Golden v. BofI Holding, Inc. et al

Filing 97

ORDER Regarding Joint 90 Motion for Determination of Discovery Dispute. Plaintiff's request for an order permitting it to review and use the Documents provided by a former employee of defendant subject to a Protective Order and defendants& #039; privilege review must be denied. The Court grants defendants' request for a Court Order requiring plaintiff to return the Documents and to destroy any copies in its possession. Signed by Magistrate Judge Karen S. Crawford on 3/22/17. (dlg)

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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF CALIFORNIA

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HOUSTON MUNICIPAL EMPLOYEES
PENSION SYSTEM, Individually and On
Behalf Of All Others Similarly Situated,

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Plaintiff,

v.
BOFI HOLDING, INC., GREGORY
GARRABRANTS, ANDREW J.
MICHELETTI, PAUL J. GRINBERG,
NICHOLAS A. MOSICH, AND JAMES
S.ARGALAS,

Case No.: 15cv2324 GPC (KSC)
ORDER REGARDING JOINT
MOTION FOR DETERMINATION
OF DISCOVERY DISPUTE
Doc. No. 90

Defendants.

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Before the Court is the parties' Joint Motion for Determination of Discovery Dispute

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No. 2. [Doc. No. 90.] Therein, plaintiff seeks an order permitting it to review and use

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documents provided by a former employee of defendant, Bofl Holding, Inc. ("Bofl") 1,

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subject to the proposed Protective Order submitted with this Motion and defendants'

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privilege review. [Doc. No. 90, at pp. 2, 29.] Defendants seek an order for plaintiff to

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The former employee in question was previously a Bofl underwriter. [Doc. No. 90, at p. 10]. She is not
a named plaintiff in this action.
15cv2324 GPC (KSC)

1 return documents that they claim are "stolen" and to destroy any copies of such documents
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in its possession (or in the possession of its agents and affiliates). [Doc. No. 90, at pp. 25,

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30.]

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The Court finds the Joint Motion for Determination of Discovery Dispute No. 2 is

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appropriate for resolution without oral argument and submits it on the papers under Civil

6 Local Rule 7.l(d)(l).
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For the reasons outlined more fully below, the Court DENIES plaintiff's request for

8 an order permitting it to review and use documents provided by a former employee of
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defendant subject to a Protective Order and defendants' privilege review. The Court

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GRANTS defendants' request for a Court Order requiring plaintiff to return the documents

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provided by a former employee ofBofl and to destroy any copies in its possession.

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BACKGROUND

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The operative Second Amended Complaint ("SAC") in this case was filed on

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November 25, 2016, alleging violations of federal securities laws by defendants. [Doc. No.

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79.] On December 23, 2016, defendants filed a Motion to Dismiss the SAC, which is

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currently pending before the District Court. [Doc. No. 88.] Here, because the pleadings

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remain unsettled (i.e., a Motion to Dismiss is pending) and no answer has been filed, the

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Court has not scheduled an Early Neutral Evaluation Conference, a Case Management

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Conference, or a Rule 26(f) conference.

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The current dispute arises out of plaintiffs informal investigations into the facts,

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when a former employee of Bofl provided 1,189 pages of documents (hereinafter

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"Documents") to an investigator employed by counsel for lead plaintiff ("Lead Counsel").

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[Doc. No. 90, at pp. 6, 12.] Defendants contend that the Documents contain a variety of

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confidential and non-public banking documents, sensitive customer financial information,

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and internal documents ofBofl. Id. at 13. Specifically, defendants assert nearly 150 pages

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of the Documents include portions of private third party financial information such as

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identifying information, social security numbers, tax forms, account numbers, financial

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information and balances, and tenant information. Id. at 21-22. Defendants further assert
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15cv2324 GPC (KSC)

1 that the Documents include some ofBofl internal emails and loan policies, Bo fl' s Code of
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Conduct, and various internal lending guidelines marked "Confidential - Internal Use

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Only." Id. at 13.

