North Carolina Business Litigation Report

In-House Counsel's Worst Nightmare: A Subpoena In A Case To Which The Company Is Not A Party

I don't think that there is anything worse than having a client get subpoenaed in a case to which it isn't a party.  It didn't want to be drawn into someone else's problem, to have to scour its records to respond to an unanticipated and intrusive request for documents, and to have to deal with the expense of an outside lawyer to handle the mess.

The good news is that Rule 45 provides greater protection to a non-party responding to a subpoena than it does to a party responding to discovery.  Judge Conrad of the NC Business Court observed in a decision last week, Arris Group, Inc. v. CyberPower Systems (USA), Inc., 2017 NCBC 57, that “[t]he courts have an obligation to protect nonparties from burden and expense imposed without sufficient justification.”(quoting Bank of Am. Corp. v. SR Int'l Bus. Ins. Co., 2006 NCBC LEXIS 17, at *16.  Op. ¶13.

He outlined some of those protections:

  • the issuing party must “take reasonable steps to avoid imposing an undue burden or expense on a person subject to the subpoena.”Id. at *11 (quoting N.C. R. Civ. P. 45(c)(1)). Op. ¶13.
  • Also,“'[t]he court shall quash or modify the subpoena if' the recipient demonstrates the existence of any enumerated grounds for objection, including privilege, unreasonableness,and undue burden." Op. ¶14 (quoting N.C.R. Civ. P. 55(c)(5)).
  • Furthermore, "[w]here the subpoena requests trade secrets or other confidential information, Rule 45 provides additional safeguards: the court may “quash or modify the subpoena” unless the issuing party “shows a substantial need for the testimony or material that cannot otherwise be met without undue hardship.” N.C. R. Civ. P. 45(c)(7) Op. ¶14.

Judge Conrad also relied on some federal court decisions on the difference between party and non-party status when dealing with discovery matters.  He said that: 

federal courts have also stressed the “distinction between a party and nonparty” in applying the Federal Rules of Civil Procedure. Beinin v. Ctr. for the Study of Popular Culture, No. C 06-2298 JW (RS), 2007 U.S. Dist. LEXIS 22518, at *6 (N.D. Cal. Mar. 16, 2007).  Although parties to litigation must accept the “travails [of discovery] as a natural concomitant of modern civil litigation,” “[n]on-parties have a different set of expectations.” Papst Licensing GmbH & Co. KG v. Apple, Inc., No. 6:15-cv-1095, 2017 U.S. Dist. LEXIS 51274, at *9 (N.D. Ill. Apr. 4, 2017). Accordingly, “the fact of nonparty status may be considered by the court in weighing the burdens imposed in the circumstances.” Katz v. Batavia Marine & Sporting Supplies, Inc., 984 F.2d 422, 424 (Fed. Cir. 1993); see also Intermec Techs. Corp. v. Palm, Inc., No. C09-80098 MISC WHA, 2009 U.S. Dist. LEXIS 132759, at *7 (N.D. Cal. May 15, 2009)(holding that protections apply “doubly when the respondent is a non-party”).

Op. ¶15 (emphasis added).

So how did Delta Products (the non-party recipient of the Defendant's subpoena) fare against this backdrop of accommodation to non-parties?  Delta came out pretty well, although not unscathed.

 

Here some background: the underlying lawsuit between Arris and CyberPower concerns power supplies sold by CyberPower to Arris.  The power supplies, sold by Arris in turn to Verizon, are plugged into a home's wall outlet to provide power to an optical network terminal which connverts a fiber optic signal into useable TV, internet, and phone service.  The power supplies came with a battery backup to provide power in the event of a power outage.

Arris claims that the power supplies were failing prematurely.  It attributes this to a design defect which caused the capacitors in the backups to overheat when used by Verizon.  Arris sued CyperPower in Illinois for breach of express and implied warranties.

The subpoena at issue was directed by CyberPower to Delta, a competitor of CyberPower's which had previously supplied Arris with power supplies for delivery to Verizon.

What did CyberPower request of Delta?  After the original subpoena was narrowed via discussions between counsel, CyberPower requested:

a. The agreement between ARRIS and Delta for the sale of power supplies or battery backup components.

b.All specifications for Delta’s power supplies or battery backup components.

c. All communications with ARRIS or Verizon regarding actual or anticipated operating conditions for the power supplies; testing or analysis of the temperature levels of the power supplies and any component parts; and the expected or actual operating life of the power supplies.

d. All documents relating to the determination, calculation, or analysis of the operating life of the power supplies.

Op. ¶8.

Delta objected to each of the modified requests on the grounds that they sought information that was "highly confidential, irrelevant to any claim or defense, and unduly burdensome."  Op. ¶16.

As to the request for the agreement between Arris and Delta, Judge Conrad rejected the argument that its production posed an undue burden to Delta.  He said that it was "discrete, targeted to a specific written agreement, and does not seek more voluminous or sensitive information associated with the agreement,such as communications regarding negotiations with ARRIS."  Op. ¶19.

The request for "specifications" did not fare as well.  Judge Conrad ordered Delta to produce any specifications that it had received from Verizon or Arris.  But Delta was not ordered to produce its own internal specifications.  Judge Conrad accepted Delta's argument that "technical specifications of this type are highly confidential and likely the subject of trade secret protection."  He said that these specifications were Delta's "crown jewels — essentially a blueprint of Delta’s power supplies."  Op. ¶23.  Arris would need to make "a strong showing of 'substantial need' to warrant compelling a nonparty to provide such information to a direct competitor."  Op. ¶23.  Judge Conrad chided CyberPower for not trying to obtain samples of Delta's products and testing them itself, suggesting that this showed that CyberPower could not demonstrate the necessary "substantial need" for Delta's internal specifications.

The lack of any time limit on CyberPower's subpoena requests also had a negative effect on its requests.  Delta's Sales Manager testified by affidavit that "the effort would entail reviewing “millions of communications,” requiring “hundreds of hours” and “extensive legal fees.” Judge Conrad said that "Delta, as a nonparty, should not be subject to such burdens"  Op. ¶27.

A Totally Different Subject: The Business Court's New Filing System

All of you probably know that the Business Court "upgraded" its filing system last month, which it purchased from a company called Tybera.  I don't know how that affected you, but the change has been a disaster for my blog and me.  It has brought things at blog central to a standstill.  I'm trying to work through it, but I may have to retire this blog if things don't improve.

In the meantime, if you've had difficulty dealing with the Tybera changes, let me know.  But I'm hoping that it hasn't been a problem on your end.

I'll keep you posted on my so far unsuccessful efforts.

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Mack Sperling
Brooks Pierce, LLP
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