In Re: Cendant Corp.

Opinions of the United
2001 Decisions States Court of Appeals
for the Third Circuit
8-8-2001
In Re: Cendant Corp.
Precedential or Non-Precedential:
Docket 99-5485
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Filed August 8, 2001
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 99-5485
IN RE: CENDANT CORP., (formerly known as CUC
International, Inc.) CENDANT CAPITAL I
LESTER A. GOLDSTEIN, on behalf of himself and all
others similarly situated; WELCH & FORBES INC., an
institutional investment manager, individually and on
behalf of all others similarly situated
v.
WALTER A. FORBES; COSMO CORIGLIANO; ANNE M.
PEMBER; MERRILL LYNCH & CO.; CHASE SECURITIES
INC.; HENRY R. SILVERMAN
v.
ERNST & YOUNG; CENDANT MEMBERSHIP SERVICES,
INC.; CASPER SABATINO; STEVEN P. SPEAKS; KEVIN T.
KEARNEY; MARY SATTLER;
HOWARD SIROTA,
Appellant
ON APPEAL FROM THE
UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF NEW JERSEY
District Judge William H. Walls
(D.C. Civ. No: 98-01664)
Argued December 15, 2000
Before: SCIRICA, FUENTES, and GARTH, Circuit Judges
(Opinion Filed: August 8, 2001)
Adam N. Saravay (argued)
Tompkins, McGuire, Wachenfeld &
Barry, LLP
Four Gateway Center
100 Mulberry Street
Newark, New Jersey 07102
Attorneys for Appellant
Judith E. Harris (argued)
Morgan, Lewis & Bockius, LLP
1701 Market Street
Philadelphia, Pennsylvania 19103
Amicus Curiae in support of the
Order of the District Court
OPINION OF THE COURT
FUENTES, Circuit Judge.
This appeal raises important questions concerning the
use of sealed bids in auctions conducted to select lead
counsel in class action lawsuits. The genesis of the appeal
lies in the District Court's selection of lead counsel in the
Cendant "PRIDES" securities litigation based on the results
of a competitive bidding process. The core of the dispute
involves a confidentiality order in which the District Court
decided to seal the bids until resolution of the case. The
order was issued in connection with an in camera hearing
where plaintiffs' attorneys, but not the general public, had
access to the bids. After learning that one of the
unsuccessful bidding attorneys, Howard Sirota, had spoken
to a reporter from the New York Times about the bidding
process, the District Court fined Sirota $1,000. Sirota
appeals the sanction. Because we conclude that the District
Court failed to articulate the necessary findings for the
issuance of the confidentiality order, and because we find
that, in any case, Sirota did not violate the order, we will
vacate the sanction.1
_________________________________________________________________
1. The Court takes this opportunity to express its appreciation to Judith
E. Harris and the law firm of Morgan, Lewis & Bockius LLP, for arguing
as amicus in support of the District Court's order in this case.
2
I.
Some explanation of the underlying securities litigation
provides a helpful background for the proceeding resulting
in the sanction against Sirota. Because a full procedural
and factual background of the Cendant litigation is set
forth in numerous published opinions,2 we will only discuss
the facts most relevant to the resolution of the issues
presented in this appeal. Briefly, on April 15, 1998,
Cendant Corporation announced that it had uncovered
substantial accounting irregularities and would have to
restate reported annual and quarterly earnings for 1997
and possibly earlier; as a result, Cendant stock plummeted
46%. Some 64 lawsuits (mostly class actions) were filed
against Cendant, its officers and directors; all but one were
consolidated.
On May 29, 1998, a preliminary case management/
scheduling order established a schedule for motions to
address the appointment of lead counsel for the class.
Among the fifteen motions filed was one submitted by
Sirota, together with co-counsel John J. Barry and Charles
C. Carella, to have their clients, the Joanne A. Aboff Family
Trust ("Aboff ") and Douglass Wilson, appointed as lead
plaintiffs and to have themselves appointed lead counsel.
After considering the motions, the District Court outlined
a process for selecting lead plaintiff and lead counsel. First,
the District Court applied a statutory presumption that the
plaintiff with the largest financial interest in the litigation
should be appointed lead plaintiff. See In re Cendant Corp.
Litig., 182 F.R.D. 144, 146-47 (D.N.J. 1998) (citing 15
U.S.C. S 77z-1(a)(3)(B)). Because of a possible conflict of
_________________________________________________________________
2. The District Court has authored several opinions. See, e.g., In re
Cendant Corp. Litig., 182 F.R.D. 144 (D.N.J. 1998); In re Cendant Corp.
Prides Litig., 51 F. Supp. 2d 537 (D.N.J. 1999), vacated in part, 243 F.3d
722 (3d Cir. 2001); In re Cendant Corp. Prides Litig., 189 F.R.D. 321
(D.N.J. 1999), aff 'd, 233 F.3d 188 (3d Cir. 2000). The Cendant cases
have also spawned a number of appeals to our Court. See, e.g., In re
Cendant Corp. PRIDES Litig., 243 F.3d 722 (3d Cir. 2001); In re Cendant
Corp. PRIDES Litig., 235 F.3d 176 (3d Cir. 2000); In re Cendant Corp.
PRIDES Litig., 234 F.3d 166 (3d Cir. 2000); In re Cendant Corp. Prides
Litig., 233 F.3d 188 (3d Cir. 2000).
3
interest, the District Court determined that a separate lead
plaintiff would be appointed to pursue claims involving
Income and Growth Prides ("PRIDES"), derivative securities
based on Cendant common stock.3See id. at 149-50.
Neither Aboff nor Wilson was selected as a lead plaintiff.
