The right counsel.

By John J. Pappas

This is one of a series of articles under the by line “Butler Pappas on Bad Faith” originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 16, #6, p. 23 (July 12, 2002). © Copyright Butler Pappas 2002. 

 

I.   The Reaction

There is nothing more disruptive, some may say affective, than the service of a Notice and Subpoena upon an insurance company's executives and officers, especially its Chief Executive Officer (“CEO”). Telephones ring, e-mails fly, and paper-shufflers sprint. In addition to this cardiovascular reaction, the actual linguistic response is both predictable and emphatic:

•   “I'm not going to tell our CEO that she must sit for a deposition.”

•   “Ya better do somthin' because this ain't gonna happen.”

•   “Who the hell does this judge think he is?”

•   “Our CEO don't know anything and he ain't submitting to any deposition.”

•   “We are simply not going to let our CEO be harassed by some plaintiff's attorney on videotape for five hours and watch it played on the Internet for the next ten years.”

•   [our personal favorite] “If you can't block this, we'll find a lawyer who can.”

•   “How much do they want?”

Depositions of CEOs and other executives at the top of the corporate hierarchy, often referred to as “apex” depositions, have long been recognized as a source of potential harassment and abuse. It is not uncommon to hear the Plaintiff's attorney's gleeful inquiry, “Okay, how much will you pay us to avoid the videotaped deposition of your CEO?” Some have referred to it as a form of “legal” extortion.

Executives with no knowledge relevant to the subject litigation are subjected to repetitive and harassing depositions prior to the use of less intrusive discovery methods that are substantially more productive. In an attempt to balance the needs of the parties to obtain relevant discovery, while preventing such abusive tactics from occurring, some courts have adopted some standards or guidelines, particularly California and Texas.

 

II.   Reasonable Guidelines

A.   The President

In Salter v. Upjohn Co., 593 F.2d 649 (5th Cir. 1979), the plaintiff sought to depose Upjohn's President. Upjohn filed a Motion for Protective Order. This motion was subsequently granted. On appeal, the Fifth Circuit affirmed, finding that “[t]he judge's attempt to postpone or prevent the necessity of taking [the President's] deposition was within his discretion in light of defendant's reasonable assertions that [the President] was extremely busy and did not have any direct knowledge of the facts.” Although the Fifth Circuit noted that it was “very unusual for a court to prohibit the taking of a deposition altogether and absent extraordinary circumstances, such an order would likely be in error,” the court found that because the order only required the plaintiff to depose lower-level employees that had more knowledge of the facts first, the order did not prohibit from taking the president's deposition if the testimony of the lower-level employees was unsatisfactory.

 

B.   Ford

In Travelers Rental Co., Inc. v. Ford Motor Co., 116 F.R.D. 140 (D. Mass. 1987), the Plaintiff sought to depose five high-level Ford officials. Following a hearing, it was agreed that Plaintiff would first depose lower-level executives who had more knowledge of the facts surrounding the lawsuit. After deposing the lower-level executives, Plaintiff again sought to depose the Ford officials. Ford objected, claiming that Plaintiff sought the depositions for the sole purpose of harassment and oppression.

Although the court agreed with Ford that the depositions would be somewhat duplicative, the court did not think they would be unreasonably so in light of the fact that:

Plaintiff is exploring Ford's motive in implementing and administering the guaranteed resale plan. The evidence respecting motive is solely within Ford's control. When the motives behind corporate action are at issue, an opposing party usually has to depose those officers and employees who in fact approved and administered the particular action.

Thus, even if lower-level employees have greater personal knowledge of relevant subject matter, if the motives and intent behind the institution of a corporate plan are at issue, and lower-level executives have already been deposed, the court may allow the depositions of the apex officials who approved that plan.

In State ex rel. Ford Motor Company v. Messina, 71 S.W.3d 602 (Mo. 2002), Ford Motor Company filed a Motion for Protective Order after the plaintiffs sought to depose four Ford high-level executives, to support their claim for punitive damages in connection with a lawsuit alleging, among other things, defective design and manufacture of the “Bronco II” vehicle. These executives included Thomas D. Baughman (“Baughman”), Executive Director, Truck, North American Truck Consumer Business Group, and John M. Rintamaki (“Rintamaki”), Group Vice President and Chief of Staff. Finding that lower-level employees had been deposed in previous Bronco II cases, and that these apex officials may have discoverable information, the trial judge ordered the depositions to proceed.

