Penn, LLC et al v. Prosper Business Development Corporation, et al
Filing
135
OPINION AND ORDER granting in part and denying in part 113 & 115 Sealed MOTION for Order Compelling Discovery. Defendants have fourteen (14) days from the date of this order to produce the additional documents required. All documents shall be produced in accordance with Fed.R.Civ.P. 34(b)(2)(E) to the extent possible. Signed by Magistrate Judge Terence P Kemp on 8/20/2012. (kk2)
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF OHIO
EASTERN DIVISION
Penn, LLC, et al.,
:
Plaintiffs,
:
v.
:
Prosper Business Development
Corporation, et al.,
Case No. 2:10-cv-993
:
JUDGE GREGORY L. FROST
Magistrate Judge Kemp
Defendants.
:
OPINION AND ORDER
This case is before the Court to resolve a discovery
dispute.
Plaintiffs Penn, LLC (“Penn”) and Big Research, LLC
(“Big Research”) brought this action against Defendants alleging
various claims, three of which have survived the dispositive
motions decided thus far: breach of fiduciary duty, conversion,
and unjust enrichment.
The remaining defendants are Prosper
Business Development Corporation (“Prosper”), Phil Rist, and Gary
Drenik.
Following a series of status conferences regarding the
parties’ discovery disputes, Plaintiffs filed a motion to compel.
The motion has been fully briefed.
On July 27, 2012, the Court
held an evidentiary hearing concerning Plaintiffs’ motion, and
Plaintiffs and Defendants have each filed a post-hearing brief.
For the following reasons, the motion will be granted in part and
denied in part.
I.
By way of general background, the parties to this case were
all involved in the business and winding down of Plaintiff Big
Research, which was a market research company using “online
interactive research techniques.”
(Pls.’ Mot. Compel, Exh. 1A.)
Penn and Prosper formed Big Research in 2000.
(Pls.’ Mot. Compel
at Exh. 1.)
Although the owners and ownership percentages have
changed over time, initially Penn and Prosper were the only two
members, each owning 50% of Big Research.
1A.)
(Id. at §1.02 & Exh.
The Big Research Operating Agreement provided that the day-
to-day business and affairs of the company would be managed by
Prosper and that Penn would contribute its e-mail subscriber
network.
(Pls.’ Mot. Compel, Exh. 1 at §5.02 & Exh. 1A.)
Defendants Mr. Drenik and Mr. Rist are the owners of Prosper and
Prosper Technologies, LLC, and they are two of the three Big
Research Board Members.
Over time, the relationship between Penn and Prosper became
strained, and the parties have sought to resolve various issues
in court and in arbitration.
One significant result of those
proceedings was an arbitrator’s determination that Penn was
improperly divested of its 47% ownership interest in Big
Research, and an award that directed Prosper to pay Penn based on
a number of years when Prosper operated Big Research for Penn’s
sole benefit.
After the date of that award, Prosper continued to
operate Big Research for several years, but ultimately wound down
its operations and purchased Big Research’s assets.
Penn filed the present action on behalf of itself and
derivatively on behalf of Big Research for restitution and
damages.
Penn alleges that Defendants improperly transferred and
diverted business opportunities, assets, and revenues of Big
Research to Prosper, and that these improper transactions
happened both when Big Research was still operating, and in
connection with the purchase of Big Research’s assets and the
transfer of its remaining business to Prosper.
The discovery at
issue was intended both to identify questionable financial
dealings and to quantify their impact on Big Research and on
Penn’s interest in that company.
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II.
The procedural history of the current discovery dispute
reflects a prototypical negotiation where one party initially
demands “everything,” and the other party initially refuses to
provide anything, followed by a series of negotiated or courtordered concessions.
At this point, several disputes remain.
The document requests at issue in Penn’s motion are listed in a
table set forth in that motion and include requests from Penn’s
Second Request for Production to Prosper, Big Research’s First
Request for Production to Prosper, Penn’s Request to Inspect Big
Research, and Penn’s Request to Inspect Prosper.
On March 27, 2012, following the issuance of the discovery
requests at issue, the Court signed the parties’ agreed
protective order, which provided protections to certain documents
that the parties designated as “Confidential” or “Attorneys Eyes
Only.”
According to the protective order, “Attorneys Eyes Only
Materials shall not be disclosed to any person other than those
identified in paragraphs 8.a., c., e., f., and g.”
Protective Order (Doc. 100) at ¶ 9.)
(Agreed
Paragraph 8.a. provided
that disclosure would be permitted to “specially-retained
consultants who are participating in or providing services for
the prosecution or defense of this matter, provided, however that
such consultants . . . to whom such access is permitted shall,
prior to such access or disclosure, be advised of the provisions
of this Order and shall be instructed to comply with it.”
Pursuant to the parties’ request, the Court held a discovery
status conference on April 2, 2012.
At that conference,
Plaintiffs argued that they needed access to all the financial
and accounting records of Big Research and Prosper and related
Prosper entities.
(4/2/12 Tr. (Doc. 103) at pp. 2-3.)
The Court
asked why there would be any resistance to making Big Research’s
financial records from September 2008 (the date of the
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arbitration award) forward available to Penn since the arbitrator
had confirmed that Penn was and is a member of Big Research.
(Id. at 22.)
Defendants agreed that those records should be made
available to Penn.
(Id. at 23, 29-31, 33.)
Defendants also
agreed to produce data from 2008 through 2011 reflecting all of
the revenue received by Prosper from the types of surveys that
both Big Research and Prosper conducted.