Second, in selecting lead counsel, the District Court
adopted a competitive bidding system, reasoning that"the
most effective way to establish reasonable attorney fees is
through marketplace . . . competition." Id. at 150. The
District Court therefore ordered "an auction to determine
the lowest qualified bidder to represent the class as
counsel." Id. at 151. To be considered, plaintiffs' attorneys
were required to submit bids under seal, stating, among
other things, their professional qualifications and the fee
arrangement that would be acceptable to them should they
be selected as lead counsel. The record as of this date
reveals that all bids remain under seal.
On October 2, 1998, the District Court selected separate
lead counsel for the non-PRIDES claims and for the
PRIDES claims; Sirota and his co-counsel were not
selected. In choosing lead counsel, the District Court
stressed the need for confidentiality. Following an in camera
hearing, attended only by applicants for the two lead
counsel positions, i.e., plaintiffs' attorneys, the court
distributed an opinion containing a confidentiality order.
The court ordered the identities of the bidders and the
nature of their proposals sealed until the conclusion of the
case, referring to the proposals only by number and
explaining:
It is of utmost concern to the Court that this opinion,
the bidders' identities and the contents of their bids be
sealed until resolution of this matter. This is done to
maintain adversarial integrity, that of strategy and
tactics, which is the prerogative of all parties, plaintiffs
and defendants.
_________________________________________________________________
3. The non-PRIDES claims included those of former shareholders of CUC
International and HFS, Inc., companies which merged to form Cendant,
as well as the claims of purchasers of Cendant stock. See Cendant, 182
F.R.D. at 146.
4
In re Cendant Corp. Litig., 191 F.R.D. 387, 387 (D.N.J.
1998) (opinion selecting lead counsel). As a result of the in
camera hearing and the confidentiality order, plaintiffs'
attorneys, but not the general public, had access to each
others' bids.
Thereafter, on November 30, 1998, the District Court
separated the PRIDES claims from the rest of the Cendant
case. In an order entered on March 18, 1999, the District
Court preliminarily approved a proposed settlement of the
PRIDES case presented by lead counsel and Cendant. The
proposed settlement provided that, in return for dismissal
and release of all claims, Cendant would confer upon each
class member who opted in, one "Right" worth $11.71 for
each PRIDES held at the close of business on April 15,
1998, giving the settlement an aggregate theoretical value
of $341.5 million. The March 18, 1999 order also approved
the "form and content" of notice to be distributed to class
members regarding the settlement. That notice stated that
lead counsel would apply for attorneys' fees, to be paid in
Rights, in an amount not to exceed 10% of the $341.5
million theoretical value of the settlement. To this effect, the
notice contained the following assurance:
You also should know that the lead counsel
appointment process included a court-mandated
bidding process. This was intended to assure that the
largest possible portion of any recovery remained with
participating class members, or conversely that
qualified lead counsel took the least possible sums
from the benefits to be obtained by participating class
members. In Lead Counsel's view, under the fee
mechanism proposed by Lead Counsel and described
herein, there is a substantial likelihood that a
substantial part, if not all, of the fees sought will be
obtained from Unclaimed Rights and Opt Out Rights.
As a consequence, in Lead Counsel's view, those Class
Members who become Authorized Claimants will not
have to pay any of Lead Counsel's fees, or if they do,
there is a substantial likelihood that it will be less than
the amount otherwise payable under the bids approved
by the Court in the process of appointing lead counsel.
5
In re Cendant Corp. Prides Litig., No. 98-2819, slip op. at
___ (D.N.J. Mar. 18, 1999) (emphasis added) (order
regarding proposed class action settlement, settlement
hearing and notice of proposed settlement).
Besides preliminary approval and notice, the order of
March 18, 1999 also provided that any class member
wishing to object to the settlement or to the lead counsel's
fee application should file written objections with the
District Court. On May 4, 1999, Sirota, along with co-
counsel, filed objections on behalf of Aboff to the proposed
settlement and to lead counsel's application for fees. In
particular, the brief submitted by Sirota argued that "the
$34 million fee Lead Counsel seeks far exceeds the fee Lead
Counsel agreed to accept [in the bidding auction]."
On May 14, 1999, the New York Times published an
article stating, "Mr. Sirota calculates that the value of [lead
counsel's proposed fee] would be $34 million, and argues
that it would thus be about 10 percent of the total
settlement fund a percentage he contends greatly exceeds
the confidential bid that [lead counsel] submitted to the
court last year." Diana B. Henriques, Lawyers Handling
Litigation Against Cendant Propose an Innovative Way to
Pay Their Fees, N.Y. Times, May 14, 1999, at C7. Seeing
this article, the District Court issued an order"to show
cause why [Sirota] should not be held in contempt and
sanctioned for violations of this Court's confidentiality order
of October 2, 1998."4
_________________________________________________________________
4. In its entirety, the order provided:
The Court brings this matter on its own initiative for Howard B. Sirota
to be ordered to show cause why he should not be held in contempt and
sanctioned for violations of this Court's confidentiality order of October
2, 1998 as reported in the New York Times on May 14, 1999 ("Mr. Sirota
calculates that the value of that compensation [Kirby's proposed fee]
would be $34 million, and argues that it would thus be about 10 percent
of the total settlement fund--a percentage he contends greatly exceeds
the confidential bid that the Kirby firm submitted to the court last
year.").
It is on this 17th day of May, 1999:
ORDERED that Mr. Sirota appear before this Court on the 19th day of
May, 1999 at 10:00 a.m. to show cause why he has not violated this
Court's confidentiality order of October 2, 1998 and why he should not
be held in contempt and sanctioned.