The Missouri Supreme Court, unlike the Texas Supreme Court in Garcia, infra, and the California appellate court in Liberty Mutual, infra, declined an opportunity to adopt apex deposition guidelines. Instead, the court stated that “depositions of top-level decision-makers should proceed in accordance with Rules 56.01(b) and 56.01(c).”⁽¹⁾ For high-level executive depositions, “the court should consider: whether other methods of discovery have been pursued; the proponent's need for discovery by top-level deposition; and the burden, expense, annoyance, and oppression to the organization and the proposed deponent.” The court further stated that in this case, the trial judge did not abuse his discretion in finding that the executives had discoverable information because at the motion on the hearing, Ford conceded relevance.

However, although Baughman and Rintamaki had discoverable information, the court held that the trial court abused its discretion by not entering a protective order. This is because “Ford showed that plaintiffs have not sought the information through less intrusive means, plaintiffs' need for discovery is slight, and there is significant burden, expense, annoyance, and oppression to Ford and these top-level officers.” Although lower-level employees had been deposed in prior Bronco II cases, the Baughman and Rintamaki depositions would be the first discovery contrasting the Bronco II with the Explorer. Thus, “plaintiffs have not sought the same information through less intrusive means.”

Although the Messina court did not specifically adopt “apex deposition guidelines,” Special Judge Roy L. Richter, in his concurring opinion, states that the “apex” or, as he calls it, the “figurehead” rule, “will provide guidance to judges faced with requests for protective orders.”

In In re Bridgestone/Firestone, Inc. Tires Product Liability Litigation, 205 F.R.D. 535 (S.D. Ind. 2002), a products liability class action, the plaintiff class moved to compel the deposition of Ford Motor Company's then Chairman of the Board, William Clay Ford, Jr. The Magistrate Judge granted plaintiffs' motion subject to a schedule limiting the time allotted to the various attorneys. Ford filed an objection to the order to the District Court claiming that prior to deposing an apex official, the federal courts require a showing that the official has “unique personal knowledge” of relevant information.

In holding that the Magistrate Judge's order was neither clearly erroneous nor contrary to the law, the court found that “the plaintiffs did present evidence that Mr. Ford has referred to his personal knowledge of and involvement in certain relevant matters, including the Firestone tire recall, Explorer safety issues, and Ford's response to the tire and Explorer issues.” The court also found that there is no hard and fast rule requiring that the proponent of the deposition to show the apex official's unique personal knowledge. Rather, each case must be determined based on its own unique facts and circumstances.

In addressing Ford's need to be protected from harassing and abusive deposition tactics, the court found that the time limits imposed by the Magistrate Judge serve to protect Ford from abusive tactics. In addition, because most of the depositions have already been conducted, allowing the parties and the court to better determine the appropriate areas of questioning, the court imposed an additional requirement:

One week before Mr. Ford's deposition, plaintiffs shall file under seal with the Court (but not serve) a list of the subjects to be covered in Mr. Ford's deposition. The purpose of this submission is not to provide the basis for a pre-deposition adjudication of the allowable scope of questioning. (The submission will be for in camera review only.) The purposes of the submission are (1) to aid the Court in preparing to rule on any disputes that may arise during the deposition, and (2) to promote the plaintiffs' adherence to a range of subjects the propriety of which they are prepared to defend.

Although Judge Barker did not closely examine whether Ford had “unique or superior” personal knowledge of discoverable information, but instead relied on Six West, infra, and Travelers Rental, when stating that “[f]ederal courts have permitted the depositions of high level executives when conduct and knowledge at the highest corporate levels of the defendant are relevant in the case,” she found that the “circumstances here are quite different and the rationale for the severe limitations on the right to depose a high level executive is not compelling in this case.” First, Judge Barker found that Ford's knowledge may well be relevant to the issues in the case. Second, because the plaintiffs seek to depose Ford only once for all of the cases pending in the multi-district litigation, “the coordinated deposition procedures outlined by Magistrate Judge Shields will serve to discourage numerous, repetitive, harassing, or abusive depositions of Mr. Ford.”

