Perrigo Co., In re

• Decision Date: 23 October 1997
• Docket Number: No. 97-1372,97-1372
• Citation: 128 F.3d 430
• Parties: In re PERRIGO COMPANY, Petitioner.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 430

128 F.3d 430

In re PERRIGO COMPANY, Petitioner.

No. 97-1372.

United States Court of Appeals Sixth Circuit.

Argued June 11, 1997.

Decided Oct. 23, 1997.

Joe A. Sutherland and Peter J. Meyer (argued), Gary W. Garner (briefed), Katherine N. O'Connell, Patrick J. Kelleher, Gardner, Carton & Douglas, Chicago, IL, Stephen D. Turner, Law, Weathers & Richardson, Grand Rapids, MI, for Petitioner.

Joel Seligman (argued), University of Arizona College of Law, Tuscon, AZ, M. Clay Ragsdale (briefed), Law Offices of M. Clay Ragsdale, Birmingham, AL, Steven E. Cauley (briefed), Little Rock, AR, for Respondent.

Before: WELLFORD, MOORE, and COLE, Circuit Judges.

WELLFORD, J., delivered the opinion of the court, in which COLE, J., joined. MOORE, J. (441-449) delivered a separate opinion concurring in part and dissenting in part.

OPINION

WELLFORD, Circuit Judge.

Plaintiffs filed a stockholder's derivative action on behalf of the corporation involved in this controversy, Perrigo Company ("Perrigo"), which has its principal place of business in Allegan County, Michigan. Plaintiffs, non-residents of Michigan, brought this suit based on diversity of citizenship. See 28 U.S.C. § 1332(a)(2). The principal defendants are present or former directors, officers, or controlling shareholders of Perrigo. Other defendants are securities investment companies designated "underwriter defendants." Perrigo now petitions this court to issue a writ of mandamus vacating a previous order of the district court and preventing the district court from ordering production of a report which Perrigo claims is privileged material. The following background information is necessary to the disposition of this petition.

In the underlying derivative suit, plaintiffs claim (among other things) that the defendants' actions constituted concealment of true facts regarding the corporation and its financial condition, breach of fiduciary duty, wrongful insider trading of Perrigo stock, and absence of good faith with respect to a large sale ("a registered public offering") of Perrigo shares listed on a public stock exchange. It is asserted that those actions profited the individual selling shareholders, directors, and officers at the expense of the corporation and, consequently, to the detriment of the shareholders generally. The complaint refers to a related but separate securities fraud lawsuit, which was brought as a class action and involves substantially the same parties and the same alleged misconduct at issue here. Picard Chemical Inc. Plan v. Perrigo Co., No. 95-CV-141 (W.D.Mich.) (hereinafter referred to as "the class action" or "the securities action").

The plaintiffs claim that the defendant directors were dominated by defendants Michael J. Jandernoa and Henry L. Hillman (Perrigo's Chief Executive Officer and alleged controlling shareholder, respectively), who allegedly were the principal beneficiaries of the improper and/or illegal activities. They claim that their derivative suit is necessary because the corporation refused to take the appropriate action against the wrongdoers despite its knowledge of the situation.

Perrigo filed a motion to dismiss the derivative lawsuit pursuant to M.C.L. § 450.1495. That section of the Michigan Business Corporation Act provides:

(1) The court shall dismiss a derivative proceeding if, on motion by the corporation, the court finds that 1 of the groups specified in subsection (2) has made a determination in good faith after conducting a reasonable investigation upon which its conclusions are based that the maintenance of the derivative proceeding is not in the best interests of the corporation ... If the determination is made pursuant to subsection (2)(c) or (d), the plaintiff shall have the burden of proving that the determination was not made in good faith or that the investigation was not reasonable.

(2) A determination under subsection (1) may be made by any 1 of the following:

(d) By all disinterested independent directors.

M.C.L. § 450.1495. The factual basis for the motion was that Perrigo's only allegedly disinterested independent director, Peter Formanek, had conducted a four-month investigation and had determined that maintenance of the derivative action was not in Perrigo's best interests. To help conduct his investigation, Formanek retained the assistance of an independent legal counsel. Formanek, with the assistance of counsel, prepared a 198-page Report ("the Report") that details his findings and conclusions regarding the desirability of maintaining the derivative lawsuit. Among other things, Formanek concluded that there was no deception of the market, intentionally or negligently, during the period before, during, and immediately after an October 1993 secondary public offering. He concluded that he did not believe that Perrigo would likely prevail on any of its potential derivative claims relating to the class action, so such claims should not be pursued.

