FTC v. Mytel Int'l, Inc.
FTC v. Mytel Int'l, Inc.
2014 WL 12980754 (C.D. Cal. 2014)
November 6, 2014
Segal, Suzanne H., United States Magistrate Judge
Summary
The FTC obtained over 185,000 documents, including emails, from the HBPD. The Court granted Defendants' Motion for Stay and Evidentiary Hearing and denied the FTC's Motion for Leave to Conduct Discovery and Motion in Limine without prejudice. An evidentiary hearing was ordered to determine whether and to what extent Defendants' attorney-client privilege may have been violated. The Court noted that ESI may be relevant and that subpoenas may need to be served to obtain it.
Additional Decisions
FEDERAL TRADE COMMISSION, Plaintiff,
v.
MYTEL INTERNATIONAL, INC., et al., Defendants
v.
MYTEL INTERNATIONAL, INC., et al., Defendants
Case No. CV 87-7259 GHK (SS)
United States District Court, C.D. California
Filed November 06, 2014
Counsel
Elsie B. Kappler, Pro Hac Vice, Elizabeth J. Averill, Pro Hac Vice, Hong J. Park, Pro Hac Vice, Ke Zhang, Pro Hac Vice, Kimberly L. Nelson, Pro Hac Vice, Mark S. Hegedus, Pro Hac Vice, Reenah L. Kim, Pro Hac Vice, Robin L. Moore, Pro Hac Vice, Sangjoon Han, Pro Hac Vice, Taylor H. Bates, Pro Hac Vice, Federal Trade Commission, Washington, DC, John Jacobs, Federal Trade Commission, Los Angeles, CA, for Plaintiff.Mark E. Beck, Mark Beck Law PC, Pasadena, CA, Warrington S. Parker, III, Crowell and Moring LLP, San Francisco, CA, for Defendants Mytel Internatl Inc.
Benjamin B. Wagner, Gibson Dunn and Crutcher LLP, Palo Alto, CA, Mark E. Beck, Mark Beck Law PC, Pasadena, CA, Kenneth Bartlett Jordan, Gibson Dunn and Crutcher LLP, Irvine, CA, Warrington S. Parker, III, Crowell and Moring LLP, San Francisco, CA, for Defendants Gilbert N. Michaels.
Keri Curtis Axel, Waymaker LLP, Los Angeles, CA, Ariel A Neuman, Terry W. Bird, Bird Marella Boxer Wolpert Nessim Drooks Lincenberg & Rhow, Los Angeles, CA, Emily Rebecca Megan Stierwalt, Waymaker LLP, Los Angeles, CA, Gabriela Rivera, Bird Marella Wolpert Nessim Drooks Lincenberg and Rhow PC, Los Angeles, CA, Warrington S. Parker, III, Crowell and Moring LLP, San Francisco, CA, for Defendants Gerald Feldman.
Benjamin B. Wagner, Gibson Dunn and Crutcher LLP, Palo Alto, CA, Kenneth Bartlett Jordan, Gibson Dunn and Crutcher LLP, Irvine, CA, for Defendants GNM Financial Services Inc.
Segal, Suzanne H., United States Magistrate Judge
MEMORANDUM DECISION AND ORDER: (1) GRANTING DEFENDANTS' MOTION FOR A STAY AND EVIDENTIARY HEARING (Dkt. No. 24); (2) DENYING WITHOUT PREJUDICE FEDERAL TRADE COMMISSION'S MOTION FOR CONTINUANCE AND LEAVE TO CONDUCT DISCOVERY (Dkt. No. 20); AND (3) DENYING WITHOUT PREJUDICE FEDERAL TRADE COMMISSION'S MOTION IN LIMINE (Dkt. No. 39)
I.
INTRODUCTION
*1 The Federal Trade Commission alleges that Defendants Gilbert N. Michaels, Michaels' company Mytel International, Inc. (“Mytel”), and Mytel's officer Gerald Feldman have violated this Court's 1988 Permanent Injunction by continuing to engage in deceptive practices in the sale of toner products. The FTC filed a Contempt Motion on April 17, 2014 seeking among other things disgorgement of $128 million and the coercive sanction of incarceration if Defendants fail to pay that amount in full. (“Contempt Motion,” Dkt. No. 3 at 24). At the same time, the Orange County District Attorney's Office (“OCDA”) is conducting a criminal investigation based on the same alleged conduct.
