litigation, and at the DOJ's request, the court agreed to stay most discovery in these civil actions. The court did permit the DOJ to “review but not copy” the limited class-certification discovery that was allowed to proceed while the stay was in place, with the caveat that the information learned could not be used as evidence in a subsequent criminal proceeding. In addition, the court entered a protective order restricting the parties' use of these materials to the consolidated class-action.

Two years later, however, after litigants refused to voluntarily provide the DOJ copies of the protected material, the DOJ sought to modify the protective order and ultimately served grand jury subpoenas on several law firms representing the foreign defendants. The subpoenas demanded copies of all civil discovery, including foreign documents and deposition testimony originating outside the United States. In quashing the subpoenas, the district court noted that the foreign discovery was brought into the United States by the defendants solely because they were compelled to do so in a civil action that ensued directly from the DOJ's public disclosure of its grand jury investigation. Allowing the government's request to obtain copies of these materials would expand the DOJ's subpoena power beyond its current geographical limits.

On appeal, however, the district court's decision was reversed, and the firms were ordered to turn over the materials. The Ninth Circuit explained that “[b]y a chance of litigation, the documents have been moved from outside the grasp of the grand jury to within its grasp. No authority forbids the government from closing its grip on what lies within the jurisdiction of the grand jury.” In re Grand Jury Subpoenas, 627 F.3d at 1144.

Under this landscape, and with the improbability of the U.S. Supreme Court addressing this issue in the near future, the safeguards offered to litigants by civil protective orders are limited. Even the expansive protections afforded by the Second Circuit have restrictions. The heightened standard articulated in Martindell ( Martindell v. International Tel. and Tel. Corp. , 594 F2d 291, 295 (2d. Cir. 1979)) only applies if a party has “reasonably relied” on the protective order. See In re Ethylene Propylene Diene Monomer (EPDM) Antitrust Litig., 255 F.R.D. 308, 318 (D. Conn. 2009).

In all other cases in the Second Circuit, “[w]hether to lift or modify a protective order is a decision committed to the sound discretion of the trial court.” SEC v. TheStreet.com , 273 F.3d 222, 229 (2d Cir.2001). In addition, in circuits that embrace the ” per se ” rule, the “ collusion exemption” has proven to be a hollow doctrine; it is a standard that has never actually been met. To meet the standard, a litigant would have to show that the government directed a civil litigant to request specific documents in order to subvert limitations on discovery in criminal cases. In re Grand Jury Subpoena, 646 F.3d 159, 166 (4th Cir. 2011). But the reality is that the government does not need to engage in collusion to reach its goal, as plaintiffs inherently have an incentive to seek broad discovery. The government need only wait, since “what the government knew or could have predicted regarding [a litigant's] independent behavior in [a] Civil Litigation is irrelevant to the propriety of the government's actions.” Id.

Lessons Learned

The disparate treatment of protective orders among the circuits has a significant effect on litigants' strategies in responding to discovery demands in civil actions where parallel criminal investigations have already been, or could potentially be, initiated. In the Second Circuit, a civil deponent who can reasonably rely on a protective order to prevent disclosure of potentially harmful testimony has a great advantage over a deponent who must choose between possible self-incrimination and the damaging adverse inferences that can follow from the assertion of Fifth Amendment rights. Similarly, in the context of document discovery, civil defendants in the Second Circuit can feel somewhat secure in producing foreign or otherwise confidential documents under a protective order, while defendants in circuits that embrace the “per se” rule may be forced to risk sanctions or default in civil cases in order to limit the risk of criminal exposure.

For companies in the global marketplace, the differing standards are particularly significant. Some commentators have suggested that this inequity invites forum shopping, both for prosecutors who could demand production of all civil discovery, including foreign materials otherwise beyond their reach; and for the civil plaintiff, who could use the threat of potential disclosure of otherwise unreachable materials as leverage to force a more favorable settlement. See Stanley A. Twardy Jr. and Doreen Klein, Grand Jury Subpoenas That Reach Around the World, American Bar Association (Mar. 13, 2014, 7:45 p.m.).

The holdings in the Fourth and Ninth Circuits potentially enable the DOJ to circumvent well-established methods for seeking foreign-based discovery such as Mutual Legal Assistance Treaties, letters rogatory, and informal diplomatic requests. Instead, the decisions of these Circuits invite the DOJ to exploit the broad discovery permitted in U.S. civil cases that are often filed following the announcement of a criminal investigation.

As explained by the U.S. Chamber of Commerce in its amicus brief in White & Case, litigants are presented with a difficult choice; either fully defend the civil action at the risk of providing the government with criminal discovery, or risk severe adverse consequences, such as sanctions, struck pleadings or dismissal of the civil action in order to avoid disclosing incriminating information that normally lies beyond the grand jury's reach. The likely result is a sizable increase in the cost of litigation. Litigants who can no longer rely on the safeguards of civil protective orders will have to take an increasingly aggressive position in motions to limit discovery requests, or elect to review foreign-based documents abroad, rather than risk bringing those documents into the United States.

In addition, in jurisdictions that limit enforcement of protective orders, there is an increased incentive for plaintiffs to file frivolous lawsuits. Defendants may be more willing to settle such cases rather than risk the threat of having documents and deposition testimony subpoenaed in a concurrent criminal investigation. See Brief of amici curiae Chamber of Commerce of the United States of America and DRI-the Voice of the Defense Bar in support of Petitioner, White & Case LLP v. United States, No. 10-1147.

Conclusion

Since it is unlikely that the Supreme Court will resolve this issue in the near future, tensions will persist regarding civil protective orders and grand jury subpoenas. For companies, especially multi-nationals, there are no easy solutions. Companies are best served by retaining, at the earliest hint of trouble, outside counsel experienced in navigating through complex parallel civil litigation and criminal investigations. Litigation strategy should be formulated with an eye toward any potential criminal or regulatory defense, even before a company is served with a subpoena or investigative demand. Protective orders may afford some protection depending on where an action is pending, but a comprehensive strategy for navigating discovery is now more important than ever.

The Fourth Circuit has suggested that litigants seek “to delay discovery until a pending grand jury investigation has been completed.” In re Grand Jury Subpoena, 836 F.2d 1468, 1476 (4th Cir. 1988). Where that is not possible, a litigant might consider proactively moving to limit the scope of discovery, or at least limiting potentially incriminating testimony. Fed. R. Civ. P. 26(b)(1). And despite its high standard, parties must also be increasingly on the lookout for evidence of collusion as a means of attacking a grand jury subpoena. See Twardy and Klein, Grand Jury Subpoenas That Reach Around the World; Civil Procedure ' Protective Orders ' Ninth Circuit Holds That Grand Jury Can Subpoena Protected Foreign Documents. ' In Re Grand Jury Subpoenas (White & Case LLP), 627 F.3d 1143 (9th Cir. 2010)., 124 Harv. L. Rev. 2099, 2106 (2011). Still, in the end, litigants may have to be prepared to accept a greater cost, including possible civil sanctions, in order to limit the increased risk of criminal exposure that is now attached to bringing foreign documents into the United States.

Jonathan B. New, a member of this newsletter's Board of Editors, is a former federal prosecutor and a partner in the New York office of BakerHostetler, where he focuses his practice on white-collar criminal and regulatory matters. Brian F. Allen is a litigation associate.