6
On May 19, 1999, the District Court held a hearing on
the order to show cause, focusing on whether Sirota's
apparent statement to the New York Times concerning lead
counsel's bid violated the October 2, 1998 confidentiality
order. Defending himself, Sirota explained that: (1) he had
no intention to violate the confidentiality order; (2) he had
simply told a reporter from the New York Times that he had
filed an objection with the District Court; (3) he did not
make any substantive comments to the reporter; (4) the
newspaper article merely referred to arguments made in his
written objection of May 4, 1999; and (5) Sirota believed
that the relative comparisons made in the written objection
had been authorized by the District Court's March 18, 1999
order. As to the last point, Sirota noted that the March 18,
1999 order which preliminarily approved the settlement of
the PRIDES case, also approved a form of notice stating
lead counsel's belief that the attorneys' fees would be less
than provided for by the bidding process. Thus, Sirota
argued that it was reasonable for him to believe that the
confidentiality order did not prohibit him from responding
to lead counsel's contention that the proposed fee was less
than the bid by arguing that it was actually more than the
bid:
[Because of the notice], the defendants and everyone
else knew the relative magnitude of the fee sought and
that according to [lead counsel] it was not more than
the bid. The rationale of keeping the defendants from
knowing the amount of the compensation of their
adversary, I thought, was over as reflected in the Court
authorized notice and reflected in [lead counsel's]
understanding that one could make claims. [Lead
counsel] made the claim in the notice . . . . The Court
invited objections in the notice and we came and said
truthfully he is asking for more than his bid.
Thereafter, the District Court stated that it had"no
problem" with Sirota making this argument in court, but
that speaking to the press was different.
At the conclusion of the hearing, the District Court
determined that finding Sirota in contempt was
unwarranted. Nevertheless, relying on Local Civil Rule
101.1 and on its inherent power to discipline attorneys, the
7
District Court imposed sanctions on Sirota for violating the
confidentiality order. The District Court explained:
Why am I doing that? Because having you yourself
admitted to twenty years before a bar if not the New
Jersey bar, I hold you to that of a reasonable attorney
who, when confronted with a specific order of
confidentiality, a specific order of confidentiality before
he would broach the subject to a third party such as
the press, whether generally or specifically, he should
have, in good conscience or in good professionalism at
least made contact with the Court to insure that
whatever he said did not violate the order. To come to
court now and say that because there is a, the
reference is made by lead counsel in the notice to
claimants that one feels free to do what you did is not
good enough as far as I'm concerned . . .
. . . .
You have a professional obligation to, as counsel for
the objector, to point out to the Court your objection.
I don't understand it. Maybe I never practiced in New
York, but, I didn't think you had a professional
obligation to point out your objection with regard to
this matter to a newspaper.
The next day, May 20, 1999, the District Court entered an
order, fining Sirota $1,000.
On June 18, 1999, Sirota filed a notice of appeal from the
order imposing sanctions. We have jurisdiction over this
appeal pursuant to the final order doctrine of 28 U.S.C.
S 1291. This includes final decisions in attorney disciplinary
proceedings. See In re Ashton, 768 F.2d 74 (3d Cir. 1985);
In re Abrams, 521 F.2d 1091 (3d Cir. 1975). 5
_________________________________________________________________
5. We note that on June 25, 1999, the District Court approved a
settlement in the Cendant PRIDES case and certified the judgment
embodying that settlement and awarding attorneys' fees to lead counsel
as final under Federal Rule of Civil Procedure 54(b). In re Cendant Corp.
PRIDES Litig., 51 F. Supp. 2d 537 (D.N.J. 1999), rev'd, 243 F.3d 722 (3d
Cir. 2001). If Sirota's appeal from the sanctions order were construed as
premature, it would have ripened upon entry of the final judgment in the
Cendant PRIDES case. See Lazy Oil Co. v. Witco Corp., 166 F.3d 581 (3d
Cir. 1999).
8
II.
The nominal issue on appeal is whether the District
Court erred in sanctioning Sirota for violating the October
2, 1998 confidentiality order by speaking to the New York
Times. That issue, however, is predicated upon the more
basic question of whether the confidentiality order
underlying the sanction was properly issued. Because of
this dependent relationship, we feel compelled, before even
considering the District Court's sanction of Sirota, to first
address the propriety of the confidentiality order. What
constitutes the proper legal standard for granting a
confidentiality order sealing bids is an issue of law, over
which we exercise plenary review. See Pansy v. Borough of
Stroudsburg, 23 F.3d 772, 783-84 (3d Cir. 1994).
In addition to this dependent relationship, we also have
an inherent supervisory power, arising out of Fed. R. Civ. P.
26, to fashion and clarify rules for district courts governing
the district courts' power to enter confidentiality orders at
the discovery stage or any other stage of litigation. See
Pansy, 23 F.3d at 786 & n.16, 789 & n.22. Accordingly,
there exists a sufficient basis for us to evaluate the District
Court's efforts to preserve the secrecy of bids. In doing so,
we conclude that, in deciding to seal the bids, the District
Court failed to recognize that the bids were judicial records,
subject to the common law presumption of public access.
As a result, the District Court failed to articulate the
necessary findings to override the presumption of access
when issuing the confidentiality order.
A.
It is well-settled that there exists, in both criminal and
civil cases, a common law public right of access to judicial
proceedings and records. Littlejohn v. BIC Corporation, 851
F.2d 673, 677-78 (3d Cir. 1988). The public's right of
access extends beyond simply the ability to attend open
court proceedings. Rather, it envisions "a pervasive
common law right ``to inspect and copy public records and
documents, including judicial records and documents.' "
Leucadia, Inc. v. Applied Extrusion Tech., Inc., 998 F.2d
157, 161 (3d Cir. 1993). As we explained in Littlejohn, the
right of access strengthens confidence in the courts:
9
The public's exercise of its common law access right in
civil cases promotes public confidence in the judicial
system by enhancing testimonial trustworthiness and
the quality of justice dispensed by the court. As with
other branches of government, the bright light cast
upon the judicial process by public observation
diminishes possibilities for injustice, incompetence,
perjury, and fraud. Furthermore, the very openness of
the process should provide the public with a more
complete understanding of the judicial system and a
better perception of its fairness.