(Id. at 37-42.)
The
Court also decided that discovery ought to be produced regarding
the email list that all parties acknowledged was an asset of Big
Research.
(Id. at 53.)
remaining questions –
The Court suggested tabling the
including what other Prosper records, if
any, should be provided – until the Big Research records had been
reviewed.
(Id. at 31-32, 55.)
Plaintiffs had their financial consultant, Rebekah Smith,
review certain documents that Defendants produced following the
status conference.
On May 1, 2012, Ms. Smith, wrote a letter to
counsel for Plaintiffs in which she summarized her preliminary
observations based on the records she had reviewed, and listed
the records she needed to see from Big Research and the records
she needed to see from Prosper and the related Prosper entities.
(Pls.’ Mot to Compel at Exh. 3B.)
On May 2, 2012, the Court held another status conference to
address the discovery issues that had been tabled at the previous
conference.
From Plaintiffs’ perspective, the documents that had
been produced up to that point supported their need for
additional discovery from Prosper and the related Prosper
entities because there was commingling of finances between those
entities and Big Research.
(5/2/12 Tr. (Doc. 108) at 2-6.)
After hearing from Defendants, who were not willing to produce
additional documents without a more specific showing of why they
were relevant, the Court concluded that it needed both parties to
set forth with clarity and precision their positions and the
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specific impasses that needed resolution.
(Id. at 12.)
In an
order following the conference, the Court summarized its rulings
as follows:
The Court therefore directed plaintiffs’ counsel to
compile a complete list of additional items they are
requesting, and to provide that list along with
justification for their requests, to defendants’
counsel by May 23, 2012. Within fourteen days
thereafter, counsel shall meet and confer concerning
these matters. As soon as the meet and confer is
scheduled, counsel will notify the undersigned, and a
status conference will be scheduled not later than
seven days after the parties meet and confer.
(Doc. 107.)
According to Ms. Smith’s testimony, her May 1st letter was
provided to counsel for Defendants in mid-May.
31:14-17.)
(7/27/12 Tr. at
On May 23, 2012, Ms. Smith wrote another letter to
counsel for Plaintiffs in which she offered what she
characterized as an “update,” which included a summary based upon
her review and which identified additional documents needed.
(Pls.’ Mot to Compel at Exh. 3C.)
She testified that she
intended for that letter to provide “specific examples of why
[she] had requested the six categories of [Prosper] documents
that [she] had requested in the May 1st letter.”
32:14-17.)
(7/27/12 Tr. at
She further testified that her May 23rd letter “is
[her] summary of the expenses and the fees charged by Prosper
Business Development Corp, Prosper Technologies and Prosper
International to BIGresearch.”
(Id. at 33:3-6.)
On June 18, 2012, the Court held another status conference.
It quickly became apparent that significant disputes about
document discovery persisted and that they could not be resolved
short of formal motions practice.
Four days later, as directed
by the Court, Plaintiffs filed their motion to compel.
27, 2012, the Court held an evidentiary hearing.
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On July
The evidence
presented at that hearing is summarized below.
III.
At the evidentiary hearing, Plaintiffs called one witness:
Rebekah Smith, CPA/CFF, CVA, CFFA, who is a Director and Member
of GBQ Consulting, LLC.
She testified that she has credentials
that relate to forensic accounting and the valuation of closelyheld businesses and has done consulting work regarding the
valuation of closely-held companies and in the field of forensic
accounting.
She was hired by Plaintiffs to examine financial
matters including valuation, accounting, and damages, and to
advise Plaintiffs.
She testified that she has an engagement
letter with Penn, she received a retainer, she has been billing
Penn for her work, and Penn has paid her.
Ms. Smith testified that she does not compete with Prosper
in any way.
(7/27/12 Tr. at 49:23-25.)
She did not know
Prosper, Penn, Mr. Drenik or Mr. Rist prior to her retention as a
consultant for Penn.
(Id. at 65:17-23.)
She has previously been
entrusted with sensitive and proprietary information of her
customers and their competitors and has maintained safeguards in
each of those instances.
(Id. at 50:1-9.)
She has
confidentiality standards to which she must adhere, she
understands the requirements of the protective order in this
case, and she had already signed the agreement to be bound by the
Agreed Protective Order in this case.
(Id. at 113:18-114:14.)
At the time of her testimony, Ms. Smith had only been able
to look at the books and records of Big Research and not of
Prosper or any of the other entities related to Prosper.
Ms.
Smith identified three topics that she was investigating: (1) the
value of the assets of Big Research that Prosper acquired in mid2010; (2) the value of the corporate opportunities of Big
Research that were obtained by Prosper; and (3) the accuracy and
reasonableness of fees and charges between Big Research and
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Prosper.
A.
Valuing Assets Acquired by Prosper
Regarding the first topic – the value of the assets of Big
Research – Ms. Smith testified that the books and records of Big
Research reflected two journal entries for Prosper’s purchase of
Big Research’s assets: one for approximately $13,000 for Big
Research’s “email list” and one for approximately $30,000 for Big
Research’s equipment.
Ms. Smith testified that Big Research also
had assets such as contracts, customer good will, customer
relationships, name and reputation, and, perhaps, business
processes.
Although there is no formal record showing that these
assets were actually purchased or acquired by Prosper, it is
undisputed that Prosper essentially took over Big Research’s
business, and if Prosper acquired these additional assets for no
consideration, that would impact Penn as a part-owner of Big
Research.
