Burke v. Ability Insurance Company et al

Filing 115

ORDER granting in part and denying in part 94 Motion for Protective Order. Signed by U.S. District Judge Karen E. Schreier on 3/6/2013. (KC)

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION
TERRY BURKE as personal
representative of the estate of
Berniece Hermsen, and in his
capacity as previous attorney in fact
for Berniece Hermsen,
Plaintiff,
vs.
ABILITY INSURANCE COMPANY,
f/k/a Medico Life Insurance
Company;
ABILITY RESOURCES, INC.;
ABILITY RESOURCES HOLDINGS,
INC.;
ABILITY REINSURANCE HOLDINGS
LIMITED, BERMUDA; and
ABILITY REINSURANCE LIMITED,
BERMUDA,
Defendants.

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CIV. 12-4051-KES

ORDER GRANTING IN PART
AND DENYING IN PART
MOTION FOR PROTECTIVE ORDER

This matter is before the court pursuant to a motion for a protective
order filed by defendant Ability Insurance Company (AIC). Docket 94. Plaintiff,
Terry Burke as personal representative of the estate of Berniece Hermsen,
resists AIC’s motion. Docket 99. AIC represents to the court that it has made a
good-faith effort to resolve this dispute without the court’s intervention.
FACTS AND PROCEDURAL HISTORY
This case is a diversity action alleging breach of contract, bad faith
insurance practices, and fraud and misrepresentation on the part of Ability
Insurance Company, Ability Resources, Inc., Ability Resources Holdings, Inc.,

Ability Reinsurance Holdings Limited, and Ability Reinsurance (Bermuda)
Limited. This action stems from a policy of long-term care insurance that was
issued to Hermsen in 2000. Burke claims that Hermsen entered an assisted
living facility based on the advice of her medical care provider and that even
though she was eligible for benefits under her long-term care policy, defendants
denied her claim.
Burke served defendants with his first set of requests for production of
documents. Docket 69-2. AIC moves for a protective order covering the following
categories of information: (1) all documents that are confidential and proprietary
in nature, “including, but not limited to, policy manuals, non-public contracts,
compensation and personnel information, and proprietary information regarding
how Ability Insurance adjudicates claims and performs its other business
operations”; and (2) “non-public health information about South Dakota
insurance consumers.” Docket 94 at 1-2. In its proposed protective order AIC
defines “confidential information” to “mean and include any materials (whether
a document, testimony, or otherwise) which the producing party reasonably and
in good faith believes contains information of a confidential commercial or
personal nature.” Docket 94-1 at 4.
AIC alleges that such information is the proper subject of a protective
order as expressly stated by Federal Rule of Civil Procedure 26(c)(1)(G) and that
the health and medical records are confidential under the Health Insurance
Portability and Accountability Act of 1996 and various South Dakota state
statutes. Burke does not dispute that AIC is entitled to a protective order, but
he does object to AIC’S proposed language in the protective order. Burke

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requests language similar to the language used in other protective orders
entered by this court to which AIC was a named party defendant.1
DISCUSSION
I.

Standards Governing Requests for Protective Orders
Federal Rule of Civil Procedure 26(c) governs the granting of a protective

order and requires that “good cause” be shown for a protective order to be
issued. “The burden is therefore upon the movant to show the necessity of its
issuance, which contemplates ‘a particular and specific demonstration of fact,
as distinguished from stereotyped and conclusory statements[.]’ ” Gen. Dynamics
Corp. v. Selb Mfg. Co., 481 F.2d 1204, 1212 (8th Cir. 1973) (quoting Wright &
Miller, Federal Practice and Procedure: Civil § 2035 at 264-65, currently at 15758); see also Pansy v. Borough of Stroudsburg, 23 F.3d 772, 786 (3d Cir. 1994)
(“Good cause is established on a showing that disclosure will
work a clearly defined and serious injury to the party seeking disclosure. The
injury must be shown with specificity. Broad allegations of harm,
unsubstantiated by specific examples or articulated reasoning, do not support a
good cause showing.”) (citations and quotation marks omitted).

