United States District Court, N.D. Illinois, Eastern Division
WASHTENAW COUNTY EMPLOYEES' RETIREMENT SYSTEM, Individually and on Behalf of All Others Similarly Situated, Plaintiffs,
v.
WALGREEN CO., GREGORY D. WASSON, and WADE D. MIQUELON, Defendants.
Sharon
Johnson Coleman District Judge.
MEMORANDUM OPINION AND ORDER
GABRIEL A. FUENTES UNITED STATES MAGISTRATE JUDGE.
Lead
Plaintiff Industriens Pensionsforsikring, A/S
("Plaintiffs")[1] has renewed its Motion To Compel
Defendant Wade D. Miquelon To Produce Documents Provided to
the Securities and Exchange Commission (D.E. 260,
"Motion to Compel"). The documents consist of three
PowerPoint presentations dated April 18, May 2, and June 7,
2018, and one "white paper" dated June 4, 2018
(collectively, "the Miquelon Rule 408 SEC
Materials"), submitted to the SEC during discussions
leading to a September 2018 settlement of the SEC's
investigation into Miquelon and the other two defendants in
this case, Walgreen Co. ("Walgreens") and Gregory
D. Wasson. Miquelon has submitted the Miquelon Rule 408 SEC
Materials for in camera review.[2] This matter is
before the magistrate judge on the district court's
referral for discovery supervision. (D.E. 147.) For the
reasons stated below, the Court denies the Motion to Compel.
I.
Background
The
underlying facts and allegations in this matter are set forth
in detail in Judge Sharon Johnson Coleman's recent
Memorandum Opinion (D.E. 244) granting in part and denying in
part the defendants' motion to dismiss under Rule
12(b)(6) and need not be repeated in full here. In short,
Plaintiffs have brought a securities fraud class action
lawsuit against Walgreens, its former Chief Executive Officer
Gregory D. Wasson ("Wasson"), and Miquelon, its
former chief financial officer (collectively,
"Defendants") under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. Plaintiffs' allegations
relate to Walgreens's public statements concerning the
expected benefits of a 2012 merger with Alliance Boots GmbH,
in the form of a goal, for fiscal year 2016, of between $9
billion and $9.5 billion ("the FY 2016 EBIT Goal")
in adjusted earnings before interest and taxes
("EBIT"). Id. at 2.
Plaintiffs
allege that Walgreens had become aware that earnings would
fall short of that goal, in large part due to a significant
level of generic drug price inflation and a phenomenon known
as "reimbursement pressure," by the class period of
March to August 2014 but continued to make statements or
omissions that downplayed the risk of not achieving the FY
2016 EBIT Goal. Id. "Despite Defendants'
actual knowledge of the Company's massive FY16 EBIT
shortfall and the company-specific reasons underlying it
(i.e., generic drug price inflation combined with
unfavorable reimbursement contracts), Defendants concealed
these material facts from investors and continued to tout the
$9 to $9.5 billion in FY16 EBIT." Redacted First Amended
Consolidated Class Complaint (D.E. 199,
"Complaint") ¶ 9. Defendant Miquelon, whose
2018 submissions to the SEC are sought in the Motion to
Compel, was chief financial officer of Walgreens during the
class period up to August 4, 2014. Defendant Miquelon's
Amended Answer to Consolidated Class Action Complaint (D.E.
87) ¶ 38.
Walgreens
asserts that it began negotiating a settlement with the SEC
in September 2017. Walgreens's Statement Regarding
Plaintiffs Motion to Compel (D.E. 273) at 1; Miquelon has
represented that in mid-December 2017, the SEC proposed
settlement terms to Miquelon's attorneys.[3] Defendant Wade D.