On June 10, 2014, the FTC filed a Motion for Continuance and Leave to Conduct Discovery (“Discovery Motion” or “DM”), including the declaration of Thomas Goodhue.[1] (“Goodhue Decl.,” Dkt. No. 20). On June 23, 2014, Defendants filed an Opposition (“DM Opp.”), including the declaration of Thomas S. McConville. (“McConville Decl.,” Dkt. No. 31). On June 30, 2014, the FTC filed a Reply. (“DM Reply,” Dkt. No. 34).
Also on June 10, 2014, the FTC filed a “Motion in Limine to Admit Consumer Complaints and Declarations in Evidence” for use in the contempt proceeding. (Dkt. No. 21). Defendants filed an Opposition on June 23, 2014. (Dkt. No. 29). The FTC filed a Reply on June 30, 2014. (Dkt. No. 35). On July 2, 2014, Judge King struck the Motion in Limine and ordered the Parties to file a Joint Stipulation, (Dkt. No. 38), which the Parties filed on July 16, 2014. (“MIL Jt. Stip.,” Dkt. No. 39).
Concurrently with the FTC's Motions, on June 16, 2014, Defendants filed a “Motion to Stay the Contempt Motion and for an Evidentiary Hearing into Violations of the Attorney-Client Privilege” (“Stay Motion” or “SM”), including the declarations of Mark E. Beck (“Beck Decl.”) and Crystal Zarpas.[2] (“Zarpas Decl.,” Dkt. No. 24). Defendants seek a stay of all contempt proceedings to allow the Court to conduct an evidentiary hearing to determine whether the FTC has been tainted by exposure to Defendants' privileged information. The FTC filed an Opposition on June 23, 2014. (“SM Opp.,” Dkt. No. 29). On June 30, 2014, Defendants filed a Reply. (“SM Reply,” Dkt. No. 37).
*2 On August 22, 2014, Judge King referred all pending motions, with the exception of the FTC's Contempt Motion, to the undersigned Magistrate Judge. (Dkt. No. 42). The Court held a hearing on October 28, 2014. For the reasons stated below, Defendants' Motion for a Stay and an Evidentiary Hearing is GRANTED. The FTC's Motion for a Continuance and Leave to Conduct Discovery is DENIED as MOOT to the extent that it seeks a continuance of the Contempt Motion hearing date and DENIED WITHOUT PREJUDICE to refiling a request for leave to conduct discovery after the Court issues a decision on the privilege matters at issue in the evidentiary hearing. The FTC's Motion in Limine is also DENIED WITHOUT PREJUDICE to refiling after the Court's evidentiary hearing ruling.
II.
BACKGROUND FACTS
On November 16, 1988, this Court issued a Final Order and Judgment against Mytel and Michaels in an action brought by the FTC.[3] (See Zarpas Decl., Exh. A). The judgment included a permanent injunction prohibiting Mytel and Michaels from engaging in certain business practices, including shipping toner products on behalf of sales companies known by Defendants to employ deceptive telemarketing sales tactics. (Id. at 4-18). The injunction also imposed affirmative obligations on Defendants to prevent further fraudulent behavior. (Id.).
In May 2013, the Huntington Beach Police Department (“HBPD”) joined in an inter-agency execution of a search warrant on Mytel.[4] (SM at 1). According to Defendants, both during the seizure and “repeatedly” thereafter, their counsel alerted the Orange County prosecutor in charge of the investigation that “the seized documents include material protected by the attorney-client privilege.” (Id.). The OCDA allegedly declined Defendants' offers to assist in identifying and isolating privileged documents. (Id.).
