U.S. v. Farley

• Decision Date: 15 December 1993
• Docket Number: No. 93-1759,93-1759
• Citation: 11 F.3d 1385
• Parties: 1993-2 Trade Cases P 70,441, 27 Fed.R.Serv.3d 1020 UNITED STATES of America, Plaintiff-Appellant, v. William F. FARLEY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1385

11 F.3d 1385

1993-2 Trade Cases P 70,441, 27 Fed.R.Serv.3d 1020

UNITED STATES of America, Plaintiff-Appellant, v. William F. FARLEY, Defendant-Appellee.

No. 93-1759.

United States Court of Appeals Seventh Circuit.

Argued Sept. 21, 1993.

Decided Dec. 15, 1993.

Fred Foreman, U.S. Atty., Crim. Div., Catherine R. Fuller, F.T.C., Chicago, IL, James W. Lowe, Dept. of Justice Antitrust Div., Appellate Section, (argued), John W. Clark, U.S. Dept. of Justice, Reid B. Horwitz, Robert N. Cook, Ernest A. Nagata, Morris A. Bloom, F.T.C., Robert B. Nicholson, Dept. of Justice, Washington, DC, for U.S.

Lee A. Watson, Donald E. Egan (argued), Jaye Quadrozzi, Katten, Muchin & Zavis, Chicago, IL, for William F. Farley.

Before POSNER, Chief Judge, and CUMMINGS and CUDAHY, Circuit Judges.

CUMMINGS, Circuit Judge.

In January 1992 the United States filed a complaint alleging that William F. Farley violated Section 7A of the Clayton Act, 15 U.S.C. Sec. 18a, commonly called the Hart-Scott-Rodino Antitrust Improvements Act ("HSR Act"). The complaint alleges that on March 24, 1988, Farley failed to notify the Department of Justice and the Federal Trade Commission ("FTC") when his purchases of the stock of West Point-Pepperell, Inc. ("West Point") exceeded $15 million, the point at which the reporting requirements of the HSR Act contained in 15 U.S.C. Sec. 18a(a)(3)(B) are triggered. The violation allegedly extended for 91 days until June 22, 1988. In accordance with 15 U.S.C. Sec. 18a(g), the government sought a civil penalty of $910,000, the maximum daily civil penalty for violating the HSR Act reporting requirements. The district court dismissed the government's complaint with prejudice when, in response to a district court order, the government declined to produce nine internal FTC documents it alleged were protected by the work product and deliberative process privileges. The documents in question have recently been submitted to us for in camera review. We reverse.

STATUTE

The HSR Act prohibits anyone with substantial assets or sales from acquiring voting securities from another firm with substantial assets or sales if the acquisition would result in the purchaser holding at least $15 million of that firm's voting securities, unless (a) the purchaser first notifies the Department of Justice and the FTC and (b) complies with the statutory waiting period of 15 days for a cash tender offer, 30 days for other transactions, and 10 days in the case of bankruptcy filings. 15 U.S.C. Sec. 18a(a), (b). There is an exemption for acquisitions of voting securities solely for the purpose of investment if they do not exceed 10% of the outstanding voting securities of the issuer. 15 U.S.C. Sec. 18a(c)(9). The notification requirements are intended to give antitrust enforcement agencies an opportunity to identify transactions that might violate Section 7A of the Clayton Act (15 U.S.C. Sec. 18a).

FACTS

In 1988 defendant Farley was the majority stockholder and chief executive officer of Farley, Inc., ¹ a holding company then engaged in the apparel, footwear and precision metals businesses. The principal executive office of Farley, Inc., a Delaware corporation, is located in Chicago. In February of 1988 Farley, Inc. borrowed $500 million through Drexel Burnham Lambert, Incorporated. Of this sum, $200 million was to pay off existing debt and the balance was to be invested in, inter alia, equity securities and possible acquisition candidates.

On March 9, 1988, Farley began purchasing West Point stock, and the value of that stock passed $15 million on March 24, 1988. Farley made no HSR filing at that time, but continued to purchase West Point stock. On April 11, he held almost 5% of the West Point stock, whose value was then about $50 million. Farley thus exceeded the HSR reporting On May 23, 1988, Farley filed an HSR Act pre-merger notification report seeking to acquire 25% of West Point stock. The HSR waiting period expired on June 23, 1988, without the Federal Trade Commission or the Department of Justice seeking additional information. On October 24, 1988, Farley made a second HSR Act filing seeking approval to purchase up to 100% of West Point voting securities. The waiting period under the Act expired on November 7, again without any action by federal enforcement agencies. On April 5, 1989, Farley completed his acquisition of West Point. This suit concerns only his March 24, 1988, failure to report the purchase of $15 million of West Point stock in contravention of 15 U.S.C. Sec. 18a(a)(3)(B).

threshold by approximately $35 million.

