When drafting a contract, think about whether to include provisions requiring the other side, in certain circumstances, to provide copies of relevant documents and/or to make its employees available for interview. Under the Supreme Court’s recent Twombly and Iqbal decisions, this kind of contract provision might make the difference between your client being able to sue for breach of contract, and not.
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Scenario: A contractor in breach – but you can’t prove it
Consider this hypothetical scenario: Your company hears rumors that one of your contractors has been using the company’s confidential information in its work for other clients, including your competitors. Entirely apart from the ethical implications, this would be a gross violation of the confidentiality provisions in your contract.
You can’t pin the rumors down, so you flat-out ask the contractor whether they’re true. The contractor responds that its operations are its own business, and refuses to discuss the matter.
Now you’re seriously concerned that the rumors might be true indeed. You’re not that big a client for the contractor, so you don’t have a lot of economic leverage. You want to file a lawsuit for theft of trade secrets, but you don’t have any hard evidence.
What to do? Must you suffer in silence as your contractor continues to betray your trust (or so you think) and give your competitors an unfair advantage?
“Notice pleading” used to be a way to get discovery
Until a couple of years ago, if you met the subject-matter jurisdiction requirements for a federal-court case, you might have been able to get by with filing suit under the notice-pleading standard, articulated by the Supreme Court in Conley v. Gibson, 355 U.S. 41 (1957).
Under the Conley standard, in essence your complaint would (i) state the facts giving you reason to think there was a breach of contract, and (ii) aver that the discovery process would reveal evidence to support your claim.
The Conley standard would have prohibited the district court from dismissing your complaint for failure to state a claim “unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Conley, 355 U.S. at 45-46.
So filing a lawsuit against your contractor, while not a sure thing, certainly could have been a reasonable bet to give you the discovery you needed about whether the contractor was misusing your confidential information.
Twombly and Iqbal now require pleading a plausible case, up front
In 2007 and 2009, however, the Supreme Court ruled that a federal-court plaintiff must meet a higher standard than mere notice pleading under Conley. The Court held that a complaint must plead sufficient facts to plausibly show that the plaintiff is entitled to relief.
FOOTNOTE: See Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. ___, 129 S. Ct. 1937 (2009).
In those cases the Court looked to Rule 8(a)(2) of the Federal Rules of Civil Procedure, which requires a complaint to contain “a short and plain statement of the claim showing that the pleader is entitled to relief” (emphasis added). See Iqbal, 556 U.S. at __, slip op. at 15.
The Court also expressed concern about the expense and burden of discovery, remarking that “something beyond the mere possibility of loss causation must be alleged, lest a plaintiff with a largely groundless claim be allowed to take up the time of a number of other people, with the right to do so representing an in terrorem increment of the settlement value.” Twombly, 550 U.S. at 546, slip op. at 11 (citations and internal quotation marks omitted).
My own view of the two rulings was, it’s about damned time! I cheered the majority’s comment that “Rule 8 … does not unlock the doors of discovery for a plaintiff armed with nothing more than conclusions.” Iqbal, 556 U.S. at __, slip op. at 14.
Legislation is pending in Congress to overrule Twombly and Iqbal and return the federal courts to the Conley notice-pleading standard. It remains to be seen, though, whether such a change will be enacted.
In the meantime, lower courts are reportedly dismissing cases right and left for failure to comply with the Twombly/Iqbal standard.
Thus, if you were to file suit in federal court against your contractor based on nothing more than rumors, you would run a non-trivial risk of being thrown out of court. Depending on the circumstances, you might even have to pay the contractor’s attorneys’ fees.
I can think of two ways in which a contract drafter might try to plan ahead to help the client meet the Twombly / Iqbal standard.
Periodic status reports might not be enough for a plausible case
One way to get the information you needed to file suit would be to contractually require the other side to provide written reports on a regular basis. This is not a new concept; some common examples include the following:
- patent- and trademark-license agreements typically require the licensee to make periodic reports of its sales, to support calculation of the royalties due;
- reseller agreements sometimes require the reseller to provider quarterly sales-forecast reports (“pipeline reports”);
- partnership- and joint-venture agreements often require that detailed operations reports be provided to the partners.
A contract drafter would want to brainstorm (preferably with the client) the kinds of information that might be desired in such reports.
But it’s entirely possible that such reports might not be enough to allow the client to plead a case that met the Twombly/Iqbal standard. In our hypothetical scenario, for example, it hardly seems likely that the contractor’s reports would constitute sufficient evidence of misappropriation of your company’s confidential information.
Consider this sample contract provision for extrajudicial discovery
Another approach would be to contractually require the parties to provide “discovery” upon request. It would surely be a tough sell in negotiations — frankly, I’d have to think hard before recommending that a client agree to it — but a drafter could try including contract provisions along something like the following lines:
Each party will voluntarily provide reasonable extrajudicial discovery upon request.
(1) If a party reasonably suspects that the other party has breached this Agreement, or if the party is accused by the other party of breaching this Agreement, then at the first party’s reasonable request, the other party will, to the extent reasonably practicable, promptly:
(i) produce copies of relevant documents;
(ii) make employees available for interviews by telephone or in person, which interviews may be recorded;
(iii) respond to written interrogatories; and
(iv) respond to written requests for admission;
all in the general manner provided by the discovery procedures of the Federal Rules of Civil Procedure.
(2) The other party may condition its compliance with clause (1) on the requesting party’s agreement (i) to reasonable confidentiality provisions, and (ii) to reimburse the other party for expenses incurred in responding to the request.
Sure, this contract language is rife with the potential for disputes about what’s “reasonable.” But let’s return once more to our hypothetical situation above. Recall that the contractor responded to your concern about misappropriation of confidential information with, mind your own business.
With language like the foregoing in your contract, if the contractor still stonewalled you, you could try filing suit for failure to provide extrajudicial discovery. (It’d be sort of like the way Al Capone was prosecuted for tax evasion.) With the contractor’s stonewalling as as your (initial) claim, you’d likely have a better shot at meeting the Twombly/Iqbal standard to avoid being tossed out of court, enabling you to get “regular” discovery.
And so, one way or another, you’d probably end up getting the information you needed to assess your potential trade-secret claim – which is what you really wanted all along.
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Signing a business contract:
FRCP also allows you to seek discovery before filing suit so why the need for “extrajudicial discovery?”
@Martin, I assume you’re talking about, for example, a pre-lawsuit deposition to perpetuate testimony before an action is filed, under Fed. R. Civ. P. 27(a), with document production under Rules 27(c), 34, and 45.
This approach requires court approval; under Rule 27(a)(1), the party seeking the pre-lawsuit deposition must tip its hand quite a bit. Back when I was doing litigation, I never once used this procedure, and don’t remember anyone at my firm doing so or having to respond to it.
My guess is that many companies would prefer to use a more-informal and less-expensive approach that wouldn’t require them to disclose their thinking at the outset.
Thanks for commenting.