Petition — Arthur Andersen & Co. v. Ohio

Ju the f

Supreme Court of the United States

October Term, 1977

¢ ¢-1t17 82

ARTHUR ANDERSEN & CO.,

Petitioner,

v.

STATE OF OHIO, ET AL...

Respond: nis.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

Cuarces W. Boann

Wilson & McIlvaine

135 South LaSalle Street

Chicago, Illinois 60605

(312) 263-1212

Of Counsel:

Coghill Goodspeed & Horowitz

1600 Broadway

Denver, Colorado 80262

(303) 861-8336

i

INDEX

OPINION BELOW

JURISDICTION ase

QUESTIONS PRESENTED

STATUTES INVOLVED

,

CONCLUSION

APPENDIX

“Foo = Pp

OPINIONS BELOW

JA" Uk.

AUTHORITIES CITED

Page

Cases:

Application Of Chase Manhattan Bank,

297 F.2d 611 (2d Cir. 1962) - 6

Dorsey v. Academy Moving & Storage, Inc.,

423 F.2d 858 (5th Cir. 1970) 10

First National City Bank v. Internal Revenue Service,

271 F.2d 616 (2d Cir. 1959), cert. denied,

361 U.S. 948 (1960) a | 6

Hammond Packing Co. v. Arkansas,

212 US. 322 (1909) 11

Ings v. Ferguson,

282 F.2d 149 (2d Cir. 1960) 6

National Hockey League v. Metropolitan Hockey Club,

427 U.S. 639 (1976). ass _..... 10, 13-15

Norman v. Young,

422 F.2d 470 (10th Cir. 1970) aneianesnar a

Robison v. Transamerica Ins. Co.,

368 F.2d 37 (10th Cir. 1966) _ . 10

SEC v. Los Angeles Trust D. @ M. Exch.,

24 F.R.D. 460 (S.D. Calif. 1959) 12

Societe Internationale v. Rogers, ,

357 U.S. 197 (1958) saben 6-8, 10-12

Trade Development Bank v. Continental I Ins. Co.

469 F.2d 35 (2d Cir. 1972) . Le 6

United States v. First National City Bank,

369 F.2d 897 (2d Cir. 1968) 2 a.

Other Authorities :

United States Constitution

Fifth Amendment, Due Process Clause _. 6-8, 12

Federal Rules of Civil Procedure

Rule 37

iain tiesntin Gite 19(1)(a) and (b) _.

United States Code

28 U.S.C. §1254(1) |

In The Imposition Of Di Setien”

91 Harvard L. Rev. 1032 (1978) .

Note, “Standards For Imposition Of Discovery

Sanctions,” 27 Maine L. Rev. 247 (1975)

Waterman, “An Appellate Judge’s Approach When

Reviewing District C ancien Seamenll

For The Purpose Of Insuring Compliance With

Pre-Trial Orders,” 29 F.R.D. 420 (1961) |

10,14

On the

Supreme Court of the United States

October Term, 1977

No.

ARTHUR ANDERSEN & CO.,

Petitioner,

v.

STATE OF OHIO, ET AL.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

Arthur Andersen & Co. (“Andersen”), Defendant-Ap-

pellant below, petitions for a writ of certiorari to the

United States Court of Appeals for the Tenth Circuit to

review a judgment of that court entered February 9, 1978

in an appeal from the United States District Court for the

District of Colorado.

OPINION BELOW

The Court of Appeals’ opinion is reported at 570

F.2d 1370 (10th Cir. 1978).

JURISDICTION

The judgment and opinion of the Court of Appeals

sought to be reviewed were entered on February 9, 1978.

On March 22, 1978 the Court of Appeals entered an order

denying Andersen's petition for rehearing and suggestion for

rehearing in banc. The jurisdiction of this Court to review

the instant case is invoked under 28 U S.C. §1254(1).

ailins

QUESTIONS PRESENTED

1. Whether a defendant ordered to produce docu-

ments from its office in a foreign country in violation of

the criminal and civil laws of such foreign country, unless

and until the consents of certain affected persons were first

obtained, has been denied due process of law or unlawfully

punished by the entry of a prejudicial preclusionary order

and fine for its delay in producing such documents until

the required consents were obtained where all of the docu-

ments ordered produced had been produced long prior to

the hearing on sanctions and no trial date has yet been set.