Between June 2013 and March 2014, the HBPD produced over 185,000 documents that it had obtained from Mytel to the FTC. (Goodhue Decl. ¶ 2). Approximately 160,000 of these documents were emails. (Id. ¶ 17). As the documents came in, Thomas Goodhue, the FTC attorney in charge of the investigation, sent them to the FTC's Bureau of Consumer Protection Litigation Support Unit “for routine processing.” (Id. ¶¶ 4, 8, 12, 15).
The HBPD's first production occurred on June 21, 2013. (Id. ¶ 3). Goodhue states that he reviewed the documents, but does not recall seeing any privileged materials. (Id. at 5). In the fall of 2013, Goodhue spoke with HBPD Detective Kevin Kesler about Mytel's documents. (Id. ¶ 6). Goodhue agreed to receive further materials, but emphasized that “the HBPD could not produce any grand jury materials or documents that were attorney-client privileged as to defendants.” (Id.). Kesler confirmed that the HBPD would not produce grand jury documents or attorney-client privileged documents. (Id.).
The remaining productions took place on November 1, 2013; January 29, 2014; and March 11-18 and 25-27, 2014, when several “smaller sets” of email productions were produced. (Id. ¶¶ 7, 11, 14). Goodhue states that although he reviewed some documents from these productions after they had been processed by Litigation Support, he “did not view documents that were potentially privileged as to either defendants or any law enforcement agency.” (Id. ¶¶ 9, 13, 16).
In early April 2014, Defendants raised concerns with Goodhue that the HBPD production, particularly the emails, included communications protected from disclosure by the attorney-client privilege. (Id. ¶ 17). In response, the FTC ran an automated search using the names of Defendants' attorneys, which resulted in the identification of 443 potentially privileged documents. (Id. ¶¶ 18-19). Upon this discovery, the FTC discontinued its review and sequestered the emails. (Id. ¶ 20). On April 11, 2014, the FTC provided copies of the 443 potentially privileged documents to Defendants, who later confirmed that 358 of them were in fact privileged. (Id. ¶ 21; SM at 7).
*3 A week later, on April 17, 2014, the FTC filed its Contempt Motion. (Goodhue Decl. ¶ 22). On April 24, 2014, Defendants demanded that the FTC produce copies of all documents that it had obtained from the HBPD. (Id. ¶ 24). The FTC complied and produced the documents on May 5 and 6, 2014. (Id. ¶ 25).
Defendants performed a “cursory” search and discovered that more of their privileged documents were in the database. (SM at 8; Beck Decl. ¶ 14). As Defendants began to conduct a more comprehensive review, they also discovered that the production included numerous confidential government investigation documents created by the OCDA and the HBPD. (SM at 9). The FTC asked Defendants to discontinue their review of the database. (Id.).
III.
THE PARTIES' CONTENTIONS
The parties are at an impasse because even though each side has a copy of the approximately 185,000 documents seized by the HBPD, neither side can review them without the risk of violating either the attorney-client or law enforcement “official information” privilege. The FTC proposes a discovery strategy that it argues will overcome the impasse. Defendants contend that preliminary issues concerning the potential violation of the attorney-client privilege must be resolved before the FTC's Discovery Motion and Motion in Limine can be addressed.
In its Discovery Motion, the FTC proposes to break the litigation impasse by returning or destroying all documents it obtained from the HBPD, with the exception of documents attached to its Contempt Motion, and conducting discovery to obtain additional evidence from Defendants and third parties without the risk of invading Defendants' attorney-client privilege. (DM at 4-5). According to the FTC, because Defendants maintain their documents on their own systems, Defendants will be able to review their system-stored documents for privilege in responding to targeted document requests without the risk of coming upon law enforcement-privileged documents. (Id. at 4).
The FTC also seeks leave to conduct the following discovery: (1) depositions of Michaels, Feldman and the corporate entity IDCServco;[5] (2) requests for admission on Defendants; (3) document subpoenas on twenty-five sales companies that allegedly made misrepresentations to consumers;[6] (4) telephonic depositions of twenty-five consumers who were allegedly defrauded by Defendants; and (5) telephonic depositions of three toner suppliers that Defendants allegedly falsely claimed to represent. (Id. at 5-9). The FTC argues that this discovery will streamline the Contempt Motion proceedings and update the evidence to reflect Defendants' allegedly continuing violations. (Id.). Finally, in its Motion in Limine, the FTC seeks a ruling on the admissibility of the consumer complaints and declarations attached as exhibits to its Contempt Motion. (MIL Jt. Stip. at 1-11).
