Standard for Discovery of Mediation Communications = Standard for Relief from a Protective Order — Note Alternative of Targeted Discovery and Seeming Openness to Interrogatories or Depositions to Obtain Same Evidence

From Savage & Assocs., PC v. K&L Gates LLP, 640 F.3d 53 (2d Cir. 2011):

Appeal and cross-appeal from an order of the United States District Court for the Southern District of New York (Castel, J.) affirming the order of the bankruptcy court (Bernstein, C.B.J.), which denied K&L Gates LLP's ("K& L Gates") motion to lift two protective orders prohibiting disclosure of communications made during a mediation, and Savage & Associates, P.C.'s cross-motion to enjoin K&L Gates from raising questions about the validity of certain provisions of a settlement agreement as a defense to malpractice in a related action.

*** [T]he protective orders are silent as to when their confidentiality restrictions may be lifted; therefore, disclosure would have been warranted only if the party seeking disclosure had demonstrated (1) a special need for the confidential material it sought; (2) resulting unfairness from a lack of discovery; and (3) that the need for the evidence outweighed the interest in maintaining confidentiality. K&L Gates failed to make the requisite showing, and accordingly, we conclude there was no error in the denial of the law firm's motion.

With respect to the lead appeal, because K&L Gates was, at most, a potential debtor of a debtor of the estate, it could not have been considered a "party in interest" with standing to contest the validity of the settlement agreement when the motion to approve that agreement was pending before the bankruptcy court. There was, therefore, no error in the holding that K&L Gates is not barred from asserting a defense challenging the validity of any provision of the settlement agreement in connection with the related malpractice action currently pending against the law firm. Accordingly, we affirm the order of the district court in its entirety. ***

When Teligent, Inc. ("Teligent") hired Alex Mandl as its CEO in 1996, the company extended Mandl a $15 million loan. The loan was to be due and payable immediately if Mandl resigned his employment without "good reason," but would be automatically forgiven if Teligent terminated Mandl's employment other than for "cause."

Mandl retained the law firm K&L Gates LLP around April 2001 in connection with his potential departure from Teligent. At that time, $12 million was outstanding on the loan. K&L Gates drafted a severance agreement for Mandl that, according to the law firm, "reflect[ed] that Teligent had terminated Mandl other than for Cause effective as of April 27, 2001, thus triggering automatic loan forgiveness."

Less than a month after the parties ratified the severance agreement, Teligent filed for bankruptcy under Chapter 11. Cross-Appellee Savage & Associates, P.C. ("Savage & Associates") was appointed by the bankruptcy court to be the Unsecured Claims Estate Representative *** [and filed] an action against Mandl, brought under Sections 548 and 550 of Chapter 11 of the Bankruptcy Code, 11 U.S.C. §§ 548, 550, to recover the balance of the loan. Mandl again retained K&L Gates to represent him in connection with this matter.

The bankruptcy court held a one-day trial after which it concluded that Mandl had resigned before Teligent terminated his employment, and therefore, Mandl was liable for the balance of the loan. See In re Teligent, Inc., 380 B.R. 324, 333-36 (Bankr. S.D.N.Y. 2008). That finding was not appealed.

Shortly after the bankruptcy court issued its decision relating to the loan, Mandl retained Greenberg Traurig, LLP ("Greenberg Traurig") as new counsel. Greenberg Traurig then filed a number of motions, including a motion for relief from the judgment based in part on a claim of newly discovered evidence. Around the same time, Savage and Associates commenced a new lawsuit in the Eastern District of Virginia against Mandl, naming as defendants Mandl's wife, Susan Mandl, and ASM Investments LLC ("ASM"), an entity associated with Mandl, and alleging that Mandl had fraudulently transferred certain property through ASM to his wife in order to shelter his assets from creditors. All parties to the action in Virginia participated in a voluntary mediation in attempt to resolve both the motions before the bankruptcy court as well as the Virginia Action. Greenberg Traurig invited K&L Gates to participate in the mediation, to address Mandl's claim that K&L Gates committed malpractice in the course of representing him during his termination from Teligent and in the resulting adversary proceeding. K&L Gates declined to participate.

In setting up a framework for the mediation, the parties agreed to be bound by the terms of the protective orders routinely employed by the Bankruptcy Court in the Southern District of New York in the context of court-ordered mediation (the "Protective Orders"). The Protective Orders imposed limitations, inter alia, on the disclosure of information relating to the mediation. However, the Protective Orders provided no guidance on when, or if, a party might be entitled to release confidential information connected to the mediation.