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Plaintiff contends that once received, the Documents were reviewed by a single

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contract attorney working with Lead Counsel to ascertain whether any of the Documents

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included privileged or otherwise protected information. Id. at 7. Once privilege concerns

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ethically screened, and the Documents were shipped to plaintiffs outside legal ethics

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counsel ("Outside Ethics Counsel"). Id. The Documents were not reviewed by any other

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member of plaintiffs Lead Counsel's firm and the sole copy remains with Outside Ethics

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Counsel. Id.

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On October 20, 2016, plaintiffs Outside Ethics Counsel contacted defendants'

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counsel requesting a privilege review of the Documents and a privilege log of any

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documents they believed should be withheld or redacted. Id. On October 28, 2016,

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defendants' counsel responded, objecting to the release of any of the Documents and

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seeking their immediate return. Id. at 13. On November 4, 2016, plaintiffs Lead Counsel

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responded that the Documents should not be destroyed and that the Documents would

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remain with Outside Ethics Counsel pending the resolution of the dispute. Id. at 8.

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On December 1, 2016, after receiving no response, plaintiffs Lead Counsel

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proposed a telephonic meet and confer. Id. at 8, 14. On December 5 and 8, 2016, the parties

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met and conferred in an effort to resolve the current issue but reached an impasse. Id. at 2. 2

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The parties' dispute arose on November 4, 2016, when plaintiff declined to destroy the documents, but
the instant Motion was not filed until January 18, 2017. [Doc. No. 90.] Crawford Chambers' Rules
requires that "discovery motions shall be filed no later than 45 days after the event giving rise to the
dispute.... " Ordinarily, the Court would reject the parties' Joint Motion as untimely. However, the
Court will resolve the parties' Joint Motion at this time for the sake of judicial efficiency. Counsel are
advised that any future motions will be rejected if they fail to satisfy the timeliness and meet and
confer reguirements.

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DISCUSSION

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Federal Rule of Civil Procedure 26(d) provides "[a] party may not seek discovery

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from any source before the parties have conferred as required by Rule 26(f)." As already

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noted, the Court knows of no authority that would permit it to enter a Rule 26( c) protective

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order before discovery has begun. [Doc. No. 80, at p. 7.] Notably, plaintiff cited to no such

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authority in seeking a protective order herein.

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Rule 26(c) is entitled "Duty to Disclose; General Provisions Governing Discovery."

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Fed. R. Civ. P. 26. Rule 26(c) addresses "Protective Orders" and states that "[a] party or

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any person from whom discovery is sought may move for a protective order in the court

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where the action is pending ...." Fed. R. Civ. P. 26(c). The plain language of Rule 26(c)

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does not provide authority for a protective order over prediscovery, informal investigations.

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Plaintiff argues herein that its Lead Counsel may review and use Documents provided by

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a former Bofl employee subject to a protective order. [Doc. No. 90, at p. 3.] However,

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plaintiff cites no authority for its position. Accordingly, the Court DENIES plaintiffs

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request for an order permitting it to review and use Documents provided by a former

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employee of defendant subject to a Protective Order and defendants' privilege review.

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The Court further concludes that plaintiffs position, to the extent it is based on In

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re: JDS Uniphase Corp. Sec. Litig., 238 F. Supp. 2d 1127 (N.D. Cal. 2002) and Brado v.

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Vocera Communications, Inc., 14 F. Supp. 3d 1316 (N.D. Cal. 2014), is unfounded.

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Plaintiff argues herein that its' Lead Counsel "may review and use these voluntarily

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provided documents [by a former Bofl employee], outside and independent of formal

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discovery, in furtherance of plaintiffs independent investigation." [Doc. No. 90, at p. 3.]

