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In re Continental Illinois Securities Litigation

decided: April 23, 1984.

IN THE MATTER OF: CONTINENTAL ILLINOIS SECURITIES LITIGATION; APPEAL OF: CONTINENTAL ILLINOIS CORP. & CONTINENTAL ILLINOIS NATIONAL BANK & TRUST COMPANY OF CHICAGO


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 82-C-4712 -- John F. Grady, Judge.

Pell, Cudahy, and Posner, Circuit Judges. Pell, Circuit Judge, concurring in part and dissenting in part.

Author: Cudahy

CUDAHY, Circuit Judge.

In this appeal we must balance the public's right of access to documents relied on as evidence in civil proceedings against a party's interest in the confidentiality -- based primarily upon the attorney-client privilege -- of its investigation into the merits of derivative suits brought on its behalf. The district court held that Dow Jones & Company, Inc. (publisher of The Wall Street Journal) and Field Enterprises, Inc. (publisher of the Chicago Sun-Times) (collectively the "Newspapers") are entitled to copies of the Special Litigation Committee Report (the "Report") compiled in connection with derivative actions pending in the district court. Because the Report was admitted into evidence in connection with a motion pending before the district court and because the court expressly relied on the Report in reaching a tentative disposition of the motion, the public is presumptively entitled to the Report. The district court did not abuse its discretion in concluding that this presumption was not rebutted in this case. Therefore, we affirm the order of the district court granting access to the Report.

I. BACKGROUND

A. The Securities Litigation

Appellants, Continental Illinois Corporation ("CI Corp.") and its wholly-owned subsidiary, the Continental Illinois National Bank and Trust Company of Chicago (the "Bank") (collectively "Continental"), are defendants in derivative suits and class actions in the district court.*fn1 The derivative suits were brought by shareholders to compel Continental to assert claims it may have against third parties or, alternatively, to allow the shareholders to assert such claims on Continental's behalf. CI Corp.'s board of directors formed a Special Litigation Committee ("SLC") to evaluate the various derivative claims. Under Delaware law, which applies because CI Corp. is a Delaware corporation, if the corporation on whose behalf a derivative suit is brought decides, with court approval, that pursuit of the claim is not in the corporation's best interest, the action may be dismissed.*fn2 See Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981). The SLC was formed, presumably, so that none of the directors sued in the various actions would participate in the decision whether to terminate the claims. See Maldonado, 430 A.2d at 786.

CI Corp. empowered the SLC to conduct an investigation into the basis of the pending derivative actions to determine whether the actions should be dismissed as not being in the best interests of the Corporation. To assist it in this endeavor, the SLC retained the law firm of Jenner & Block and its partner, former U.S. Circuit Judge Philip W. Tone, as legal counsel. Jenner & Block, in turn, engaged Thomas A. Donahoe and the accounting firm of Price Waterhouse as its accounting consultants for investigation of allegations against Continental's independent auditors, Ernst & Whinney.

The SLC, with the aid of counsel, conducted its investigation between September 27 and December 7, 1982. This investigation involved, inter alia, reviewing numerous documents and summaries of interviews conducted earlier by the law firm of Mayer, Brown & Platt, which was Continental's counsel in the district court litigation. Additionally, Jenner & Block, on behalf of the SLC, conducted more than eighty interviews of bank employees and others who might have information about the Penn Square Bank fiasco. The law firm also researched the law applicable to the derivative claims, the standards governing special litigation committees and the availability of insurance coverage for liabilities arising in the litigation.

On December 7, 1982, the SLC met and decided that it would be in Continental's best interest to terminate all of the derivative actions except the Penn Square-related claims against three former officers of the Bank. Jenner & Block then prepared the Report which is the subject of this appeal, reporting and defending the SLC's conclusions. "The Report is 158 pages long and is a full and candid discussion of all the SLC's significant factual findings, its understanding of the applicable law, and its conclusions." Brief of Appellants at 8.

