Pet Food Express Ltd. v. Applied Underwriters Inc. et al

Filing 95

ORDER signed by Magistrate Judge Allison Claire on 6/13/18 ORDERING the Defendant's 89 motion to compel responses to subpoenas by third-party Relation Insurance Services, Inc. is GRANTED. Relation shall bear the cost of production. (Becknal, R)

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UNITED STATES DISTRICT COURT

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FOR THE EASTERN DISTRICT OF CALIFORNIA

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SHASTA LINEN SUPPLY, INC.,

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No. 2:16-cv-00158 WBS AC

Plaintiff,
v.

ORDER

APPLIED UNDERWRITERS INC., et al.,

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Defendants.

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PET FOOD EXPRESS LTD., et al.,
No. 2:16-cv-01211 WBS AC
Plaintiffs,

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v.
APPLIED UNDERWRITERS, INC., et al.,
Defendants.

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Two related putative class actions, Pet Food Express Ltd. v. Applied Underwriters Inc., et

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al, 16-cv-01211 WBS AC (“Pet Food”) and Shasta Linen Supply, Inc. v. Applied Underwriters, et

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al., 16-cv-00158-WBS-AC (“Shasta”) were consolidated for pre-trial purposes and set to the same

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pre-trial schedule. Shasta at ECF No. 59 at 2-4. These discovery motions were referred to the

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magistrate judge pursuant to E.D. Cal. R. 302(c)(1). This matter is before the court on the motion

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of defendants (referred to collectively as “Applied Underwriters”) to compel responses to a third-

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party subpoena. Pet Food, ECF No. 89, Shasta ECF No. 2:16-cv-00158. For simplicity and

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because the motions are identical, unless otherwise noted, the citations herein are to filings in the

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Pet Food case.

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Applied Underwriters and third-party Relation Insurance Services, Inc. (“Relation”)

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participated in a hearing on June 13, 2018. ECF No. 94. Plaintiffs have no part in this motion.

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For the reasons stated below, the court GRANTS Applied Underwriters’ motion to compel.

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I. Relevant Background
On January 26, 2016, the Shasta Linen case was filed as a putative class action “seeking

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restitution/disgorgement for Plaintiff and the putative class as a result of Defendants’ unlawful

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business practices, including the use of an unfiled, void and illegal ‘collateral agreement’ in the

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collection of excessive fees and expenses for the workers’ compensation insurance arrangements

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between Defendants and Plaintiffs.” Shasta ECF No. 1 at 2. The Pet Food case, also filed as a

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putative class action and making similar allegations, was removed to this court from Alameda

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Superior Court on March 29, 2016. Pet Food ECF No. 1. A third-party, Relation, is the

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insurance broker that sold the policies at issue in both cases to the plaintiffs. ECF No. 93 at 3.

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As broker, Relation received a commission on the sales of the policies, which Applied

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Underwriters asserts amounted to roughly $400,000. Id.

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On November 7, 2016, the parties submitted a joint status report in which defendants

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argued that the court should bifurcate class and merits discovery. ECF No. 38 at 12. The matter

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was fully briefed by both sides. ECF No. 38. On November 14, 2016, the Honorable Judge

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William B. Shubb issued a scheduling order in which he declined to bifurcate class and merits

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discovery. ECF No. 41 at 3. On July 6, 2017, pursuant to the parties’ stipulation, the related

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actions were consolidated for pre-trial purposes. Shasta at ECF No. 58. The parties have been

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engaging in ongoing discovery, and in February of 2018 Judge Shubb modified the case deadlines

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to extend the discovery cutoff to July 1, 2019. ECF No. 88. Motions related to class certification

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are due by July 18, 2018. Id.
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On January 12, 2018, Applied Underwriters sent a third-party subpoena to Relation

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seeking documents, information, or objections, or to permit inspection of the premises in the Pet

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Food case. ECF No. 93 at 2. On January 16, 2018, Applied Underwriters served a substantively

