Heraeus Kulzer GmbH v. Esschem, Inc.

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
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No. 09-3982
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HERAEUS KULZER G MBH
Appellant
v.
ESSCHEM, INC.,
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
(No. 09-MC-00017)
District Judge: Honorable Cynthia M. Rufe
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Argued: May 11, 2010
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Before: BARRY, ROTH, Circuit Judges and HAYDEN,* District Judge
(Opinion Filed: July 28, 2010)
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Lawrence D. Rosenberg, Esq. (Argued)
Jones Day
51 Louisiana Avenue, N.W.
Washington, DC 20001-0000
-AND-
*
Honorable Katharine S. Hayden, United States District Judge for the District of New Jersey,
sitting by designation.
Samuel W. Silver, Esq.
Schnader Harrison Segal & Lewis
1600 Market Street
Suite 3600
Philadelphia, PA 19103
Counsel for Appellant
Mary F. Platt, Esq. (Argued)
Montgomery, McCracken, Walker & Rhoads
123 South Broad Street
24th Floor
Philadelphia, PA 19109-0000
Counsel for Appellee
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OPINION
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HAYDEN, District Judge.
Under 28 U.S.C. §1782, foreign litigants may request production of documents
that are located in a particular U.S. judicial district for use in foreign litigation.
Accordingly, Heraeus Kulzer GmbH (“Heraeus”), a German company that has instituted
suit for misappropriation of trade secrets (“the German litigation”) against a direct
competitor, the Biomet Group,1 petitioned the District Court for the Eastern District of
Pennsylvania for discovery from a non-litigant, Esschem, Inc. The Court denied the
petition and granted Esschem’s motion to quash under Federal Rule of Civil Procedure
1
“The Biomet Group” refers to several affiliated European and American entities. It will
be referred to as “Biomet” in this opinion.
2
(“Fed. R. Civ. P.”) 45. Based on events that have occurred since this appeal was argued,
we will remand to the District Court with directions to grant Heraeus’s discovery requests
as modified.
I.
Heraeus manufactures bone cement, which, along with other medical applications,
is used extensively in hip joint endoprosthetics. In the early 1970s, Heraeus entered into
a distribution agreement with another German company, Merck KGaA (“Merck”), which
gave Merck confidential information about Heraeus’s product. When Merck entered into
a joint venture in 1997 with Biomet, Heraeus, while concerned about the confidentiality
of its information, still agreed to supply bone cement to the joint venture because Merck
was contractually bound not to disclose its trade secrets to Biomet.
But in 2004, without notice to Heraeus, Merck sold its joint venture shares to
Biomet. When Heraeus learned of the sale, it informed Biomet that it would cease
delivery of its products. Near the end of August, 2005, Biomet introduced its own bone
cements in Europe. According to Heraeus, its product had never been replicated by a
competitor. An expert Heraeus hired to analyze Biomet’s product ruled out the
possibility that the product could have been lawfully reproduced by reverse engineering.
The German litigation followed, in which Heraeus is suing Biomet and Merck, among
other defendants, for misappropriation of its trade secrets.
Heraeus filed two contemporaneous § 1782 petitions in United States federal
courts—the first in the Northern District of Indiana against two Biomet subsidiaries; and
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the second in the Eastern District of Pennsylvania against Esschem, a specialty chemical
company that supplied materials to Biomet for use in manufacturing its bone cement.
Both petitions seek discovery of information allegedly crucial to Heraeus’s success in the
German litigation.
The magistrate judge in Indiana initially granted Heraeus’s ex parte petition, but
later granted Biomet’s motion to quash the subpoena and vacate the order. Kulzer v.
Biomet, Inc., 09-MC-08, 2009 WL 961229 (N.D. Ind. April 8, 2009). The Indiana district
court affirmed. Kulzer v. Biomet, Inc., 09-CV-183, 2009 WL 2058718 (N.D. Ind. July 9,
2009). Heraeus filed an interlocutory appeal in the Seventh Circuit, and also filed another
petition with the Indiana magistrate judge modifying the scope of discovery. Heraeus’s
second petition, which the magistrate judge described as “nearly identical to [the] first
application[,]” was denied. Kulzer v. Biomet, 09-MC-275, 2009 WL 3642746 (N.D. Ind.