On December 8, Continental moved in the district court to terminate the claims the SLC found to be not in Continental's best interests. This brought into play the standards prescribed in Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981), which govern a court's review of a corporation's decision to terminate a derivative suit. The district court's interpretation of Maldonado led it to conclude that the reasonableness of the SLC's investigation and findings was an important determinant of whether it was proper to terminate the claims.*fn3 Thus, the Report became crucial to disposition of the motion to terminate. And on May 13 the district court -- Judge John Grady -- ordered Continental to provide the court and opposing counsel with a copy of the Report.*fn4

The district court determined that in order to terminate the claims, Continental had the burden of showing that the SLC conducted an independent investigation in good faith and that the bases for its conclusions were reasonable. (Step One). See Order dated May 6, 1983 pp. 5-6. If Continental met that burden then the district court would exercise "'its own independent business judgment' in determining whether the motion to dismiss should be granted." (Step Two). Id. at 5 (quoting Maldonado, 430 A.2d at 789). Continental introduced the Report into evidence at the June 30, 1983 hearing on Step One, presumably to support its claim that the SLC conducted an independent, good faith investigation and that the SLC's conclusions were reasonable. The record also indicates that witnesses testified in open court, on both direct and cross-examination, about the contents of the Report. In fact, on cross-examination in open court, plaintiffs' counsel read excerpts from the Report aloud to witnesses.

After the June 30 testimony was completed, Judge Grady, still in open court, discussed his "tentative impressions" of the merits of Continental's motion. It is apparent from the transcript that these "tentative impressions" were the result of detailed, careful analysis of the factual and legal issues raised by Continental's motion. Judge Grady agreed with the SLC that the cases against the outside directors should be dismissed. The trial judge noted that, if he were to find in favor of the plaintiffs on Step One, he would apply his own business judgment (Step Two) and conclude that public policy dictated dismissing the cases against the outside directors. Judge Grady disagreed, however, with the SLC's decisions concerning Ernst & Whinney and three bank officers, George R. Baker, Patrick M. Goy and James D. Harper, Jr. The court also stated that further argument was necessary on whether Continental's motion should be granted with respect to five additional defendants. In the cases of Ernst & Whinney and Harper, the district court concluded that the SLC's investigations were inadequate.*fn5 Regarding Baker and Goy, Judge Grady concluded that the suit should not be dismissed as to them despite the SLC's conclusion that recovery from the remaining defendants would provide the maximum financial benefits. Judge Grady feared that a jury might react to what would appear to be selective prosecution among bank officials by refusing to find anyone liable.

After hearing further argument on July 1, 1983, the district court set September 6, 1983, as the date for a further hearing, however, Judge Grady made it clear that only the plaintiffs were to be allowed to present evidence on September 6 and that the SLC had effectively rested its case and would only be allowed to present "argument from Counsel on the evidence . . . already heard." Continental Appendix at 389. In fact, Judge Grady clearly conveyed his attitude that his "tentative impressions" would become his rulings unless argument by defense counsel or evidence on behalf of the plaintiffs changed his mind. Continental Appendix at 384-85. The tentative nature of Judge Grady's conclusions appears to derive from the fact that the plaintiffs had not yet put on their case. It, therefore, seems more likely that what might have changed Judge Grady's mind was the evidence to be proffered by the plaintiffs rather than legal argument by the defendants.

On August 5, 1983, consistent with the district court's announced conclusions, the plaintiffs agreed to dismiss the derivative claims against the outside directors. On August 22, 1983, again in conformity with Judge Grady's views, Continental withdrew the motion to terminate the claims against the remaining defendants. In a letter to the district court, Continental's counsel explained that Continental did not wish to participate in a "mini-trial" of the merits of the claims against the remaining defendants. Such a "mini-trial" would have been necessary because of the district court's conclusion that it was required, under Maldonado, to evaluate the reasonableness of the SLC's decision to terminate the claims and to exercise its own business judgment before deciding the motion.*fn6

B. The Newspapers' Motion for Disclosure

Reporters from the Chicago Sun-Times and The Wall Street Journal covered the proceedings in the district court. A Wall Street Journal reporter attended the June 30 and July 1 hearings and wrote an article discussing Judge Grady's decision which appeared in the Journal's July 1, 1983 edition. An article written by a Chicago Sun-Times reporter appeared in that newspaper's July 5 edition. Both reporters informally requested access to the Report from the district court and, upon the district court's instructions, made formal motions to that effect.