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identical subpoena upon Relation in the Shasta Linen case. Id. On January 26, 2018, Relation’s

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counsel sent a letter to Applied Underwriters’ counsel asserting objections to all of the document

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requests. Id at 2. On February 8, 2018, counsel participated in a phone conference to meet and

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confer regarding Relation’s objections and contentions. Id. Counsel agreed to revisit the meet

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and confer process when Relation’s counsel could provide further detail regarding the alleged

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burden of complying with the subpoenas, and when Applied Underwriters’ counsel could provide

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further detail regarding the status of discovery among the litigants, specifically, electronically

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stored information (“ESI”) discovery. Id.

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On April 13, 2018, counsel participated in a follow-up meet and confer telephone

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conference. Id. Counsel continued to meet and confer regarding the parameters for an initial or

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staged production by Relation. Id. On April 18, 2018, counsel for Relation offered to make a

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limited production of documents, limiting categories of documents within date ranges of July 1,

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2009-November 1, 2009, July 1, 2012-November 1, 2012, and July 1, 2015-November 1, 2015

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for Pet Food, and July 1, 2010-November 1, 2010 for Shasta Linen, if Applied Underwriters

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agreed to pay for the costs of production. Id. at 2-3.

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On April 25, 2018, counsel for Applied Underwriters responded to Relation’s proposal

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and demanded full production in response to the subpoenas. Id. at 3. Applied Underwriters also

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disputed the demand that it should pay the cost of the production. Id. The parties were ultimately

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unable to reach a resolution, and Applied initiated this discovery motion in light of impending

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case management deadlines. Id.

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II. Motion

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Although not explicitly stated in the motion, Applied Underwriters asks the court to

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compel Relation to make full productions to the issued subpoenas at its own expense. See

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generally, ECF No. 93.

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III. Discussion

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A. Legal Standard

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Federal Rule of Civil Procedure 45 allows a party to a lawsuit to serve a subpoena that

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commands a non-party to “produce documents, electronically stored information, or tangible

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things . . .” Fed. R. Civ. P. 45(a)(1)(C). A court must modify or quash such a subpoena that fails

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to allow a reasonable time to comply, requires a person to travel more than 100 miles (except for

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trial within the state), requires disclosure of privileged or other protected materials, or subjects a

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person to undue burden. See Fed. R. Civ. P. 45(d)(3)(A) (i-iv). Rule 45 further provides that a

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court may modify or quash a subpoena when the subpoena, inter alia, requires the disclosure of a

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“trade secret or other confidential research, development, or commercial information.” See Fed.

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R. Civ. P. 45(d)(3)(B).

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The Federal Rules limit the scope of subpoenas by the relevance standards set forth in Federal

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Rule of Civil Procedure 26(b)(1) (“[p]arties may obtain discovery regarding any nonprivileged

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matter that is relevant to any party’s claim or defense”), and the considerations of burden and

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expense set forth in Federal Rules of Civil Procedure 26(b)(2) and 45(c)(1). “In evaluating

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whether a subpoena is unduly burdensome, the court balances the burden imposed on the party

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subject to the subpoena by the discovery request, the relevance of the information sought to the

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claims or defenses at issue, the breadth of the discovery request, and the litigant’s need for the

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information.” Wahoo Int’l, Inc. v. Phix Doctor, Inc., No. 13CV1395-GPC BLM, 2014 WL

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3573400, at *2 (S.D. Cal. July 18, 2014) (internal citations omitted). Rule 26 also includes an

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explicit proportionality requirement; discovery must be proportional to the needs of the case.

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Fed. R. Civ. P. 26(1). Non-parties subject to a subpoena duces tecum “deserve extra protection

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from the courts.” High Tech Medical Instrumentation v. New Image Indus., 161 F.R.D. 86, 88

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(N.D. Cal. 1995) (citing United States v. Columbia Broadcasting System, 666 F.3d 364, 371-72

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(9th Cir. 1982).