Defendants argue that the Court should not “reward” the FTC for its mistakes in building its case around a “tainted” database by allowing the FTC to engage in “unilateral and extensive fact discovery” to obtain alternate evidence. (DM Opp. at 3). In their Motion, Defendants argue that a stay is necessary so that the court may conduct an evidentiary hearing into potential violations of the attorney-client privilege. Defendants maintain that the FTC should have known that the documents it received included privileged materials in light of its prior litigation with Defendants and therefore should have taken “the necessary precautions” to avoid exposure to their privileged communications. (SM at 9-11). Defendants also argue that even if the FTC did not directly review the majority of documents it received, it may have “derivatively” been exposed to privileged information because it relied on the assistance of HBPD Detective Kevin Kesler, who participated in the seizure of Defendants' documents and reviewed them. (Id. at 12). Defendants contend that an evidentiary hearing will clarify whether Kesler “shared investigative facts” gleaned from the review of privileged documents with the FTC. (Id.).
*4 The FTC contends that a stay is not warranted because Defendants' Motion does not raise issues that affect the merits of FTC's Contempt Motion. (SM Opp. at 1). Furthermore, FTC's counsel has sworn in declarations under oath that the FTC has not reviewed any privileged material. (Id. at 2; see also DM, Exhs. A-B). Even if it had, the FTC contends that there is no “exclusionary rule” in civil proceedings. (SM Opp. at 2). Finally, the FTC argues that a stay is unnecessary because the four-month window it requested to conduct discovery will provide Defendants with ample opportunity to file a “taint” motion. (Id. at 4).
At the hearing, the Court asked the Parties who they would call as witnesses if the Court were to order an Evidentiary Hearing. Defendants stated that they intended to call:
1. OCDA Senior Deputy District Attorney Marc Labreche;
2. An unnamed investigator with the OCDA;
3. HBPD Detective Kevin Kesler;
4. HBPD Officer Yashaf Nikitin;
5. USSS Agent Warren;
6. Former FTC Attorney Thomas Goodhue;
7. Current FTC Attorney Elsie B. Kappler; and
8. Current FTC Attorney Reenah L. Kim.
The FTC stated that it did not intend to call other witnesses, though it reserved the right to call rebuttal witnesses as necessary if the Court orders an Evidentiary Hearing.
IV.
STANDARDS
A. Stay Requests
As part of the court's “inherent power to control its docket and promote efficient use of judicial resources,” Dependable Highway Exp., Inc. v. Navigators Ins. Co., 498 F.3d 1059, 1066 (9th Cir. 2007), a court may decide in its discretion to stay civil proceedings “when the interests of justice seem to require such action.” Keating v. Office of Thrift Supervision, 45 F.3d 322, 324 (9th Cir. 1995) (internal quotation marks omitted); see also Leyva v. Certified Grocers of California, Ltd., 593 F.2d 857, 863–64 (9th Cir. 1979) (“A trial court may, with propriety, find it is efficient for its own docket and the fairest course for the parties to enter a stay of an action before it, pending resolution of independent proceedings which bear upon the case. This rule applies whether the separate proceedings are judicial, administrative, or arbitral in character, and does not require that the issues in such proceedings are necessarily controlling of the action before the court.”). This determination is case-specific and “particular [to the] circumstances and competing interests involved in the case.” Federal Sav. & Loan Ins. Corp. v. Molinaro, 889 F.2d 899, 902 (9th Cir. 1989).
