CytoSport, Inc. v. Vital Pharmaceuticals, Inc., No. 2:2008cv02632 - Document 143 (E.D. Cal. 2010)
Court Description: ORDER denying 134 Motion for Reconsideration signed by Judge Frank C. Damrell, Jr on 5/10/10. (Waggoner, D)
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CytoSport, Inc. v. Vital Pharmaceuticals, Inc. Doc. 143 1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 EASTERN DISTRICT OF CALIFORNIA 10 ----oo0oo---- 11 CYTOSPORT, INC. 12 NO. CIV. S-08-2632 FCD/GGH Plaintiff, 13 v. MEMORANDUM AND ORDER 14 VITAL PHARMACEUTICALS, INC., 15 Defendant. 16 17 18 ----oo0oo---This matter is before the court on defendant Vital 19 Pharmaceuticals, Inc.’s (“VPX”) motion for reconsideration of the 20 magistrate judge’s March 2, 2010 order, denying VPX’s amended 21 motion to modify protective order. 22 Cal. L.R. 303(c). 23 Stipulated Protective Order (Docket #43) (the “Protective Order”) 24 on the ground that it prevented VPX’s in-house counsel from 25 effectively functioning as lead counsel in this action by denying 26 counsel access to materials designated “Attorneys’ Eyes Only” 27 (“AEO”). 28 VPX failed to demonstrate that it would suffer actual prejudice Fed. R. Civ. P. 72(a); E.D VPX sought modification of the parties’ The magistrate judge denied VPX’s motion, finding that 1 Dockets.Justia.com 1 if the Protective Order remained in place, and thus, it failed to 2 meet its initial burden of demonstrating good cause to modify the 3 order. 4 modifying the Protective Order would result in both an increased 5 risk of inadvertent disclosure of trade secret material as well 6 as grave consequences to plaintiff CytoSport, Inc. (“CS”) 7 resulting from any such disclosure.1 (Docket #132.) The magistrate judge further found that 8 9 (Id.) BACKGROUND CS brought this action on November 14, 2008 against VPX for 10 trademark and trade dress infringement, dilution, unfair 11 competition and false advertising in regard to CS’s ready to 12 drink protein beverage, Muscle Milk, claiming VPX copied it in 13 the form of VPX’s product, Muscle Power. 14 parties entered into the Protective Order, which provided in part 15 that documents designated AEO would be available to “Qualified 16 Persons,” from which category in-house counsel were specifically 17 excluded. 18 On March 30, 2009, the (Docket #43 at ¶ 10, n. 2.) Subsequently, VPX replaced its general counsel and 19 established a new in-house legal department, consisting of three 20 lawyers and support staff. 21 and in-house legal department to act as lead litigation counsel 22 for all VPX litigation across the country, including this action. 23 In making this selection, VPX replaced its former lead counsel in 24 this case, Perkins Coie, and retained new outside counsel to act VPX selected its new general counsel 25 26 27 28 1 Because the court finds that oral argument will not be of material assistance, it orders this matter submitted on the briefs. E.D. Cal. L.R. 230(g). 2 1 as local counsel.2 2 to speed on the case and began to prepare for depositions, it 3 became clear that VPX’s in-house counsel could not effectively 4 function as lead counsel without access to AEO material. 5 sought CS’s agreement to modify the Protective Order, but CS 6 refused, claiming the Protective Order was necessary to protect 7 commercially sensitive information from disclosure to rival 8 companies. 9 following this court’s grant of a preliminary injunction VPX asserts that as its new counsel came up VPX CS emphasized that the Protective Order was entered 10 preventing VPX from manufacturing, marketing or selling its 11 Muscle Power product, which was affirmed by the Ninth Circuit, as 12 well as discovery, and that it was carefully negotiated between 13 the parties. 14 15 Because CS would not agree to modification of the order, VPX filed the underlying motion to modify the protective order.3 16 STANDARD 17 The standard of review on a motion for reconsideration of a 18 magistrate judge’s ruling on a nondispositive matter is “clearly 19 erroneous or contrary to law.” 20 Cal. L.R. 303(f). 