In order to explore this topic further, Ms. Smith
testified that she would need to review additional documents to
determine (1) whether Prosper paid a fair price for the assets
that it did purchase (the email list and equipment); and (2) what
net revenue was generated from the other Big Research assets that
Prosper did not pay for but that appear to have been acquired by
Prosper.
For example, during her direct examination, Ms. Smith
testified that it appeared that certain revenue streams that had
been recorded as Big Research revenues were transferred to
Prosper in mid-2010, and that those revenue streams were in
excess of $200,000 in the last six months of 2010 alone.
The
size of the revenue streams that were transferred to Prosper
raised a red flag for Ms. Smith as to whether the purchase price
that Prosper paid for Big Research’s assets fairly reflected the
value of those assets.
She testified that the only way for her
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to determine the net revenue that Prosper received from those
revenue streams would be to look at Prosper’s books and records
in order to identify the total gross revenue that Prosper
received from its use of these assets and to identify the
expenses associated with producing that income stream.
Ms. Smith
will be unable to value these assets unless she can determine
Prosper’s net return on Big Research’s assets.
B.
Valuing Big Research’s Corporate Opportunities
Regarding the second topic – the value of Big Research’s
corporate opportunities – Ms. Smith testified that Prosper may
have received benefits by using Big Research’s revenue-sharing
agreements and trademarks.
Regarding the revenue-sharing
agreements, she described one such agreement – the MediaPlanIQ
agreement – which provided that Big Research was entitled to a
certain percentage of revenues from the sale of its product when
made in conjunction with the sale of other products offered by
Prosper.
However, in the actual sales contracts with customers
for items covered by that agreement, each item being sold was not
separately priced.
Rather, the contracts show a total price for
all items (both Big Research and Prosper products) which were
bundled together.
Ms. Smith explained that in order to determine
whether a fair percentage of the sales revenue was allocated to
Big Research in instances where its products were bundled with
Prosper products, she would need to determine what Prosper
charged for its products when they were not bundled.
In response
to questioning by the Court, Ms. Smith indicated that she was not
sure whether looking at a sample of sales of unbundled products
would suffice in this case because each case is different, so,
ideally, she would like to see records of all the sales of the
unbundled products for the time period when Prosper was selling
those products in conjunction with Big Research products.
(7/27/12 Tr. at 109:10-110:10.)
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Ms. Smith also testified that she would need to look at
Prosper’s books and records to see if Prosper generated revenue
from the use of Big Research’s trademarks and, if so, how much.
In particular, she testified that she would need Prosper’s tax
returns, general ledger, financial statement, payroll records,
customer information including accounts receivables and invoices
and customer contracts, and accounts payable information to make
this determination.
C.
Fees and Charges
Regarding the third and final topic - the accuracy and
reasonableness of fees and charges between Big Research and
Prosper – Ms. Smith testified that the payments reflected in the
books and records of Big Research raised a red flag in her mind
because the amount of payments from Big Research to Prosper more
than doubled following the arbitration award.
She testified that
in order to determine whether the increase in payments was
reasonable, she would need to review Prosper’s books and records
which supported the amounts charged to Big Research for various
services provided by Prosper – specifically the categories of
documents identified in her May 1st letter.
34:6-35:13.)
23
rd
She further testified that she intended for her May
letter to provide “specific examples of what [she] had
already asked for in the May 1st letter.”
11.)
(7/27/12 Tr. at
(7/27/12 Tr. at 32:10-
The May 23rd letter dealt “primarily with [this] third
category . . . the appropriateness and reasonableness of the fees
back and forth between the companies.”
(Id. at 33:3-9.)
testified that the chart on page 4 of her May 23
rd
She
letter
probably has listed all of the categories of expenses regarding
which she would need further data from the Prosper documents.
(Id. at 39:6-12.)
However, on cross examination she clarified
that the chart “is a pretty thorough list, but [she is] not sure
that it is 100 percent complete.”
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(Id. at 63:8-14.)
Among other
records that she testified about, she noted heavy redactions in
certain of the billing records provided relating to legal fees.
(Id. at 42:24-45:25.)
As a general matter, Ms. Smith testified that the reason she
needs to see the records of Prosper and the Prosper-related
entities is because Prosper’s finances were commingled with Big
Research’s.
By way of example, she testified that Big Research’s
books and records included American Express bills that were
heavily redacted, but that certain of the 2008 bills that were
not redacted demonstrated that Big Research paid American Express
bills in their totality even though those bills included Big
Research charges, Prosper charges, and some personal expenses for
an employee of Prosper.
In light of the commingling of the
finances, the Big Research documents tell only part of the story.
She testified that “it is very easy to come to the wrong
conclusions when you are given only pieces of information.
It is
very important from a financial analysis standpoint to have the
full picture.”
(7/27/12 Tr. at 35:18-21.)
For that reason, as
an accountant, she would prefer to see more information rather
than less information.
She conceded that the total universe of
documents that she has identified needing would ultimately
contain some irrelevant information, but she noted that it would
be dangerous to look at one account or transaction in isolation.
(Id. at 104:11-105:13.)
IV.
Before beginning to analyze the issues in terms of whether
Prosper has produced all of the information to which Penn is
reasonably entitled, the Court will address Prosper’s argument
that the motion to compel is procedurally improper and in
violation of the Court’s May 2, 2012 order.
Plaintiffs’ position is that they complied with the Court’s
order by providing two documents to counsel for defendants – the
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May 1st letter and the May 23rd letter - which, taken together,
were the complete list of additional items Plaintiffs were
requesting along with the justification for their requests.
