I.

INTRODUCTION

Plaintiff Bal Seal Engineering, Inc. (“Bal Seal”) and Defendant Nelson Products, Inc. (“NPI”) are competitors; both make canted coiled springs. (Dkt. 38 at 4, 7.) In the operative First Amended Complaint, Bal Seal alleges that NPI misappropriated its trade secrets by “manufacturing ... canted coils springs for customers who come to it with a previously engineered solution,” i.e., a solution previously engineered by Bal Seal. (Id. at 7.) NPI’s operative Second Amended Counterclaim alleges claims for declaratory judgment, violations of the Sherman Act (15 U.S.C. § 2), unfair business practices, and intentional interference with prospective economic advantage. (Dkt. 60; Dkt. 163 [dismissing trade secret misappropriation counterclaim].)

On April 30, 2018, NPI moved for terminating sanctions against Bal Seal under Rules 16(f) and 37(b) of the Federal Rules of Civil Procedure and the Court’s inherent power due to Bal Seal’s alleged breach of the protective order entered in 2014 (“PO” at Dkt. 15). (Dkt. 198.) Bal Seal filed an opposition (Dkt. 233) and NPI filed a reply (Dkt. 255).

In a nutshell, NPI alleges that counsel for Bal Seal gave NPI documents designated as Highly Confidential—Attorneys’ Eyes Only (“AEO”) to Bal Seal personnel. (Dkt. 198 at 13-14.) Counsel for Bal Seal does not dispute that they provided certain NPI drawings to Bal Seal personnel, but they contend that this was done with NPI’s agreement, citing contemporaneous notes from a telephone conference and a subsequent confirming email. (Dkt. 233-1 [Fuller Decl. ¶¶ 7-10]; Dkt. 233-2 [Ford Decl. ¶¶ 18-22]; Dkt. 233-4 [notes from 11/16/17 call]; Dkt. 233-5 [11/16/17 email].)

II.

THE PO’S TERMS

The PO defines “Confidential Information” as information produced during discovery that the producing party deems confidential. (Dkt. 15 ¶ 1.) The PO permits parties producing Confidential Information to designate it either as “Confidential” or “Highly Confidential—For Attorneys’ Eyes Only” upon a “good faith belief” that the designation applies. (Id. ¶¶ 1, 4.) “Mass, indiscriminate, or routinized designations are prohibited.” (Id. ¶ 4(c).)

The PO restricts the disclosure of AEO materials to outside counsel and certain listed individuals (such as experts, e-discovery vendors, and clerical employees) “provided each such individual has read [the PO] in advance of disclosure and has agreed in writing to be bound by its terms.” (Id. ¶ 8.) Exhibit A to the PO is a form “Agreement to be Bound by Protective Order” that can be used to satisfy Paragraph 8 (the “Ex. A Form”). (Id. at 17.)

A party receiving designated material may object to the designation at any time by notifying the producing party in writing “of the objected-to materials and the grounds for the objection.” (Id. ¶ 13.) Notice provided via electronic mail is acceptable “provided a receipt confirming delivery is generated.” (Id. ¶ 27.) Disputes over designations may be “resolved consensually between the parties,” but if the parties cannot reach an agreement, then the objecting party “may move the Court for a ruling on the objections.” (Id. ¶ 13.) The PO’s “restrictions and obligations” do not apply “to any information that ... the parties agree should not be designated Confidential Information.” (Id. ¶ 24.)

*2 The use of designated materials is restricted to use “for purposes of this action.” (Id. ¶ 14.) “Counsel for each party, and each person receiving Confidential Information must take reasonable precautions to prevent the unauthorized or inadvertent disclosure of such information.” (Id.) At the end of the litigation, the receiving party must destroy or return all designated materials to the producing party. (Id. ¶ 22.)