Miquelon's Response to Lead Plaintiffs Motion To Compel
Defendant Wade D. Miquelon To Produce Documents Provided to
the Securities and Exchange Commission (D.E. 272,
"Response") at 1. On September 28, 2018, the SEC
concluded its three-year investigation by announcing a
settlement that called for Walgreens to pay a $34.5 million
penalty and included a cease-and-desist order, along with a
penalty of $160, 000 for Miquelon and Wasson, without an
admission or denial by Walgreens, Miquelon, or Wasson of the
SEC's findings that they had misled investors about the
FY 2017 EBIT Goal. SEC Press Release 2018-220, "SEC
Charges Walgreens and Two Former Executives With Misleading
Investors About Forecasted Earnings Goal" (Sept. 28,
2018) (https://www.sec.gov/news/press-release/2018-220);
Motion to Compel, Ex. A.
The
portion of the SEC investigation leading to that settlement
was known as "Phase II." On November 14, 2018, this
Court, per then-Magistrate Judge Rowland, ordered defendants
to produce certain exhibits and core documents submitted to
the SEC during Phase II (Phase I being irrelevant to this
matter), except for materials concerning solely international
and/or non-pharmacy matters. (D.E. 171.) The November 2018
ruling on that separate, earlier motion to compel did not
concern the Miquelon Rule 408 SEC Materials. Judge Rowland by
then already had concluded that "documents addressing
the impact of generic inflation and/or reimbursement pressure
on the FY 2016 EBIT Goal are relevant for discovery" and
that Walgreens would have to produce them, whether they
address the impact of those two issues either in 2013-14 or
through fiscal year 2016. (D.E. 167.) Those conclusions are
unaffected by Judge Coleman's ruling on Walgreens's
motion to dismiss the Complaint, as she found nonactionable
only Plaintiffs' claim stemming from statements made at
the April 30, 2014, Barclay's conference by Rick Hans of
Walgreens. (D.E. 244 at 12.) In the end, this Court must
consider whether the Miquelon Rule 408 SEC Materials are
within the scope of permissible discovery as relevant to a
claim or defense and proportional to the needs of the case.
Fed.R.Civ.P. 26(b)(1).
The
Motion to Compel argues that the purported inadmissibility of
the Miquelon Rule 408 SEC Materials as settlement
communications does not render them non-discoverable in the
litigation. Motion to Compel at 3. Plaintiffs' argument
for discoverability rests mostly on what they describe as the
undisputed relevance of the Miquelon Rule 408 SEC materials
to the question of whether Defendants made actionable
misrepresentations, and their argument on proportionality is
limited to stating that "there is no burden in
re-producing the documents here." Id. at 3-6.
In response, Miquelon argues that FRE 408 and its underlying
purposes shield from discovery these four documents, which he
says in any event were "sourced from documents produced
to the SEC and testimony that has already been or will soon
be (as part of Walgreens' productions), produced to
Plaintiff[s]." Response at 3-4. Miquelon, like
Plaintiffs, presents little or no argument about Rule
26(b)(1)'s proportionality requirement as it might apply
to the compelled production of the Miquelon Rule 408 SEC
Materials. At oral argument on the motion, on November 12,
2019, counsel for Walgreens stated in open court that
disclosure of the Miquelon Rule 408 SEC Materials would have
a chilling effect on future settlement discussions, insofar
as Walgreens or other parties would have reason to be
concerned that their statements to the regulators would be
discovered in the private litigation.
II.
Analysis
The
Court's resolution of the Motion to Compel turns on an
analysis of whether the requested discovery meets Rule
26(b)(1)'s proportionality requirement. Both parties
correctly have cited Clark v. Experian Information
Solutions, Inc., No. 03 C 7882, 2006 WL 626820 (N.D.
III. Mar. 8, 2006), although for different propositions. As
Plaintiffs note, the district court in Clark
reasoned that Rule 408 "does not create any category of
documents that is off limits from discovery."
Id. at *2. In fact, Rule 26(b)(1), as amended in
2015, added the express language that "information
within th[e] scope of discovery need not be admissible in
evidence to be discoverable." Fed.R.Civ.P. 26(b)(1). As
Miquelon notes, the Clark court acknowledged that
"the purpose of Rule 408 to encourage settlement of
disputes might be chilled by fear that negotiations might be
discoverable, and have sought to balance furthering that
purpose with the policy of liberal discovery."