 

C.   Liberty Mutual

Based on a review of several federal cases, including Salter and Travelers Rental, the California Court of Appeals, in Liberty Mutual Ins. Co. v. Superior Court of California, 13 Cal. Rptr. 2d 363 (Cal. Ct. App. 1992), held that:

When a plaintiff seeks to depose a corporate president or other official at the highest level of corporate management, and that official moves for a protective order to prohibit the deposition, the trial court should first determine whether the plaintiff has shown good cause that the official has unique or superior personal knowledge of discoverable information. If not, as will presumably often be the case in the instance of a large national or international corporation, the trial court should issue the protective order and first require the plaintiff to obtain the necessary discovery through less-intrusive methods. These would include interrogatories directed to the high-level official to explore the state of his or her knowledge or involvement in plaintiff's case; the deposition of lower-level employees with appropriate knowledge and involvement in the subject matter of the litigation; and the organizational deposition of the corporation itself, which will require the corporation to produce for deposition the most qualified officer or employee to testify on its behalf as to the specified matters to be raised at the deposition. (§ 2025, subd. (d)(6).) Should these avenues be exhausted, and the plaintiff make a colorable showing of good cause that the high-level official possesses necessary information to the case, the trial court may then lift the protective order and allow the deposition to proceed.

(emphasis supplied). Thus Liberty Mutual states the following standards or guidelines for the apex deposition:

1)  Unique or superior knowledge;

2)  (b)(6) corporate deposition insufficient;

3)  written interrogatories upon that corporate official insufficient; and,

4)  the targeted deponent possesses information necessary to the case.

 

D.  “Pet” Boys

A few years later, the Texas Supreme Court, in Crown Central Petroleum v. Garcia, 904 S.W.2d 125 (Tex. 1995), also suggested guidelines for depositions of apex officials. In this case, the plaintiff, who had lung cancer allegedly caused by asbestos exposure in the refinery where he worked, sought to depose the CEO, rather than those individuals involved in making the day-to-day decisions at the refinery. The CEO filed a Motion to Quash Deposition and a Motion for Protective Order accompanied by an affidavit in which he stated:

I have no personal knowledge of Mr. Carl or his job duties, job performance, or any facts concerning alleged exposure to asbestos by Mr. Carl. I was not involved in the day-to-day maintenance decisions made at the Refinery. I have no expertise in industrial hygiene, toxicology, or the health effects of asbestos exposure.

The trial court denied the Motion to Quash and ordered the CEO to submit to the deposition. The corporation petitioned the Texas Supreme Court for a Writ of Mandamus. Following California's lead, the Texas Supreme Court, which had not previously addressed this issue, developed procedures to be followed when a party seeks to depose the CEO or other high level corporate official, essentially identical to those stated in Liberty Mutual.

Whether the party seeking the deposition has arguably shown that the official has any unique or superior personal knowledge of discoverable information. If the party seeking the deposition cannot show that the official has any unique or superior personal knowledge of discoverable information, the trial court should grant the motion for protective order and first require the party seeking the deposition to attempt to obtain the discovery through less intrusive methods. Depending upon the circumstances of the particular case, these methods could include the depositions of lower level employees, the deposition of the corporation itself, and interrogatories and requests for production of documents directed to the corporation. After making a good faith effort to obtain the discovery through less intrusive methods, the party seeking the deposition may attempt to show (1) that there is a reasonable indication that the official's deposition is calculated to lead to the discovery of admissible evidence, and (2) that the less intrusive methods of discovery are unsatisfactory, insufficient or inadequate. If the party seeking the deposition makes this showing, the trial court should modify or vacate the protective order as appropriate. As with any deponent, the trial court retains discretion to restrict the duration, scope and location of the deposition. If the party seeking the deposition fails to make this showing, the trial court should leave the protective order in place.

Garcia, at p. 128.