2. Whether it is consistent with the Due Process

Clause of the Fifth Amendment and Rules 34 and 37, F.R.

Civ.’P., for a federal district court, in the circumstances of

this case, to impose sanctions under Rule 37 precluding a

defendant from fully contesting a plaintiff's claims at trial,

not for the purpose of compelling discovery, which had

been fully made, or to redress prejudice, which did not

exist, but solely to punish the defendant and to ‘et an ex-

ample for others.

STATUTES INVOLVED

‘The statutes involved, which are set forth in Appendix

A, pp. 16-24, are:

Penal Code of Switzerland:

Article 35 (Recueil Systematique du Droit Fed-

eral, Book 1, p. 9)

Article 36 (R.S.D.F., Book 1, p. 9)

Article 48 (R.S.D.F., Book 1, pp. 19-20)

Article 162 (R.S.D.F., Book 2, p. 57)

Article 273 (R.S.D.F., Book 2, pp. 89-90)

Rules:

Rule 34, Federal Rules of Civil Procedure (U.S.

Code, Vol. 7, p. 7793)

a

Rule 37, Federal Ru'es of Civil Procedure (U.S.

Code, Vol. 7, pp. 7798-99)

STATEMENT

Andersen is a partnership of independent public ac-

countants that has offices and conducts its professional

practice throughout the United States and in numerous

foreign countries. It is thus, like many other concerns, sub-

ject to the laws of the United States and the foreign coun-

tries in which it conducts its professional practice.

In the spring of 1970 the State of Ohio made two loans

aggregating $8,000,000 to King Resources Company, an

audit client of Andersen’s Denver, Colorado office. In

August, 1971 King Resources Company went into Chapter

X reorganization proceedings. In April, 1972 Ohio filed

suit against King Resources Company, Arthur Andersen &

Co., and others seeking to recover the loans.

Prior to the cut-off of discovery as of April 3, 1976

Andersen had produced to Ohio approximately 55,000

documents which had been microfilmed by Ohio.

On May 27, 1976, on an application by plaintiff filed

after the cut-off of discovery, the district court for the first

time ordered Andersen to provide certain documents from

its office located in Geneva, Switzerland. A subsequent

related order set a final deadline of August 20, 1976 for

full compliance.

On June 18, 1976, Andersen's Denver counsel com-

menced a file search in Geneva, Switzerland for the docu-

ments ordered produced. Two hundred twenty responsive

documents were located. The responsive documents were

reviewed with Swiss counsel, who determined whether,

under Swiss criminal and civil law, they could be pro-

vided promptly or whether both the criminal and civil

laws of Switzerland prohibited their production unless and

until the consents of various non-parties were first ob-

~~ =

tained because they contained the protected business se-

crets of such non-parties.

Appeals and mandamus were sought in respect of

that order and certain related orders of the district court

and a stay of such orders was obtained on July 23, 1976

from the Tenth Circuit because Andersen had been unable

to obtain all of the requisite consents to disclosures from

non-parties to the action, which stay remained in effect

until January 10, 1977.

By July 29, 1976, Andersen had produced all, or the

responsive portions, of 195 of the 220 documents ordered

produced and had filed a list describing each of the 25

documents not yet produced and identifying the non-party

consents Swiss counsel advised were required by both the

Swiss criminal and civil law before the remaining docu-

ments could be produced.

As Andersen obtained the required consents of such

non-parties, or was able to find copies outside of Switzer-

land of documents identified by its search of the Geneva

files, it produced the documents. By January 21, 1977, five

months after the district court's deadline for discovery, but

only eleven days after the expiration of the stay, Andersen

had produced all of the documents in respect of which

the severe sanctions were imposed four months later witheur

any prejudice to plaintiff having been established.

