U.S. v. National Medical Enterprises, Inc.

• Decision Date: 09 September 1986
• Docket Number: No. 85-2485,85-2485
• Citation: 792 F.2d 906
• Parties: 1986-1 Trade Cases 67,157, 1987-1 Trade Cases 67,519, 5 Fed.R.Serv.3d 349 UNITED STATES of America, Plaintiff-Appellant, v. NATIONAL MEDICAL ENTERPRISES, INC., and NME Hospitals, Inc., Defendants- Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 906

792 F.2d 906

1986-1 Trade Cases 67,157, 1987-1 Trade Cases 67,519,

5 Fed.R.Serv.3d 349

UNITED STATES of America, Plaintiff-Appellant, v. NATIONAL MEDICAL ENTERPRISES, INC., and NME Hospitals, Inc. Defendants- Appellees.

No. 85-2485.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Jan. 14, 1986.

Decided June 23, 1986.

As Amended Sept. 9, 1986.

Douglas H. Ginsburg, U.S. Dept. of Justice, Washington, D.C., for plaintiff-appellant.

Robert Fabrikant, Casson, Calligardo & Mutryn, Washington, D.C., for defendants-appellees.

Appeal from the United States District Court for the Eastern District of California.

Before GOODWIN, WALLACE, and ALARCON, Circuit Judges.

WALLACE, Circuit Judge:

The government appeals the district court's dismissal with prejudice of an antitrust action against National Medical Enterprises, Inc. (National Medical). The district court dismissed the action because of misconduct by government attorneys. We have jurisdiction pursuant to 28 U.S.C. Sec. 1291. We affirm in part, and vacate and remand in part.

I

In December 1982, National Medical, the fourth largest health care company in the United States, and owner of the largest general acute care hospital in the Modesto, California, market area, acquired the third largest hospital in Modesto (the Modesto hospital). The acquisition caused National Medical's share of the market area, as measured by gross in-patient revenues, to rise above 50%. After conducting a seven-month investigation, the government filed a complaint in district court, alleging that the acquisition violated section 7 of the Clayton Act, 15 U.S.C. Sec. 18.

During discovery, a government attorney contacted seven individuals and informed them that the government was challenging National Medical's recent acquisition of the Modesto hospital. He told them that they might be called to testify and that the government would like to attend any interviews they would grant National Medical and to obtain copies of any documents they would give to National Medical. The government contends that all seven individuals were told that they had no obligation to honor the government's request.

In December 1983, National Medical filed a motion for a protective order, alleging that the government's statements to the seven individuals caused some to refuse to grant National Medical interviews unless government counsel was present or to refuse to release documents unless government counsel approved. Although the district judge questioned government counsel's conduct, he did not determine that there had been a breach of the ethical standards of the legal profession. He found that government counsel had unintentionally "undercut the willingness of these witnesses to deal evenhandedly with the parties." The district judge declined to find that the government's conduct "irreparably impaired or prejudiced [National Medical's] ability to prepare its case." Nevertheless, he concluded that sufficient confusion and misunderstanding had resulted to warrant granting the motion for a protective order.

The protective order established guidelines for requesting public documents, required the government to provide National Medical with copies of notes taken during private interviews with individuals who later refused to meet privately with National Medical, and emphasized that each witness was free to set the terms of future interviews. The court also sent letters to the seven individuals encouraging them "to speak privately and freely with counsel for both sides and to provide each side with any documents" the individuals felt were appropriate to disclose. No review of this order has been sought.

The government and National Medical continued to conduct extensive discovery over the next several months. In April 1985, National Medical moved to dismiss the complaint, alleging misconduct of a government attorney at the depositions of Paul A. Thomas, an administrator of National Medical's major competitor in Modesto, and Carl Klopatek, president of Gould Medical Group.