Case management concerns, standing alone, “[are] not necessarily a sufficient ground[s] to stay proceedings.” Dependable Highway Exp., 498 F.3d at 1066. Factors a court may consider in determining whether a stay is warranted “will vary according to the case itself,” Molinaro, 889 F.2d at 903, but will generally include “(1) potential prejudice to the non-moving party; (2) hardship and inequity to the moving party if the action is not stayed; and (3) the judicial resources that would be saved by avoiding duplicative litigation if the cases are in fact consolidated.” Rivers v. Walt Disney Co., 980 F. Supp. 1358, 1360 (C.D. Cal. 1997).
B. Evidentiary Hearing Requests
The purpose of an evidentiary hearing is “to resolve disputed issues of fact, or to provide the district court with a sufficient factual basis for deciding an issue.” Sablan v. Dept. of Finance of Com. of Norhern Mariana, 856 F.2d 1317, 1322 (9th Cir. 1988) (internal citations omitted). Even where issues of fact are disputed, however, a district court's decision whether to hold an evidentiary hearing is reviewed for abuse of discretion. Murphy v. Schneider National, Inc., 362 F.3d 1133, 1139 (9th Cir. 2004).
V.
DISCUSSION
*5 The Court cannot yet determine the existence or scope of any violation of the attorney-client privilege that may have occurred. Because the Court finds that this threshold issue may affect the Court's ruling on the FTC's Discovery Motion and Motion in Limine, the Court GRANTS Defendants' Motion for Stay and Evidentiary Hearing, and DENIES the FTC's Motion for Leave to Conduct Discovery and Motion in Limine WITHOUT PREJUDICE to refiling them after the Court rules on the privilege matters at issue in the evidentiary hearing.
A. Attorney-Client Privilege
The Supreme Court has “recognized the attorney-client privilege under federal law[ ] as ‘the oldest of the privileges for confidential communications known to the common law.’ ” United States v. Zolin, 491 U.S. 554, 562 (1989) (quoting Upjohn Co. v. United States, 449 U.S. 383, 389 (1981)). The attorney-client privilege encourages complete disclosure of information between attorney and client and furthers the interests of justice. Upjohn, 449 U.S. at 389. Under the attorney-client privilege, confidential communications made by a client to an attorney to obtain legal services are protected from discovery. Id. at 396; United States v. Richey, 632 F.3d 559, 566 (9th Cir. 2011).
According to the Ninth Circuit, the elements of the attorney-client privilege are:
(1) where legal advice of any kind is sought
(2) from a professional legal adviser in his capacity as such
(3) the communications relating to that purpose
(4) made in confidence
(5) by the client
(6) are at this instance permanently protected
(7) from disclosure by himself or by the legal adviser
(8) unless the protection is waived.
Admiral Ins. Co. v. U.S. Dist. Court for Dist. of Arizona, 881 F.2d 1486, 1492 (9th Cir. 1989) (internal citations omitted). The burden of establishing the elements of the privilege rests with the party asserting it. Richey, 632 F.3d at 566.
The attorney-client privilege is a rule of evidence. It has not been held a constitutional right. Clutchette v. Rushen, 770 F.2d 1469, 1471 (9th Cir. 1985). “In some situations, however, government interference with the confidential relationship between a defendant and his counsel may implicate Sixth Amendment rights.” Id. To avoid exposure to privileged information seized in an investigation, the government may, as one option, decide to employ a “taint team” to conduct a privilege review. See United States v. SDI Future Health Inc., 464 F. Supp. 2d 1027, 1037–38 (D. Nev. 2006) (discussing use of taint teams to execute search warrants where potentially privileged materials may be discovered and to segregate such materials where the government has already taken possession of them).
Finally, even if the government is exposed to privileged documents, no harm may result where the privilege is waived.[7] It is well-established that “[t]he privilege which protects attorney-client communications may not be used both as a sword and a shield.” Chevron Corp. v. Pennzoil Co., 974 F.2d 1156, 1162 (9th Cir. 1992). “Disclosing a privileged communication or raising a claim that requires disclosure of a protected communication results in waiver as to all other communications on the same subject.” Hernandez v. Tanninen, 604 F.3d 1095, 1100 (9th Cir. 2010); see also Chevron Corp., 974 F.2d at 1162 (“Where a party raises a claim which in fairness requires disclosure of the protected communication, the privilege may be implicitly waived.”).