The PO further provides that it “may be modified by written agreement of the parties, subject to approval by the Court.” (Id. ¶ 28.) “No modification by the parties shall have the force or effect of a Court order unless the Court approves the modification.” (Id.) Additionally, the “Court may modify the terms and conditions of [the PO] for good cause, or in the interest of justice, or on its own order at any time in these proceedings.” (Id. ¶ 29.)

III.

FACTUAL BACKGROUND

On October 27, 2017, counsel attended an in-person meet and confer conference at Fish IP Law in Irvine. (Dkt. 233-1 [Fuller Decl. ¶ 2].) During the meeting, Bal Seal’s counsel Daniel Fuller “raised concerns regarding the practical difficulties the parties’ respective productions created ... considering both parties had designated tens of thousands of documents” AEO. (Id. ¶ 3.) In particular, Mr. Fuller was concerned that “NPI had mass designated its entire production” as AEO. (Id. ¶ 4.) This meant that counsel could not get technical assistance from engineers at Bal Seal to determine which NPI part numbers appeared to be copies of Bal Seal products. (Id. ¶ 5.) Counsel discussed that using the AEO designation for everything was easier and faster than carefully reading each document. (Id. ¶ 4.) The lawyers did not reach an agreement as to how to handle the mass designations, but agreed to think about the issue and revisit it. (Id.)

The substance of these communications is reflected in detailed meeting notes taken by Bal Seal’s counsel Kristen Ford. (Dkt. 233-3.) Under the heading “Protective Order,” the notes have several bullet points, including “It’s easier to just produce everything as highly confidential ...” and “[b]oth sides are frankly guilty of violating the provision prohibiting mass or routinized designations.” (Id. at 6.) The last bullet point states, “we [counsel for Bal Seal] need to tell our client other customers should be on the list – Same thing for part numbers.” (Id.) Counsel for Bal Seal “would like to propose [a resolution] next week.” (Id.)

The declarations submitted by counsel for NPI, John van Loben Sels, do not address the October 27, 2017 meeting. (See Dkt. 198-2 and Dkt. 255-1.)

On November 16, 2017 at 10:00 a.m., counsel for Bal Seal (Mr. Fuller and Ms. Ford) participated in a telephonic meet and confer conference with NPI’s counsel (Mr. van Loben Sels and Jennifer Shih) on various discovery-related issues. (Dkt. 233-1 [Fuller Decl. ¶ 6].) Mr. Fuller declares that counsel reached the following agreement during the call:

*3 (Id. ¶ 7 (emphasis in original).) Mr. Fuller told Mr. van Loben Sels that “we would include our agreement on these issues in a confirming e-mail that we would send to him.” (Id.)

Mr. Fuller’s declaration is consistent with Ms. Ford’s notes from the November 16, 2018 call. (Dkt. 233-4 at 2 [notes saying “Any customer names that appear in the docs produced by NPI that are currently or have been Bal Seal customers we can disclose those names to our client plus any part numbers or drawing – NO PROBLEM WITH THAT. We will prepare something – maybe just an agreement – maybe an email.”). The notes conclude with a list of action items that includes “Confirming email re: protective order.” (Id. at 4.)

Mr. Fuller’s declaration is also consistent with the fact that at 10:59 a.m. on November 16, 2017, Ms. Ford sent Mr. van Loben Sels an email, cc’d to Mr. Fuller, stating in relevant part:

(Dkt. 233-5 [the “Confirmation Email”].)

Bal Seal representative Jonathan Stillman declares that on November 16, 2017, shortly after 11:00 a.m., he received a call from Ms. Ford informing him that NPI’s counsel had agreed during the meet and confer conference earlier that morning that Bal Seal’s counsel could disclose the customer names (that are already Bal Seal customers), and part numbers and design drawings that appear in NPI’s production. (Dkt. 233-21 [Stillman Decl. ¶ 2].) Ms. Ford told him that she had sent a confirming email to Mr. van Loben Sels and was waiting to make sure he did not have any qualifiers. (Id.) Bal Seal did not receive a response to the Confirmation Email.