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Burke also proposes that the parties agree that AIC need not produce
discovery already produced in previous actions wherein Burke’s attorney sued
AIC alleging breach of contract and bad faith. Burke, however, has not cited
any legal authority that authorizes the court to require a party to enter into
such a stipulation. While the parties are free to enter into such a stipulation,
the court is not aware of any legal authority that gives it the power to mandate
such an arrangement without a stipulation between the parties. Therefore, this
request is denied.
3

In Pansy, the Third Circuit Court of Appeals described the good cause
standard in a manner that this court finds instructive. Although Pansy dealt
specifically with the issue of whether the trial court abused its discretion in first
granting and then subsequently refusing to modify a confidentiality order over a
settlement agreement, confidentiality orders over matters concerning stages of
litigation and protective orders over discovery are “functionally similar, and
require similar balancing between public and private concerns.” Pansy, 23 F.3d
at 786. Additionally,
In considering whether good cause exists for a protective order, the
federal courts have generally adopted a balancing process. . . . [T]he
court . . . must balance the requesting party's need for information
against the injury that might result if uncontrolled disclosure is
compelled. When the risk of harm to the owner of [a] trade secret or
confidential information outweighs the need for discovery,
disclosure [through discovery] cannot be compelled, but this is an
infrequent result.
Once the court determines that the discovery policies require that
the materials be disclosed, the issue becomes whether they should
be disclosed only in a designated way, as authorized by the last
clause of Rule 26(c)(7) . . . . Whether this disclosure will be limited
depends on a judicial balancing of the harm to the party seeking
protection (or third persons) and the importance of disclosure to the
public. Courts also have a great deal of flexibility in crafting the
contents of protective orders to minimize the negative consequences
of disclosure and serve the public interest simultaneously.
Id. at 787 (additional citations and quotation marks omitted).
The balancing test requires courts to consider a variety of factors to
determine if a protective order is appropriate. Id. at 789. These factors,
discussed below, “are unavoidably vague and are of course not exhaustive” so

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as to provide courts with “the flexibility needed to justly and properly”
resolve discovery disputes. Id. Moreover,
[o]ne interest which should be recognized in the balancing process
is an interest in privacy. It is appropriate for courts to order
confidentiality to prevent the infliction of unnecessary or serious
pain on parties who the court reasonably finds are entitled to such
protection. In this vein, a factor to consider is whether the
information is being sought for a legitimate purpose or for an
improper purpose. However, privacy interests are diminished when
the party seeking protection is a public person subject to legitimate
public scrutiny.
While preventing embarrassment may be a factor satisfying the
“good cause” standard, an applicant for a protective order whose
chief concern is embarrassment must demonstrate that the
embarrassment will be particularly serious. As embarrassment is
usually thought of as a nonmonetizable harm to individuals, it may
be especially difficult for a business enterprise, whose primary
measure of well-being is presumably monetizable, to argue for a
protective order on this ground.
Circumstances weighing against confidentiality exist when
confidentiality is being sought over information important to public
health and safety and when the sharing of information among
litigants would promote fairness and efficiency.
A factor which a court should consider in conducting the good
cause balancing test is whether a party benefitting from the order of
confidentiality is a public entity or official. Similarly, the district
court should consider whether the case involves issues important to
the public. . . . [I]f a case involves private litigants, and concerns
matters of little legitimate public interest, that should be a factor
weighing in favor of granting or maintaining an order of
confidentiality.
Id. at 787-88 (internal quotation marks, footnotes, and citations omitted).
When dealing with sensitive or proprietary information, courts routinely
grant protective orders that limit who may access the disclosed information

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and how the disclosed information may be used. Id. at 787 (additional citation
omitted). Rule 26(c) confers “ ‘broad discretion on the [district] court to decide
when a protective order is appropriate and what degree of protection is
required.’ ” Miscellaneous Docket Matter No. 1 v. Miscellaneous Docket Matter
No. 2, 197 F.3d 922, 925 (8th Cir. 1999) (quoting Seattle Times Co. v.
Rhinehart, 467 U.S. 20, 36 (1984)).
II.