On May 23, 1977, the district court severely sanctioned

Andersen for its delayed compliance. The court entered

an order that at trial Andersen “shall not oppose or intro-

duce any evidence opposing [two of] plaintiff State of Ohio's

{principal| claims” and awarded plaintiff $59,949. State

of Ohio v. Crofters, Inc., 75 F.R.D. 12, 25-26 (D. Colo.

1977). The Tenth Circuit affirmed.

Andersen did decline to provide each document or-

dered to be produced until it had obtained the required

consents or located copies thereof outside of Switzerland.

—

As a consequence the ordered discovery was delayed beyond

deadlines imposed by the district court, but full compliance

was delayed only eleven days after the expiration of the

stay. Andersen has been severely sanctioned for the delay

caused by the necessity to obtain the required consents in

order to avoid violating both the criminal and civil laws

of Switzerland. As of the date of the filing of this petition,

Ohio has had all the documents in question for 17 months

and has used them during depositions of Andersen person-

nel; and the court has not as yet considered setting a trial

date.

REASONS FOR GRANTING THE WRIT

I

This peution presents for review the question whether

it was a denial of due process or a violation of federal law

to impose a preclusionary order and fine against a defend-

ant who has made full discovery, but whose delay in com-

pliance with the ordered discovery was caused by the re-

quirements of the criminal and civil laws of Switzerland

that prior to production the defendant obtain consents of

non-parties whose protected business secrets were included

in the documents ordered produced. All the documents in

question were produced as and when the defendant, at a

total cost of over $71,000, obtained the required consents

or was able to locate copies of the documents outside of

Switzerland. No prejudice to plaintiff as a result of the

delay was established.

The conflict between domestic discovery orders and

foreign legal prohibitions to be resolved is one potentially

confronting every American firm which does business

abroad. The conduct of business on a world-wide basis is

now commonplace. Each company engaged in such busi-

ness is required to comply with the laws of each country

in which it conducts its business. This case presents an

_

important due process and federal law question which is

likely to recur with increasing frequency and which should

be addressed by this Court.

It is respectfully submitted that the district court’s im-

position of the preclusionary sanction and fine against the

defendant in these circumstances was contrary to the Due

Process Clause, contrary to this Court’s decision in Societe

Internationale v. Rogers, 357 U.S. 197 (1958), and con-

trary to applicable decisions of the Second Circuit: Trade

Development Bank v. Continental Insurance Co., 469 F.2d

35 (2d Cir. 1972); United States v. First National City

Bank, 369 F.2d 897 (2d Cir. 1968); Application of Chase

Manhattan Bank, 297 F.2d 611 (2d Cir. 1962); Ings v.

Ferguson, 282 F.2d 149 (2d Cir. 1960) ; First National City

Bank v. Internal Revenue Service, 271 F.2d 616 (2d Cir.

1959), cert. denied, 361 U.S. 948 (1960).

In Societe a Swiss company—a plaintiff, which had

voluntarily sought the aid of a United States district court

—had produced from Switzerland, after obtaining consents

or otherwise meeting the prohibitions of Swiss law, sub-

stantial quantities of documents ordered produced by the

district court. However, the plaintiff had declined to pro-

duce from Switzerland thousands of documents ordered

produced because of its inability to comply with Swiss law

as to them. Even though the plaintiff had firs’ been

ordered to produce these documents nine years before this

Court’s decision, this Court held that, in light of the Due

Process Clause, dismissal of plaintiff's case was inappropri-

ate and indicated that the most severe punishment approp-

riate for the non-production might be the “[possible]

drawing [of] inferences [at trial] unfavorable to petitioner

as to particular events” if production had not then been

made. Societe, 357 U.S. at 213.

“It is hardly debatable that fear of criminal prose-

cution constitutes a weighty excuse for non-production,

_ on

and this excuse is not weakened because the laws pre-

venting compliance are those of a forei_n country.” Jd.

at 211.

This is an a@ fortiori precedent for a defendant who

has been involuntarily brought before a court by legal

process.

Andersen, the defendant in the instant case, sought to

excuse only delay — not non-production — because of fear

of criminal prosecution that could be directed at its person-

nel in Switzerland, civil litigation, and potential loss of its

license to co bank and mutual funding auditing if the ord-

ered discovery were provided from Switzerland without first

obtaining the necessary consents.