851 F.2d at 678 (citations omitted). In addition,"[a]ccess to
civil proceedings and records promotes ``public respect for
the judicial process' and helps assure that judges perform
their duties in an honest and informed manner." Leucadia,
998 F.2d at 161 (citations and internal quotations omitted).
The public right of access clearly applies to the in camera
hearing conducted by the District Court, as that hearing
was a judicial proceeding. We also believe that the right
applies to the bids. Whether or not a document or record is
subject to the right of access turns on whether that item is
considered to be a "judicial record." Pansy, 23 F.3d at 781.
The status of a document as a "judicial record," in turn,
depends on whether a document has been filed with the
court, or otherwise somehow incorporated or integrated into
a district court's adjudicatory proceedings. Id. at 780-83.
While filing clearly establishes such status, a document
may still be construed as a judicial record, absent filing, if
a court interprets or enforces the terms of that document,
or requires that it be submitted to the court under seal. See
Enprotech Corp. v. Renda, 983 F.2d 17, 20 (3d Cir. 1993);
but cf. Pansy, 23 F.3d at 780-83.6 Especially relevant here
is the case of Leucadia, in which we held that "there is a
presumptive right of public access to pretrial motions of a
_________________________________________________________________
6. Pansy held that a settlement agreement not filed with the district
court, but submitted to and reviewed by that court, was not a judicial
record. However, Pansy's holding is inapplicable here because, among
other reasons, unlike the settlement agreement in that case, the records
at issue here were submitted at the District Court's request and were
generated in connection with the litigation.
10
nondiscovery nature, whether preliminary or dispositive,
and the material filed in connection therewith." 998 F.2d at
164.
In the present case, the District Court's auction
procedure transformed the bids into judicial records. The
District Court relied on the 1995 Personal Securities
Litigation Reform Act ("PSLRA") as authority for the
selection by lead plaintiffs of lead counsel. The PSLRA
provides: "The most adequate plaintiff shall, subject to the
approval of the court, select and retain counsel to represent
the class." 15 U.S.C. S 77z-1(a)(3)(B)(v) (emphasis added).
Viewing its approval under the PSLRA as a discretionary
judgment, the District Court ordered plaintiffs' attorneys to
submit bids, In re Cendant Corp. Litig., 182 F.R.D. at 150-
51, and the attorneys did so in direct response to the
court's command. While not explicitly denominated as
such, the bids were essentially submitted in the form of
motions to be appointed lead counsel. See id. at 151
(ordering bidders to describe why they are professionally
qualified to be lead counsel). Following the in camera
hearing, the District Court ruled, and issued an Order
appointing counsel. In re Cendant Corp. Litig. , 191 F.R.D. at
387. That Order, a public document itself, summarized the
content of the bids in an encoded chart. Id. In these
circumstances, we believe that, at the time of the District
Court's confidentiality order, the bids were judicial
documents subject to the common law right to access.
B.
The practical effect of the right to access doctrine is to
create an independent right for the public to view
proceedings and to inspect judicial records. See Pansy, 23
F.3d at 781. The right of public access is particularly
compelling here, because many members of the "public" are
also plaintiffs in the class action. Accordingly, all the
reasons we discussed in Littlejohn for the right of access to
public records apply with even greater force here. See p. 10,
supra. Protecting the access right in class actions
"promotes [class members'] confidence" in the
administration of the case. Littlejohn, 851 F.2d at 678.
Additionally, the right of access diminishes the possibility
11
that "injustice, incompetence, perjury, [or] fraud" will be
perpetrated against those class members who have some
stake in the case but are not at the forefront of the
litigation. Id. Finally, openness of class actions provides
class members with "a more complete understanding of the
[class action process] and a better perception of its
fairness." Id.
Indeed, the information sealed in this case and kept
secret from most of the parties was of the utmost
importance in the administration of the case; it was directly
relevant to the selection of lead counsel. This point is
crucial. In class actions, the lead attorneys have an
unusual amount of control over information concerning the
litigation. By contrast, class members often have little input
into the conduct of the class action and accompanying
settlement negotiations, because of the large scale of
litigation and the disconnect between defendants' possibly
enormous liability and the relatively small recovery
available to the individual plaintiffs. The only stage at
which class members can exercise effective control is in the
selection of class counsel. Throwing a veil of secrecy over
the selection process deprives class members of that
opportunity.
Thus, there should have been, in the present case, a
strong presumption that the bids and the in camera
proceeding would be part of an open process, accessible to
the public. See Littlejohn, 851 F.2d at 678. That
presumption disallows the routine and perfunctory closing
of judicial records. Miller v. Indiana Hosp., 16 F.3d 549,
551 (3d Cir. 1994). Our discussion, however, does not end
here.
Although the common law right to public access is a
recognized and venerated principle, courts have also
recognized the accompanying principle that "the right is not
absolute." Littlejohn, 851 F.2d at 678; Leucadia, 998 F.2d
at 165 (same); Publicker Indus., Inc. v. Cohen , 733 F.2d
1059, 1070 (3d Cir. 1984) (same). The presumption of
public access may be rebutted. See Republic of Phillipines v.
Westinghouse Elec. Corp., 949 F.2d 653, 662 (3d Cir. 1991).
"Every court has supervisory power over its own records
and files, and access has been denied where court files
12
might have become a vehicle for improper purposes."
Littlejohn, 851 F.2d at 678 (quoting Nixon v. Warner
Communications, Inc., 435 U.S. 589, 598 (1978)). Thus, the
question becomes, under what circumstances may a
district court seal judicial proceedings or documents, such
as bids, by means of a confidentiality order. For this
question, there are settled standards.
