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In re Domestic Drywall Antitrust Litigation

United States District Court, Eastern District of Pennsylvania

May 15, 2014




I. Introduction

Disputes about confidential information and sources consume much judicial energy, but often with good cause. Whether the confidences relate to national security or a company’s trade secrets, a judge must be sensitive to the value of confidences in general, and in the specific case, when resolving disputes about access. The issue presented is whether Plaintiffs in these antitrust cases, asserting price fixing in the sale of domestic drywall, should have access to the reports and investigative files prepared by a nonparty, which collects information—often from sources it keeps confidential—about the domestic drywall industry.

On December 10, 2013, Plaintiffs served nonparty Thompson Research Group, LLC (“TRG”) with a subpoena duces tecum. The subpoena made several requests for documents, but only three requests are relevant here.[1] TRG filed a Motion to Quash the subpoena in the Middle District of Tennessee. The matter was transferred to this Court pursuant to 28 U.S.C. § 1407(b). ECF 17, Case No. 13-mc-194 (M.D. Tenn.). The Court held a hearing on TRG’s Motion on April 24, 2014.

TRG’s Motion is granted in part and denied in part. The Court will modify the subpoena and condition the disclosures in accordance with the issues addressed in this memorandum.

II. Facts

TRG is a company that conducts research on the construction materials industry. TRG’s findings and opinions are published in reports, which it sells to large institutional investors, such as mutual funds and hedge funds, as a tool for providing investment advice. The reports cover industry-wide trends and provide company-specific analysis. TRG does not publish its reports to the public. To the contrary, TRG takes several precautions to keep them confidential, including the use of online publishing software that controls and tracks who receives the reports. TRG also maintains specific policies that prohibit its employees and clients from providing its research to third parties.

One method TRG uses to generate research for these reports involves conducting surveys and interviews with various sources within the construction materials industry. The information provided by these sources enables TRG to track and analyze important trends and developments within the industry. TRG’s network of sources includes employees from public and private companies, U.S. Senate and House of Representative contacts, and state officials. The identities of these sources are confidential. TRG’s sources provide information to TRG based on an agreement that their identities and specific affiliations will not be disclosed. Accordingly, TRG does not publish the name of a source or the company the source works for without the source’s consent. Over several years, TRG has developed an extensive network of confidential sources within the industry. This network is a critical component of TRG’s business.

In 2011, several manufacturers announced a price increase for drywall beginning in January 2012. In 2012, these manufacturers announced a similar price increase that would take effect in January 2013. These price increases are at the center of Plaintiffs’ antitrust claims. During this period, TRG monitored the price increase announcements and the market conditions of the drywall industry. For example, in October 2011, TRG published a report entitled Wallboard Industry: A Game Changing Strategy, which opined on pricing behavior in the drywall industry.

Through its subpoena, Plaintiffs seek various documents from TRG that they believe will lead to the discovery of evidence that can be used in their antitrust suit. TRG seeks to quash three of the subpoena’s requests. They are:

Request 1. All reports, studies, forecasts, analyses, articles, presentations or surveys drafted by You related to the market for Wallboard, including those concerning prices, costs, profits, Job Quotes, industry conditions, market concentration, markets in terms of geographic location or product type, competition, entry or exit of suppliers in the market for Wallboard, supply and demand, profitability, production capacity and fungibility or interchangeability, or substitutes for Wallboard, whether published or not, in draft and final form, including “Wallboard Industry: A Game Changing Strategy” and Your October 2011 Flashnote.
Request 2. All Documents concerning any of the statements made in any of the specific Documents referenced in the preceding request, including any notes or materials used to prepare those Documents.
Request 4. All communications with or concerning any Defendant or other Wallboard Manufacturer relating to the pricing of, or use of Job Quotes for, Wallboard.

ECF 1-1, Case No. 13-mc-194 (M.D. Tenn).

III. Legal Standard — Rule 45 and Third-Party Subpoenas

Federal Rule of Civil Procedure 26 sets forth the general scope of discovery in civil suits: “Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense.” Fed.R.Civ.P. 26(b)(1). “Although the scope of discovery under the Federal Rules is unquestionably broad, this right is not unlimited and may be circumscribed.” Bayer AG v. Batachem, Inc., 173 F.3d 188, 191 (3d Cir. 1999). Discovery requests may be curtailed to protect a person from whom discovery is sought from “annoyance, embarrassment, oppression, or undue burden or expense.” Fed.R.Civ.P. 26(c)(1).

Rule 45 provides corresponding protections for nonparties subject to subpoena. After being served with a subpoena duces tecum, a nonparty may object to producing any or all of the requested information by serving a written objection on the party or person designated in the subpoena. An objection must be served to the subpoenaing party within fourteen days after the subpoena is served, but it need not be filed with the court.[2] Fed. R. Civ P. 45(d)(2)(B). After providing notice to the subpoenaed nonparty, the subpoenaing party may move the court to compel compliance with the subpoena. Id. 45(d)(2)(B)(i).