October 29, 2009).
In its §1782 petition filed ex parte against Esschem in Pennsylvania, Heraeus
alleged that Biomet instructed Esschem to manufacture bone cement materials using
Heraeus’s confidential information and trade secrets. The discovery sought consists of
information about the specifications in Esschem’s files and any communications between
Esschem and Biomet about the materials supplied. The petition included a draft subpoena
and limited the scope of disclosure through a proposed protective order barring access to
any confidential information produced by Esschem.
Initially, the District Court granted the petition. Then Esschem, whose legal
4
representation was being paid by Biomet, filed a motion to quash the subpoena, arguing
that compliance would be overly burdensome and would require Esschem to disclose its
confidential information and trade secrets. Heraeus revised the subpoena in advance of
oral argument, and at argument Heraeus offered to impose additional protections,
specifically that discovery would be accepted on an outside counsel’s eyes only basis,
with access denied to experts or legal support personnel; Heraeus proposed as well that
before it made any use of the information, it would return to court for leave to use the
information overseas.
Heraeus argued that Esschem was “uniquely” in possession of the documents it
sought. It represents that German civil procedure does not contain discovery procedures
like § 1782, and so the mere allegation of the existence of a document would not be
sufficient to convince a German court to issue a subpoena. And even if Heraeus could
pinpoint the documents it needed, they are located in the United States and outside
Germany’s jurisdictional reach. So even a sympathetic German court could not order
Esschem, a third party, to produce them. In ruling against Heraeus and granting the
motion to quash, the District Court found that the discovery request was “plainly proper”
under § 1782, and was not unduly burdensome within the meaning of Rule 45.
Nonetheless, in its written opinion the Court reasoned that Heraeus failed to meet the
“substantial need” test under Rule 45. The factual underpinning for this analysis was the
existing status of Heraeus’s efforts in the Northern District of Indiana to get discovery
from Biomet – the litigant itself – which was pending on two levels: before the Seventh
5
Circuit Heraeus was appealing the district court’s affirmance of the magistrate judge’s
ruling against Heraeus on its §1782 petition for discovery as originally framed; and
before the Indiana district court Heraeus had filed objections to a subsequent ruling of the
magistrate judge denying a narrower discovery request.
These procedural facts had not changed when Heraeus argued before us. Its
argument on appeal was that the District Court improperly read into §1782 a requirement
that Heraeus exhaust all possible avenues before it would be granted discovery from
Esschem, and that the District Court erroneously imposed an inflated “substantial need”
standard in its analysis under Rule 45. As such, Heraeus argued that the strong policy
considerations that favor granting § 1782 discovery, and the adequacy of the order
protecting Esschem’s confidential information, required reversal. The legal analysis
required to decide the appeal was nuanced: even assuming the information was
unavailable through action by the German courts, how critical to the success of Heraeus’s
showing under §1782 was the pendency of its requests to the federal court with
jurisdiction over Biomet, which is, after all, the litigant and in possession of much of the
same information?
Very soon after the argument before us, the landscape shifted: the district court in
Indiana ruled against Heraeus on its objections and affirmed the magistrate judge. This
left only the appeal before the Seventh Circuit of the original ruling against Heraeus’s
broader discovery requests to Biomet, which had been stayed pending the ruling on the
objections. Absent a reversal, Heraeus is denied discovery from Biomet’s U.S. entities
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for use in its German lawsuit.
When we were notified of the status of the §1782 petitions in Indiana, we directed
counsel to address two issues: the impact of the decision of the district court in the
Indiana litigation; and deadlines, if any, that might be imminent in the German litigation.
II.
We review the District Court’s decision for abuse of discretion. Euromepa v. R.
Esmerian, 154 F.3d 24, 27 (2d Cir. 1998). Here the District Court made its decision in a
context that has shifted. In anticipation that might happen, the court noted specifically that
“Heraeus may present a more compelling circumstance of need if its discovery efforts in
Indiana and Germany prove unavailing.” Accordingly, our review will be plenary where
pertinent factors the district judge relied on have changed.