However, Defendants’ position is that they understood the May
23rd letter alone to be the complete list of additional items
that Plaintiffs were requesting pursuant to the Court Order.
Because Defendants produced the items specifically identified in
the May 23rd letter, (see 7/27/12 Tr. at 82:11-83:5, 86:1-20),
they contend that Plaintiffs are not entitled to any additional
relief.
The Court chooses to resolve the issues presented on
substantive rather than procedural grounds, and will turn to the
merits of the motion.
V.
A.
Attorney Eyes Only Documents
The first issue that the Court must decide is whether Ms.
Smith may review certain records produced by Defendants and
designated as “Attorney Eyes Only.”
The terms of the Agreed
Protective Order permit specially-retained consultants who are
providing services for the prosecution or defense of this matter
to view such records as long as they are advised of the
provisions of the Order before viewing such records and are
instructed to comply with it.
There is no question that Ms.
Smith has been retained by Penn for the prosecution of this
matter.
Indeed, Defendants elicited testimony that she has
billed Penn and that Penn has paid her for her services.
The
only dispute is whether the fact that Plaintiffs have identified
her as a fact witness precludes her from viewing Attorney Eyes
Only documents.
It could certainly be the case that a party might try to
evade the purpose of the Protective Order by, for example,
designating an employee of a party as a “consultant.”
That type
of subterfuge would likely be precluded by the language of the
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Protective Order identifying a consultant as “speciallyretained.”
Here, there is no indication that Ms. Smith’s
designation as a consultant would be problematic or would
threaten the purposes of the Protective Order.
The undisputed
testimony at the hearing was that Ms. Smith does not compete with
Defendants in any way and did not even know Defendants or Penn
prior to being retained in this action.
Furthermore, Ms. Smith
testified credibly and without contradiction that she has
experience protecting the confidentiality of her clients and
their competitors and has done so in every instance, that she
herself has confidentiality standards that she must adhere to,
and that she has agreed to abide by the protective order in this
case.
All of the arguments that Defendants have raised go to the
propriety of her testifying as a fact witness, a question that is
not presently before the Court, and not the propriety of her
reviewing the Attorney Eyes Only documents pursuant to the terms
of the Protective Order.
The Court finds that, so long as she
complies with the requirements of paragraph 8.a. and has signed
an “Agreement to be Bound by the Agreed Protective Order,” Ms.
Smith may view Attorney Eyes Only Materials pursuant to the terms
of the Agreed Protective Order.
B.
Discovery from Prosper and Prosper-Related Entities
The second issue before the Court is whether Plaintiffs are
entitled to review books and records of defendant Prosper and
certain related companies (assuming that Prosper has control over
those companies’ records) that are not Defendants in this case
and, if so, the scope of any such discovery.
The tension at the
heart of this dispute is the tension in nearly every discovery
dispute between the broad scope of discovery set forth in Rule
26(b)(1) and the limitations designed to prevent the burden or
expense of the proposed discovery from outweighing its likely
benefit, which are set forth in Rule 26(b)(2).
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Here Plaintiffs have presented credible evidence that they
have not gotten all of the information they need to put a value
on their various claims.
At the same time, Ms. Smith has
acknowledged that the broad discovery that plaintiffs seek
includes information that is irrelevant.
Further, the Court is
very reluctant, in a case like this, which involves a number of
discrete claims rather than any claims which carry with them the
right to conduct a complete audit of an opposing party’s business
activities, to allow such a wholesale audit to take place.
Accordingly, the Court will attempt to set forth with some
specificity the discovery from Prosper’s business records to
which plaintiffs are reasonably entitled.
The Court will
consider the testimony of Ms. Smith and the letters to which she
referred during her testimony as setting forth the discovery at
issue.
Regarding the first category of discovery about which Ms.
Smith testified – the value of the assets that Prosper acquired
from Big Research in mid-2010 – Plaintiffs are entitled to
certain discovery relating to the gross revenues and associated
expenses that are attributable to assets acquired by Prosper from
Big Research.
Plaintiffs indicate that Prosper acquired the
assets, so this first category seemingly applies to defendant
Prosper alone.
(See, e.g., Pls.’ Mot. Compel at 6-8.)
However,
plaintiffs state that Defendants produced portions of the general
ledger of a “Prosper affiliate” known as Consumer Research
Partners, LLC, from June 2010 through December 31, 2011.
9.)
(Id. at
Those portions of the general ledger credit that entity
“with all of the custom and syndicated research revenue
associated with the ‘Big Research®’ and ‘Big Insight’ contracts
that Defendants simultaneously produced.”
(Id.)
In the next
line, Plaintiffs refer to that ledger as a “Prosper” ledger.
(Id.)
Because discovery requests require a defendant to produce
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documents that are in its “possession, custody or control,” the
discovery ordered below might well require Defendant Prosper to
produce records from Consumer Research Partners, LLC.
(See F.R.
Civ. P. 34(a)(1).)
Ms. Smith testified that she is trying to determine (1)
whether Prosper paid a fair price for the two assets that it did
purchase (the email list and equipment), which she would
determine by calculating the net revenues derived from those
assets; and (2) what net revenue was generated from the other Big
Research assets that Prosper did not formally purchase but that
appear nevertheless to have been acquired by Prosper.