B. An Evidentiary Hearing Is Warranted
*6 Whether and to what extent Defendants' attorney-client privilege may have been violated is a threshold issue that may affect the Court's ruling on the FTC's Discovery Motion and Motion in Limine. Furthermore, the alleged violation involves issues of fact that do not appear capable of being fully resolved absent an evidentiary hearing. Accordingly, the Court finds it appropriate to stay proceedings and hold an evidentiary hearing.
It seems unlikely that the FTC will be significantly prejudiced by the issuance of a stay given the approximately twenty-five years since the Court's Final Order and Judgment issued in 1988. At the same time, Defendants may be considerably harmed if violations of the attorney-client privilege occurred or if the FTC's knowledge of relevant events was tainted by those violations. The Court finds that it will be more efficient to rule on the privilege issues raised by Defendants before determining the other Motions currently pending before the Court. Accordingly, the Court DENIES the FTC's Discovery Motion and Motion in Limine WITHOUT PREJUDICE as premature. The FTC may refile the Motions, if necessary, after the Court rules on the privilege matters at issue in the preliminary hearing. Defendants' Motion for Stay and Evidentiary Hearing is GRANTED. The Court will issue a separate Order addressing procedures for the evidentiary hearing.
VI.
CONCLUSION
For the foregoing reasons, this action is STAYED pending the conclusion of an evidentiary hearing to determine whether, and to what extent, any violations of the attorney-client privilege occurred.
The Court will hold an evidentiary hearing on Tuesday, January 27, 2015 at 10:00 a.m. in Courtroom 23 of the United States District Court, Central District of California, 312 N. Spring Street, Los Angeles, California 90012.
To the extent that the Parties intend to call any third party witnesses, they should serve the necessary subpoenas within fourteen (14) days of the date of this Order and file proofs of service with the Court no later than three days following service. The parties shall include a copy of this Order with any subpoena served in connection with the evidentiary hearing. Should a third party witness wish to challenge a subpoena, the deadline for filing a motion to quash shall be within fourteen (14) days of the date of service of the subpoena.
Counsel for any witness desiring to challenge a subpoena must comply with the procedures set forth in this Court's Local Civil Rule 45-1, a copy of which is available under the “Court Procedures” button in the menu bar on this Court's website at www.cacd.uscourts.gov. If expedited review is necessary, the challenging party may file an ex parte application for an order shortening time consistent with Local Civil Rule 7-19.
Footnotes
On October 22, 2014, Judge King vacated the hearing date on the FTC's Contempt Motion and declined to set a new specific hearing date until after the undersigned rules on the Parties' other pending Motions. (See Dkt. No. 48 at 1). Accordingly, to the extent that the instant Motion seeks an Order continuing the Contempt Motion hearing date, it is DENIED AS MOOT. However, the FTC's request for leave to conduct discovery has not been mooted by Judge King's Order.
On June 18, 2014, Defendants filed a Notice of Errata and a corrected version of their Motion due to the inadvertent omission of the date and signature from its original filing. (Dkt. No. 27). Defendants' original and corrected Stay Motions are substantively identical. For the sake of clarity, all of the Court's citations to Defendants' Stay Motion will be to the corrected version filed on June 18, 2014.
Although the FTC named Feldman as a Defendant in the action, it dismissed its claims against him as part of the Stipulated Order and Judgment. (Zarpas Decl., Exh. A at 2).
Defendants stated at the hearing that a United States Secret Service (“USSS”) agent participated in the search along with the HBPD and OCDA.
According to Defendants, “Mytel now operates alongside another entity, G.N.M. Financial Services, Inc., dba IDCSERVCO (“G.N.M.”) that performs the same services that Mytel performed during the timeframe relevant to this Motion.” (DM Opp. at 1 n.2).
The FTC's stated purpose in propounding this discovery is to obtain evidence of Defendants' connection to the companies, which the FTC maintains Defendants control. (DM at 6).
The FTC raised the possibility at the hearing that Mytel may assert an “advice of counsel” defense, which could waive the privilege. This issue is not yet resolved.