Dreiling v. Jain

• Decision Date: 24 June 2004
• Docket Number: No. 73756-8.,73756-8.
• Court: Washington Supreme Court
• Parties: Thomas R. DREILING, Plaintiff, v. Naveen JAIN and Anuradha Jain, husband and wife, and their marital community; Rufus W. Lumry, III, and his marital community; Acorn Ventures I.S., L.L.C., a Washington limited liability company; John E. Cunningham, IV, and his marital community; Stiles A. Kellett, Jr., and his marital community; Kellett Investment Corporation, a corporation, and its affiliate Kellett Partners L.P., a limited partnership; Clear Fir Partners, L.P., a partnership; David House, and his marital community; Peter L.S. Currie, and his marital community; Gary C. List, and his marital community; Bernee D.L. Strom, and her marital community; Carl Stork, and his marital community; Ellen Alben, and her marital community; Tammy D. Halstead, and her marital community; Arun Sarin, and his marital community; Ashok Narasimhan, and his marital community; Russell C. Horowitz, and his marital community; Porpoise Corp., a corporation; John Keister, and his marital community; Richard Thompson, and his marital community; Douglas Bevis, and his marital community; The Bevis Family Trust; Rasipuram Arun, and his marital community; Edmund O. Belsheim, and his marital community; and Deloitte & Touche, L.L.P, Defendants, and Infospace, Inc., a Delaware corporation, Nominal Defendant/Respondent, and The Seattle Times Company, Intervenor/Petitioner.

93 P.3d 861

151 Wash.2d 900

Thomas R. DREILING, Plaintiff, v. Naveen JAIN and Anuradha Jain, husband and wife, and their marital community; Rufus W. Lumry, III, and his marital community; Acorn Ventures I.S., L.L.C., a Washington limited liability company; John E. Cunningham, IV, and his marital community; Stiles A. Kellett, Jr., and his marital community; Kellett Investment Corporation, a corporation, and its affiliate Kellett Partners L.P., a limited partnership; Clear Fir Partners, L.P., a partnership; David House, and his marital community; Peter L.S. Currie, and his marital community; Gary C. List, and his marital community; Bernee D.L. Strom, and her marital community; Carl Stork, and his marital community; Ellen Alben, and her marital community; Tammy D. Halstead, and her marital community; Arun Sarin, and his marital community; Ashok Narasimhan, and his marital community; Russell C. Horowitz, and his marital community; Porpoise Corp., a corporation; John Keister, and his marital community; Richard Thompson, and his marital community; Douglas Bevis, and his marital community; The Bevis Family Trust; Rasipuram Arun, and his marital community; Edmund O. Belsheim, and his marital community; and Deloitte & Touche, L.L.P, Defendants, and Infospace, Inc., a Delaware corporation, Nominal Defendant/Respondent, and The Seattle Times Company, Intervenor/Petitioner.

No. 73756-8.

Supreme Court of Washington, En Banc.

Argued November 13, 2003.

Decided June 24, 2004.

Graham & Dunn PC, Judith Endejan, Janis White, Seattle, for petitioner.

Paul Brown, Kevin Paulich, Steven Ross, Jean Huffington, Seattle, Paul Dawes, John Tang, Menlo Park, CA, Sirianni & Youtz, Stephen Youtz, Seattle, Charles Kenneth Wiggins, Bainbridge Island, Perkins Coie, Harry Schneider, Barry Kaplan, George Greer, Daniel Dunne, Matthew Carvalho, Gillian Apfel, Mark Roth, Kelly Noonan, Raymond Weber, Seattle, David Friedman, San Francisco, for respondents.

CHAMBERS, J.

"Justice in all cases shall be administered openly...." CONST. art. I, § 10. The open operation of our courts is of utmost public importance. Justice must be conducted openly to foster the public's understanding and trust in our judicial system and to give judges the check of public scrutiny. Secrecy fosters mistrust. This openness is a vital part of our constitution and our history. The right of the public, including the press, to access trials and court records may be limited only to protect significant interests, and any limitation must be carefully considered and specifically justified.

We are called upon to apply these principles to a particular type of private dispute adjudicated within a public forum. To determine the appropriate standard, we must first decide the nature of a motion to terminate a shareholder derivative suit. We conclude that the motion to terminate is substantially similar to a dispositive motion on the merits. Accordingly, we hold that the analytical approach set forth in Seattle Times Co. v. Ishikawa, 97 Wash.2d 30, 640 P.2d 716 (1982), shall be used before the motion and documents filed in support thereof may be sealed.

FACTS

Thomas Dreiling, among other plaintiffs, is a shareholder of InfoSpace, Inc. (InfoSpace), a Delaware corporation. He filed this shareholder's derivative action against certain officers and directors of InfoSpace, alleging insider trading, breach of fiduciary duty, materially false and misleading statements about revenues and mergers, and other corporate wrongdoings. The Seattle Times newspaper (Times) has been following the InfoSpace litigation (aspects of which are before several different state and federal courts)¹ for some time. The Times has made a formal motion to intervene in this case and to unseal the records. Because it is unnecessary for us to detail the facts of the underlying litigation to resolve the issues before us, we will briefly outline only the events which gave rise to review.