Therefore,
to the extent that this information has not been produced thus
far,1 the Court finds that Defendants should produce the
following documents:
Relating to shared or acquired customers:
information from the general ledger(s) sufficient
to show all revenues from May of 2010 through
August of 2011 from any customers that were
customers of Big Research at any time;
all customer invoices, receivable records, or
other supporting documents from May of 2010
through August of 2011 associated with such
revenues;
portions of its general ledger(s) showing all
expenses associated with the generation of such
revenues; and
all accounts payable invoices, payable records, or
other supporting documents associated with such
1
The Court understands that some of the items identified
below have already been produced. Counsel for Defendant Prosper
avers that Prosper has produced “portions of the Prosper
Companies’ general ledgers that identify the date, customer,
amount, and general nature (syndicated or custom)” of the surveyrelated revenue received by the Prosper Companies from 2008-2011
along with “copies of the invoices and contracts with the thirdparties that generated that revenue.” (Defs.’ Mem. Contra at 13
& Exh.2 (Clifford Decl.) at ¶3.)
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expenses.
Relating to new customers:
documents showing all revenue received by Prosper
from May of 2010 through August of 2011 from any
customers that were new to Prosper during that
time period but which came from Big Research’s
email list;
all customer invoices, receivable records, or
other supporting documents from May of 2010
through August of 2011 associated with such
revenues;
portions of the general ledger(s) sufficient to
show all expenses associated with the generation
of such revenues; and
all accounts payable invoices, payable records, or
other supporting documents associated with such
expenses.
Relating to Big Research’s non-customer assets:
financial documents relating to Prosper’s purchase
of Big Research’s equipment, including documents
relating to the valuation of Big Research’s
equipment;
to the extent not produced in response to one of
the categories listed above, information from the
general ledger(s) sufficient to show all revenues
from May of 2010 through August of 2011 that were
generated from any of Big Research’s non-customer
assets;
all customer invoices, receivable records, or
other supporting documents from May of 2010
through August of 2011 associated with such
revenues;
information from the general ledger(s) sufficient
to show all expenses associated with such
revenues; and
all accounts payable invoices, payable records, or
other supporting documents associated with such
expenses.
Plaintiffs cite to Ms. Smith’s May 23rd letter to describe
her need to “determine if there are any normalizing adjustments
which must be made, in accordance with generally accepted
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valuation methodologies.”
(Pls.’ Mot. Compel at 18.)
Because
Plaintiffs will be valuing the assets of Big Research and not
valuing Prosper as a whole, it seems that any normalizing
adjustments should relate to the revenues and expenses associated
with such assets and do not justify opening up Prosper’s books
and records in their entirety.
Before turning to the second category of documents described
by Ms. Smith, the Court will address discovery relating to
trademarks, because it straddles several categories.
While Ms.
Smith testified about Prosper’s use of Big Research’s trademarks
as part of her second category of documents relating to the value
of Big Research’s corporate opportunities, it appears that the
discovery relevant to assessing the value of the trademarks would
be captured by the discovery relating to the first and third
categories of documents described by Ms. Smith.
Ms. Smith
testified that she would need to look at Prosper’s books and
records to see if Prosper generated revenue from Big Research’s
trademarks and, if so, the business value of the trademarks.
According to the evidence presented by Plaintiffs, Prosper may
have generated such revenue in two ways: (1) from a fee charged
to Big Research for its use of the trademarks and (2) from
customer revenues based on Prosper’s own use of the trademarks.
First, Plaintiffs argue that while Big Research was still
operating, Prosper registered certain trademarks that were
corporate opportunities for Big Research.
Based on the evidence
Plaintiffs have presented, it appears that beginning in the third
quarter of 2008, Prosper began charging Big Research 8% of Big
Research’s revenues for its “Use of Intellectual Property.”
(Pls.’ Mot. Compel, Exh. 3C at 9.)
The documentation sought in
connection with that 8% fee is discussed by Ms. Smith in
connection with the third category of documents that she
described (documents relating to the accuracy and reasonableness
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of fees and charges between Big Research and Prosper and Prosperrelated entities), and accordingly, that documentation will be
discussed below in the context of the third category of
documents.
Second, Plaintiffs have also presented evidence that at some
point Prosper itself began using the trademarks at issue.
Plaintiffs cited to contracts that customers entered into after
mid-2010 in which the contracts are signed on behalf of “Big
Research®” and a note below the signature states that “Big
Research is a registered trademark of Prosper Business
Development Corp.
Services will be delivered by Prosper and/or a
Prosper affiliated entity.”
(Pls.’ Mot. Compel, Exh. 4.)
To the
extent that Prosper benefitted from its use of that trademark or
the other trademarks at issue, the benefit would have been in the
form of customer revenues, and discovery relating to such
customer revenues has been ordered in connection with the first
category of documents.
Turning now to the second category of documents about which
Ms. Smith testified – the value of Big Research’s corporate
opportunities – Plaintiffs have argued that they need to test the
reasonableness of certain prices charged where Prosper products
were bundled with Big Research assets pursuant to revenue-sharing
agreements.
This Court finds that Plaintiffs are entitled to a
sample of documents sufficient to test the reasonableness of such
prices.
Therefore, to the extent that this information has not
already been produced, Defendants should produce the following
discovery:
For each Prosper product or service that was sold
to customers both together with and separate from
Big Research assets, a sample of documents from
the relevant time period reflecting the price that
charged for the Prosper product or service when
sold alone. This sample shall be made up of the
lesser of 20 randomly-chosen instances or all
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instances in which each such Prosper product or
service was sold alone.
Regarding the third category of documents about which Ms.