In order to override the common law right of access, the
party seeking the closure of a hearing or the sealing of part
of the judicial record "bears the burden of showing that the
material is the kind of information that courts will protect"
and that "disclosure will work a clearly defined and serious
injury to the party seeking closure." Miller , 16 F.3d at 551
(citing Publicker, 733 F.2d at 1071). In delineating the
injury to be prevented, specificity is essential. See Publicker,
733 F.2d at 1071. Broad allegations of harm, bereft of
specific examples or articulated reasoning, are insufficient.
As is often the case when there are conflicting interests, a
balancing process is contemplated. "[T]he strong common
law presumption of access must be balanced against the
factors militating against access. The burden is on the
party who seeks to overcome the presumption of access to
show that the interest in secrecy outweighs the
presumption." Leucadia, 998 F.2d at 165 (quoting Bank of
Am. Nat'l Trust and Sav. Ass'n v. Hotel Rittenhouse Assoc.,
800 F.2d 339, 344 (3d Cir. 1986)).
Additionally, because of the peculiar posture of class
actions whereby some members of the public are also
parties to the class action, and because of the importance
of selection of lead counsel to class action plaintiffs, the
test for overriding the right of access should be applied in
this case with particular strictness. We are guided in the
formation of a stricter standard by Miller, where the sealing
order warranted exceptional scrutiny because the district
court had sealed the entire record. In that case, we held:
In a case such as this, involving ordinary civil
litigation, the district court, before taking such an
unusual step, should have articulated the compelling
countervailing interests to be protected, made specific
findings on the record concerning the effects of
13
disclosure, and provided an opportunity for interested
third parties to be heard.
Miller, 16 F.3d at 551 (citations omitted) (emphasis added).
Thus, we hold that a "compelling countervailing interests"
standard is most appropriate here, with the additional
requirement of specific findings. This may or may not
require a hearing.
Therefore, our emphasis here is on the District Court's
denial of public access to the bids and proceedings in
connection with the sealed bid auction employed to select
lead counsel in this case, and we do not focus here nor
decide on the propriety of bid auctions generally.
In re Oracle Sec. Litig., 136 F.R.D. 639 (N.D. Cal. 1991),
the district court case relied upon by the District Court in
the present case, admittedly is one of the earliest cases in
which competitive bids for lead counsel and the propriety of
sealing such bids was considered.7 Oracle opted for
competitive selection of class counsel for a number of
reasons which we decline to explore inasmuch as the issue
of competitive selection is not presented on this appeal.
Suffice it to say, the reasons listed in Oracle for use of
competitive bidding provoke serious reservations and
concerns here,8 but we leave the decision as to whether
competitive bidding is appropriate, justifiable, or desirable
to the future case where that issue is directly raised.
Regardless of whether bidding for lead counsel would be
deemed appropriate, however, we can neither subscribe to
nor affirm the District Court's ruling that the bidding
_________________________________________________________________
7. We do note, for background purposes, that lead counsel auctions have
not been widely used by federal courts. See Developments, The Paths of
Civil Litigation, 113 Harv. L. Rev. 1827, 1842 (2000) [Civil Litigation]
(noting that auctions have been used in only four federal district courts,
and only within the securities and antitrust context). Recently, Chief
Judge Becker of this Court formed a task force to examine in detail the
competitive bidding process and the method of selecting lead counsel in
federal class action litigation. See Editorials, Class-Counsel Auctions,
N.J.L.J., Feb. 12, 2000, at 22.
8. Indeed, one district court has affirmatively rejected bid auctions,
holding that such auctions violate the PSLRA. See In re Razorfish, Inc.
Sec. Litig., 143 F. Supp. 2d 304, 311 (S.D.N.Y. 2001).
14
auction the court conducted should have been closed, i.e.,
sealed and kept from the very parties to whom our
precedents and logic advocate disclosure. Indeed, this very
principle was recognized in Oracle, where the court refused
to seal or hold secret the bids for class counsel.
The Oracle court did this in part by rejecting claims that
an open bidding process would allow the defendants to
obtain information about lead counsel's evaluation of the
case and might permit them to economically "squeeze" lead
counsel by protracting proceedings. The Oracle court
opined, as we do, that disclosure of class counsel's bids
and compensation arrangements benefits the class because,
"[u]nlike the usual attorney-client situation, . . . class
members do not participate in the negotiations by which a
part of their claim is bargained away." 136 F.R.D. at 645.
Moreover, class members are not in a position to monitor
the faithfulness of their self-appointed champion. See, e.g.,
In re General Motors Corp. Pick-Up Truck Fuel Tank Prods.
Liab. Litig., 55 F.3d 768 (3d Cir. 1995) (where the original
settlement called for lead counsel to receive attorneys' fees
in the amount of $9.5 million, and class plaintiffs received
no more than a $1,000 certificate towards a GM truck).
Thus, we generally believe that opening the bidding
process (if such a process is to be authorized), while not a
panacea for the agency problems in class actions, should
facilitate the monitoring of lead counsel by class members
and others. The disclosure of bids also comports with the
spirit of the Model Rules of Professional Conduct. See
Model Rules of Prof 'l Conduct R. 1.5(b) (1983) (requiring
communication to the client of the "basis or rate of the fee
. . . before or within a reasonable time after commencing
the representation").
We find implicit recognition of these principles in the
1985 Third Circuit Task Force report on court-awarded
attorneys' fees. In analogous circumstances, the Task Force
expressed concern that, when lead counsel seeks fees after
a settlement has been reached, "the plaintiffs' attorney's
role changes from one of a fiduciary for the clients to that
of a claimant against the fund created for the clients'
benefit." Court Awarded Attorney Fees, Report of the Third
Circuit Task Force, 108 F.R.D. 237, 255 (1985)[hereinafter
15
Task Force Report]. The Task Force Report accordingly
recommended that district courts force the negotiation of
class counsel's fee, asserting the "critical importance [in]
assuring that the compensation plan is negotiated in an
open and appropriately arm's length manner." Id. at 256
(emphasis added).