21 magistrate judge’s decision unless it has a “definite and firm 28 U.S.C. § 636(b)(1)(A); E.D. Under that standard, the court must accept the 22 23 24 2 Angeles. Said counsel is located in California but in Los VPX’s in-house legal department is located in Florida. 3 25 26 27 28 In opposing the instant motion, CS offers a sealed Declaration of Samuel Straight, attaching six exhibits that CS brought to the hearing on the underlying motion. CS offers the exhibits as proof that it will suffer grave consequences from inadvertent disclosure. The exhibits were rejected and not considered by the magistrate judge. Accordingly, they do not form the basis for his order, and thus, this court has likewise not considered the declaration or attached exhibits. 3 1 conviction that a mistake has been committed.” 2 Prods. of Cal., Inc. v. Const. Laborers Pension Trust for So. 3 Cal., 508 U.S. 602, 622 (1993); Husain v. Olympic Airways, 316 4 F.3d 829, 835 (9th Cir. 2002). 5 6 Concrete Pipe & ANALYSIS VPX makes a number of arguments in support of its motion, 7 many of which are overlapping and basically raise the same point. 8 Its essential arguments can be summarized as follows: the 9 magistrate judge erred in (1) misapplying the governing case law 10 addressing modification of protective orders; (2) finding VPX 11 failed to show actual prejudice since continuation of the 12 Protective Order infringes on its constitutional right to select 13 counsel of its choosing; and (3) assuming an increased risk of 14 inadvertent disclosure based merely on counsel’s in-house status. 15 The court has reviewed the parties’ papers, including their 16 submissions on the underlying motion, and contrary to VPX’s 17 protestations, it cannot find any error in the magistrate judge’s 18 order. 19 standard to the motion. 20 to show preliminarily how the Protective Order would prejudice 21 its case; in other words, to demonstrate the requisite “good 22 cause” to modify the order, VPX had to demonstrate actual 23 prejudice. 24 1470 (9th Cir. 1992); Intel Corp. v. VIA Techs., Inc., 198 F.R.D. 25 525, 528 (N.D. Cal. 2000). 26 the court balances, “the risk of inadvertent disclosure of trade 27 secrets to [VPX], against the risk . . . that protection of . . . 28 trade secrets impaired prosecution [of VPX’s] claims.” First, the magistrate judge applied the correct legal To modify the Protective Order, VPX had Brown Bag Software v. Symantec Corp., 960 F.2d 1465, If VPX established good cause, then 4 Intel 1 Corp., 198 F.R.D. at 528. 2 Here, the magistrate judge correctly found that VPX offered 3 no evidence of actual prejudice; namely, evidence as to why its 4 use of in-house counsel as lead counsel was critical to this 5 case. 6 adequately explain the reasons why it switched to in-house 7 counsel. 8 shown that the use of in-house counsel was necessary due to the 9 specialized expertise of the counsel, required in order to Indeed, VPX wholly failed, and continues to fail, to Courts have found actual prejudice where a party has 10 maintain a company’s financial stability or essential to its 11 prosecution or defense of an action due to outside counsel’s 12 incompetency or lack of sufficient time to present the client’s 13 best case.4 See Intel, 198 F.R.D. at 529-30; Brown Bag, 960 F.2d 14 at 1470-72. That VPX must rely on competent outside counsel does 15 not create an “undue and unnecessary burden,” sufficient to 16 demonstrate actual prejudice, as recognized in Intel. 17 F.R.D. at 529-30. 