Brado v. Vocera Communications, Inc.

Citations: 14 F. Supp. 3d 1316; 2014 WL 3752134; 2014 U.S. Dist. LEXIS 104685Docket: No. C-13-3567 EMC

Court: District Court, N.D. California; July 30, 2014; Federal District Court

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Lead Plaintiffs Baltimore County Employees’ Retirement System and Arkansas Teacher Retirement System are pursuing a consolidated securities class action against Vocera Communications, Inc., alleging misrepresentation of its profitability, resulting in stock price losses. The New York law firm Labaton Sucharow LLP represents the Lead Plaintiffs and has conducted investigations, including interviewing a former Senior Director of Internal Audit at Vocera, who provided internal documents and information related to the alleged misconduct. Concerns arose regarding the potential attorney-client privilege of these documents. Vocera claims that the former employee improperly shared these documents, violating contractual confidentiality obligations, and seeks their return and restrictions on their use by Plaintiffs prior to discovery.

In response, the Plaintiffs filed a Motion to limit the scope of Vocera's confidentiality agreements, requesting the Court to invalidate those agreements affecting employee cooperation, conduct an in camera review of the documents to segregate privileged materials, and establish a protective order for Vocera's trade secrets. The Court denied the request to invalidate the confidentiality agreements but granted permission for the Plaintiffs to use the documents, contingent upon claims of privilege and a protective order. The former employee had previously signed a Separation Agreement confirming the return of all company property and was bound by an Employment Agreement to maintain the confidentiality of Vocera's proprietary information.

Confidential Information is defined in the Employment Agreement as proprietary or non-public business information of the Company, including financial data and business plans. The Former Employee is obligated to return all Vocera documents, confidential or not. Vocera does not challenge the ethics of Labaton or its investigator and has committed to producing non-privileged, responsive documents if discovery proceeds. While Vocera seeks to restrict the use of documents taken by the Former Employee until formally produced, Plaintiffs argue they should access non-privileged information immediately, under a protective order, and challenge the validity of Vocera's confidentiality agreements that limit cooperation with Plaintiffs' investigation.

Vocera has indicated it does not oppose the Plaintiffs' use of information orally conveyed by the Former Employee during an interview, acknowledging that such informal disclosures are common in securities fraud investigations despite confidentiality agreements. Relevant case law supports this stance, allowing interviews of former employees to gather information for securities fraud claims.

The Court finds that the misappropriation of documents by the Former Employee does not justify their return to Vocera or prohibit their use by Plaintiffs. Vocera's arguments, citing the Former Employee's warranty in the Separation Agreement and past cases barring use of unauthorized documents, are rejected by the Court.

Plaintiffs' ability to utilize internal documents improperly obtained from a defendant in civil cases hinges on several considerations. Courts evaluate the conduct of counsel in acquiring the documents, the motivations of employees who may have taken them, potential prejudice to the opposing party, the necessity of pursuing truth in legal proceedings, and relevant public policies, such as those favoring whistleblowers under the Sarbanes-Oxley Act. In cases where documents were excluded, improper attorney conduct was a significant factor. For instance, attorneys have been barred from using documents when they misrepresented their source or bypassed discovery rules. However, there is no indication of improper conduct by the plaintiffs' counsel, Labaton, in this instance. The former employee obtained the documents independently before Labaton's involvement in the case, indicating that Labaton did not engage in wrongful acts or ethical violations. Consequently, the factors considered favor the plaintiffs' use of the documents, as there is no need to penalize counsel for conduct inappropriately linked to document acquisition.

Misappropriation of documents by a former employee can confer direct benefits to the misappropriator, as illustrated by a case where a plaintiff accessed confidential files post-termination for personal litigation advantage. Courts are reluctant to reward such misconduct, as it creates moral hazards and encourages dishonest behavior rather than protecting legitimate claims. The former employee in this case was not a named plaintiff and lacked a direct interest in the ongoing suit. Additionally, the former employee remains liable for breaches of contract or conversion, indicating that other legal disincentives exist beyond restricting document use. 

The parties acknowledged that any prejudice to Vocera was primarily related to the timing of access to documents rather than the substance of the case. Vocera affirmed its commitment to producing responsive, non-privileged documents during the discovery phase. Under the Private Securities Litigation Reform Act (PSLRA), a plaintiff must plead specific details regarding falsity and scienter, and discovery is generally stayed until a complaint survives a motion to dismiss. Vocera contends that permitting document use during this stay would undermine the PSLRA's discovery restrictions and unfairly disadvantage them by allowing plaintiffs to circumvent the heightened pleading standards.

Vocera contends that the Plaintiffs' actions constitute 'discovery' under the Private Securities Litigation Reform Act (PSLRA), imposing undue 'discovery costs' on the company, which must oppose the Motion and may need to negotiate a protective order. However, it asserts that no actual discovery has begun, as the relevant documents were not produced by Vocera but were already held by a third party. The PSLRA's discovery stay was designed to prevent abusive discovery practices, which can coerce innocent parties into settling frivolous securities class actions due to high litigation costs. Vocera argues that the current situation does not constitute a broad-based fishing expedition, thus the PSLRA's discovery stay remains intact. Although Vocera experiences some disadvantage due to the Plaintiffs' document acquisition, it does not amount to prejudice from a PSLRA violation. The former employee's ability to testify on Vocera's conduct further mitigates any potential disadvantage, emphasizing that the truth-seeking function of the court is upheld. Additionally, public policy supports whistleblower protections as outlined in the Sarbanes-Oxley Act of 2002, which underscores the importance of private securities litigation in enforcing these laws, even though the current case is not tied to a federal investigation. Overall, Vocera is not significantly prejudiced by the Plaintiffs' actions.

Vocera's reliance on JDS Uniphase Corp. v. Jennings is deemed inappropriate. In Jennings, the court found that the employee was liable for breaching a confidentiality agreement despite acting as a whistleblower. The current case differs as the key issue is whether plaintiffs, who did not cause the misappropriation of documents, can use those documents to enforce securities laws. The potential liability for the Former Employee under Jennings removes the need for an additional deterrent against document misuse.

The Court establishes that while plaintiffs may utilize the documents, their use will be governed by a protective order, which the parties will agree upon. Vocera will have the opportunity to assert claims of privilege through redactions before documents are reviewed by Labaton. A privilege log must accompany these redactions, and both the documents and log must be provided under the protective order within 21 days.

The Court denies the plaintiffs' requests to assess the enforceability of the Confidentiality Agreements and to conduct an in camera review of attorney-client privileged documents for Vocera, as these matters are moot. The Court also grants the plaintiffs an extension to file a consolidated class-action complaint, resetting the deadline to 21 days after the ordered production of documents and the privilege log. The order addresses Docket No. 73. Notably, neither the Separation Agreement nor the Employment Agreement specifies 'Proprietary Information.' The Court suggests that if the government can utilize misappropriated documents in criminal cases, it is difficult to justify their exclusion in civil cases. The term "misappropriation" refers to unauthorized document acquisition.