Although formal mediation did not result in a settlement, the parties thereafter reached an agreement. In exchange for dismissal of the action in Virginia, Mandl agreed to pay the estate $6.005 million and to commence a malpractice suit against K&L Gates. The terms of the agreement also required Mandl to remit to the estate 50% of the net value of any malpractice recovery. The bankruptcy court approved the settlement pursuant to a motion under Federal Rule of Bankruptcy Procedure 9019. The approval of the settlement is not before us on appeal.

On May 30, 2008, and as required by the settlement, Mandl filed a malpractice action against K&L Gates in the Superior Court of the District of Columbia. During discovery, K&L Gates sought documents relating to "the negotiations leading up to the Settlement Agreement, including all mediation and settlement communications[.]" K&L Gates argued that the discovery was "critical to issues such as causation, mitigation, and damages." In response to K&L Gates's request, Mandl produced certain documents.

When Savage and Associates learned that Mandl had disclosed confidential mediation communications, Denice Savage, the firm's principal, contacted Mandl, insisting that he withhold all documents relating to the settlement agreement. Denise Savage also demanded that K&L Gates destroy or return any such documents in its possession. Both parties complied with these requests.

K&L Gates then filed a motion with the bankruptcy court, seeking to lift the confidentiality provisions of the Protective Orders. The bankruptcy court denied the motion, see In re Teligent, Inc., 417 B.R. 197 (Bankr. S.D.N.Y. 2009), reasoning, among other things, that K&L Gates had not shown a need for all mediation communications, though the law firm had sought discovery of the entire universe of documents. Id. at 207. The bankruptcy court also noted that its conclusion was "not intended to foreclose K&L's right to argue before the DC court that a specific communication is not covered by the confidentiality provisions of the [Protective] Orders (e.g., it was not made 'during the mediation process'), or that the court should nevertheless order disclosure of a specific communication under applicable law." Id. at 209. ***

In this case, the bankruptcy court denied K&L Gates's motion to lift the confidentiality provisions of the Protective Orders based on the court's conclusion that K&L Gates failed to demonstrate a compelling need for the discovery, failed to show that the information was not otherwise available, and failed to establish that the need for the evidence was outweighed by the public interest in maintaining confidentiality. See generally In re Teligent, 417 B.R. 197 (Bankr. S.D.N.Y. 2009). The district court affirmed these conclusions. See In re Teligent Servs., Inc., No. 09 Civ. 9647, 2010 U.S. Dist. LEXIS 49010, 2010 WL 2034509 (S.D.N.Y. May 13, 2010). There was no error in this conclusion.

Confidentiality is an important feature of the mediation and other alternative dispute resolution processes. Promising participants confidentiality in these proceedings "promotes the free flow of information that may result in the settlement of a dispute," In re Grand Jury Subpoena Dated Dec. 17, 1996, 148 F.3d 487, 492 (5th Cir. 1998), and protecting the integrity of alternative dispute resolution generally, see. e.g., In re Cnty. of Los Angeles, 223 F.3d 990, 993 (9th Cir. 2000); Clark v. Stapleton Corp., 957 F.2d 745, 746 (10th Cir. 1992) (per curiam); Sheldone v. Pa. Tpk. Comm'n, 104 F. Supp. 2d 511, 517 (W.D. Pa. 2000); Fields-D'Arpino v. Rest. Assocs., Inc., 39 F. Supp. 2d 412, 417 (S.D.N.Y. 1999); Folb v. Motion Pictures Indus. Pension & Health Plans, 16 F. Supp. 2d 1164, 1170-80 (C.D. Cal. 1998), aff'd 216 F.3d 1082 (9th Cir. 2000); Bernard v. Galen Grp., Inc., 901 F. Supp. 778, 784 (S.D.N.Y. 1995). We vigorously enforce the confidentiality provisions of our own alternative dispute resolution, the Civil Appeals Management Plan ("CAMP"), because we believe that confidentiality is "essential" to CAMP's vitality and effectiveness. Lake Utopia Paper Ltd. v. Connelly Containers, Inc., 608 F.2d 928, 930 (2d Cir. 1979); see also Calka v. Kucker Kraus & Bruh, 167 F.3d 144, 146 (2d Cir. 1999) (per curiam); 2d Cir. app. D, R.. 4 (prohibiting parties in CAMP conferences from advising "unauthorized third parties of discussions or action taken at the conference").

