Overstock.com, Inc. v. Goldman Sachs Grp., Inc.

Decision Date13 November 2014
Docket NumberA133487,A135180
Citation231 Cal.App.4th 471,180 Cal.Rptr.3d 234
CourtCalifornia Court of Appeals Court of Appeals
PartiesOVERSTOCK.COM, INC. et al., Plaintiffs and Appellants, v. The GOLDMAN SACHS GROUP, INC. et al., Defendants and Respondents; The Economist Newspaper et al., Interveners and Appellants. Overstock.Com Inc. et al., Plaintiffs and Respondents, v. Merrill Lynch, Pierce Fenner & Smith Inc. et al., Defendants and Appellants; The Economist Newspaper et al., Interveners and Respondents.

Theodore A. Griffinger, Jr., San Francisco and Jonathan Edward Sommer and Lubin, Olson, Niewiadomski LLP for Plaintiffs Overstock.com, Inc., et al.

Joseph Edward Floren and Morgan, Lewis & Bockius, San Francisco, for Defendants The Goldman Sachs Group, Inc., et al.

Matthew David Powers, Redwood Shores, Andrew J. Frackman, and Abby F. Rudzin and O'Melveny & Myers for Defendants Merrill Lynch, Pierce Fenner & Smith, Inc.

Karl Olson and Ram, Olson, Cereghino & Kopczynski, San Francisco, for Interveners The Economist Newspaper et al.

Banke, J.

I. Introduction

In this consolidated appeal, we address two “sealing” orders. The first granted motions by defendants to seal documents submitted in connection with plaintiffs' efforts to file a fifth amended complaint. The second denied, in substantial part, motions by defendants to seal documents submitted in connection with defense motions for summary judgment. The second order overlapped the first, since the materials underlying the proffered amended pleading resurfaced in opposition to the summary judgment motions. Accordingly, the second sealing order is the trial court's final call as to the propriety of sealing these discovery materials, and the parties have ultimately focused on this order, as do we.

We affirm most of the trial court's sealing decisions. But there are key exceptions, a principal one being thousands of pages of documentation plaintiffs submitted to the court, but which they never cited and which were irrelevant to the issues raised by the summary judgment motions. Under the plain terms of the protective order in place, these irrelevant materials never should have burdened the trial court or this court. Nor should they have been subjected to analysis under the sealing rules, since irrelevant materials have no bearing on the trial court's adjudicatory function and, thus, are not within the ambit of the public's right of access to court records. Rather, these discovery materials should have been struck from the record and remained confidential pursuant to the provisions of the protective order. As for the materials that were relevant to the summary judgment proceedings, some contain confidential financial information of third parties and should have been sealed under the “sealed records rules.”

On our way to reaching these conclusions, we address several issues pertaining to sealing orders that have remained unsettled, including the reach of California Rules of Court, rules 2.550 and 2.551, and media participation in sealing hearings. We also discuss tools available to the trial courts to deal with abusive litigation tactics impacting the handling of sealing issues. Indeed, we are appalled at the burden the parties foisted on the trial court here and view this case as a companion to the decision of our brethren in Nazir v. United Airlines, Inc. (2009) 178 Cal.App.4th 243, 289–290, , decrying unnecessary and oppressive summary judgment tactics.

II. Background

Plaintiffs are Overstock.Com, Inc., an online retailer, and several of its investors. In their fourth amended complaint, plaintiffs alleged defendants, Merrill Lynch, Pierce Fenner & Smith Inc. and Merrill Lynch Professional Clearing Corp. (collectively Merrill) and Goldman Sachs & Co. and Goldman Sachs Execution & Clearing L.P. (collectively Goldman), intentionally depressed the price of Overstock stock by effecting “naked short sales”—that is, sales of shares the brokerage houses and their clients never actually owned or borrowed. This practice, plaintiffs claimed, artificially increased the supply and short sales of the stock, while decreasing its value. Plaintiffs alleged this conduct violated Corporations Code sections 25400 and 25500, Business and Professions Code sections 17200 and 17500, and New Jersey's RICO statute (N.J.Stat.2C:41–2(c)(d) ).