Reduced to fundamental principles, Societe and the

cited decisions of the Second Circuit establish that the Due

Process Clause and federal law require that a conflict be-

tween an order directing discovery from a foreign country

and a discovered party’s (even a plaintiff and most certainly

a defendant) inability to respond because of the prohibi-

tions of foreign law should be reconciled by affording the

discovered party every reasonable opportunity to comply

right up to the time of trial so long as the discovered party

persists in its efforts to provide the discovery ordered. This

basic due process requirement was disregarded in this case

— the district court issued orders directing immediate pro-

duction without regard to whether such production would

violate Swiss law, and then severely sanctioned Andersen for

non-compliance with the deadline imposed.

“Now I want it clearly understood that the 19th

of August is the eutoff date. The cutoff date is tonight

for documents that you can get by tonight, but in any

event, with or without consents, the Court wants full

compliance by the 20th of August on these 20 or 25

documents .. .”’ (Emphasis added. )

=—=

Andersen's efforts to obtain the district court's assistance

in establishing procedures satisfactory to the district court

and parties which would permit Andersen to provide the

ordered discovery in a manner compatible with Swiss law

were rejected. Andersen then proceeded in the same man-

ner as the petitioner in Societe — withholding production

while seeking consents or alternative means to satisfy to the

extent possible the requirements of Swiss law, and producing

the documents as and when the requirements of Swiss law

were met or obviated at great expense to Andersen.

The district court viewed defendant Andersen's good

faith efforts to reconcile the conflict between its order and

Swiss law as a charade, obstruction and avoidance. The

Tenth Circuit adopted the district court's erroneous find-

ings of fact and conclusions of law and affirmed.

It is respectfully submitted that a party's failure to make

production from a foreign country until it has complied with

the applicable criminal and civil laws of that country is not

a charade, obstruction and avoidance, bad faith or sanction-

able conduct but is appropriate under the Due Process

Clause, the decision of this Court in Societe, the cited Second

Circuit decisions, and the realities of today’s world where

companies are increasingly subject to the laws of more than

one sovereign.

It is further submitted that the Due Process Clause

and federal law as interpreted in Societe and the Second

Circuit cases require the Federal Rules of Civil Procedure

to be applied in a manner which permits the discovered

party to comply with discovery orders in a manner com-

of the district court affirmed by the Tenth Circuit should

be reversed and brought into line with those decisions.

Rule 19(1)(a) and (b) of the Supreme Court Rules.

aulitins

by the district court, adopted by the Tenth Circuit, which

form the basis for their erroneous conclusions that Ander-

sen did not proceed as outlined in Andersen's Statement at

pp. 3-5. Contrary to the basic facts found by the district

court, and adopted by the Tenth Circuit, the record estab-

lishes unequivocally that:

(i) Andersen was not ordered to provide discovery

from Switzerland until May 27, 1976 and thus did not delay

from November 1975 to May 27, 1976 making the produc-

tion ordered. (Compare Appendix B, pp. 25-29, with

Tenth Circuit opinion, 570 F.2d at 1373, 1374).

(ii) Andersen did not improperly delay the review by

counsel of its files in Geneva, Switzerland, but rather un-

dertook that review promptly after it became incumbent

upon it to do so. (Compare Appendix C, pp. 30-39, with

Tenth Circuit opinion, 570 F.2d at 1374).

(ili) Andersen adhered throughout to its position of

not providing the ordered discovery until the Swiss law

prohibitions had been met and at no time abandoned this

position. (Compare Appendix D, pp. 40-51, with Tenth

Circuit opinion, 570 F.2d at 1374).

(iv) Andersen did not obtain the consent of 1.0.S.,

Ltd. until December 1976 and thus did not delay from

May 1976 to December 1976 producing the document

covered by that consent. (Compare Appendix E, pp. 52-62,

with Tenth Circuit opinion, 570 F.2d at 1373).