Before bringing a shareholders' derivative action, shareholders must present their claims to the corporation and give the corporation an opportunity to pursue the case. See generally Joy v. North, 692 F.2d 880 (2d Cir.1982)

. InfoSpace is a Delaware corporation, and under Delaware law, the corporation has a variety of options, one of which is to form a special litigation committee (SLC) to evaluate the shareholders' claims. In re Oracle Corp. Derivative Litig., 808 A.2d 1206, 1210 (Del.Ch.2002). If the SLC concludes that the suit is in the corporation's best interest, the corporation may assume the shareholders' place and pursue the suit on its own. Id. However, if the SLC concludes the action is not in the corporation's best interest, the corporation may bring a motion to terminate the suit. Id. at 1210-11. If the court does not grant the motion, the court may permit the shareholders to prosecute the suit on the corporation's behalf. Zapata Corp. v. Maldonado, 430 A.2d 779, 784 (Del.1981).

In this case, InfoSpace elected to form an SLC, and the trial court stayed the shareholders' action pending the SLC investigation. The SLC was formed of directors who were not serving on the board at the time of the alleged misconduct and were therefore presumably independent. The SLC investigated the claims and recommended that the action be terminated. Before it filed the motion to terminate with the court, InfoSpace received a protective order allowing it to file its motion and supportive documentation under seal. The court gave the SLC the authority to self-designate confidential documents, and it prohibited disclosure of confidential documents (except to the plaintiff). Much of the record was placed under seal. The Times challenges this order. Dreiling opposed dismissal and litigation resumed. Ultimately, the trial court dismissed some claims and stayed others. See Clerk's Papers (CP) at 1264 (Order on Special Litig. Comm.'s Mot. to Dismiss & Various Mots.).

The Times made a formal motion to intervene and to unseal the records. The trial court granted leave to intervene but largely denied the motion to unseal. This order said in relevant part:

A special litigation committee's task is an unusual one in the context of securities litigation. The committee must investigate the plaintiff's claims and report to the court why those claims should or should not be pursued by the corporation. To accomplish this evaluation, the committee must review its internal documents, including legal advice and sensitive proprietary information, and must also interview its employees, some of whom have allegedly engaged in wrongdoing, and consult experts. The results of the inquiry are presented in a special litigation committee report. In order to evaluate the accuracy and reasonableness of the report in this case, the court ordered that plaintiff's counsel be given access to internal corporate documents, employee interviews, and expert consultations reviewed by the Committee. This information would not be obtainable in ordinary litigation such as that currently pending against Infospace in another King County Department and in U.S. District Court for the Western District of Washington, because of privilege or protections of the work product doctrine. The court ordered the disclosure only with appropriate confidentiality requirements and protective orders in place.

The court finds that most of the information contained in the Special Litigation Committee's Report, the SLC's motion, the plaintiff's response, and the court's letter ruling of December 6, 2002, is based on protected information. It would be error to order this information disclosed to the public.

At the same time, some of the documents filed as attachments to the SLC's report and motion and plaintiff's responses either are in the public domain or do not have the same privileged or proprietary status.

Therefore, counsel for the SLC is directed to serve and file, within 45 days of this order, a log of those documents filed as attachments to its report and motion, the plaintiff's response, and the SLC's reply that should remain confidential. The log should be organized by attachment tab number and Bates production number. Counsel should describe the general nature of the document and the specific basis for its continued confidentiality. The documents not included in the log shall be disclosed. If the court finds the SLC's justification as to a particular document inadequate, that document will also be disclosed, after advance notice to plaintiff and SLC counsel and an opportunity to object to the disclosure.

CP at 1129 (Order Granting the Mot. of the Seattle Times Co. to Intervene & Directing the Filing of a Log as to Docs.).

The order did not articulate the specific analytical approach the SLC should take to determine if a document is properly confidential or the analysis the trial court would undertake if the sealing were challenged. Overwhelmingly, documents were simply filed under seal. After the intervention of the Times, some documents were unsealed. This court granted interlocutory review of a limited question of whether the trial court applied the correct legal standard when it sealed material and briefing filed with the court in support of the SLC's motion to terminate a shareholder derivative lawsuit.

ISSUE

We must decide when a motion to terminate a shareholders' derivative suit and the documents filed in support thereof may be sealed.

ANALYSIS

STANDARD OF REVIEW

Generally, we review a trial court's decision to seal records for abuse of discretion. King v. Olympic Pipe Line Co., 104 Wash.App. 338, 348, 16 P.3d 45 (2000); accord Foltz v. State Farm Mut. Auto. Ins. Co., 331 F.3d 1122, 1130 (9th Cir.2003)

. However, if the trial court rested its decision on an improper legal rule, the appropriate course of action is to remand to the trial judge to apply the correct rule. King, 104 Wash.App. at 369,

16 P.3d 45; see also Pansy v. Borough of Stroudsburg, 23 F.3d 772, 775 (3d Cir.1994) (r...