COMPLAINT BY JUSTICE DEPARTMENT

In early 1989 the FTC commenced investigating whether Farley violated the HSR Act's reporting and waiting period requirements when he passed the $15 million West Point stock threshold on March 24, 1988. Thereafter the FTC recommended that the Department of Justice bring this action against Farley for violating the HSR Act. As a result this suit was filed on February 12, 1992, seeking recovery of a $910,000 statutory penalty under 15 U.S.C. Sec. 18a(g)(1).

Farley's answer claimed, among other defenses, ² that he was not required to report his March and April 1988 West Point purchases because they fell within the investment-only exemption contained in the HSR Act which exempts "acquisitions, solely for the purpose of investment, of voting securities, if, as a result of such acquisition, the securities acquired or held do not exceed 10 percent of the outstanding voting securities of the issuer." 15 U.S.C. Sec. 18a(c)(9).

After the FTC had recommended to the Justice Department that this suit be brought but before the complaint was filed, Raymond Randall--an FTC attorney who had worked on the investigation--without the permission of the FTC delivered internal FTC documents relating to the Farley investigation to one of Farley's law firms. That firm's ethics counsel returned the original documents to the FTC but retained copies.

After the complaint was filed, Farley demanded production of 16 years' worth of FTC and Department of Justice files relating to the interpretation and application of the investment-only exemption in the HSR Act (15 U.S.C. Sec. 18a(c)(9)). This request covered over 1,000 documents and attachments. Shortly thereafter Farley requested the documents that FTC attorney Randall had improperly released. The government produced all documents relating to the investment-only exemption and the Farley investigation (over 400 documents) except 39 documents and attachments the FTC alleged were protected by the work product and deliberative process privileges. The 39 documents withheld included most of the documents wrongfully disclosed by Randall.

The district judge referred this and other open discovery matters to Magistrate Judge Lefkow. Farley moved to compel the production of all documents not yet produced relating, among other things, to the investigation of his acquisitions, including any communications with West Point or its counsel.

After reviewing the disputed documents in camera, the magistrate judge ordered certain of them be disclosed to Farley. The government filed objections to Magistrate Judge Lefkow's decision as to nine of the documents (identified on the government's privilege log as numbers 119-B, 210-B, 221-B, 221-D, 244-C, 249-B, 286, 287-B-1, 288-A-1), ³ again relying on the work product and deliberative process privileges. The nine

documents included memoranda of FTC staff members and discussions of the Farley matter, as well as documents containing the FTC staff's views on the investment-only exemption and recommendations for future action. Without inspecting the disputed documents, Judge Duff refused to overturn the magistrate judge's disclosure order because of his expressed confidence in her ruling. Consequently, in accordance with the procedure approved in United States v. Procter & Gamble Co., 356 U.S. 677, 678-681, 78 S.Ct. 983, 984-986, 2 L.Ed.2d 1077, the government suggested dismissal of the case solely in order to obtain appellate review. Thereafter the action was dismissed with prejudice on January 26, 1993, and this appeal subsequently was filed.

ANALYSIS

(A) Deliberative Process and Work Product Privileges

The magistrate judge ruled that the documents in question were covered by the deliberative process or work product privilege but that the documents should nonetheless be disclosed. The deliberative process privilege protects communications that are part of the decision-making process of a governmental agency. NLRB v. Sears, Roebuck & Co., 421 U.S. 132, 150-152, 95 S.Ct. 1504, 1516-1517, 44 L.Ed.2d 29. Since frank discussion of legal and policy matters is essential to the decisionmaking process of a governmental agency, communications made prior to and as a part of an agency determination are protected from disclosure. Id. at 151, 95 S.Ct. at 1516-17. Communications made subsequent to an agency decision are, however, not similarly protected. Id. at 152, 95 S.Ct. at 1517. The deliberative process privilege may be overcome where there is a sufficient showing of a particularized need to outweigh the reasons for confidentiality. Cf. Coastal States Gas Corp. v. Department of Energy, 617 F.2d 854, 868 (D.C.Cir.1980) (the privilege should be applied "as narrowly as consistent with efficient government operation"); Black v. Sheraton Corp. of America, 564 F.2d 531, 545 (D.C.Cir.1977).

After examining the documents, this Court concludes that the documents were clearly part of the deliberative process leading to the decision to sue. Document No. 244-C is the referral memorandum from the FTC staff to the Department of Justice. Having been rendered prior to the Department's decision to bring an action against Farley, the document is within the Department's deliberative process privilege. Since the document was pre-decisional and deliberative, the fact that the document passed from one agency to another does not terminate...