The strong presumption of public access forces district
courts to be cognizant of when the reasons supporting
sealing in a specific case (if any are found) have either
passed or weakened, and to be prepared at that time to
unseal bids and allow public access. Even if a sealing order
was proper at the time when it was initially imposed, the
sealing order must be lifted at the earliest possible moment
when the reasons for sealing no longer obtain. As we
observed in Leucadia, "continued sealing must be based on
``current evidence to show how public dissemination of the
pertinent materials now would cause the competitive harm
[they] claim[ ]." 998 F.2d 157, 167 (3d Cir. 1993) (emphasis
added). By establishing a strong presumption in favor of an
open process, we intend to instill a measure of consistency
into an important area where district courts have varied
widely in their practice.9
III.
The heightened standard which we have held must be
applied to sealing class action bids is also supported by the
language and legislative history of the PSLRA.10 The PSLRA
_________________________________________________________________
9. In cases employing competitive bidding to select lead counsel, some
district courts have used what appear to be an open, unsealed bidding
process. See, e.g., In re California Micro Devices Sec. Litig., 168 F.R.D.
257, 259-60 (N.D. Cal. 1996). Other courts have sealed the bids but later
unsealed them when the lead counsel was selected. See, e.g., In re Amino
Acid Lysine, 918 F. Supp. 1190, 1192, 1201 (N.D. Ill. 1996); In re Bank
One S'holders Class Actions, 96 F. Supp. 2d 780, 782, 785 (N.D. Ill.
2000); In re Wells Fargo Sec. Litig., 157 F.R.D. 467, 468 (N.D. Cal.
1995).
Besides the District Court here, we have found only one other court that
has utilized a completely sealed bidding process. See In re Auction
Houses Antitrust Litig., 197 F.R.D. 71, 74, 84 (S.D.N.Y. 2000).
10. It should be noted that the District Court applied the provisions of
the PSLRA several times in the course of the Cendant litigation, though
16
sets forth a detailed procedure for class members to apply
to become lead plaintiffs. Additionally, the PSLRA provides
that "[t]he most adequate plaintiff11 shall, subject to the
approval of the court, select and retain counsel to represent
the class." 15 U.S.C. S 77z-1(a)(3)(B)(iv).
The legislative history of the PSLRA explains that the
Act's purpose is:
(1) to encourage the voluntary disclosure of information
by corporate issuers; (2) to empower investors so that
they--not their lawyers--exercise primary control over
private securities litigation; and (3) to encourage
plaintiffs' lawyers to pursue valid claims and
defendants to fight abusive claims.
S.Rep. No. 104-98, at 4 (1995), reprinted in 1995
U.S.C.C.A.N. 679, 683 (emphasis added).
The legislative history also points out that "[i]nvestors in
the class usually have great difficulty exercising any
meaningful direction over the case brought on their behalf.
The lawyers can decide when to sue and when to settle,
based largely on their own financial interests, not the
interests of their purported clients." S. Rep., U.S.C.C.A.N.
at 685. Additionally:
A 1994 Securities Subcommittee Staff Report found
``evidence * * * that plaintiffs' counsel in many
_________________________________________________________________
never in the context of selection of lead counsel. See, e.g., In re
Cendant
Corp. Litig., 139 F. Supp. 2d 585 (D.N.J. 2001) (PSLRA barred
contribution claims); In re Cendant Corp. Litig. , 109 F. Supp. 2d 285
(D.N.J. 2000) (attorneys' fees awarded pursuant to the PSLRA); In re
Cendant Corp. Litig., 109 F. Supp. 2d 235 (D.N.J. 2000) (applied PSLRA
in connection with notice of proposed settlement); In re Cendant Corp.
Litig., 76 F. Supp. 2d 539 (D.N.J. 1999) (PSLRA requires showing of
scienter in securities fraud action).
11. The PSLRA states that the court "shall appoint as lead plaintiff the
member or members of the purported plaintiff class that the court
determines to be the most capable of adequately representing the
interests of class members (hereinafter in this paragraph referred to as
the ``most adequate plaintiff ') . . ." 15 U.S.C. S 77z-1(a)(3)(B)(i)
(emphasis
added).
17
instances litigate with a view toward ensuring payment
for their services without sufficient regard to whether
their clients are receiving adequate compensation in
light of evidence of wrongdoing.' The comment by one
plaintiffs' lawyer--``I have the greatest practice of law in
the world. I have no clients.'--aptly summarizes this
flaw in the current system.
S. Rep., U.S.C.C.A.N. at 685.
To regulate this practice of lawyers, instead of lead
plaintiffs, driving securities class actions, Congress enacted
the PSLRA, through which, "[s]ubject to court approval, the
most adequate plaintiff retains class counsel." H. Conf.
Rep. No. 104-369, at 35 (1995), reprinted in 1995
U.S.C.C.A.N. 679, 734. The Senate Committee explained:
"This provision is intended to permit the plaintiff to choose
counsel rather than have counsel choose the plaintiff."
S.Rep. No. 104-98, at 11 (1995), reprinted in 1995
U.S.C.C.A.N. 679, 690 (emphasis added).
Congress' clear intent in enacting the PSLRA was to
transfer control of securities class actions from the
attorneys to the class members (through a properly selected
lead plaintiff). The sealing of the bids in the lead counsel
auction in this case contravenes this purpose. Instead of
allowing the class plaintiffs in this action to choose lead
counsel, the District Court selected class counsel through
a sealed bidding process which has yet to be unsealed. It
also prevented many class plaintiffs and defendants from
accessing the bids for lead counsel. Sealing the bids in this
case enabled counsel to " ``litigate with a view toward
ensuring payment for their services without sufficient
regard to whether their clients are receiving adequate
compensation in light of evidence of wrongdoing.' " S.Rep.,
U.S.C.C.A.N. at 685.12
_________________________________________________________________
12. We do recognize that, in this case, the District Court gave lead
plaintiffs' counsel the option of matching the most acceptable bid and
becoming lead counsel.