Policy Manuals and Proprietary Information Regarding Claims
Handling and Business Operations
AIC argues in footnote 1 of its brief that its policy manuals and other

proprietary information regarding claims handling and business operations are
trade secrets or other confidential research, development, or commercial
information pursuant to Rule 26(c)(1)(G). Courts may grant protective orders to
prevent or limit the disclosure of trade secrets or “other confidential research,
development, or commercial information.” Fed. R. Civ. P. 26(c)(1)(G). The
importance of protecting trade secrets is explained by the Eighth Circuit Court
of Appeals:
Confidential business information has long been recognized as
property. Because of the intangible nature of a trade secret,
however, the extent of the property right therein is defined by the
extent to which the owner of the secret protects his interest from
disclosure to others. Public disclosure of trade secrets extinguishes
the owner's property rights.
In re Remington Arms Co., 952 F.2d 1029, 1032 (8th Cir. 1991) (internal
quotation marks and citations omitted).
Rule 26(c) thus serves to facilitate disclosure of sensitive information that
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parties may be reluctant to disclose without protection. “If they suspect that
their trade secrets may fall into the wrong hands, parties may be uncooperative
with respect to discovery requests. Assuring the safety of these sensitive
disclosures often has the effect of encouraging the apprehensive litigants to
fully cooperate with the discovery process.” Andrew Corp. v. Rossi, 180 F.R.D.
338, 340 (N.D. Ill. 1998) (citing In re Krynicki, 983 F.2d 74, 75 (7th Cir. 1992)).
The burden rests on the party opposing discovery, here AIC, to
show that a protective order is warranted for trade secret information. In re
Remington Arms Co., 952 F.2d at 1032. To meet its burden, AIC
must show (1) that the information qualifies for protection, i.e., that the
information is confidential or a trade secret and (2) that AIC would be
harmed by disclosure of the information. Id. Courts look to applicable state
law to determine if the requested documents qualify as trade secrets. Id. at
1033.
The South Dakota Uniform Trade Secrets Act, codified at SDCL
37-29-1, defines a trade secret as follows:
(4)

Trade secret, information, including a formula, pattern,
compilation, program, device, method, technique, or process,
that:
(i)

Derives independent economic value, actual or potential,
from not being generally known to, and not being readily
ascertainable by proper means by, other persons who can
obtain economic value from its disclosure or use; and

(ii)

Is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy.
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SDCL 37-29-1(4).
Once AIC shows that the requested information constitutes a
trade secret, the burden then shifts to Burke “to show that the information is
relevant to the subject matter of the lawsuit and is necessary to prepare the
case for trial.” In re Remington Arms Co., 952 F.2d at 1032. If Burke shows both
relevance and need, then the court “must weigh the injury that disclosure might
cause to the property against [Burke’s] need for the information.” Id. If both
parties satisfy their respective burdens of proof, the court must issue a
protective order to safeguard the rights of the parties, taking into account the
following considerations:
First, use of the discovered information should be limited to the
particular lawsuit in which it has been shown to be both relevant
and necessary to the prosecution of the case. Second, the protective
order should limit the persons who are given access to the trade
secrets. Third, the protective order should limit, or prohibit entirely,
the reproduction of all confidential documents. Fourth, the
protective order may require a bond to protect against the risk of
injury from the disclosure of the trade secrets. Finally, the
protective order may designate an attorney to serve as a custodian
for all confidential documents.
Id. at 1033 (internal citations omitted).
The exact issue before this court was addressed by the District Court of
South Dakota in Pochat v. State Farm, Civ. No. 08-5015, Docket 44 (D.S.D.
Dec. 11, 2008). In Pochat, plaintiffs were involved in a rear-end collision and
sustained multiple injuries. Insured by State Farm, plaintiffs submitted claims
for medical treatment expenses. Plaintiffs alleged that State Farm acted in bad