Smith testified - the accuracy and reasonableness of fees and
charges between Big Research and Prosper and Prosper-related
entities – Ms. Smith testified that the chart on page 4 of her
May 23rd letter probably listed all of the categories of expenses
regarding which she would need further data from the Prosper
documents.
(Id. at 39:6-12.)
While she also testified that
there may be other categories not reflected in that letter,
Plaintiffs have not presented evidence of any additional
categories.
In her May 23rd letter, Ms. Smith set forth in detail
additional documents she needed in order to determine whether
those categories of expenses were appropriate and reasonable.
Plaintiffs have presented no evidence to support a need for
documents other than those identified in that letter in order to
analyze the accuracy and reasonableness of fees and charges
between Big Research and Prosper.
The parties have indicated
that, other than a dispute regarding the redaction of certain
documents produced, Defendants have produced the documents
requested in the May 23rd letter, and it does not appear that
Plaintiffs’ motion to compel is seeking the documents identified
in the May 23rd letter.
20.)
(See 7/27/12 Tr. at 82:11-83:5, 86:1-
However, as a general matter, in light of the evidence of
commingling of records and finances between Big Research and
Prosper, Defendants should produce the following discovery to the
extent that this information has not already been produced:
from January 1, 2008 through December 31, 2011,
information from Prosper’s general ledger
sufficient to show all payments that Prosper made
or owed to Big Research, as well as all payments
that Prosper made or owed to some other entity on
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behalf of Big Research;
all accounts payable invoices, payable records, or
other supporting documents associated with such
payments;
from January 1, 2008 through December 31, 2011,
information from Prosper’s general ledger
sufficient to show all income and receivables that
Prosper received or was owed from Big Research, as
well as all income and receivables that Prosper
received or was owed from some other entity on
behalf of Big Research; and
all customer invoices, receivable records, or
other supporting documents associated with such
accounts income and receivables.
C.
Redactions of Legal Bills
The final issue that the Court will consider here is whether
certain legal bills that have already been produced need to be
produced in an unredacted or less redacted form.
Some discussion
is required to pinpoint in particular which documents are at
issue.
Plaintiffs’ Motion complains that Defendants have refused
to provide any unredacted bills (Pls.’ Mot. at 11), and their
reply gives examples of certain bills that have not been produced
or have been produced but are “wholly redacted.”
25.)
(Pls.’ Reply at
In particular, Plaintiffs’ reply complains about retention
agreements and invoices from Baxter and Arnold and Isaac Brandt.
(Id.)
At the hearing it became clear that at least some of the
invoices of both Baxter and Issac Brandt have been produced by
those law firms.
(See Hearing Exhs. D-1, D-2.)
These records
have some redactions but are not “wholly redacted.”
(See Id.)
Plaintiffs have not pointed to any inappropriate redactions in
those records, and it appears that those are not the records with
which they are really concerned.
97:24-98:3.)
(See, e.g., 7/27/12 Tr. at
Rather, Plaintiffs seek to compel production of
unredacted versions of other legal bills containing the broadbrush redactions of the sort made in Hearing Exhibit P3.6.
-19-
(7/27/12 Tr. at 42:24-45:25.)
Regarding the records that Plaintiffs claim were “wholly
redacted,” which appear to include at least the bills involving
legal work by Gordon P. Shuler and legal work by James E. Arnold
& Associates, LPA, Defendants have claimed that those redactions
are appropriate assertions of attorney-client privilege and the
work product doctrine because they were descriptions of work done
on behalf of “Big Research and/or the other Defendants” in
litigation where Penn was adverse to Big Research and Prosper.
(Defs.’ Mem. Contra at 21.)
The Declaration of Damion M.
Clifford, counsel for Prosper, swore that the redacted legal
bills produced by Defendants contained “attorney-client
communications, attorney work-product, and detailed, itemized
descriptions of legal work performed on behalf of” Drenik, Rist,
and/or Prosper Business in litigation against Penn, LLC and/or
Steve Denari and on behalf of Big Research in litigation against
Penn, LLC.
(Defs.’ Mem. Contra, Exh. 2 at ¶7.)
The parties cite to federal and state law without addressing
which applies.
In a case where jurisdiction is based on a
federal question, the existence of pendent state law claims does
not relieve the Court of the “obligation to apply the federal law
of privilege.”
1992).
Hancock v. Dodson, 958 F.2d 1367, 1373 (6th Cir.
However, because the only federal claim in this case has
been dismissed, all of the privilege questions relate to statelaw claims.
Accordingly, there is some basis for arguing that
the question of privilege is governed by Ohio law.
See Maday v.
Pub. Libraries of Saginaw, 480 F.3d 815, 821 n.2 (6th Cir. 2007)
(citing Fed. R. Evid. 501).
As discussed below, however, the
Court would reach the same conclusion under state or federal law.
First the Court considers whether Defendants should be
prevented from invoking the privilege against Plaintiffs because
-20-
Penn is a Member of Big Research.2
The attorney-client privilege
“extends to corporations, but it is not absolute.”
White, 965 F.2d 126, 132 (6th Cir. 1992).
Fausek v.
“There is a mutuality
of interests between a corporation and its shareholders that
precludes use of the privilege by management to deprive
shareholders of information relating to their investments in the
corporation.”
Id. (citing Garner v. Wolfinbarger, 430 F.2d 1093,
1103 (5th Cir. 1970)).
Accordingly, “when shareholders present a
colorable claim of fraud . . . that is inimical to their
interests as shareholders, they must be given an opportunity to
establish good cause why the attorney-client privilege should not
be invoked in their particular case.”