18 enough that the Protective Order merely increases the difficulty 19 of managing the litigation; rather, VPX must show it “actually 20 prejudice[s] [its] presentation of [its] case.” Intel, 198 As the magistrate judge emphasized, it is not Id. at 528 21 4 22 23 24 25 26 27 28 Contrary to VPX’s contentions, the magistrate judge did not require VPX to divulge attorney/client communications when he inquired as to the reasons why VPX chose to use in-house counsel as its lead counsel. The magistrate judge’s question was a proper inquiry in order to ascertain whether there was any actual prejudice, and if VPX was concerned about the disclosure of any protected attorney/client communications, it could have submitted its reasons in camera to the court. Instead, during the hearing on the motion, VPX’s counsel simply stated that he was not “privy” to the reasons why the choice was made. VPX again does not offer any explanation on the instant motion, except to intimate, in conclusory fashion, that the choice was made for cost savings reasons. This bald assertion is not evidence of actual prejudice. 5 1 (finding no prejudice where Intel could not show its ability to 2 litigate through outside counsel was impaired). 3 noteworthy that though VPX terminated its former counsel, Perkins 4 Coie, it still retains outside counsel, who it describes as its 5 “local counsel.” 6 material subject to the Protective Order. 7 Indeed, it is Presumably, that counsel can review any AEO Notwithstanding these governing standards, VPX contends that 8 the magistrate judge’s order is in error because it ultimately 9 prevents VPX from utilizing “counsel of its choice”–-a right VPX 10 asserts is constitutionally protected by the due process clause 11 of the Fifth Amendment. 12 its choice, however, is not absolute, and the right can be 13 overridden, as even VPX acknowledges, for “compelling” reasons. 14 See In re Bell South Corp., 334 F.3d 941, 955-56 (11th Cir. 2003) 15 (relied on by both VPX and the magistrate judge). 16 magistrate judge properly found that “the protection of trade 17 secrets, which is deemed important enough to allow sealing and 18 other protections in a public court, is important enough to 19 restrict ‘counsel of one’s choice’ from viewing the secrets in 20 appropriate situations.” 21 A civil litigant’s right to counsel of Here, the (Docket #132 at 6:24-26.) Because VPX failed to meet its initial burden of 22 demonstrating good cause for modifying the Protective Order, the 23 magistrate judge’s additional findings regarding the increased 24 risk of disclosure and the danger of harm to CS are essentially 25 dicta. 26 party must first demonstrate that it has good cause for modifying 27 the protective order). See Intel, 198 F.R.D. at 528 (stating that the moving As such, any error in these findings is 28 6 1 irrelevant for purposes of the instant motion.5 2 that the magistrate judge properly denied VPX’s motion based on 3 its lack of a showing of actual prejudice. 4 properly ends there; no further balancing of interests is 5 necessary. 6 This court finds The discussion However, because the magistrate judge balanced the relevant 7 interests, the undersigned has also reviewed these findings and 8 concludes that they are not clearly erroneous or contrary to law. 9 The magistrate judge did not err in finding an increased risk of 10 inadvertent disclosure. 11 attorneys in its in-house legal department, and it is a 12 relatively small company; VPX conceded that its in-house counsel 13 are directly reportable to the company’s CEO, Jack Owoc, who is 14 responsible for all competitive decisionmaking. 15 magistrate judge correctly noted that the risk and potential 16 danger of inadvertent disclosure is “compounded” by these facts. 17 (Docket # 132 at 7:1-2.); see MMCA Group, Ltd. v. Hewelett- 18 Packard Co., No. C-06-7067 MMC (EMC), 2009 WL 1874026, *2 (N.D. 19 Cal. June 26, 2009) (recognizing the risk of inadvertent 20 disclosure was “compounded” by the fact that in-house counsel 21 worked for a small company and was the only in-house attorney 22 tasked with providing legal advice to the company). 23 the magistrate judge did not, as VPX contends, simply assume a 24 likelihood of disclosure based on counsel’s in-house status. Significantly, here, VPX has only three Thus, the Moreover, 25 26 27 28 5 For example, VPX’s argument that the magistrate judge improperly denied it an evidentiary hearing on the issue of whether there was an increased risk of disclosure of AEO material is inapposite. Such a hearing is unnecessary since VPX failed to meet its threshold burden. 