Thomas's deposition was attended by his counsel, counsel for National Medical, and counsel for the government. During his deposition, Thomas testified that he could not recall certain information that was the subject matter of National Medical's questioning. Thomas indicated that the information was contained in a document on his desk located two doors away from the room in which the deposition was being conducted. Thomas's attorney offered to "call and have someone bring [the document] over." The government attorney then told Thomas "that you don't have to do that if you don't want to." The government attorney explained to Thomas that if he referred to a document during the deposition, the information could be discoverable and, that since he had already made documents available to National Medical, he was "under no obligation now to produce other documents for them." Counsel for National Medical objected and cautioned the government that it was in no position to discourage Thomas from providing "information of documents that he was otherwise apparently inclined to furnish." The government attorney responded that he did not intend to discourage Thomas from producing documents, but rather that he feared such requests were an effort to prolong the deposition.

National Medical alleges that similar conduct occurred during the deposition of Klopatek. Klopatek was represented at the deposition by his counsel. National Medical questioned Klopatek about the decision of Gould Medical Group to provide the government with the identical documents it provided under subpoena to National Medical. Klopatek responded that he was told it would be easier to provide all of the documents at once since the government would seek them eventually. National Medical asked who had told him that and Klopatek responded that his attorney had. Klopatek's counsel told him that "you don't have to tell him what I told you." The government attorney then stated, subject to the approval of Klopatek's counsel, that the conversation between Klopatek and his attorney was probably subject to the attorney-client privilege. Klopatek's attorney immediately agreed with the government attorney.

Later in the same deposition, Klopatek answered, in response to a question concerning the possible impact of National Medical's acquisition of the third largest hospital in Modesto, that National Medical "could do just about anything that it wanted to, within the parameters of legality, of course." The government attorney then stated, "Perhaps outside those parameters, too."

The district judge concluded that the statements made by the government attorney "during the Thomas and Klopatek depositions were highly improper and had the potential of influencing these witnesses in their responses to appropriate questions on discovery." ¹ He emphasized that the government's explanations for its actions did not excuse "unprofessional and unethical conduct." The district judge observed that "there has been a sufficient violation of the spirit and intention of the [protective] order in an attempt to influence witnesses and the outcome of this litigation to warrant dismissal of the action." He declined, however, to dismiss the action because there was no indication that either Thomas or Klopatek had been influenced by the government's conduct. Instead, the district judge imposed a $3,000 compensatory sanction payable to National Medical against the government for attorneys' fees and costs incurred in connection with the motion to dismiss.

Trial commenced in July 1985. Shortly thereafter, National Medical moved to dismiss the action a second time based on allegedly improper statements by government attorneys to Sheila Yuter, a government witness. Yuter signed an affidavit stating that during a meeting to review her testimony, a government attorney suggested that National Medical made payoffs to three individuals through unearned consulting fees to facilitate acquisition of the Modesto hospital. The government denies that any mention of a payoff was made.

Yuter also stated during an evidentiary hearing that a female government attorney told her that she was the only female witness in the case, that National Medical was a disreputable company, and that there were no women corporate officers at National Medical. The same government attorney also posed the following question to Yuter, "What kind of a company would name its [health plan] 'PMS'?" The question reflects the fact that PMS is also a common abbreviation for premenstrual syndrome.

The district judge granted National Medical's motion and dismissed the government's action with prejudice. The district judge concluded that the government attorneys' statements to Yuter were intended to influence her testimony and to convince her that the government's position in the case was correct. The district judge reviewed the facts associated with the protective order and the previous sanction and concluded that "the conduct [that is] the subject of this order constitutes yet another attempt by [government] counsel to improperly influence a neutral witness." The district judge refused to accept the government's argument that dismissal was improper because no prejudice had been demonstrated.

II

The government contends that the district court abused its discretion in imposing the $3,000 compensatory sanction because the sanction was fundamentally unfair and because the alleged misconduct did not violate the protective order. Rule 37(b), Fed.R.Civ.P., authorizes the district court to impose a wide range of sanctions if a party fails to comply with a discovery order. See United Artists Corp. v. La Cage Aux Folles, Inc., 771 F.2d 1265, 1270-71 (9th Cir.1985) (La Cage ); Wyle v. R.J. Reynolds Industries, Inc., 709 F.2d 585, 589 (9th Cir.1983) (Wyle ). The district court's authority to issue the sanctions is subject to certain...