 

E.  The Chairmen

Five years later, in In re Alcatel USA, Inc., 11 S.W.3d 173 (Tex. 2000), the Texas Supreme Court clarified the “apex” deposition procedures it suggested in Garcia. In re Alcatel USA involved an alleged plan by Samsung Electronics Co., Ltd. (“Samsung”) to steal “intelligent network” and “next generation switching” systems from DSC Communications (“DSC”). DSC claimed that the plan was developed and implemented at the highest level of Samsung's corporate structure and that Samsung executives were involved in all stages of the plan.

After filing suit, DSC noticed the depositions of two of Samsung's Chairmen, both of which the parties agreed qualified as “apex” depositions. Samsung moved to quash the depositions of both Chairmen. A special discovery master denied this motion and ordered both depositions to proceed. Samsung then appealed the special master's order to the trial court, which affirmed the order. Following the trial court's denial of Samsung's Motion for Reconsideration, Samsung filed for Writ of Mandamus to the court of appeals.

The court of appeals conditionally granted mandamus relief to Samsung finding that DSC did not prove that it was entitled to take the apex depositions. DSC then filed a Petition for Writ of Mandamus in the Texas Supreme Court, arguing that the court of appeals abused its discretion because the trial court did not abuse its discretion.

The Texas Supreme Court found that the court of appeals did not abuse its discretion by conditionally granting mandamus relief because the trial court should have granted Samsung's Motion to Quash the “apex” depositions. The court held that “DSC failed to present any evidence that arguably shows that the executives have unique or superior personal knowledge of discoverable information.”

The Texas Supreme Court then discussed the “apex” deposition guidelines that it first suggested in Garcia. In doing so, the court further clarified that the first inquiry is whether the party seeking the deposition has “arguably shown that the official has any unique or superior personal knowledge of discoverable information.” In reaching its holding, the court extensively examined the knowledge possessed by both chairmen.

DSC argued, among other things, in regard to one of the chairmen, that: “(1) Lee is the leader of the Samsung Chaebol, (2) Lee sets the overall vision for the Samsung companies, and (3) Samsung's goal is to be one of the world's top five telecommunications companies by 2005.” However, despite DSC efforts, the court stated:

Evidence tending to support these allegations does not satisfy the first Crown Central test; it merely demonstrates that Lee is a long-time company leader who sets the company vision with lofty goals. Virtually every company's CEO has similar characteristics. Allowing apex depositions merely because a high-level corporate official possesses apex-level knowledge would eviscerate the very guidelines established in Crown Central. Such evidence is too general to arguably show the official's knowledge is unique or superior.

In regard to the other Chairman, DSC asserted that his unique or superior personal knowledge was shown in the deposition testimony of a Samsung manager that conveys that he may have been made aware of information contained in reports regarding the next-generation switching system. In addition, DSC argued that a Samsung computer file index contains several files identified as reports made to this Chairman on the next-generation switching system.

The court stated that although this evidence arguably showed that the Chairman may have discoverable information, the first Garcia guideline requires more; “it requires that the person to be deposed arguably have ‘unique or superior personal knowledge of discoverable information.'” The court further stated:

If “some knowledge” were enough, the apex deposition guidelines would be meaningless; they would be virtually indistinguishable from the scope of general discovery. Although Crown Central did not elaborate on what character of knowledge makes it unique or superior, there must be some showing beyond mere relevance, such as evidence that a high-level executive is the only person with personal knowledge of the information sought or that the executive arguably possesses relevant knowledge greater in quality or quantity that other available sources.

(emphasis supplied). Thus, the Texas Supreme Court expressly held that the apex deponent should be the “only person with personal knowledge of the information sought.” See, Jennifer Weirs, In re Alcatel - - Just Another Weapon for Discovery Reform, Baylor Law Review (Winter 2001).

 

F.   The CEO

In Six West Retail Acquisition, Inc. v. Sony Theatre Management Corp., 203 F.R.D. 98 (S.D.N.Y. 2001), the plaintiff, Six West Retail Acquisition, Inc. (“Six West”), owned three movie theaters managed by the defendant, Sony Theatre Management Corp. (“Sony”). In connection with a suit alleging breach of contract and antitrust claims arising from Sony's management of the theaters, as well as its movie distribution practices, Six West filed a motion to compel the depositions of three high-level Sony officials, including Nobuyuki Idei, the CEO of Sony.

