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Precedential or Non-Precedential: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