A. The Protective Order

The parties' discovery demands were extensive, and in May 2008, pursuant to a stipulation, the trial court issued a protective order. The order allowed the parties to designate certain produced materials as “Protected Material,” and to further classify this material as either “Confidential” or “Highly Confidential.” Paragraph 13 of the order specified: “If a party seeks to file Protected Material, the party must seek to do so under seal pursuant to California Rules of Court 2.550 and 2.551.”1 Paragraph 14 required the parties to “endeavor in good faith to restrict their ... submissions to Confidential Information ... reasonably necessary for the Court ['s deliberations].”

Two years later, in June 2010, the trial court entered a second protective order to “modif[y] and extend[ ] the [May 30, 2008] order to confidential information pertaining to third parties. The parties acknowledged in this order that information identifying specific client transactions “may be protected by rights of privacy or other confidentiality rights.” [T]o avoid undue delay, burden, and expense in document production,” the parties also agreed to “produce documents containing information of Third Parties without redaction of such information.” We refer to both orders, collectively, as the protective order.

B. The Proposed Fifth Amended Complaint and Related Motions to Seal

In February 2011, defendants successfully demurred to the New Jersey RICO cause of action in the fourth amended complaint. The trial court allowed plaintiffs to propose a fifth amended complaint with a reworked RICO claim, stating if they did so, the court would order an expedited briefing and hearing schedule. In May, plaintiffs submitted a proposed new pleading. The publicly filed document was heavily redacted; an unredacted version was conditionally lodged under seal.

Defendants opposed allowing the fifth amended complaint on three grounds: a California court should not apply New Jersey RICO law; plaintiffs had not, in any event, stated a claim under that law; and granting leave to amend so late in the case would prejudice defendants. The publicly filed opposition papers were redacted; unredacted versions were conditionally lodged under seal. Plaintiffs then submitted papers in support of their proposed pleading, and defendants thereafter submitted reply papers. Again, the publicly filed documents were redacted; unredacted versions were conditionally lodged under seal.

In connection with these substantive filings, defendants made ten separate motions to seal. Plaintiffs opposed five of the motions, including two motions to seal certain allegations of the proposed fifth amended complaint based on discovery materials designated “Confidential” or “Highly Confidential” under the parties' protective order. Plaintiffs contended the allegations did not reveal trade secrets or implicate significant privacy interests. The media also filed, without court permission, opposition to the sealing motions, including requesting the court to unveil the “88 paragraphs of the proposed Fifth Amended Complaint” defendants wished to seal in whole or in part.

After a lengthy hearing, the trial court ruled from the bench and denied leave to file the proposed fifth amended complaint on two grounds: (1) granting leave to add a new, complex RICO claim would prejudice defendants on the eve of trial and (2) the RICO claim “would be futile because the facts as alleged ... do not warrant the application of New Jersey RICO [law] to this case under California choice-of-law principles.”

Two days later, on August 3, 2011, the court issued a written order granting the motions to seal. It first determined the sealed records rules applied, and then made the express findings required under the rules and ordered the clerk to file, under seal, the unredacted materials that had been conditionally lodged with the court. The court also ruled the media had not sought to intervene in conformance with Code of Civil Procedure section 387 or under rule 2.551 and therefore denied intervention and struck the media's memorandum opposing sealing. The court noted, however, it had allowed the media to participate in the hearing. Plaintiffs and the media appealed (appeal No. A133487).2

C. The Summary Judgment Motions and Related Motions to Seal

The following month, defendants moved for summary judgment on the remainder of plaintiffs' causes of action (under Corp. Code, §§ 25400 and 25500 and Bus. and Prof. Code, §§ 17200, 17500 ) on multiple grounds.

Plaintiffs' opposition would eventually fill 38 banker's boxes and included thousands of pages of discovery materials that had been designated “Confidential” or “Highly Confidential” pursuant to the protective order. The materials were ostensibly proffered to show defendants knowingly employed a strategy of naked short sales to devalue Overstock, and did so in California. The trial court, at the parties' urging, approved lodging all of these confidential materials conditionally under seal and deferring disposition of any sealing motions until after it ruled on the summary judgment motions.

The trial court heard three days of argument on evidentiary objections to the materials filed in connection with the summary judgment motions and a full day of argument on the merits of the motions. In an order dated January 10, 2012, the trial court granted the motions. As to the Corporations Code claim, the court ruled only conduct in California was actionable and plaintiffs “failed to raise [any] triable issue of material fact supportive of a finding that any act by any defendant foundational to liability, causation, or...

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