Alternatively, a subpoenaed nonparty may bypass objecting to the subpoena altogether and, instead, seek to have it quashed by filing a motion with the issuing court. Rule 45(d)(3)(A) describes when a court must quash or modify a subpoena, such as when a request “subjects a person to undue burden.” Rule 45(d)(3)(B) and (C) describe when a court should quash or modify a subpoena, unless the subpoenaing party can show a substantial need for the requested material and the court can specify conditions of production that accommodate the interests of the subpoenaed nonparty. See Wright & Miller, 9A Fed. Prac. & Proc. Civ. § 2463.1 (3d ed.). Material protected under Rule 45(d)(3)(B) includes “a trade secret or other confidential research, development, or commercial information” or “an unretained expert’s opinion or information that does not describe the specific occurrences in dispute and results from the expert’s study that was not requested by a party.”

“The serve-and-volley of the federal discovery rules govern the resolution of” a motion to quash. Mycogen Plant Sci., Inc. v. Monsanto Co., 164 F.R.D. 623, 625 (E.D. Pa. 1996). The subpoenaing party must first show that its requests are relevant to its claims or defenses, within the meaning of Federal Rule of Civil Procedure 26(b)(1). Id. at 625-26. Next, the burden shifts to the subpoenaed nonparty who must show that disclosure of the information is protected under Rule 45(d)(3)(A) or (B). Id. at 626. If the subpoenaed nonparty claims the protections under Rule 45(d)(3)(B) or asserts that disclosure would subject it to undue burden under Rule 45(d)(3)(A), it must show that disclosure will cause it a “clearly defined and serious injury.” City of St. Petersburg v. Total Containment, Inc., Case No. 06-cv-20953, 2008 WL 1995298, at *2 (E.D. Pa. May 5, 2008) (undue burden under Rule 45(d)(3)(A)); In re Mushroom Direct Purchaser Antitrust Litig., Case No. 06-cv-0620, 2012 WL 298480, at *5 (E.D. Pa. Jan. 31, 2012) (disclosure of trade secrets under Rule 45(d)(3)(b)(i)). “This burden is particularly heavy to support a motion to quash as contrasted to some more limited protection such as a protective order.” Frank Brunckhorst Co. v. Ihm, Case No. 12-cv-0217, 2012 WL 5250399, at *4 (E.D. Pa. Oct. 23, 2012).

If the subpoenaed nonparty demonstrates a “clearly defined and serious injury” for a claim of undue burden under Rule 45(d)(3)(A), the Court conducts a balancing test, discussed below, in which it weighs the subpoenaing party’s interest in disclosure and the subpoenaed nonparty’s interest in non-disclosure to determine whether the burden on the subpoenaed nonparty is, in fact, undue. If the subpoenaed nonparty demonstrates a “clearly defined and serious injury” for a claim of protection under Rule 45(d)(3)(B), an additional step is required.

The burden shifts to the subpoeaning party to show “a substantial need for the testimony or material that cannot be otherwise met without undue hardship, ” Fed.R.Civ.P. 45(d)(3)(C)(i), and demonstrate “that the subpoenaed [nonparty] will be reasonably compensated, ” id. 45(d)(3)(C)(ii). If the subpoenaing party makes this showing of substantial need, the Court then weighs the interests in the disclosures.

This balancing test requires a Court to weigh (1) the relevance, (2) need, (3) and confidentiality of the requested materials, as well as (4) the harm that compliance would cause the subpoenaed nonparty. Mannington Mills, Inc. v. Armstrong World Indus., Inc. 206 F.R.D. 525, 529 (D. Del. 2002) (“[E]ven if the information sought is relevant, discovery is not allowed where no need is shown, or where compliance is unduly burdensome, or where the potential harm caused by production outweighs the benefit.”). A court should be “particularly sensitive to weighing the probative value of the information sought against the burden of production on [a] nonparty.” Fears v. Wilhelmina Model Agency, Inc., Case No. 02-cv-4911, 2004 WL 719185, at *1 (S.D.N.Y. Apr. 1, 2004).

IV. Contentions

Here, there are two types of material at issue: (1) TRG reports related to the drywall industry and (2) the investigative files on which those reports were based.

TRG argues that these requests should be quashed because (1) they subject TRG to “undue burden, ” Fed.R.Civ.P. 45(d)(3)(A)(iv); (2) they require the disclosure of “a trade secret or other confidential research, development, or commercial information, ” id. 45(d)(3)(B)(i); and (3) they require TRG to disclose “an unretained expert’s opinion, ” id. 45(d)(3)(B)(ii).[3] Specifically, TRG argues that producing the requested reports would amount to a “taking” of its unretained expert opinion. According to TRG, the reports contain research and expert analysis that are proprietary and confidential. Because Plaintiffs could obtain specific company and market analysis by hiring their own experts, Plaintiffs cannot demonstrate a need for the reports. Additionally, TRG contends that producing these materials will likely expose the identities of TRG’s confidential sources—a critical component of its business which took many years and great expense to develop.