In mid-to-late-day on November 16, 2017,[1] Mr. Stillman received from Bal Seal’s counsel a binder that contained design drawings produced by NPI (the “Binder”). (Id. at ¶ 4.) Mr. Stillman gave the Binder to Bal Seal engineer Daniel Poon who was tasked with writing a computer program to identify the Bal Seal part numbers that matched NPI part numbers. (Id. at ¶¶ 6-8.) The Binder was kept in a cabinet in Mr. Poon’s office which is locked when he is not there. (Id. at ¶ 9.) On April 19, 2018, Mr. Stillman retrieved the Binder from Mr. Poon and returned it to counsel. (Id.)

Mr. Poon showed the Binder only to Bal Seal employee Hamida Temori who assisted him in creating the computer program. (Dkt. 233-19 [Poon Decl. ¶ 11].) Ms. Temori did not share Binder with anyone. (Dkt. 233-20 [Temori Decl. ¶¶ 2-4].)

In April 2018, Mr. Stillman also received electronic copies of design drawings that NPI produced in discovery following March 2018 depositions. (Dkt. 233-21 [Stillman Decl. ¶ 13].) He forwarded the e-files to Bal Seal employee Richard Aceves. (Id.) Mr. Aceves has expertise in data mining and was tasked with identifying correct matches based on the output from Mr. Poon’s computer program. (Id. at ¶ 11.) Mr. Aceves received the e-files and a spreadsheet with output from Mr. Poon’s program. (Dkt. 233-22 [Aceves Decl. ¶¶ 4, 6].) Per instructions, he did not share the e-files with anyone, and the only other Bal Seal employee with whom he shared the spreadsheet was Roy Dilig in IT. (Id. at ¶¶ 5, 8.) Mr. Dilig did not share the spreadsheet with anyone. (Dkt. 233-23 [Dilig Decl. ¶¶ 6-7].)

*4 On February 7, 2018, Bal Seal served its Third Amended Identification of Trade Secrets adding numerous additional companies that were mutual customers of Bal Seal and NPI and from whom Bal Seal alleged NPI had improperly acquired Bal Seal’s trade secrets; the allegedly copied products were identified using both Bal Seal’s and NPI’s part number. (Dkt. 197-1 [sealed].) When NPI’s counsel reviewed it, “a question arose among [his] team and client concerning how Bal Seal or its counsel could have possibly made the product connections that it did as reflected in that chart.” (Dkt. 198-2 [van Loben Sels Decl. ¶ 5].) Bal Seal could not know “the characteristics of the NPI parts without the use of NPI’s production documents which contained that information, and which had all been produced” designated AEO. (Id. ¶ 6.)

On March 15, 2018, Mr. van Loben Sels sent a letter asking Bal Seal to identify by Bates number what documents Mr. Poon had access to when writing his computer program (which Mr. Poon had described at his February deposition). (Dkt. 198-6.) On March 30, 2018, Ms. Ford sent a letter stating Bal Seal “will not be providing additional information in regards to the documents reviewed by Daniel Poon as NPI’s counsel had the opportunity to inquire about these documents during Mr. Poon’s deposition.” (Dkt. 233-8.) Ms. Shih sent an email the same day saying, “We take Bal Seal’s refusal to identify Mr. Poon’s documents as an admission that Bal Seal and its counsel deliberately violated the protective order.” (Dkt. 233-9.) On April 2, 2018, Ms. Ford responded by asking NPI’s counsel to state “what specifically leads [NPI] to believe Bal Seal violated the Protective Order.” (Dkt. 233-10.) Mr. van Loben Sels responded, “We have provided you all the information you need ....” (Id.) On April 5, 2018, Mr. van Loben Sels wrote an email clarifying that the basis of NPI’s claim was that “Mr. Poon is not an authorized recipient of NPI’s AEO information under the protective order.” (Dkt. 233-11.)