(v) Andersen's production from sources other than

Geneva of copies of certain of the documents not identified

until the search of its files in Geneva was a good-faith effort

to obviate Swiss law prohibitions and to make production

more quickly than would otherwise have been possibie be-

cause under Swiss law no consents were required to pro-

duce copies located outside Switzerland. (Compare Appen-

dix F, p. 63, with Tenth Circuit opinion, 570 F.2d at 1373,

1374).

==

To deny reveiw because of erroneous basic conclusions

would emasculate Societe and would enable lower courts to

evade review where the principles of Societe have been vio-

lated by arriving at unsupported conclusions. See National

Hockey League v. Metropolitan Hockey Club, 427 U.S. 639,

641, 643 (1975). where this Court granted certiorari and

reversed the Third Circuit, which the Supreme Court found

had arrived at erroneous conclusions contrary to those of

the district court.

Il

This case presents for review a second important due

process and federal law question: whether under Rule 37,

F.R. Civ. 6 ee ee eee

tered against a defendant, in the ci cumstances of this case

>pposing [two of] phil Sate of Obi’ [prin

cipal came not for the purposes of compelling discovery

Acadis hnd aon Sully enackd or un enliven poapeion Quin

was not established), but solely to punish the defendant and

to set an example for others.

Rule 37, F.R. Civ. P. — “Failure To Make Discovery:

Sanctions” — provides a means by which the trial court

can insure that the purposes served by the pre-trial discovery

posed when necessary to compel a party to furnish discovery

or to prevent prejudice to one party which otherwise would

result from its adversary’s abuse of the discovery process.

See, e.g., Dorsey v. Academy ae ae Inc., 423

F.2d 858, 860 (5th Cir. 1970); Robison v. Transamenca

Ins. Co., 368 F.2d 37, 39 (10th Cir. 1966) ; “The Emerging

Sanctions,” 91 Harvard L. Rev. 1032, 1038-1040 (1978)

(“The Deterrence Orientation”).

—

Compatible with these principles, a trial court's selec-

tion of the particular Rule 37 sanction to be imposed in a

particular case should be guided by a consideration of the

nature of the discovery abuse involved and the framing of

a remedy which rationally relates to curing that abuse. See,

e.g., “An Appellate Judge’s Approach When Reviewing

District Court Sanctions Imposed For The Purpose Of In-

suring Compliance With Pre-Trial Orders,” Hon. Sterry R.

Waterman, 29 F.R.D. 420, 426 ee CW agpeiions evan

lam, counts havve bethdl Gus & fo guapur ve ngece Che quedo.

wrirenpeg~enprene~te de Rule sts (2) (B) — “an order

cote tenadatbecantddingumamtaminaaies

ignated claim or defense.” The rationale is clear, and sen-

sible: that a party's failure or refusal to produce such infor-

enn ee a ee

sie any ells tastenn Hated dh ee OM adinten an.

specting the claim. Societe, supra, 357 U.S. at 212-213;

Hammond Packing Co. v. Arkansas, 212 U.S. 322, 350-351

(1909); Norman v. Young, 422 F.2d 470, 473 (10th Cir.

1970) ; “Standards For Imposition Of Discovery Sanctions,”

27 Maine L. Rev. 247, 251 (1975).

The district court's imposition of a preclusion sanction

upon defendant Andersen was in clear conflict with these

preclusion sanctions Andersen had provided ail the discovery

which formed the purported basis for the sanction impose:

Ths there was and could be no logical bass forthe drawing

— =

of information because all the information had been made

available. Furthermore, the discovery was furnished in time

for the discovering party to use it during depositions and

the discovery is available for any appropriate use at trial

(no trial date yet has been considered by the court). Thus,

there is no substantive “prejudice” to the discovering party

which the “preclusion” sanction rationally could redress.