Plaintiffs contend that these reports and investigative notes are necessary to their suit because they contain what are likely to be the only contemporaneous communications made by drywall manufacturers about pricing decisions during the period of the alleged conspiracy. Plaintiffs also argue that TRG may have served as a conduit through which drywall manufacturers passed information to further the conspiracy. Under this theory, TRG’s communications with its confidential sources are a potentially critical component to Plaintiffs’ case. Moreover, they argue that any potential harm TRG could experience will be adequately addressed by the Court’s standing protective order governing the collection of discovery.

The defendant drywall manufacturers take no position on TRG’s motion.

V. Discussion

The Court’s analysis will proceed as follows. Part V.A discusses the relevance of the subpoenaed materials to Plaintiffs’ case. Part V.B discusses whether the TRG reports are entitled to subpoena protection under Rule 45(d)(3)(B). Part V.C. discusses whether the investigative files are entitled to similar protection. Part V.D examines Plaintiffs’ “conduit theory” to determine whether they have demonstrated a substantial need to overcome any Rule 45(d)(3)(B) protections available to the reports and investigative files. Part V.E balances the interests that Plaintiffs have in obtaining the subpoenaed materials with TRG’s interests in preventing their disclosure. Part V.F discusses what compensation TRG should receive for complying with the subpoena. Part V.G addresses whether complying with the subpoena would pose an undue burden on TRG. Part VI discusses future steps and the scope of TRG’s production. Part VII briefly concludes.

A. TRG’s Reports and Investigative Files Are Relevant to the Case

At the outset, Plaintiffs have identified that the reports and investigative files meet the requisite degree of relevance required for nonparty discovery. There is a “general policy of allowing liberal discovery in antitrust cases.” Zukoski v. Phila. Elec. Co., Case No. 93-cv-4780, 1994 WL 637345, at *3 (E.D. Pa. Nov. 14, 1994); see also Callahan v. A.E.V. Inc., 947 F.Supp. 175, 179 (W.D. Pa. 1996) (“Discovery in an antitrust case is necessarily broad because allegations involve improper business conduct. . . . Such conduct is generally covert and must be gleaned from records, conduct, and business relationships.”). Nevertheless, the “standards for non-party discovery require a stronger showing of relevance than for party discovery.” Zukoski, 1994 WL 637345, at *3. Plaintiffs have met this requirement. Not only have they demonstrated that the requested materials are reasonably calculated to lead to information related to the pricing behaviors of drywall manufacturers during the period of the alleged conspiracy, they have also shown that at least one of the reports specifically discusses this subject matter. This satisfies the higher relevancy burden required for nonparty discovery.

To prevail on its motion, TRG must show that the requested information falls within the protection of Rule 45.

B. The TRG Reports Are Entitled to Rule 45 Protection

TRG claims that disclosing the reports and other materials enumerated in Request 1 constitutes “disclosing an unretained expert’s opinion or information that does not describe specific occurrences in dispute and results from the expert’s study that was not requested by a party.” Fed.R.Civ.P. 45(d)(3)(B)(ii). TRG’s reports are a valuable product. They principally contain two kinds of material: factual statements from sources within the industry and expert analysis—often based on their sources’ statements. TRG’s resistance to the subpoena concerns both kinds of material because they constitute “information that the producing party has accumulated through its own time and effort.” Cohen v. City of New York, 255 F.R.D. 110, 118 (S.D.N.Y. 2008). It would thus be unjust, so the argument goes, “to require a party to turn over the fruit of its labor in discovery without receiving adequate compensation.” Id.

But TRG goes further—it does not want to disclose its reports at all. TRG contends that Plaintiffs could obtain the same analysis contained in the reports by hiring their own expert to opine on the status of the drywall market during the relevant period. According to TRG, to permit discovery of TRG’s reports and underlying research would simply enable Plaintiffs to benefit from its expertise for free.

This contention is not without merit. The Advisory Committee for the Federal Rules of Civil Procedure had this very concern in mind[4] when it drafted Rule 45(c)(3)(B)(ii).[5] TRG also cites In Re Subpoenas Duces Tecum to Lehman Bros. Kuhn Loeb, Inc., 1983 U.S. DIST. LEXIS 11752 (S.D.N.Y. Nov. 14, 1983), as additional support. There, the court refused to compel a nonparty to produce documents that pertained to the underlying litigation but also contained expert work product. In so ruling, the court observed that “it would be unfair to Lehman to compel it to perform expert services free of charge.” Id. at *3. TRG also cites to In the Matter of Application of Consumers Union of United States, Inc., which held that a plaintiff was not entitled to confidential testing data based on ...

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