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B. Relation Must Produce Non-Privileged, Responsive Information

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The subpoenas issued by Applied Underwriters seek production of documents responsive to

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18 separate requests for production. ECF Nos. 93-1, 93-2. The requests seek information related
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to the insurance brokerage work Relation did for plaintiffs, and Relation’s ultimate sale of

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Applied Underwriters’ policy to both plaintiffs. Id. Applied Underwriters argues that the

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requests are relevant because plaintiff’s complaints are based on the allegation that that they

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relied on Applied Underwriters’ fraudulent statements in making their decision to purchase

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insurance. For example, in the Pet Food case, it is alleged that “[i]n reliance on the information

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provided by the Summary & Scenario and Proposal and [Applied Underwriters’] other

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misrepresentations and omissions in their uniform marketing materials (including that the

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Program was legal), Pet Food Express elected to enter the EquityComp Program for a three-year

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term effective October 1, 2009. Subsequently, without knowledge of the Program’s illegality, Pet

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Food Express renewed the Program for an additional three-year term, and then a subsequent one-

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year term.” ECF No. 54 at 22. Applied Underwriters argues that Relation’s brokerage

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documents are relevant to the case because, insofar as plaintiffs allege they were misled,

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plaintiffs’ general knowledge of the market and competitive products is relevant to Applied

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Underwriters’ defense. ECF No. 88 at 4. The court agrees that the subpoenas fall within the

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bounds of Fed. R. Civ. P. 26(b)(1)’s relevancy requirement.

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Relation makes two primary objections regarding responsive, non-privileged documents: (1)

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certain of the responsive documents are available from the parties themselves, and (2) certain of

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the documents contain proprietary, confidential, trade-secret information that would put it at a

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competitive disadvantage if disclosed. See ECF No. 93.

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1. Relation’s Privacy Concerns are Adequately Addressed by the Existing Protective
Order
Relation’s argument that the subpoenas request documents which would reveal its

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confidential, proprietary information does not protect it from compliance. The protective order

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issued in this case addresses such concerns. ECF Nos. 47, 48. The only case Relation relies on to

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support its contention that a broker’s work for a client is protected for privacy reasons, Tucker v.

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Am. Int’l Grp., Inc., 281 F.R.D. 85, 97 (D. Conn. 2012), is not on point. In Tucker, a plaintiff

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sought personal inspection of her former employer’s insurance broker’s records after the broker

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had made multiple productions in response to a third-party subpoena which plaintiff believed
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were incomplete. Id. Although the court in Tucker did acknowledge the broker’s privacy

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concerns, it was only in passing; the primary concern of the Tucker court was overbreadth and the

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speculative nature of the requests. Id. at 93-97. Privacy concerns arose at least in part because

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rather than seeking a production, plaintiff sought to personally inspect the broker’s full records.

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Id. The Tucker case presented an entirely different situation from the one at issue here.

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Similarly, Relation has not demonstrated that disclosure of the requested information in

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this case will place it at a competitive disadvantage. Relation is correct that “a subpoena is

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subject to being quashed or modified if, among other things, it . . . requires ‘disclosing a trade

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secret or other confidential, research, development, or commercial information.’ Fed. R. Civ. P.

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45(c)(3)(B)(i).” Cohen v. City of New York, 255 F.R.D. 110, 117 (S.D.N.Y. 2008). In Cohen, a

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case which Reliance cites to support its position, the court identified sets of circumstances in

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which the privacy of sensitive business information is of concern in response to a subpoena. The

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Cohen court stated: “[t]he most common situation is that in which the producing party is able to

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demonstrate that the dissemination of confidential information will place it at a competitive

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disadvantage.” Id. at 118. In such cases, the information “can generally be protected by a

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protective order limiting the purposes for which the information can be used and the extent to

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which it can be disseminated.” Id. Relation admits that it falls into this category, and provides no

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argument as to why it falls outside the general rule that a protective order resolves its

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confidentiality concern. ECF No. 88 at 11. The protective order in this case appears to

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contemplate protection for non-party productions. See, e.g., ECF No. 47 at ¶ 2.1. To the extent

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Relation feels that the existing protective order does not adequately protect its interests, the

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parties are free to negotiate a separate or supplemental protective order. In any case, a protective

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order can adequately address Relation’s privacy concerns.