18
IV.
Of course, notwithstanding the limitations on sealing
created by the common law public right to access,"[t]he
balancing of the factors for and against access is a decision
committed to the discretion of the district court, although
it is not generally accorded the narrow review reserved for
discretionary decisions based on first-hand observations."
Bank of Am. Nat'l Trust and Sav. Ass'n v. Hotel Rittenhouse
Assocs., 800 F.2d 339, 344 (3d Cir. 1986). The discretion
that exists, however, must be exercised properly because
the issuance of a confidentiality order overriding the
common law right of public access contemplates an
analytical process.
In this respect, we hold that the District Court abused its
discretion in sealing the bids. Apart from one general and
ambiguous reference to "adversarial integrity" and "strategy
and tactics," the District Court did not provide any clear
reason for why it sealed the bids. The court did not
recognize the presumption of access, nor did it engage in
balancing process to determine whether the bids were the
type of information normally protected or whether there
was a clearly defined injury to be prevented. See Publicker,
733 F.2d at 1073 (noting similar procedural deficiencies in
the context of the First Amendment right to access); accord
Criden, 648 F.2d at 819 (stating that district courts must
"provide a firm base for an appellate judgment that
discretion was soundly exercised"). Here, before sealing the
entire bid record, the District Court should have articulated
the "compelling countervailing interests" it found which
would authorize the closure through sealing of the matters
it sought to protect. Miller, 16 F.3d at 551. No such
factfinding or identification of compelling countervailing
interests can be found in the District Court's order. We
therefore conclude that the District Court's confidentiality
order of October 2, 1998, was improperly issued, and
therefore, invalid.13
_________________________________________________________________
13. In addition to the common law right of access, we note that the Third
Circuit has held that the "First Amendment [also] embraces a right of
access to [civil] trials." Publicker , 733 F.2d at 1070 (citation and
internal
quotations omitted). This right exists independently of the common law
19
V.
In addition to concluding that the October 2, 1998
confidentiality order was improperly issued, we conclude
that the District Court erred in finding that Sirota violated
the terms of the order. This point is important because,
among other reasons, the fine was widely reported in the
newspapers and legal journals, and because attorney
disciplinary authorities in New York have initiated an
inquiry, which is still pending, to determine whether Sirota
should be sanctioned in New York based on the same facts
that led the District Court to impose the fine.
Sirota's principal argument is that the District Court
abused its discretion in sanctioning him $1,000 for
_________________________________________________________________
right of access. See Republic of Phillipines v. Westinghouse Elec. Corp.,
949 F.2d 653, 659 (3d Cir. 1991). The general rationale behind this right
is that "[p]ublic access to civil trials . . . plays an important role in
the
participation and the free discussion of governmental affairs." Publicker,
733 F.2d at 1070; see also Globe Newspaper Co. v. Superior Court for the
County of Norfolk, 457 U.S. 555, 604-05 (1980) ("[T]o the extent that the
First Amendment embraces a right of access to criminal trials, it is to
ensure that this constitutionally protected ``discussion of governmental
affairs' is an informed one.").
The First Amendment right of access requires a much higher showing
than the common law right to access before a judicial proceeding can be
sealed. In Publicker, for example, we stated that "to limit the public's
access to civil trials [where First Amendment right to access applies,]
there must be a showing that the denial serves an important
governmental interest and that there is no less restrictive way to serve
that governmental interest." 733 F.2d at 1070. We also described certain
procedural and substantive requirements that are required when the
First Amendment applies. 733 F.2d at 1071-73.
However, the parameters of the First Amendment right of access to
civil proceedings are undefined. There remain significant constitutional
questions about what documents are subject to its reach. See Littlejohn,
851 F.2d at 680 n.14. Because we conclude that the District Court's
confidentiality order did not satisfy the requirements for abridging even
the common law right of access, we will not address these issues. See
Hagan v. Lavine, 415 U.S. 528, 547 (1974) (noting "the ordinary rule
that a federal court should not decide federal constitutional questions
where a dispositive nonconstitutional ground is available").
20
speaking to a newspaper reporter. " ``We review a district
court's imposition of sanctions under its inherent power for
abuse of discretion.' " Republic of Philippines v.
Westinghouse Elec. Corp., 43 F.3d 65, 75 (3d Cir. 1994)
(quoting Chambers v. NASCO, Inc., 501 U.S. 32, 55 (1991)).
A district court "abuse[s] its discretion if it base[s] its ruling
on an erroneous view of the law or on a clearly erroneous
assessment of the evidence." Garr v. U.S. Healthcare, Inc.,
22 F.3d 1274, 1279 (3d Cir. 1994) (citation and internal
quotations omitted).
At the sanction hearing, the District Court informed
Sirota that it was proceeding pursuant to L.Civ.R. 101.1,
which gives the court broad authority to discipline
attorneys. Clearly, the court had authority to proceed under
this Rule and under its inherent disciplinary jurisdiction.
The Supreme Court has long established that "[c]ourts of
justice are universally acknowledged to be vested, by their
very creation, with power to impose silence, respect, and
decorum, in their presence, and submission to their lawful
mandates." Anderson v. Dunn, 19 U.S. (6 Wheat.) 204, 227
(1821); accord Ex parte Robinson, 86 U.S. (19 Wall.) 505,
510 (1873). This Court, as well, has recognized the
authority of district courts to wield sanctioning power, in
the form of the court's "inherent authority," where
necessary to preserve the integrity of the judicial process.
Philippines, 43 F.3d at 73; accord Eash v. Riggins Trucking,
Inc., 757 F.2d 557, 560-65 (3d Cir. 1985) (discussing
thoroughly the inherent powers of courts); In re Corn
Derivatives Antitrust Litig., 748 F.2d 157, 160 (3d Cir.