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A summary ofplaintiffs position is:

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The appropriate course is for defendants to review and redact any
information they believe to be attorney-client privileged, and for the
materials to otherwise be made available for review by plaintiff, subject
to a [stipulated] Protective Order to protect any appropriately-designated
'Confidential' information (including trade secret, competitively
sensitive, or otherwise confidential business information) from
dissemination or use outside of this litigation. If necessary, private
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personal identifying information ofBofl customers ... may be redacted
as well.
[Doc. No. 90, at p. 3.]

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Defendants do not dispute that the parties are entitled to conduct "informal

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investigations" into the claims and defenses asserted in litigation. Id. at p. 5. Defendants

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argue that "plaintiff's ability to investigate its claims is not at stake" because plaintiff has

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already obtained "the alleged statements of eleven purported former employees ofBofl."

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Id. at p. 5. A summary of defendants' position is:

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What is at stake [here] is whether a former [employee] at Bofl can steal
the private financial information of Bofl and its customers and then
disseminate that information to plaintiff and its counsel. ... [The former
employee] was subject to three separate confidentiality agreements [and
various federal and state laws that protect the financial privacy ofBofl's
banking customers] in favor of Bofl, all of which expressly prohibited
her from improperly using and disclosing the private information of
Bofl's customers and/or the bank's internal documents. . . . The
Constitutional right to financial privacy ofBofl's customers outweighs
any policy reasons supporting a securities plaintiff's informal
investigations .... [Also,] all of the documents significantly pre-date the
putative Class Period and are irrelevant to the issues alleged in the SAC.

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[Doc. No. 90, at p. 5.]
Plaintiff argues "[i]nformal investigations by parties to securities fraud lawsuits have
become standard, particularly for plaintiffs who are obligated to meet the heightened
pleading standards of the Private Securities Litigation Reform Act ("PSLRA"). [Doc. No.
90, at p. 14.]

Plaintiff contends that defendants' relevance objections are misplaced

because: (1) the informal investigation phase does not fall within the scope of formal
discovery regulated by Rule 26; and (2) discovery is not limited to the alleged class period.

Id. at p. 15. Plaintiff further claims that the confidentiality agreements cited by defendants
cannot be used· to prevent employees from disclosing information related to possible

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15cv2324 GPC (KSC)

1 securities fraud as they conflict with public policy in favor of allowing current or former
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employees to assist with securities fraud investigations. [Doc. No. 90, at p. 16 (citing In re:

3 JDS Uniphase Corp. Sec. Litig., 238 F. Supp. 2d 1127 (N.D. Cal. 2002) (limiting the scope
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of defendant corporation's confidentiality agreements with former employees); Brado v.

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Vocera Communications, Inc., 14 F. Supp. 3d 1316 (N.D. Cal. 2014) (permitting plaintiff

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to use documents acquired from defendant corporation's former employee).]
In addition to the summary of defendants' arguments cited above, defendants

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8 counter plaintiffs arguments as follows: (1) plaintiff has improperly acquired the private
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financial information3 of third parties from an ex-employee who stole the documents upon

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her termination4 ; (2) plaintiff has cited no authority that permits private litigants to obtain

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the private financial information of non-parties through "informal investigations" without

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notice and consent of the affected parties; and, (3) denying plaintiff access to the stolen

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documents will not interfere with their "informal investigations" ofBofl because plaintiff

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is free to continue to interview former Bofl employees regarding the wrongdoing alleged

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in the SAC. [Doc. No. 90, at pp. 21-23.]

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The Court finds plaintiffs reliance on JDS Uniphase Corp. Sec. Litig., 238 F. Supp.