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faith in rejecting most of plaintiffs’ first-party uninsured claims and by failing to
reasonably settle the first-party claim within policy limits. Consequently,
plaintiffs sued State Farm for breach of contract and bad faith insurance
practices. Plaintiffs sought discovery of information concerning State Farm’s
claims handling policies, practices, and procedures, in response to which State
Farm moved for a protective order on the ground that such information
consisted of confidential and proprietary business information and was a trade
secret. State Farm intended to disclose the information2 but requested certain
safeguards from the plaintiffs.
Rejecting the protective order proposed by State Farm, the court
nonetheless found good cause for the entry of a modified or limited protective
order. Id. at 21. The court held that State Farm, through affidavit, established
that the requested information constituted a trade secret under state law.3 Id. at
2

In Pochat, State Farm sought a protective order to prevent disclosure
of the following information to nonparties:
(1) all documents contained in the personnel files of the claim
handlers in charge of Plaintiffs’ claims as well as persons in the
chain of command above these claim handlers; (2) documentation
regarding how employees qualify for salaries, bonuses, incentives,
benefits and commissions; (3) claims handling, policies, practices
and procedures; (4) training materials; and (5) documentation
relating to efforts to increase claim department profitability and
decrease loss ratios or claims severity costs.
Much of this information is identical to the information sought by Burke and is
the subject of AIC’s current motion.
3

The definition of a trade secret under Indiana state law is identical to
that under South Dakota law. See Hamilton v. State Farm Mut. Auto. Ins. Co.,
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20. State Farm had demonstrated by affidavit that information about its claims
handling procedures and associated training materials were unique to its
organization and were economically valuable because considerable time,
effort, and expense were expended to develop these materials. Id. State Farm
further attested that it made every effort to maintain the secrecy of these
materials by only disclosing them to its employees and only producing them
pursuant to a protective order or confidentiality agreement in other litigation. Id.
State Farm also attested that it would suffer financial harm from the
unrestricted disclosure of this information because competing insurance
companies could duplicate State Farm’s claims handling policies, manuals, and
procedures. Id. In light of these representations, the court found that State
Farm satisfied its burden of showing that the subject materials constituted
trade secrets or other confidential research, development, or commercial
information and that State Farm would be harmed by unrestricted disclosure.
Id.; see In re Remington Arms Co., 952 F.2d at 1032.
Similarly, in the present case, AIC, by affidavit, declares that documents
and communications concerning its business plans and strategies, its policies
for establishing loss reserves, claims handling and other business operations,
and agreements and transactions between AIC and its related entities are
unique to its organization and were created by its employees. AIC further attests

204 F.R.D. 420, 423 (S.D. Ind. 2001); see also Ind. Code § 24-2-3-2.
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the information is protected from disclosure outside AIC and that its employees,
as a condition of employment, annually execute documents that prohibit
disclosure of the information as a condition of their employment. AIC also states
that it would be financially harmed by its competition if its strategic plans,
goals, and financial information were disclosed.
Because AIC is not objecting to the disclosure of the requested
information subject to a protective order at this time, the court will assume
without deciding that the information is relevant and necessary to litigate
Burke’s claims. A limited protective order is appropriate in this case as it would
satisfactorily protect both parties’ interests—Burke would have access to
the requested information, and competitors could not exploit or duplicate AIC’s
internal policies and procedures. Burke has suggested no reason to doubt AIC’s
assertion that access to the disclosed information by competitor companies
would be detrimental to AIC. Also persuasive is the fact that Burke has not
shown, substantively or concretely, how his interests would be harmed by a
limited protective order.
III.