Section 1782 imposes three fundamental requirements for a discovery subpoena: (1)
the person from whom discovery is sought must reside in the district; (2) the discovery must
be for use in proceedings before a foreign tribunal; and (3) the application can be made by
either the foreign tribunal or by an interested party. E.g., In re Merck & Co., 197 F.R.D. 267,
270 (M.D.N.C. 2000); Esses v. Hanania (In re Esses), 101 F.3d 873, 875 (2d Cir. 1996). “A
proceeding includes any proceeding in which an adjudicated function is being exercised or
is imminent. An interested person includes a party to the foreign litigation, whether directly
or indirectly.” In re Merck, 197 F.R.D. at 270 (citing Lancaster Factoring Co., Ltd. v.
Mangone, 90 F.3d 38 (2d Cir. 1996)).
7
The Supreme Court set out four factors to assist district courts when evaluating a §
1782 petition in Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004), identified
as follows:
1. Whether the discovery sought is within the foreign tribunal's
jurisdictional reach, and therefore accessible without seeking the aid of
§ 1782;
2. The nature of the foreign litigation; the character of the proceedings
already underway; and the foreign country's receptivity to court
assistance from the U.S.;
3. Whether the § 1782 request conceals "an attempt to circumvent foreign
proof-gathering limits" or other policies of the foreign country; and
4. Whether the subpoena includes unduly intrusive or overly burdensome
requests.
In re Microsoft Corp., 428 F. Supp. 2d 188, 193 (S.D.N.Y. 2006) (citing Intel, 542 U.S. at
264-65). District courts have since followed the Supreme Court's direction in interpreting
§ 1782 petitions. See e.g., In re Babcock, 583 F. Supp. 2d 233 (D. Mass. 2008); In re
Application of Fischer Advanced Composite Components AG, C08-1512, 2008 WL 5210839(W.D. Wash. Dec. 11, 2008); In re Microsoft Corp., 428 F. Supp. 2d 188 (S.D.N.Y. 2006).
While a district court is not obliged to evaluate whether the requests in a § 1782
application comply with the foreign country's discovery laws, In re Letter of Request from
Amtsgericht Ingolstadt, 82 F.3d 590 (4th Cir. 1996), a litigant may not willfully circumvent
foreign discovery restrictions. In re Court of Comm'r of Patents for Republic of South Africa,
88 F.R.D. 75, 77 (E.D. Pa. 1980). The court must consider whether the litigant's motives are
tainted by a surreptitious effort to bypass foreign discovery rules; however, that consideration
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cannot serve as the sole determining factor because the statute does not reference a
requirement of discoverability under the foreign country's laws. Schmitz v. Bernstein,
Liebhard & Lifshitz, LLP, 121 F.3d 77 (2d Cir. 1997).
III.
We can quickly address whether most of the Intel factors are met here: they are.
Heraeus has represented, and Esschem – aside from conclusory arguments – has not
effectively disputed the following: German civil procedure does not offer a mechanism for
general pretrial discovery comparable to that obtainable in the United States; any request to
the German court must be for specific documents, and without access to Biomet’s files,
Heraeus cannot pinpoint what it is seeking; and the German court has no jurisdiction over
a non-party such as Esschem. Notwithstanding the foregoing curbs on its production
capability, the German court does not restrict receipt of the evidence sought and in fact has
postponed a hearing scheduled for April 15, 2010 to September 30, 2010, specifically for the
purpose of permitting Heraeus extra time to pursue its discovery requests in Indiana and
Pennsylvania. Arguably, then, Heraeus has presented a textbook predicate for a successful
§ 1782 petition, given courts’ consistently liberal interpretation of the statute and its objective
“to assist foreign tribunals in obtaining relevant information that the tribunals may find
useful but, for reasons having no bearing on international comity, they cannot obtain under
their own laws.” Intel, 542 U.S. at 262. Indeed, Heraeus’s application to the federal court
with jurisdiction over non-party Esschem is arguably more compelling than if it were seeking
party discovery. “[N]onparticipants in the foreign proceeding may be outside the foreign
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tribunal’s jurisdictional reach; hence, their evidence, available in the United States, may be
unobtainable absent § 1782(a) aid.” Intel, 542 U.S. at 264.