7 1 Instead, VPX’s own evidence demonstrated that its in-house 2 counsel is involved in the competitive decisionmaking process. 3 (See Pagano Decl.) 4 exists, “the risk of disclosure may [well] outweigh the need for 5 confidential information.” 6 1465, 1468 (Fed. Cir. 1984). 7 Courts recognize that where such involvement U.S. Steel Corp. v. U.S., 730 F.2d In MMCA, 2009 WL 1874026, *1, the court held that in-house 8 counsel’s activities, including drafting and/or rendering advice 9 on contracts between the defendant and its clients and employees, 10 while not specifically addressing competitive issues like pricing 11 and hiring, still “implicate[d] competitive decisionmaking.” 12 Even “input” on contracts and their enforceability involved 13 matters of competitive decisionmaking, thus disqualifying counsel 14 from access to AEO materials. 15 as VPX’s in-house counsel describes her duties similarly to 16 counsel in MMCA. 17 judge properly considered the impracticalities of the situation. 18 He reasonably found that in-house counsel could not be expected 19 to “lock away” in her mind information related to this case every 20 time she faced a company issue or had interaction with the CEO. 21 Because this was likely not possible, counsel would be placed in 22 an untenable position, potentially being unable to render 23 adequate legal advice to her client. 24 531 (denying in-house counsel access to AEO material in part 25 because it placed counsel in the “untenable position of having to 26 refuse his employer legal advise on a host of . . . decisions 27 lest he improperly or indirectly reveal . . . trade secrets”). Id. Such is also the case here, (Docket # 132 at 4.) 28 8 Finally, the magistrate See Intel, 198 F.R.D. at 1 No only was there a heightened risk of inadvertent 2 disclosure, the consequences of disclosure to CS would be grave, 3 as the magistrate judge found. 4 arguments to the contrary. 5 competition through the sale of almost identical products in the 6 same manner to a similar audience. 7 grant of a preliminary injunction against VPX, the potential harm 8 to CS by disclosure of its trade secrets is significant and 9 cannot be ignored. In fact, VPX makes no meaningful Both companies are in direct As evidenced by this court’s CS’s trade secrets could be used by its 10 competitors to copy its highly successful products, compete for 11 customers, or otherwise interfere with CS’s business plan and 12 thereby, allow competitors to gain an advantage in the 13 marketplace. 14 CONCLUSION 15 For the foregoing reasons, VPX’s motion for reconsideration 16 is DENIED. 17 March 2, 2010 order denying VPX’s motion for modification of the 18 Protective Order is clearly erroneous or contrary to law. 19 magistrate judge correctly found that VPX failed to demonstrate 20 good cause to modify the order as it offered no evidence of any 21 actual prejudice caused by continuation of the order, and even if 22 such prejudice existed, the balance of interests weighed in favor 23 of maintenance of the order as originally negotiated. 24 of inadvertent disclosure was too high considering the nature of 25 the VPX’s in-house legal department and in-house counsel’s 26 specific role in the company and the consequences are dire to CS 27 /// 28 /// The court cannot find that the magistrate judge’s 9 The The risk 1 2 3 if disclosure of its trade secrets occurs.6 IT IS SO ORDERED. DATED: May 10, 2010 4 5 _______________________________________ FRANK C. DAMRELL, JR. UNITED STATES DISTRICT JUDGE 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 6 In opposing the motion, CS complains that VPX refuses to allow CS to take VPX’s Rule 30(b)(6) deposition and asks that this court consider extending the discovery period to permit CS additional time to take this deposition. Consideration of this issue is not appropriate on the instant motion; if CS wishes to extend the discovery deadline, it should file the appropriate motion under Rule 16. 10
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