1984); In re Abrams, 521 F.2d 1094, 1099 (3d Cir. 1975);
11A Charles A. Wright et al., Federal Practice and Procedure
S 2960 (2d ed. 1995) (analyzing the inherent power of
federal courts to punish in contempt).
We have emphatically stated that federal courts retain
the inherent power "to sanction errant attorneys financially
both for contempt and for conduct not rising to the level of
contempt." Eash, 757 F.2d at 566 (citing Roadway Express,
Inc. v. Piper, 447 U.S. 752, 765 (1980)). The Eash court
elaborated:
[The] Supreme Court . . . [has] stat[ed] that the
"inherent power" to sanction an attorney was"governed
21
not by rule or statute but by the control necessarily
vested in courts to manage their own affairs so as to
achieve the orderly and expeditious disposition of
cases." If a court's inherent powers include the ability
to do whatever is reasonably necessary to deter abuse
of the judicial process, . . . courts must be able to
impose reasonable sanctions for conduct by lawyers
that falls short of contempt of court.
Id. at 567 (citations omitted).
Requiring courts to await the conclusion of extensive
investigation and prosecution procedures following every
courtroom infraction would greatly compromise the courts'
ability to direct and control the proceedings. Acknowledging
the weighty interest judges have in maintaining order in
court affairs, we have recognized that "district courts have
broad authority to preserve and protect their essential
functions." Philippines, 43 F.3d at 73. We have also
previously observed that formal rules and statutes do not
exhaust a district court's power to control errant behavior:
To the contrary, the Supreme Court recently reaffirmed
that a district court has inherent authority to impose
sanctions upon those who would abuse the judicial
process. . . . The Supreme Court explained that"[i]t
has long been understood that certain implied powers
must necessarily result to our Courts of justice from
the nature of their institution, powers which cannot be
dispensed with in a Court, because they are necessary
to the exercise of all others."
Id. at 73 (quoting Chambers v. NASCO, Inc., 501 U.S. 32,
43-44 (1991) (internal quotations and citations omitted)).
Before invoking its inherent authority, a court must
consider a number of factors:
Of course, "[b]ecause of their very potency, inherent
powers must be exercised with restraint and
discretion." "A primary aspect of [a district court's]
discretion is the ability to fashion an appropriate
sanction for conduct which abuses the judicial
process." Thus, a district court must ensure that there
is an adequate factual predicate for flexing its
substantial muscle under its inherent powers, and
22
must also ensure that the sanction is tailored to
address the harm identified. . . . [T]he court must
consider the conduct at issue and explain why the
conduct warrants sanction.
Id. at 74 (quoting Chambers, 501 U.S. at 44).
Here, we are constrained to conclude that no adequate
factual predicate existed to justify the exercise of the
District Court's inherent authority. The proceeding against
Sirota commenced when the court initially charged him
with violating its confidentiality order. Sirota conceded that
he had spoken to the New York Times without initially
approaching the District Court, but insisted that he had
divulged no information of substance:
I spoke to the New York Times and said we filed a brief
and if you want to see it, you can see it. And, I have
confirmed with the author of the article that she was
quoting from the brief and that I made no substantive
oral statement to the New York Times. They are
quoting from our brief.
The District Court did not dispute the truth of Sirota's
assertion. Instead, the court seems only to have stated that
Sirota's behavior breached standards of "good conscience or
. . . good professionalism":
I hold you to that of a reasonable attorney who, when
confronted with a specific order of confidentiality,. . .
before he would broach the subject to a third party
such as the press, whether generally or specifically, he
should have, in good conscience or in good
professionalism at least made contact with the Court to
insure that whatever he said did not violate the order.
Certainly, a violation of the confidentiality order would
constitute "conduct which abuses the judicial process" and
could justify a sanction. However, the record does not
support a finding that Sirota violated any order.
Amicus counsel, in support of the District Court's order,
argues that Sirota did, in fact, violate the confidentiality
order because Sirota's brief may have, by implication,
identified two bidders for the lead counsel position, himself
and Kirby. The problem with this contention is that Sirota's
23
brief was not under seal, was available to the general
public, and did not expressly divulge the identity of any
bidder. In essence, the brief is nothing more than a
response to the court's order of March 18, 1999, which
required that any class member wishing to contest an
aspect of the settlement "file said objections, papers and
briefs with the Clerk of the United States District Court for
the District of New Jersey."
We further observe that, when Sirota asserted at the
hearing that all the information recited by the reporter
simply derived from material "[w]e filed . . . in our briefs
before your Honor," the court responded, "I don't have any
problem with that in court. I have no problem with your
objecting in court, none whatsoever, none whatsoever."
Thus, under the District Court's reading, Sirota was free to
present in open court the same material he presented in his
brief. The public, including the media, had a right of access
to all such material. See Leucadia, 998 F.2d at 161 ("the
public has the right to inspect and copy judicial records").
While it would be improper for an attorney to divulge the
substance of a case that the court has deemed confidential,
the public's right of access demands that the attorney
must, at the very least, be able to refer a reporter to a
public document.
Finding that his written submissions did not offend the
confidentiality order, the Court, instead, objected solely to
Sirota's contact with the media. However, because the
District Court could not identify any improper extrajudicial
statement, it could not sanction Sirota for contacting the
media in violation of the confidentiality order. See L. Civ. R.
105.1 ("Notwithstanding [the Local Rules on extrajudicial
statements], a lawyer involved in the litigation of a matter
may state without elaboration . . . the information
contained in a public record."). Under these circumstances,
we find no violation of the court's confidentiality order and
no evidence of any misconduct.
VI.
For the foregoing reasons, we will vacate the District
Court's sanction, and we direct that the District Court enter
24
an order unsealing all sealed bids and documents in the
record if it has not already done so.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
25