On April 11, 2018, Bal Seal responded to a request for production from NPI seeking documents Mr. Poon referenced in his deposition by objecting that “all such documents are already in the possession of NPI, including the very exhibit about which Mr. Poon testified he was given and from which he extracted the NPI part information and design drawings which he reviewed pursuant to the parties’ November 16, 2017 agreement.” (Dkt. 198-8 [RFP No. 142].)

On April 12, 2018, Ms. Shih cited this discovery response in an e-mail to Bal Seal’s counsel, claiming the response indicated Bal Seal was taking its “own email as carte blanche to share NPI’s [AEO] documents” in violation of the PO. (Dkt. 233-13.) On April 13, 2018, Ms. Ford responded via email asserting, “At all times Bal Seal complied with the terms of the Protective Order in this case and the parties’ subsequent November 16, 2017 agreement which is attached hereto.” (Id.) Thus, shortly after Bal Seal understood the basis of NPI’s claim that Bal Seal had violated the PO, Bal Seal referred to the November 16, 2017 agreement. (Id.)

Mr. van Loben Sels declares that the “first time [he recalls] reading Ford’s November 16 email was after Bal Seal cited it in a discovery response.” (Dkt. 255-1 [van Loben Sels Decl. ¶ 11].) He explains it is “difficult ... to keep up with email correspondence” because he travels frequently and receives hundreds of emails, making it “essential” that an associate or paralegal be copied on emails addressed to him. (Id. ¶¶ 8-9.) He notes that the Confirmation Email—unlike nearly all the other emails from Bal Seal’s counsel over the course of the lawsuit—was not cc’d to anyone else on the NPI legal team. (Id.)

Mr. van Loben Sels further declares that had he read the Confirmation Email when it was sent, he would have “responded and disavowed any such agreement, or sought clarification of what [Ms. Ford] meant in her cryptically worded message.” (Id. ¶ 11.) Regarding the Confirmation Email, Mr. van Loben Sels declares, “the parties never made any such agreement concerning design documents because no such conversation ever took place.” (Dkt. 198-2 [van Loben Sels Decl. ¶ 14].) Mr. van Loben Sels agrees he participated in a meet and confer call with Bal Seal’s counsel on November 16, 2017, but declares, “The parties never had a discussion about NPI giving Bal Seal permission to share NPI’s AEO design drawings with Bal Seal’s engineers.” (Id. ¶ 21.) According to Mr. van Loben Sels, “The discussion on November 16, 2017 concerned the possible sharing of classified NPI sales data with ... Jon Stillman ....” (Id. ¶ 22.)

*5 Mr. Fuller responded to Mr. van Loben Sels’ description of the November 16, 2017 call as follows:

(Dkt. 233-1 [Fuller Decl. ¶ 12] (emphasis and italics in original).) Ms. Ford’s notes from the November 2017 call do mention “sales docs,” but only in the context of NPI saying “no additional sales docs are being produced” in response to one of Bal Seal’s motions to compel. (Dkt. 233-4 at 2, 1 (“sales docs” “produced yesterday”).)

IV.

DISCUSSION

A. Counsel for Bal Seal Believed Counsel for NPI had Agreed to Re-Designate Certain NPI Drawings from AEO to Confidential.