Clark, 2006 WL 626820 at *3. In considering how to
determine whether the requested discovery of Rule
408-protected materials is proportional to the needs of this
case, the Court must consider the degree to which such
compelled discovery would impose a burden on the important
social policy goals underlying Rule 408, and it must make
that determination within the framework of the needs of the
instant case and with the benefit of an in camera
review of the substance of the documents.
A.
Applying Rule 26(b)(1) Proportionality to Rule 408-Protected
Materials
The
Northern District of Indiana was one of the first courts to
have considered proportionality under Rule 26(b)(1) in the
context of a request to discover FRE 408 materials.
See Arcelormittal Indiana Harbor LLC v. Amex
Nooter, LLC, No. 2:15-CV-195-PRC, 2016 WL 614144 (N.D.
Ind. Feb. 16, 2016). The Arcelormittal court
analyzed Clark and other pre-2015 amendment
decisions that "adopted a higher standard for
discovering the settlement negotiations based on the
pre-amendment language of Rule 26(b)(1) that otherwise
inadmissible evidence is discoverable if it appears
reasonably calculated to lead to the discovery of admissible
evidence." Id. at *5 (internal quotations
omitted) (citing Pfizer Inc. v. Apotex, Inc., 731
F.Supp.2d 754, 762 (N.D. 111. 2010); Steele v. Lincoln
Fin. Group, No. 05 C 7163, 2007 WL 1052495, at *3-4
(N.D. 111. Apr. 3, 2007); Clark, 2006 WL 626820, at
*2-3; and Vardon Golf Co. v. BBMGT Golf. Ltd., 156
F.R.D. 641, 651-52 (N.D. 111. 1994)). The court in
Arcelormittal discussed how these cases denied or
restricted discovery into FRE 408 materials while recognizing
the absence of a federal settlement privilege, and how
judicial concerns about the policies underlying FRE 408 could
rest on Rule 26(b)(1)'s post-amendment language
emphasizing the proportionality requirement as an important
factor in calculating the scope of discovery. See
Arcelormittal, 2016 WL 614144, at *5-6 (discussing
cases).
The
court in Arcelormittal first concluded that the FRE
408 materials were relevant to the claims and defenses in the
action. Id. at *6. Although the court did not have
the benefit of briefing on the issue of proportionality of
the discovery under Rule 26(b)(1), it reached that question
nonetheless, granting the discovery based on (1) the
centrality of the discovery to the issues in the case; (2)
the court's conclusion that the "burden and expense
on Amex Nooter in producing these documents is low"; and
(3) the ability of a protective order to address any concerns
about the confidentiality of settlement negotiations
disclosed by the discovery. Id. at *7.
A
superficial reading of Arcelormittal's emphasis
on Rule 26(b)(1) relevance and proportionality might suggest
a shift away from considering the admissibility of FRE 408
materials in the discoverability calculus. After all, the
phrase "reasonably calculated to lead to the discovery
of admissible evidence" is disappearing from the lexicon
of the scope of discovery and was deleted from the text of
the rule in 2015. This Court sees the shift away from Rule
26(b)(1)'s pre-amendment language as more nuanced. The
purpose for which the Rule 408 materials are sought, and
whether such purpose is related to the materials'
inadmissibility under Rule 408, remain important, but not so
much under a theory that inadmissibility is an obstacle to
their discovery because such discovery cannot "lead to
the discovery of admissible evidence."
Rather,
when a party seeks Rule 408-protected material for the
express purpose of proving or disproving the validity or
invalidity of a claim or defense, the policies underlying FRE
408 move to the forefront, and the danger of undermining
those policies is at its greatest. In that type of
circumstance, a court must ensure under Rule 26(b)(1) that
even if the Rule 408-protected materials are relevant, the
threat that compelled production might pose to the policy
behind Rule 408 does not render the production
disproportionate to the needs of the case. And here is where
this Court parts ways with ...