In examining the knowledge possessed by each of the three officials and finding that the depositions were justified, the District Court distinguished this case from In re Alcatel USA, relied on by Sony, by stating that unlike the “plaintiff corporation's efforts to depose the current and previous chairmen of a rival company based on vague and conclusory assertions that these officials had been involved in a plan to steal new telecommunications technology developed by the plaintiff,” Six West “supports its allegations with evidence sufficient for this Court to infer that Mr. Idei has some unique knowledge on a number of relevant issues.” In regard to Mr. Idei, the court found that:

Mr. Idei may not have had any inkling of the specific day-to-day management decisions which resulted in the plaintiff's injuries. Nevertheless, Six West has offered sufficient evidence to support an inference that Sony's CEO had been well-informed about the general structure of Sony's film distribution policies, and that he also had some unique knowledge about the company's alleged block-booking practices in the United States, particularly in New York.

The District Court also found that Six West was not attempting to harass these Sony officials or jump directly to the apex of the Sony Corporation before attempting to compel the depositions, but rather sought these depositions only after already deposing several lower-level executives and providing sufficient notice to these officials.

 

III.   Today Was Tomorrow

The above cases were written before the current Enron and WorldCom scandals became public. To be an officer, let alone a CEO of any large corporation, especially a large insurance company, is to be a litigation target.

When an insurer is sued in either a first-party or third-party claim for “bad-faith,” the insurer should expect to receive a Notice and Subpoena for the deposition of specific corporate officers, including but not limited to the CEO. This is especially so if the court allows a Count or “Prayer” for punitive damages. Such litigation is becoming more and more an “institutional bad-faith” case.⁽²⁾ That is, the Plaintiff argues that the corporate-insurer's business-model and business-practices encourage, or even are, “bad-faith” claims practices. The insurer's corporate practices to maximize profit pressures its employees to commit “bad-faith.” Given such a theory of the case, it is not surprising that Plaintiff's counsel “surf-the-Internet” and participate in certain “chat-rooms,” discovering speeches, interviews, and even internal memoranda attributed to the CEO of the Defendant insurance company.

If counsel and court apply a reasoned and fair approach in determining whether a CEO or another particular officer of a corporation should be deposed, the number of such depositions would be so minute so as to not even justify this commentary. Sadly, however, this is not the case. The reality is that some courts find persuasive argument to be such comments as “We need to get his [CEO] attention,” or “If he doesn't know what's going on, then the deposition will educate him,” or “Three hours under oath ain't going to kill him, and may help him, his company, and the consumer in the long run,” or “If the President of the United States must submit to deposition, then by golly so should this CEO.” All attorneys do not engage in the reasoned analysis espoused by Liberty Mutual and Garcia. Neither do all judges. Not all appellate courts entertain argument on Petitions for Writ of Mandamus, let alone grant such Writs. Therefore, corporate executives and their bureaucracies better get prepared.

The present social-economic-political climate is full of angst and frustration, if not hatred, against large corporations and their corporate practices. Although most are motivated by honorable and needed quests for profit, all will suffer due to the dishonorable greed of a few. Thus, all corporate executives, and more importantly, all corporate bureaucracies, especially those of insurance companies, better get prepared for the onslaught. That is, even if you and your counsel do everything right, some judge, out of some court, from some county, in some state, is going to order you, the CEO, to submit to deposition. And, given the increasing difficulty in keeping such discovery confidential, such a videotaped deposition may end up on the Internet. The authors of this article suggest that while attorneys and courts should be cognizant of the reasonable and fair standards that should be met before the apex deposition is conducted, each corporate executive should nevertheless be prepared to submit to deposition.

Preparation means not only that such officers know how to give such testimony, but that the bureaucracy surrounding them does not create an unreasonable corporate culture of stress and fear that would result in such corporate executives not being properly prepared for such depositions. One way of preventing such bureaucratic discombobulation would be to stop responding to such subpoenas with the question, “How much do they want?”

 

Endnotes

Attorneys

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John J. Pappas