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Finally, Relation misses the mark in arguing that the subpoenas functionally convert it

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into an unpaid expert. Relation cites Mattel, Inc. v. Walking Mountain Prods., 353 F.3d 792, 814

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(9th Cir. 2003), for the proposition that a request for information on the market at issue is

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equivalent to a request for expert testimony. ECF No. 88 at 11. This is a misreading of the

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holding in Mattel. In that case, the expert testimony theory was one of the many arguments a
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third party made in moving to quash a subpoena; the Ninth Circuit held only that the “district

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court did not abuse its discretion by quashing Mattel’s subpoena, and its factual findings do not

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display clear error.” Mattel, 353 F.3d at 814. Even if the Ninth Circuit had endorsed the third

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party’s theory, the facts of Mattel are distinguishable from the case at bar. In Mattel, the

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defendant served upon the plaintiff an expert report by a professor at an art institute. Id. at 792.

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The plaintiff then served a third-party subpoena on the art institute that employed the defendant’s

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expert. Id. Unlike the art institute in Mattel, Relation provided a service to the plaintiffs in these

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cases, and the information sought by Applied Underwriters directly connects to that service

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relationship. There is no real indication that, in this case, Relation’s production would render it

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an uncompensated expert.

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2. Applied Underwriters’ Subpoenas Are Not Premature

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Relation’s second argument, that many of the documents sought from Relation are

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obtainable from plaintiffs, fails in light of the circumstances of this case. ECF No. 93 at 6.

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Relation is correct that when documents are in the possession of both the opposing party and a

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non-party, the first request should be to the opposing party. However, Relation cites no bright-

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line rule that party discovery must be complete before a third-party subpoena would be

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appropriate, and the court is aware of no such rule. Relation’s citation to Soto v. Castlerock

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Farming & Transp., Inc. is on point, but ultimately does not support its argument. 282 F.R.D.

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492, 505 (E.D. Cal. 2012). In Soto, the court noted that “[i]n general, there is a preference for

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parties to obtain discovery from one another before burdening non-parties with discovery

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requests.” Id. There, the subpoenaing party first sought documents from the opposing party, who

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largely refused to produce responsive documents. Id. The Soto court found that this attempt

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established the subpoenaing party’s need to obtain the documents from the third party. Id.

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Here, Applied Underwriters sought discovery from plaintiffs in this case, and found that their

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productions had gaps which Applied Underwriters believes would be filled by the production

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from Relation. ECF No. 88 at 8. Relation cites no law that indicates Applied Underwriters’

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attempts were insufficient, or that party discovery must be somehow final before it can be

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required to produce documents. Applied Underwriters also argued at hearing that metadata
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associated with Relation’s copy of documents may be important to its arguments; the court finds

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this reasoning persuasive. Because Applied Underwriters has attempted to get responsive

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documents from plaintiffs and retains a belief that Relation has additional responsive documents

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in its possession, and because Relation’s copy of documents may include discoverable metadata

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unique to their version of the document, Applied Underwrites has demonstrated a need to obtain

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the documents from Relation and the third-party subpoenas are not premature.

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C. Relation Must Bear The Costs Of Production

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Relation must produce non-privileged documents responsive to Applied Underwriters’

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subpoenas, and pay the full costs of production. Federal Rule of Civil Procedure 45(d)(2)(B)(ii)

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states that when a court issues an order compelling production in response to a subpoena, the

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order “must protect a person who is neither a party nor a party’s officer from significant expense

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resulting from compliance.” The Ninth Circuit has referred to this as a “cost shifting” provision.