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2d 1127 (N.D. Cal. 2002) to be misplaced. In JDS Uniphase, the Court entered a narrow

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order allowing the securities plaintiff to contact the company's ex-employees for the

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limited purpose of asking them ten specifically identified questions related to the

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The Documents contain nearly 150 pages of highly sensitive information, including the names,
addresses, phone numbers, social security numbers, account numbers, account balances, rent rolls,
tenant names and information, and tax forms ofBofl's customers. [Doc. No. 90, at pp. 21-22 (internal
citations omitted).]
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The former employee who supplied the Documents to plaintiffs Lead Counsel signed three separate
confidentiality agreements, all of which were geared towards protecting Bo fl' s and its customers'
confidential information. [Doc. No. 90, at p. 22 (citing Exs. J, K, L, and M of the Stigi Declaration).]
Notwithstanding the agreements signed by the former employee, upon her termination from Bofl, she
took and distributed the documents at issue containing confidential information regarding Bofl,
including its customers' private financial information.
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15cv2324 GPC (KSC)

1 allegations in the securities complaint. Id. at 1138. Indeed, plaintiff here has already
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interviewed former employees of Bofl as evidenced by the inclusion in the SAC of

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information obtained from various confidential witnesses. [Doc. No. 79, at

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68, 234.]

4 JDS Uniphase does not concern third-party financial information or internal company
5 documents taken by a former employee. Also, in JDS Uniphase, the Court limited the
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plaintiff to questions concerning defendants' activities during the class period. 238 F. Supp.

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2d at 1138. By contrast, the Documents at issue herein are outside of the class period.

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[Doc. No. 90, at p. 26; Stigi Deel.~ 21; Doc. No. 79, ~ 1.] Accordingly, the Court rejects

9 plaintiffs reliance on JDS Uniphase as inapposite to the facts in this dispute.
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Similarly, plaintiffs reliance on Brado v. Vocera Communications, Inc., 14 F. Supp.

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3d 1316 (N.D. Cal. 2014 ), is also misplaced. In Brado, the Court allowed the plaintiffs to

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use relevant documents that a former employee of the defendant gave to an investigator

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hired by the plaintiffs lawyers. Id. at 1323. The Court set forth various factors to be

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considered in determining whether to permit the plaintiffs to use the defendant's internal

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documents that had been misappropriated by the former employee, including: (1) the

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impropriety of counsel's conduct in obtaining the documents; (2) the incentives and

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disincentives to employees to wrongfully take documents; (3) the prejudice to the opposing

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party; (4) the court's imperative to pursue truth in resolving a dispute; and (5) the public

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policy favoring whistleblowers. Id. at 1320.

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Here, the Brado factors weigh against plaintiffs request to keep the Documents

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subject to a protective order. Preliminarily, Brado was in a different procedural posture

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than the instant case in that a consolidated complaint had yet to be filed. Id. at 1318. Here,

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plaintiff already filed a consolidated class action complaint. Regarding the impropriety of

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counsel's conduct in obtaining the documents, in Brado, the defendant company did not

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claim that counsel played any role in the former employee's misappropriation of

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documents. Id. at 1321. Here, defendants argue that plaintiffs counsel's actions in

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obtaining the Documents were improper because plaintiffs investigator obtained the

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Documents after being put on notice that Bofl's former employees are subject to strict
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1 confidentiality obligations. [Doc. No. 90, at p. 27 (citing Stigi Deel.

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2-3, Ex. F).] It

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appears, as well, that the scope of the documents at issue in this dispute are far broader than

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those in Brado, as they include nearly 150 pages that contains highly confidential

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information such as customer identifying information, social security numbers, tax forms,

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account numbers, financial information and balances, and tenant information. [Doc. No.

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90, at pp. 21-22.] Regarding the former employee's incentives or disincentives to take the

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former employee for breaching her confidentiality obligations to Bofl, and plaintiff

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provides no evidence on this issue. 5 Regarding the factor of prejudice to the opposing

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party, in Brado, the Court found that the only prejudice to the company was in the timing

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of plaintiffs access to the documents because the parties agreed that the documents at issue

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would be produced in formal discovery. 14 F. Supp. 3d at 1322. By contrast in this case,

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Bofl maintains that the Documents are irrelevant and outside of the class period at issue

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and has not agreed to produce them in formal discovery.

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Finally, regarding the public policy in favor of whistleblowers, plaintiff has

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produced no evidence that the former employee at issue is a "whistleblower" under

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Sarbanes Oxley. See JDS Uniphase Corp., v. Jennings, 473 F. Supp. 2d 697, 702 (E.D.Va.