A party seeking disclosure of confidential mediation communications must demonstrate (1) a special need for the confidential material, (2) resulting unfairness from a lack of discovery, and (3) that the need for the evidence outweighs the interest in maintaining confidentiality. Accord Iridium India Telecom Ltd. v. Motorola, Inc., 165 F. App'x 878, 880 (2d Cir. 2005) (summary order) (movant must show "a compelling need or extraordinary circumstances necessary to modify [a] protective order"); see also In re Anonymous, 283 F.3d 627, 636-37 (4th Cir. 2002); cf. TheStreet.Com, 273 F.3d at 229 ("Where there has been reasonable reliance by a party or deponent, a District Court should not modify a protective order granted under Rule 26(c) absent a showing of improvidence in the grant of [the] order or some extraordinary circumstances or compelling need" (alteration in original, internal quotation marks omitted)); Martindell v. Int'l Tel. & Tel. Corp., 594 F.2d 291, 296 (2d Cir. 1979) (same). All three factors are necessary to warrant disclosure of otherwise non-discoverable documents.

We draw this standard from the sources relied upon by the learned bankruptcy court, which include the Uniform Mediation Act ("UMA"), the Administrative Dispute Resolution Act of 1996 ("ADRA 1996"), 5 U.S.C. §§ 571 et seq., and the Administrative Dispute Resolution Act of 1998 ("ADRA 1998"), 28 U.S.C. §§ 651 et seq. Each of these recognizes the importance of maintaining the confidentiality of mediation communications and provides for disclosure in only limited circumstances. For example, ADRA 1996, which applies to federal administrative agency alternative dispute resolution, prohibits disclosure of confidential mediation communications unless the party seeking disclosure demonstrates exceptional circumstances, such as when non-disclosure would result in a manifest injustice, help establish a violation of law, or prevent harm to the public health or safety. 5 U.S.C. § 574(b)-(c). Relatedly, under the UMA, the party seeking disclosure of confidential mediation communications must demonstrate that the evidence is not otherwise available and that the need for the communications substantially outweighs the interest in protecting confidentiality. UMA § 6(b).

The standards for disclosure under the UMA and the ADRAs are also consistent with the standard governing modification of protective orders entered under Federal Rule of Civil Procedure 26(c). As we explained in FDIC v. Ernst & Ernst, 677 F.2d 230 (2d Cir. 1982) (per curiam), once a protective order has been entered and relied upon, "it can only be modified if an 'extraordinary circumstance' or 'compelling need' warrants the requested modification." Id. at 232 (quoting Martindell, 594 F.2d at 296). In SEC v. TheStreet.Com, 273 F.3d 222 (2d Cir. 2001), we further refined this principle, explaining that there is a "strong presumption against the modification of a protective order," and orders should not be modified "absent a showing of improvidence in the grant of the order or some extraordinary circumstance or compelling need." Id. at 229 (internal quotation marks, alteration, and citations omitted).

Here, as the bankruptcy court observed, K&L Gates has sought a blanket lift of the confidentiality provisions in the Protective Orders. In re Teligent, 417 B.R. at 207. However, K&L Gates failed to demonstrate a special or compelling need for all mediation communications. Cf. TheStreet.Com, 273 F.3d at 229. Indeed, the law firm failed to submit any evidence to support its argument that there was a special need for disclosure of any specific communication. There was, therefore, no error in the bankruptcy court's conclusion that K&L Gates failed to satisfy prong one of the standard governing disclosure of confidential mediation communications.

Likewise, the bankruptcy court committed no error in holding that K&L Gates failed to satisfy prong two of the test. As the bankruptcy court explained, the law firm failed to demonstrate a resulting unfairness from a lack of discovery, because the evidence sought by K&L Gates was available through other means, including through responses to interrogatories or depositions. See In re Teligent, 417 B.R. at 208. Accordingly, the law firm failed to show that "extraordinary circumstances" warrant disclosure. Cf. TheStreet.Com, 273 F.3d at 229.

Finally, because K&L Gates failed to demonstrate a special need for the mediation communications, the law firm did not satisfy prong three of the test, which requires a party seeking disclosure of confidential material to show that its need outweighs the important interest in protecting the confidentiality of the material. As we explained in the context of litigation in TheStreet.Com, if "protective orders have no presumptive entitlement to remain in force, parties would resort less often to the judicial system for fear that such orders would be readily set aside in the future." Id. at 229-30. It follows that similar concerns arise in the context of mediation. Were courts to cavalierly set aside confidentiality restrictions on disclosure of communications made in the context of mediation, parties might be less frank and forthcoming during the mediation process or might even limit their use of mediation altogether. These concerns counsel in favor of a presumption against modification of the confidentiality provisions of protective orders entered in the context of mediation. Accordingly, we conclude that there was no error in the denial of K&L Gates's motion to lift the confidentiality provisions of the Protective Orders in this case.

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