1. The Agreement’s Formation.

Based on the evidence summarized above, the Court finds that after the November 16, 2017 call and upon not receiving a response to the Confirmation Email, counsel for Bal Seal believed in good faith that they had reached an agreement with NPI. As they understood it, the agreement permitted them to share drawings produced by NPI designated AEO with personnel at Bal Seal who were assisting with the litigation, essentially downgrading the designation of those documents from AEO to Confidential. (See Dkt. 15 ¶ 9 [Confidential material may be viewed by “executives and others employed or retained by the receiving party who participate in policy decisions with reference to this action ....”].) This is consistent with (1) the October 2017 meeting notes, (2) the November 2017 call notes, (3) the Confirmation Email, and (4) the declarations of Mr. Fuller and Ms. Ford. It is further consistent with facts that (1) counsel needed technical assistance matching NPI and Bal Seal part numbers, which was important to Bal Seal’s litigation strategy, (2) Ms. Ford called Mr. Stillman immediately after speaking with NPI’s counsel and told him that counsel had reached an agreement, (3) Bal Seal served an amended trade secret identification making it apparent it had compared the technical specifications for certain NPI and Bal Seal part numbers (i.e., counsel did not feel that they needed to hide this analysis), (4) Bal Seal cited the parties’ agreement in its April 11, 2018 discovery response, and (5) when NPI argued that this discovery response was evidence of wrongdoing, Ms. Ford again cited the parties’ agreement in her April 13, 2018 email.

*6 NPI argues that the subject of sharing NPI’s drawings with Bal Seal personnel never came up at all; the only documents Bal Seal’s counsel requested to share with their client were “sales data.” The Court finds this account less credible because (1) the parties had numerous, detailed meetings and calls to discuss discovery disputes, and Mr. van Loben Sels does not reference any notes that he or Ms. Shih took that he could have reviewed to refresh his recollection, (2) sharing sales data with Bal Seal personnel would not have advanced Bal Seal’s litigation strategy, and (3) the Confirmation Email says nothing about sales data.

NPI argues that the Court should disbelieve the existence of the asserted agreement because “[u]nder no circumstances” would its counsel have entered an agreement to allow Bal Seal’s engineers to see “its most sensitive design documents.” (Dkt. 198 at 22.) It may be that Mr. van Loben Sels did not fully appreciate the proposal to which he said, “no problem,” and did not see the Confirmation Email until months later. Alternatively, it may be that the agreement seemed reasonable to Mr. van Loben Sels at the time to avoid further costly, time-consuming disputes over mass AEO designations, and its terms only became the focus of attention when NPI’s counsel saw Bal Seal’s third amended trade secret identification. Neither scenario shows “deliberate misconduct” on the part of Bal Seal. (Id. at 9.)

2. The Agreement’s Efficacy.

NPI argues that even if the parties formed some agreement in November 2017, Bal Seal still violated the PO because (1) the PO could not be changed by agreement of the parties, or (2) Bal Seal acted beyond the scope of any reasonable interpretation of the agreement.

The parties could agree to modify the terms of the PO, but the agreed-upon modifications would not “have the force or effect of a Court order” absent court approval. (Dkt. 15 ¶ 28.) Without a court order, however, the parties could agree to re-designate AEO documents as “Confidential” or as not bearing any confidentiality designation. (Id. ¶¶ 13, 24.)

NPI argues that the Confirmation Email should be interpreted as an attempt to change PO Paragraph 8 by agreement, and is thus ineffective. (Dkt. 198 at 15.) NPI argues that the Confirming Email does not describe an agreement to de-designate or re-designate drawing documents because it does not use those terms and does not refer to AEO designations at all. (Id.) Bal Seal counters that it was seeking NPI’s agreement to have certain drawings produced as AEO no longer treated as such, and de-designation is something to which NPI could agree without a court order. (Dkt. 233 at 9, 18.)

The Confirmation Email references “the Protective Order” and memorializes an agreement to “discuss with or disclose” certain documents “with our client,” i.e., with personnel at Bal Seal. (Dkt. 233-5.) The only context in which counsel for Bal Seal would need NPI’s agreement to share documents with their client is for sharing documents NPI produced designated AEO. Counsel for NPI must have understood Bal Seal was talking about sharing AEO documents, because NPI designated its entire production (19,000 plus documents at the time and 129,000 plus documents now) as AEO. (Dkt. 233-2 [Ford Decl. ¶ 16].)