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Legal Voice v. Stormans Inc., 738 F.3d 1178, 1184 (9th Cir. 2013). The Ninth Circuit’s analysis

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in Stormans leaves no doubt as to the rule of law in this Circuit on this topic: “Rule

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45(d)(2)(B)(ii) requires the district court to shift a non-party’s costs of compliance with a

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subpoena, if those costs are significant.” Id. The Ninth Circuit clarified by stating that “when

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discovery is ordered against a non-party, the only question before the court in considering

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whether to shift costs is whether the subpoena imposes significant expense on the non-party. If

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so, the district court must order the party seeking discovery to bear at least enough of the cost of

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compliance to render the remainder “non-significant.” Id.

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Relation asserts that, following a preliminary review of its electronic systems and employees

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to identify relevant custodians and evaluate the scope of work, compliance with Applied

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Underwriters’ subpoenas would cost it approximately $15,000. ECF No. 88 at 13-14. Applied

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Underwriters’ response is that $15,000 is not a “significant” cost of compliance because Relation

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made over $400,000 in commissions over the years from sales to plaintiffs, and $15,000 is less

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than 4% of $400,000. Id. at 13. To support his argument, Applied Underwriters notes that on

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remand in Stormans, the district court used similar logic to justify splitting the costs between the

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non-party and the requesting party. Stormans Inc. v. Selecky, No. C07-5374 RBL, 2015 WL
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224914, at *7 (W.D. Wash. Jan. 15, 2015) (stating that because a third-party non-profit received

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over $700,000 in contributions in one year it was “capable” of paying some of its own expenses.).

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District Courts in California have held that, in determining whether an amount is “significant” to

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support cost shifting, “courts look to the nonparty’s financial ability to bear the costs of

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production.” In re Subpoenas to Intel Corp., No. 4:17-MC-80159-KAW, 2018 WL 1035794, at

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*6 (N.D. Cal. Feb. 23, 2018) (quoting Balfour Beatty Infrastructure, Inc. v. PB & A, Inc., 319

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F.R.D. 277, 281 (N.D. Cal. 2017). “Courts also consider whether the nonparty has an interest in

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the outcome of the underlying case.” Balfour Beatty Infrastructure, 319 F.R.D. at 281

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In the context of this case, $15,000 is not a “significant” cost such that fee shifting is

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appropriate. Relation did not provide the court with any information indicating that $15,000 is

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significant with respect to its total value as a company. Nor did Relation provide any information

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regarding it gross revenues. Although Relation stated at the hearing that Applied Underwriters’

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$400,000 figure was likely high, it did not provide an alternative figure, and in any case, Applied

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Underwrites has represented that $15,000 is a small fraction of what it personally paid Relation in

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commissions over the years. ECF No. 88 at 13. This, along with Relation’s statement at hearing

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that Relation is a national company with multiple offices, indicates Relation has the financial

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ability to bear the costs of production. Id.

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Additionally, while Relation may not have a personal interest in the outcome of plaintiffs’

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cases, Relation did have an interest in the transactions at issue in those cases by operating as

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plaintiffs’ agent, and could reasonably have expected litigation expenses to arise from those

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transactions. Balfour Beatty Infrastructure, 319 F.R.D. at 281 (citing Tutor–Saliba Corp. v.

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United States, 32 Fed.Cl. 609, 610, nt. 5 (1995) for the proposition that a party substantially

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involved in an underlying transaction can anticipate its involvement may spawn litigation

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expenses). In fact, Relation stated at the hearing that it is involved in other disputes based on its

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work selling Applied Underwriters policies. Fee shifting is not appropriate here because

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Relation, while a third party, had a business relationship with the parties that renders it

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“interested” for the purposes of determining production cost allocation.

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IV.

Conclusion

Defendant’s motion to compel responses to subpoenas by third-party Relation Insurance

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Services, Inc. is GRANTED. Relation shall bear the cost of production.

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DATED: June 13, 2018

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