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2007) ("By no means can the [California policy favoring whistleblowing] fairly be said to

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authorize disgruntled employees to pilfer a wheelbarrow full of an employer's proprietary

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documents in violation of their contract merely because it might help them blow the whistle

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on an employer's violations of law, real or imagined. Endorsing such theft or conversion

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would effectively invalidate most confidentiality agreements, as employees would feel free

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to haul away proprietary documents, computers, or hard drives, in contravention of their

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confidentiality agreements, knowing they could later argue they needed the documents to

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pursue suits against employers under a variety of statutes .... "); Watkins v. Ford Motor Co.,

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parties are free to pursue these and other issues during the formal discovery process.
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1 2005 WL 3448036, at *7 (S.D. Ohio Dec. 15, 2005) ("[I]fthe Court were to adopt plaintiffs
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argument that [copying and disclosing an employer's confidential documents] is protected

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activity, 'plaintiffs everywhere would be entitled, under the umbrella of protected activity,

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to steal company information and, so long as they give the information to their lawyer, not

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only be able to avoid disciplinary action by their employer, but also be empowered to

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successfully maintain a claim against their employer if adverse action is taken for the

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In addition to the factors set forth by the Court in Brado, this Court has considered

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other factors which lead this Court to conclude that production and/or use of the Documents

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at this time is not appropriate. First, in Brado, the documents at issue were largely what

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defendants purported to be "confidential and proprietary information." 14 F. Supp. 3d 1316

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(2014). By contrast, the Documents in this case contain a more significant breadth of

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customer information comprised of nearly 150 pages of highly sensitive information,

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including the names, addresses, phone numbers, social security numbers, account numbers,

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account balances, rent rolls, tenant names and information, and tax forms of Bofl's

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customers. [Doc. No. 90, at pp. 21-22 (internal citations omitted).]

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Second, in Brado, the Court noted that the "PSLRA mandates a discovery stay until

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the complaint withstands a motion to dismiss" which was "enacted to place limits on

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abusive discovery to prevent fishing expedition lawsuits." 14 F. Supp. 3d at 1322 (internal

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citations omitted). In Brado, the Court found that although defendant was subject to some

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cost in opposing the discovery motion and negotiating a protective order, "that cost is

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different in quantity and quality from the burdensome discovery costs Congress had in

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mind in enacting the discovery stay provision." Id. at 1322-1323. By contrast, the

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defendants in this case would be subject to significant additional costs associated with, at

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a minimum, conducting a privilege review and redacting any attorney-client privileged

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matter and personally identifying information of third parties, and contacting the identified

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customers to determine whether they object to the disclosure of their private financial

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information.

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Finally, plaintiffs arguments relating to the Documents go well beyond "informal

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investigations" into the claims and defenses asserted in litigation. For example, there is an

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issue of whether the Documents are relevant because defendants contend they predate the

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Class Period, and that they contain "unrelated internal emails and outdated loan policies."

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[Doc. No. 90-8, at p. 8.] In sum, the instant Motion relates to issues that go well beyond

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plaintiffs informal investigation. While some or all of the information contained in the

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Documents at issue in this Motion may be subject to production during formal discovery,

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this Court will not entertain the parties' arguments in advance of the District Court's ruling

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on the pending Motion to Dismiss the SAC and until formal discovery is underway.

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CONCLUSION

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Based on the foregoing, plaintiffs request for an order permitting it to review and

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use the Documents provided by a former employee of defendant subject to a Protective

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Order and defendants' privilege review must be DENIED. 6

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defendants' request for a Court Order requiring plaintiff to return the Documents and to

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destroy any copies in its possession.

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IT IS SO ORDERED.

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The Court GRANTS

Dated: March ~017

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United States Magistrate Judge

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In light of the ruling herein, the Court will not consider the proposed form of Protective Order
submitted by plaintiff in connection with this Motion.
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