For these reasons, the Court declines to find that the parties agreed to modify the PO without Court approval (making their agreement a nullity) and instead finds that counsel for Bal Seal believed in good faith that NPI had agreed to de-designate NPI drawings for customers shared with Bal Seal as no longer AEO, per the Confirmation Email.

3. The Agreement’s Scope.

*7 NPI argues that the Confirmation Email “does not purport to cover drawings designated as Highly Confidential—Attorneys’ Eyes Only.” (Dkt. 255-1 [van Loben Sels Decl. ¶ 11].) Again, that email memorializes an agreement that counsel for Bal Seal can share certain NPI drawings with their client, and all NPI drawings were designated AEO, so the Confirmation Email necessarily covers AEO drawings.

NPI argues that it could not agree to change AEO designations made by third parties who produced documents in response to subpoenas. While this is true, there is no evidence that the documents shared with Bal Seal personnel were AEO documents produced by parties other than NPI. Ms. Ford declares that the Binder contained Bal Seal drawings and NPI drawings, and the e-files included “design drawings” NPI had recently produced in discovery. (Dkt. 233-2 [Ford Decl. ¶¶ 44-45].)

NPI argues that it would have been unreasonable for Bal Seal to think that NPI agreed to re-designate its drawings from AEO to no protection at all. The Court agrees, and counsel for Bal Seal does not appear to have interpreted the agreement in that manner, because they instructed the employees who received the drawings to treat them as Confidential. Under the PO, persons receiving Confidential Information are required to execute the Ex. A Form “in advance of disclosure.” (Dkt. 15 ¶ 9.) It is undisputed that the Bal Seal employees at issue executed the Ex. A Form on April 16, 2018, which was after disclosure. (Dkt. 233-15 [Ex. A Forms executed by Stillman, Dilig, Poon, Temori, and Aceves].)

B. Terminating Sanctions Are Not Warranted.

“Dismissal is a harsh penalty and is to be imposed only in extreme circumstances.” Henderson v. Duncan, 779 F.2d 1421, 1423 (9th Cir. 1986). Before dismissing a case with prejudice for failure to comply with a court order, the district court must weigh five factors: (1) The public’s interest in expeditious resolution of litigation; (2) the court’s need to manage its docket; (3) the risk of prejudice to the defendant; (4) the public policy favoring disposition of cases on their merits; and (5) the availability of less drastic sanctions. Malone v. U.S. Postal Service, 833 F.2d 128, 130-133 (9th Cir. 1987), cert. den., 488 U.S. 819 (1988) (dismissal of pro se litigant’s case for failure to comply with pre-trial order was not abuse of discretion).

To the extent that both parties committed minor violations of the PO—Bal Seal by obtaining late executions of Ex. A Forms and NPI by mass designating its production AEO—neither of these violations merits terminating sanctions. NPI’s motion for terminating sanctions is based on the premise that sharing the Binder and e-files with Bal Seal personnel violated the PO, causing competitive harm to NPI. Pursuant to the discussion above, the Court finds that Bal Seal’s counsel’s disclosure of the Binder and the e-files to Bal Seal personnel was not a violation of the PO.

V.

RECOMMENDATION.

Based on the foregoing, the Court recommends that NPI’s motion be DENIED.

While Ms. Ford declares that after sending the Confirmation Email, she “waited approximately 24 hours before disclosing any information to Bal Seal,” the Court does not find this inconsistency material. (See Dkt. 233-2 [Ford Decl. ¶ 40].)

Ms. Shih also submitted a declaration stating that, while she participated in the November 16, 2017 call, the “parties never discussed that day the possibility of NPI giving Bal Seal permission to share NPI’s AEO design drawings with Bal Seal’s engineers under any circumstances.” (Dkt. 199 [Shih Decl. ¶ 8].) Ms. Shih asserts that the discussion concerned the “possible sharing of classified NPI sales data” with Mr. Stillman. (Id. ¶ 9.)