Fausek, 965 F.2d at 132-
33.
Defendants argued that Garner is inapplicable here.
Defendants cited to a line of cases in the Delaware Chancery
Courts holding that the mutuality of interest described in Garner
will have lapsed by the time the corporation and the shareholder
can reasonably anticipate litigation about a particular dispute.
(Defs.’ Mem. Contra at 21-22.)
Those cases are not binding on
this Court, but the Court considers their reasoning, which is
articulated by the Court of Chancery as follows:
Before the Court considers whether a showing of good
cause compels production of purportedly privileged
documents, however, the “litigant [must] first
establish that a mutuality of interest existed between
the parties” at the time the disputed communication was
made. This mutuality of interest exists when a
fiduciary (such as a corporate director) seeks legal
2
Plaintiffs also seem to argue that Defendants cannot assert
the privilege because Big Research was named as a Plaintiff in
light of the fact that Penn is bringing this as a derivative
action. That argument fails under Garner v. Wolfinbarger, 430
F.2d 1093 (5th Cir. 1970), which also involved a shareholder
derivative suit, and still required the plaintiffs to show good
cause in order to prevent the application of the privilege.
-21-
advice in connection with actions taken or contemplated
in his role as a fiduciary. Because the director is
obligated to act in the best interest of the
corporation and its shareholders, there is a mutuality
of interest among the director, the corporation, and
the shareholders when such legal advice is sought. It
is logical, therefore, that upon a showing of good
cause, the attorney-client privilege does not attach to
prevent a plaintiff-shareholder-for whose ultimate
benefit that advice was sought-from discovering the
contents of that communication. At the point in time
when the interests of the fiduciary and the beneficiary
diverge, however, there is no longer a mutuality of
interest and a Garner analysis is not appropriate.
Although there is little Delaware case law on the
subject, and no bright-line rule that identifies the
point in time when mutuality of interest diverges in
each case, that divergence must necessarily occur at
the point in time when the parties can reasonably
anticipate litigation over a particular action.
In re Fuqua Indus., Inc., CIV.A. 11974, 2002 WL 991666, *3 (Del.
Ch. May 2, 2002) (citations omitted).
Whether anticipation of
litigation excepts communications from Garner, as the Delaware
Chancery Court suggests, or whether it factors into the good
cause analysis set forth in Garner, Plaintiffs have not
demonstrated that the privilege should be inapplicable here.
Plaintiffs have not discussed the good cause factors set
forth in Garner and Fausek, but weighing those factors
demonstrates that good cause is absent in this case.
While Penn
certainly has a financial interest in whether Big Research was
properly paying certain bills including legal bills, that
interest cannot be a backdoor means to access otherwise
privileged information regarding litigation in which Penn is and
has been adverse.
Several of the “good cause” indicia, including
“the apparent necessity or desirability of the shareholders
having the information,” weigh against preventing any assertion
of the privilege.
Plaintiffs do not claim that they need to know
the substance of attorney-client communications regarding the
-22-
litigation – rather they merely wish to test the propriety of
certain legal fees being charged to or reimbursed by Big
Research.
In fact, the question at issue is not really a
question of whether Defendants should be barred from asserting
the privilege but rather whether Defendants asserted it properly.
This Court finds that, while Defendants may assert the attorneyclient privilege, they have not asserted the privilege properly
here.
The attorney-client privilege does not require redaction of
all detail in the billing records.
It is not unusual for parties
to an action to seek reimbursement of legal fees either pursuant
to an agreement or pursuant to statutory authorization of
attorney fee awards.
Where a party seeks statutory attorney fees
in a legal action, “the documentation offered in support of the
hours charged must be of sufficient detail and probative value to
enable the court to determine with a high degree of certainty
that such hours were actually and reasonably expended in the
prosecution of the litigation.”
Corbis Corp. v. Starr, 719 F.
Supp. 2d 843, 844 (N.D. Ohio 2010) (quoting Imwalle v. Reliance
Med. Prods., Inc., 515 F.3d 531, 553 (6th Cir. 2008) (internal
citation and quotation omitted)). “[S]tatements regarding
generally what counsel did for a specific period of time (i.e.,
‘prepared summary judgment reply’) are not privileged or work
product.”
Corbis Corp., 719 F. Supp. 2d at 846 n.4.
If certain
portions of statements are privileged or protected by the workproduct doctrine, the party claiming that privilege bears the
burden of establishing that it applies.
omitted).
Id. at 846 (citations
While redactions to protect attorney-client privilege
and attorney work product may be appropriate, it would be an
unusual case where all billing details were privileged.
See,
e.g, Libertarian Party of Ohio v. Brunner, No. 2:04-CV-08, 2007
WL 4171630, *3 (S.D. Ohio Nov. 20, 2007) (discussing the grey
-23-
area between detailed billing records that disclose substance
that would be privileged and ones that are general enough to
“enable the Court to determine that the time was reasonably spent
in pursuit of necessary and relevant interests” without revealing
privileged information).
Defendants cite to State ex rel. Dawson v. Bloom-Carroll
Local School Dist., 131 Ohio St.3d 10, 15-16, 959 N.E.2d 524,
529-30, 2011-Ohio-6009, ¶28 (Ohio 2011), to support nondisclosure of all narrative portions of attorney-fee statements,
but that case applies specifically to whether certain records are
exempt from disclosure under the Public Records Act and not the
propriety of withholding detailed descriptions of billing records
in discovery.