Rather, the dispute boils down to the Supreme Court’s cautionary observation in Intel
that § 1782 “authorizes, but does not require, a federal district court to provide judicial
assistance to foreign or international tribunals or to ‘interested person[s]’ in proceedings
abroad.” Id. at 247. Judicial discretion remains the touchstone, and accordingly the Supreme
Court in Intel provided general guidance for district judges and, in the matter before it,
decided to “leave it to the courts below to ensure an airing adequate to determine what, if
any, assistance is appropriate.” Id. at 266.
We find no abuse of discretion in the District Court’s determinations under §1782.
As a matter of fact, the court had already issued an order ex parte at the time it held the
hearing. At issue was Esschem’s motion to quash the discovery subpoena, and the court
found the primary fact dispute between the parties was whether an “undue burden” was
imposed on Esschem.2 Significantly, the court concluded there was not, particularly because
the basis of the dispute had been “significantly tempered by a series of voluntary proposals
made by Heraeus with respect to the scope of the discovery that it would initially seek,” and
in light of the “notable” revelation that Esschem’s litigation costs were being paid in full by
Biomet.
2
Interestingly, this inquiry dovetails with the fourth Intel factor, whether the subpoena includes
an unduly intrusive or overly burdensome request. Because of the urgency reflected in the
record, we need not examine the import of this overlap, other than to observe the intricacies of
discovery disputes entrusted to the magistrate judges and district courts.
10
The District Court found that Esschem had met its burden of demonstrating that the
information sought was confidential, supporting the motion to quash under Fed. R. Civ. P.
45(c)(3)(B)(I), and determined that the motion should be granted unless Heraeus showed
“substantial need” under Fed. R. Civ. P. 45(c)(3)(B). It was the confluence of apparent
discovery sources in the Indiana courts and the German court, where Heraeus had pending
requests “serv[ing] the same purpose, and in some cases, seek[ing] the same documemts, as
the requests at issue here,” that convinced the District Court that “[i]t is not at all clear that
Heraeus’s need for Esschem’s information is substantial. . . .”
Things have changed. We have been advised that for at least the substantial period
of time that appellate review of the Indiana district court’s discovery rulings will require,
Heraeus will not be able to obtain discovery from Biomet’s U.S. affiliates. And it may never
get the discovery from that source through a § 1782 subpoena. Moreover, we have been
advised by Heraeus’s response to our post-argument inquiry that the September 30 th hearing
in Germany – specifically rescheduled so that the discovery sought in these §1782 petitions
might be presented – is potentially dispositive. Heraeus claims, and we have no reason to
disbelieve, that it will be severely prejudiced if it cannot obtain the evidence it seeks from
Esschem before the September 30 th hearing. The District Court below was prescient when
it made its ruling against Heraeus with the qualifier that the ruling was made “for now,” and
that “Heraeus may present a more compelling circumstance of need if its discovery efforts
in Indiana and Germany prove unavailing.” (App. at 13.)
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That time has arrived. We do not quarrel with the analysis undertaken by the District
Court. Applying that analysis to the information before us, we easily find that Heraeus now
demonstrates sufficient need for the information sought in the subpoena, and that its
discovery efforts in Indiana and Germany are sufficiently “unavailing” to require assistance
from the federal courts envisioned under § 1782.3 We vacate the order quashing the
discovery subpoena, and remand to the District Court with instructions to grant discovery on
an expedited basis, duly narrowed and accompanied by protective orders as discussed in the
District Court’s opinion.
3
Just before this Opinion was filed, Heraeus provided the Scheduling Order from the Seventh
Circuit directing that briefs be filed on the consolidated appeals from the decisions of the Indiana
District Court. Briefing will not be completed until October 1, 2010. Heraeus advises that there
is little likelihood that the Seventh Circuit will expedite the appeals, and that Biomet will oppose
any request or motion to expedite.
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