By Tim Nelson and Robert Milligan

The recent decision of California’s Third Appellate District in Wallis v. PHL Associates, Inc. underscores the importance of following the terms of a protective order in trade secret litigation and acting cautiously when handling materials that arguably may be protected under a protective order.

In Wallis, the trial court imposed sanctions of $43,678.42 against an attorney and her clients. The sanctions arose out of alleged conduct by the attorney and her clients in response to a declaration and accompanying documents that opposing counsel attempted to filed under seal pursuant to a protective order, but which inadvertently ended up in the court’s public file.

Opposing counsel filed an attorney declaration with over 800 pages of documents attached, which included his client’s alleged trade secrets. The caption for the declaration indicated that it was to be filed under seal. At the bottom of each page of the declaration was a footer that indicated that it was to be filed under seal. In addition, some of the individual pages of documents that were attached were marked as confidential. The declaration was placed in an envelope and sealed, and a copy of the first page of the declaration was affixed to the envelope that indicated it was to be filed under seal. Notwithstanding the caption that the confidential declaration and exhibits thereto were to be filed under seal, the filing was made available to the public.

According to the appellate court’s decision, the sanctioned attorney discovered that the confidential declaration was in the court’s public file. She claimed she notified opposing counsel of the problem, but according to the appellate court her only evidence was a cryptic reference in an opposition brief. The attorney also claimed that she spoke to someone at the State Bar ethics hotline regarding the issue, although according to the appellate court, there was no indication that she discussed the protective order. 

The attorney allegedly notified her client that the declaration was in the court’s public file. The client then sent three people to view the public file and to take notes so that an argument could be made that the alleged trade secrets had been publicly disclosed. The client also had a copying service make a digital copy of the confidential declaration. The client apparently had third parties view the declaration to shield the client from violating the protective order but to make the argument that the trade secrets had been disclosed. There was also evidence that the confidential declaration had been posted on the internet, but emails that indicated where the declaration was posted had been deleted by one of the clients.

On appeal, the attorney and her clients argued that the trial court abused its discretion because the circumstances showed that they believed the declaration was not entitled to the protection of the protective order and that the declaration did not contain trade secrets. They also argued that the sanctions order was premature because there had yet to be a determination that the information attached to the declaration constituted protectable trade secrets.

The appellate court affirmed the imposition of sanctions. The appellate court found that the attorney’s actions were frivolous and were taken in bad faith. The appellate court found that the totality of the circumstances made it clear, and would have made it clear to any reasonable attorney, that the confidential declaration was to be filed under seal and was protected by the protective order. Furthermore, if the attorney truly believed that the declaration was not confidential, her remedy was to bring the issue to the court’s attention and have the court make the determination, according to the appellate court. The appellate court also found that the actions taken by the clients were frivolous and were taken in bad faith.

The Wallis decision makes clear the need to honor the terms of protective orders in trade secret cases and to act cautiously when handling materials that may arguably be protected under a protective order. Parties and their counsel who fail to do so risk the imposition of sanctions.