On October 31, 1983, Judge Grady ordered that "the materials [he] considered" in arriving at his tentative impressions "should be open to inspection" by the press. Judge Grady specifically identified the Report as one of the documents he had considered and asked the parties to attempt to agree on which other documents should be produced. In arriving at this decision, Judge Grady apparently felt that his "tentative impressions" expressed after the June 30 hearing were tantamount to a judicial decision. He adopted this view because, consistent with the "impressions," the parties dismissed the outside directors and withdrew the motion to terminate in relation to the remaining defendants.*fn7

This appeal followed.*fn8

II. APPEALABILITY

The order requiring disclosure of the Report did not terminate the litigation in the district court. Thus, we must first address whether there has been a "final decision" of the district court within the meaning of 28 U.S.C. § 1291, sufficient to confer appellate jurisdiction.

If the order appealed from did not terminate the proceedings in the district court, it must meet the four prerequisites of the "collateral order" doctrine of Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541, 546, 93 L. Ed. 1528, 69 S. Ct. 1221 (1949). Three of the collateral order requirements present no problem in this case. The matter appealed from, disclosure of the Report, is, first, clearly separable from the merits of the underlying securities litigation and second, presents this court with important and unresolved legal questions. Third, if we were without jurisdiction to entertain this appeal, the rights asserted would be lost because, presumably, the Report would be released immediately. Once the Report was released, any error in releasing it would be impossible to correct. Compare In re UNR Industries, Inc., 725 F.2d 1111, 1117-18 (7th Cir. 1984). Thus, these three requirements of the Cohen doctrine are easily met. See generally In re UNR Industries, Inc., 725 F.2d at 1116-18; United States v. Dorfman, 690 F.2d 1230, 1231-32 (7th Cir. 1982); Oswald v. General Motors Corp., 594 F.2d 1106, 1118-21 (7th Cir.), cert. denied, 444 U.S. 870, 100 S. Ct. 146, 62 L. Ed. 2d 95 (1979).

There is a special problem in the application of the collateral order test to this case. The order appealed from is somewhat ambiguous as to whether Judge Grady actually ordered disclosure of the Report. For the district court held that all materials he relied on in formulating his decision on the motion to terminate were subject to disclosure. He further noted that he relied mainly on the Report. Finally, however, Judge Grady invited the parties to attempt to agree on which documents were subject to disclosure based on his order. The Supreme Court has indicated that, as an additional collateral order requirement, "tentative" decisions by the district court should not be appealable under the Cohen doctrine. See Coopers & Lybrand v. Livesay, 437 U.S. 463, 469 & n.11, 57 L. Ed. 2d 351, 98 S. Ct. 2454 (1976). While it may have been better practice to defer this appeal until a complete list of the documents subject to the order had been compiled, Judge Grady unequivocally held that the Newspapers were entitled to the Report. While conceivably the district court could, while compiling the list, have modified or reversed this conclusion, the likelihood of this happening is too slight to affect the finality of Judge Grady's decision. See Oswald, 594 F.2d at 1118; 15 L. WRIGHT, A. MILLER & E. COOPER, FEDERAL PRACTICE AND PROCEDURE § 3911 at 470 (1976). Therefore, we conclude that we have jurisdiction of this appeal under 28 U.S.C. § 1291. Cf. In re San Juan Star, 662 F.2d 108, 112-13 (1st Cir. 1981) (order prohibiting disclosure of deposition evidence appealable under "collateral order" doctrine).

III. THE MERITS

In support of its contention that the Report should remain confidential Continental has presented us with an array of purported impediments to disclosure. Continental argues (1) that the presumption of access to evidentiary material does not apply in this case; (2) that, instead, our only inquiry should be whether "good cause" existed for the entry of a protective order under FED. R. CIV. P. RULE 26(c) when the Report was originally sealed; (3) that the district court did not consider, or failed to attach adequate weight to, Continental's interest in confidentiality; and (4) that the failure of the district court to make findings on the weight to be accorded the various interests in disclosure or confidentiality of the Report requires us either to make a de novo examination of the case or to remand the case for such findings. While all of Continental's contentions are addressed below, we think it appropriate to view the case as presenting the question whether the district court properly balanced the ...


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