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November 25, 2008

Wallis v. PHL Associates (2008) 168 Cal.App.4th 882

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The Third District holds that severe monetary sanctions against an attorney and a client were warranted for violations of a protective order. 

 Dale Wallis sued her former employer PHL, who cross-complained against her and her husband for misappropriation of trade secrets.  In the course of litigation the parties agreed to a protective order allowing the parties to file confidential documents under seal.  PHL filed a declaration under seal with attachments it maintained contained trade secrets.  It later inadvertently appeared as a publicly filed document.  Wallis’s attorney Joanna Mendoza notified her client of the public availability of the documents and in an attempt to defeat PHL’s claim that the information contained trade secrets, the Wallises and Mendoza had third-parties view and copy the declaration.

PHL filed a motion under Code of Civil Procedure § 128.5 against the Wallises and Mendoza.  The trial court granted the motion, finding that the actions of the Wallises and Mendoza were frivolous and taken in bad faith.

The public nature of the filing came to light when the Wallises filed an opposition to a motion for terminating sanctions where they claimed that their actions were justified by PHL’s inability to keep material confidential.  Mendoza asserted that these statements in her points and authorities was the manner in which she notified PHL and its attorneys that the declaration was not under seal.  She admitted at the hearing in the trial court that she had not otherwise notified PHL and its counsel.  Ms.  Mendoza also claimed that she got advice from State Bar ethics hotline to the effect that her “paramount” duty was to her clients to reveal to them the public availability of the alleged trade secrets and to advise them concerning the legal effect of the public availability on the status of the information as trade secrets.  The Wallises had third parties view or copy the declaration in an attempt to shield themselves from a lawsuit or other adverse consequences of having viewed the Griffin declaration themselves.

Ms.  Mendoza revealed to the court that the sealed declaration had been posted on the internet, and PHL hired a computer consultant to locate it in an Internet posting.  Ms.  Mendoza claimed not to know where the posting was and would not say how she had learned of it based on attorney client privilege.  It later came to light that James Wallis had e-mailed both Dale Wallis and Mendoza the address of the Internet posting.  Dale Wallis intentionally deleted the e-mail, thus making it unavailable to the court and PHL.

Although no longer in effect, C.C.P.  § 128.5 applied because the action was filed prior to December 31, 1994.  Section 128.5 gives the trial court discretion to award ”reasonable expenses, including attorney’s fees, incurred by another party as a result of bad-faith actions or tactics that are frivolous or solely intended to cause unnecessary delay.” “Frivolous” means totally and completely without merit or for the sole purpose of harassing an opposing party.  It permits the trial court to impose sanctions under certain narrowly defined conditions.  Sanctions are warranted only if the moving party meets its burden of proving that the opposing party’s action or tactic was (1) totally and completely without merit, measured by the objective, “reasonable attorney” standard, or (2) motivated solely by an intention to harass or cause unnecessary delay, measured by a subjective standard.  Whether sanctions are warranted depends on an evaluation of all the circumstances surrounding the questioned action.  The award is within the sound discretion of the trial court and can only be overturned on appeal for an abuse of discretion.

An action that is simply without merit is not by itself sufficient to incur sanctions; an action involving issues that are arguably correct, but extremely unlikely to prevail, should not incur sanctions; and sanctions should be used sparingly in the clearest of cases to deter the most egregious conduct.

The court rejected Mendoza’s claim of good faith.  As for her contention that PHL regularly revealed trade secrets, the court found that PHL did not protect formulas that could no longer be considered trade secrets.  This did not make her conclusion that PHL was waiving the confidentiality of the declaration reasonable.

The circumstances of the filing of the declaration and its appearance in the public file would not lead a reasonable attorney to believe that the protective order was inapplicable and PHL’s waiver of confidentiality in the past did not justify Mendoza’s action.  The totality of the circumstances surrounding the declaration, including the multiple “confidential” designations on the documents, made it clear to a reasonable attorney that the declaration was filed under seal.  Mendoza’s asserted belief that the declaration was not under seal was not credible because Mendoza acted surreptitiously to have her clients or others view the contents of the declaration while they appeared unprotected in the court file.

PHL’s counsel substantially complied with the protective order and in the analogous realm statutory compliance substantial compliance is the governing test.  The filing contained the formulas over which the parties were litigating trade secret status.  There was no reason to require an unreasonably strict application of the requirements of the protective order.  Mendoza could have brought her concerns to the attention of the court for a determination.

Mendoza’s cryptic reference in a pleading filed two weeks after breaching the protective order was insufficient.  Mendoza often asserted in pleadings that PHL publicly disclosed its trade secrets but this was not effective notice of the public availability of the declaration in the court file and did not justify violating the order.
                                                                                                                                                                                                                                            Mendoza’s reliance on trade secret law was equally unavailing.  The sanctions order was for the violation of the protective order and the actions of the Wallises and Mendoza in obstructing the investigation into those violations, not for revealing trade secrets.

The protective order provided a procedure challenging the status of a confidential filing that Mendoza ignored.

In the precedent relied on by Mendoza the proponent of the trade secret allowed it to be publicly revealed.  PHL acted pursuant to the protective order to keep the trade secrets confidential, it was the court’s clerical error that placed the information in the public file.

Mendoza’s contact with the State Bar ethics hotline did not shield her from a finding that her actions were frivolous and taken in bad faith.  The court determined that Mendoza did not discuss her duties with respect to the protective order and that the self-serving evidence of what was said in a confidential conversation with a person at the ethics hotline was unconvincing.  Even assuming the call took place the evidence of good faith is weak.  PHL presented evidence that the ethics hotline staff cannot provide legal counsel, advice, or opinions.  They discuss issues and authorities and refer callers to statutes, rules, cases, and bar opinions.

Part of the Wallis’s defense was their reliance on Mendoza.  Yet, the Wallises knew the declaration contained the alleged trade secrets and that the presence of the declaration in the public file was inadvertent.  They nonetheless hatched a scheme to have third parties view and copy the contents of the declaration.  Post-violation efforts to hide their behavior also supported the finding of bad faith.

Comment: This case illustrates that attorneys considering how to respond to an ethical dilemma should put substance over form and adhere to the spirit of rules governing attorney behavior.


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