In discovery disputes, a blanket assertion of
privilege regarding attorney fee bills is typically not
appropriate.
See, e.g., Muehrcke v. Housel, No. 85643, 85644,
2005 WL 2593551, *3, 2005-Ohio-5440, ¶¶17-20 (Ohio Ct. App.
Cuyahoga Cty. Oct. 13, 2005); see cf. Shell v. Drew & Ward Co.,
L.P.A., 178 Ohio App. 3d 163, 169-70, 897 N.E.2d 201, 206-07
2008-Ohio-4474, ¶¶25-29 (Ohio Ct. App. Hamilton Cty. Sept. 5,
2008) (holding that billing records in that case were “extremely
detailed” and were protected by attorney-client privilege and
should be produced in redacted form).
However, billing records
reflecting, for example, calls made with opposing counsel would
certainly not be privileged under either state or federal law.
Here, Defendants, as the party seeking to exclude all of the
itemized descriptions of legal work for certain legal bills, have
not met their burden of demonstrating that the privilege applies
to everything on those bills.
Defendants shall produce those
bills again, but shall redact them only to exclude descriptions
that would reveal privileged attorney-client communications or
matters that are protected by the work product doctrine.
VI.
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For the foregoing reasons, Plaintiffs’ Motion to Compel is
granted in part and denied in part, as follows:
1.
Ms. Smith may view Attorney Eyes Only Materials pursuant
to the terms of the Protective Order so long as she complies with
the requirements of paragraph 8.a. and has signed an “Agreement
to be Bound by the Agreed Protective Order.”
2.
To the extent that this information has not been
produced thus far,3 the Court finds that Defendants should
produce the following documents:
Relating to shared or acquired customers:
information from the general ledger(s) sufficient
to show all revenues from May of 2010 through
August of 2011 from any customers that were
customers of Big Research at any time;
all customer invoices, receivable records, or
other supporting documents from May of 2010
through August of 2011 associated with such
revenues;
portions of its general ledger(s) showing all
expenses associated with the generation of such
revenues; and
all accounts payable invoices, payable records, or
other supporting documents associated with such
expenses.
Relating to new customers:
documents showing all revenue received by Prosper
from May of 2010 through August of 2011 from any
customers that were new to Prosper during that
time period but which came from Big Research’s
email list;
all customer invoices, receivable records, or
other supporting documents from May of 2010
through August of 2011 associated with such
revenues;
portions of the general ledger(s) sufficient to
3
The Court understands that some of the items identified
below have already been produced.
-25-
show all expenses associated with the generation
of such revenues; and
all accounts payable invoices, payable records, or
other supporting documents associated with such
expenses.
Relating to Big Research’s non-customer assets:
financial documents relating to Prosper’s purchase
of Big Research’s equipment, including documents
relating to the valuation of Big Research’s
equipment;
to the extent not produced in response to one of
the categories listed above, information from the
general ledger(s) sufficient to show all revenues
from May of 2010 through August of 2011 that was
generated from any of Big Research’s non-customer
assets;
all customer invoices, receivable records, or
other supporting documents from May of 2010
through August of 2011 associated with such
revenues;
information from the general ledger(s) sufficient
to show all expenses associated with such
revenues; and
all accounts payable invoices, payable records, or
other supporting documents associated with such
expenses.
Relating to products that were bundled:
for each Prosper product or service that was sold
to customers both together with and separate from
Big Research assets, a sample of documents from
the relevant time period reflecting the price that
was charged for the Prosper product or service
when sold alone. This sample shall be made up of
the lesser of 20 randomly-chosen instances or all
instances in which each such Prosper product or
service was sold alone.
Relating to potential commingling of funds between
companies:
from January 1, 2008 through December 31, 2011,
information from Prosper’s general ledger
sufficient to show all payments that Prosper made
-26-
or owed to Big Research, as well as all payments
that Prosper made or owed to some other entity on
behalf of Big Research;
all accounts payable invoices, payable records, or
other supporting documents associated with such
payments;
from January 1, 2008 through December 31, 2011,
information from Prosper’s general ledger
sufficient to show all income and receivables that
Prosper received or was owed from Big Research, as
well as all income and receivables that Prosper
received or was owed from some other entity on
behalf of Big Research; and
all customer invoices, receivable records, or
other supporting documents associated with such
accounts income and receivables.
3.
Defendants shall re-produce versions of the legal bills
it produced, redacted only to exclude descriptions that would
reveal privileged attorney-client communications or matters that
are protected by the work product doctrine.
Defendants have 14 days from the date of this Order to
produce the additional documents required.
All documents shall
be produced in accordance with Fed. R. Civ. P. 34(b)(2)(E) to the
extent possible.
VII.
Any party may, within fourteen days after this Order is
filed, file and serve on the opposing party a motion for
reconsideration by a District Judge.
28 U.S.C. §636(b)(1)(A),
Rule 72(a), Fed. R. Civ. P.; Eastern Division Order No. 91-3,
pt. I., F., 5.
The motion must specifically designate the order
or part in question and the basis for any objection. Responses to
objections are due fourteen days after objections are filed and
replies by the objecting party are due seven days thereafter.
The District Judge, upon consideration of the motion, shall set
aside any part of this Order found to be clearly erroneous or
contrary to law.
-27-
This order is in full force and effect, notwithstanding the
filing of any objections, unless stayed by the Magistrate Judge
or District Judge. S.D. Ohio L.R. 72.3.
/s/ Terence P. Kemp
United States Magistrate Judge
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