Nonpublic Contracts, Compensation and Personnel Information, and
Nonpublic Health Information about South Dakota Insureds
AIC requests safeguards to be in place prior to disclosing the following

information: nonpublic contracts, compensation, and personnel information,
and nonpublic health information about its South Dakota customers. The
district court for the District of South Dakota also directly addressed this issue

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in Pochat. Finding such information to be relevant to plaintiffs’ bad faith
insurance and breach of contract claims, the court ordered the defendant to
disclose the information. Recognizing that the requested information implicated
defendant’s confidential and proprietary business practices and policies,
however, the court ordered plaintiffs not to disclose or exchange the information
with anyone not associated with the case. Pochat at 13.
Similarly, this court finds that AIC’s request for safeguards to be
in place prior to disclosing the above information is reasonable. Because AIC is
not objecting to the disclosure of the requested information subject to a
protective order at this time, the court will assume without deciding that the
information is relevant and necessary to litigate Burke’s claims. Under the
balancing test, the court finds that AIC has met its burden to establish good
cause for a limited protective order. The potential harm to AIC of unrestricted
disclosure of confidential information outweighs the public interest in
disclosure. See Pansy, 23 F.3d at 787.
As attested to by AIC through affidavit, personnel files contain the
confidential information of individuals who are not parties to this litigation.
AIC’s files also contain the financial, employment, and private information of
AIC’s employees, agents, and customers. Docket 108-2 at 3. These employees,
agents, and customers are not parties to this lawsuit, but rather are private
individuals with legitimate privacy concerns. See Dahdal v. Thorn Americas, Inc.,
Civ. No. 97-2119, 1997 WL 599614, at *1 (D. Kan. Sept. 15, 1997) (entering
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limited protective order for personnel files of employees because employees were
nonparties to the suit, files commonly contain sensitive, personal information
with little or no relevance to the suit, and widespread dissemination of such
information could result in economic or emotional harm to the employees);
Williams v. Bd. of Cnty. Comm'rs, Civ. No. 98-2485, 2000 WL 133433, at *1 (D.
Kan. Jan. 21, 2000) (stating generally that “personnel files and records are
confidential in nature and that, in most circumstances, they should be
protected from wide dissemination”). Furthermore, documents pertaining to how
AIC awards financial incentives and bonuses implicate AIC’s business practices.
And the medical or health information of AIC’s customers is deemed confidential
by the Health Insurance Portability & Accountability Act of 1996. See Pub. L.
No. 104-191, § 261-64, 110 Stat. 1936 (1996); see also 45 C.F.R. §§ 160 et seq.
(2011).
Finally, Burke has not shown, substantively and concretely, how
his interests would be harmed by a limited protective order. Such an order
would not prevent Burke from obtaining the information relevant to his
claims, but rather would merely prevent said information from being
disseminated to third parties.
The court declines to adopt the protective order proposed by AIC,
however, because it allows the producing party to designate “any materials
(whether a document, testimony, or otherwise) which the producing party
reasonably and in good faith believes contains information of a confidential
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commercial or personal nature.” Docket 94-1 at 3. The court is concerned that
this broad language will serve to give each party “carte blanche to decide what
portions of the record shall be kept secret.” See Citizens First Nat’l Bank of
Princeton v. Cincinnati Ins. Co., 178 F.3d 943, 945 (7th Cir. 1999). While the
court finds that AIC has established good cause for the entry of a protective
order to secure its trade secrets and other confidential information, the terms of
and the conduct of discovery will be governed by the protective order as
Docket 116 of this case.
CONCLUSION
For good cause shown, it is
ORDERED that AIC’s motion for a protective order (Docket 94) is granted
in part and denied in part consistent with the above opinion.
Dated March 6, 2013.
BY THE COURT:

/s/ Karen E. Schreier
KAREN E. SCHREIER
UNITED STATES DISTRICT JUDGE

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