Perrigo relied on Formanek's recommendation as the basis for its motion to dismiss. Faced with having to prove that Formanek's decision was not in good faith or was not based on a reasonable investigation, plaintiffs sought production of the Report. Perrigo refused to produce it, however, claiming that it was protected by work-product immunity and the attorney-client privilege. The district court addressed the issue for the first time in its opinion dated July 22, 1996. See Kearney v. Jandernoa, 934 F.Supp. 863 (W.D.Mich.1996). It held that any attorney-client privilege was waived when Perrigo relied upon the Report in seeking dismissal. However, the court further held that the waiver did not extend to other parties, such as the plaintiffs in the class action lawsuit. Therefore, the Report could be used only by the derivative plaintiffs in responding to the motion to dismiss.

Perrigo moved to clarify and modify the July order and opinion. On November 8, 1996, the district court entered an order modifying in part the July order by vacating the "waiver" analysis and finding instead that the plaintiffs had established a substantial need for the Report and that undue hardship would result from the court denying the plaintiffs the Report. ¹ Kearney v. Jandernoa, 949 F.Supp. 510 (W.D.Mich.1996). The court referred to and incorporated its analysis in an opinion entered at about the same time in the class action. Picard Chemical Inc. Profit Sharing Plan v. Perrigo Co., 951 F.Supp. 679 (W.D.Mich.1996). Because the Picard opinion is the basis for the holding in the derivative action, a brief summary is pertinent to the instant petition for mandamus.

In Picard, the class action plaintiffs sought production of the Report from Perrigo. The district court held that the Report was protected by the attorney-client privilege and work-product immunity. The court found specifically that "Perrigo has waived neither the privilege nor the immunity in the class action suit with respect to the Report." Id. at 693. For the plaintiffs in the class action to obtain the Report, the court found, they must show substantial need and undue hardship. They could not do so, the court held, because they had other means of discovering the information in the Report. ² Therefore, only the derivative plaintiffs were entitled to the Report.

The court went on, however, to discuss the policies behind public access to court records, reasoning that "[a] judicial record must have a role in the adjudication process in order to be accessed by the public." Id. at 690 (citing Joy v. North, 692 F.2d 880, 893 (2d Cir.1982)). After reviewing the pertinent case law, the court said:

[O]nce the Report is submitted to this Court to induce reliance upon the Report, the public interest in open adjudication outweighs the interests underlying the attorney-client privilege and work product immunity. Therefore, although the Report is protected by both the attorney-client privilege and work product immunity, the Report will have to be disclosed to the public once the Report is submitted to the Court for this Court's determination of whether Formanek made a good faith judgment after a reasonable investigation.

Id. at 692. The court determined that "[t]his ruling gives Perrigo control of whether and when the Report will be submitted and become part of the public record." Id. The district court opined that Perrigo could withdraw its motion to dismiss if it feared public access, or it could wait until the conclusion of all discovery in the derivative action in determining whether it chose to submit the Report to the court in the class action. Id.

As stated before, the district court altered its reasoning in the instant derivative action "for the reasons set forth" in the Picard order. Kearney, 949 F.Supp. at 511. It maintained its holding that the Report was protected by the attorney-client privilege and work product immunity, but it found that the derivative plaintiffs were entitled to the Report because, unlike the class action plaintiffs, they could establish substantial need and undue hardship. In vacating the "waiver" analysis, the court found that a determination regarding waiver was unnecessary in light of its finding of hardship. The court concluded that the derivative "plaintiffs, and only [the derivative] plaintiffs are entitled access to the Report." Id. at 512.

That order did not put the issue to rest. When other defendants in the derivative action also sought disclosure of the Report, the district court entered an order allowing them access provided the parties entered into a stipulated protective order which would protect the contents of the Report in a manner consistent with the November 1996 Picard order. The parties submitted such a protective order in February of 1997. The order governs the treatment of the Report once it is released to the plaintiffs, but not once it is incorporated into court pleadings.

Still wishing to keep the Report under wraps, Perrigo filed a...