In these circumstances the district court’s imposit

of the prechasion cenation — on evder which boesa un vation

al relationship to the effectuation of the discovery process or

to the remedying of any harm suffered by the discovering

party — can only serve a punitive function. That sanctions,

purportedly imposed under Rule 37, may not be imposed

purely “for punishment’s sake” is the explicit teaching of

decisions of this Court and other courts which have empha-

sized the constitutional constraints upon a trial court’s exer-

cise of its powers under Rule 37. See, e.g., Societe, supra,

357 U.S. at 109 (“the provisions of Rule 37 which are here

involved must be read in light of the provisions of the Fifth

Amendment that no person shall be deprived of property

weniens Gas poasen <5 Rawr . . oe ee

mary or default peters SEC v. Los Angeles ‘Tras

D. & M. Exch., 24 F.R.D. 460, 466-467 (S.D. Calif. 1959).

It follows that the exercise of the power to preclude under

Rule 37 for the purpose of punishing a defendant or to deter

others violates due process and federal law.

In its judgment, the Court of Appeals for the Tenth

Circuit disregarded these concerns. It stated as follows:

“In opposing the sanctions, Andersen emphasizes

San 3 amey peSeeNS Ce Cane. Cine Gece

tion is not determinative. The Rule permits a sanction

when a party ‘fails to obey an order.’ ademan vied

willfully to obey for an unreasonable time on the con-

=

trived excuse, eventually abandoned,[*) of the Swiss

secrecy laws. The ultimate, and reluctant, production of

documents, more than a year[*] after a legitimate re-

quest, does not absolve Andersen of the charge that it

willfully failed to obey a valid court order.” (State of

Ohio v. Andersen, 570 F.2d at 1374).

tekaedmeitedandeanttaadiondte ameten

ed the necessary justification for the imposition of sanctions

under Rule 37 (id. at 1374-75) the court of appeals, at the

same time, in effect held that neither that rationale — nor

any other rational justification — need be present when “a

party fails to obey an order” (td. at 1374). If the court of

appeals’ approach is permissible, then any sanction, no

matter how harsh, can be imposed and will be deemed a

reasonable exercise of discretion. The court of appeals cited

this Court’s holding in National Hockey League, supra, at

643, as support for this result, apparently because of the

observation in National Hockey League re

of sanctions may serve a “deterrent” purpose, ignor

Court’s qualification of that observation by “in appropriate

cases.”

If the interpretation of National Hockey League im-

plicit in the court of appeals’ a ee, Oe

tis Giseniaii 008k tcmmien Gimaney bo 0 puntinden

case, but for “affecting the conduct of parties not currently

*As shown in Appendices B and D, the references to Andersen's

=o

before the court,” “The Deterrence Orientation’, supra, p.

1048, and as encouraging trial courts “wo consider systemic

needs” in selecting a sanction (id. at 1052) —te., a sanc-

tion imposed on a single litigant in a particular case is

to be justified by how, and to what extent, it addresses the

sociological facts that “court dockets are more crowded

[and] cases are more complex . . .” (id. at 1055).

Petitioner's view is that National Hockey League con-

tained no such revolutionary rejection of the law requiring

that the imposition of Rule 37 sanctions be a reasoned exer-

cise of power rationally related to considerations of the

Hockey League there was an enjustifi; i failure in dis-

covery which prejudiced (or would prejudice) the moving

party on the merits.

Accordingly, in National Rockey Seagne Oe Sa

appears to be stating that a justifiable imposition of dis-

euvery constlons con have 6 Gu not, as the

Court of Appeals for the Tenth Circuit has in effect held

here, that the powers of Rule 37 can be invoked solely for

such purpose. If, however, National Hockey League is to be

construed in the latter fashion, it raises serious and difficult

memati

iedged when sonctlons ase taveied guaie ie nae

pose of deterrence. Although the sanctions of dismissal

or default may be imposed after minimal civil process,

criminal process may be essential where the court in-

flicts other sanctions for this purpose.” (“The Deter-

rences Orientation,” supra, p. 1055).

have arisen in the short period of time since National Hoc-

key League which have grappled with these questions. Surely,

will be considerable. This case thus presents the Court with

— =

an opportunity to consider the important question of the

extent to which Rule 37 sanctions may be imposed to limit

a party’s rights to fully contest its adversary’s claims at

trial and eliminate uncertainty in the wake of National

Hockey League.

CONCLUSION

For the foregoing reasons, the petition for a writ of

certiorari should be granted.

Respectfully submitted,

/s/ CuHartes W. Boanp

Charles W. Boand

Wilson & Mcllvaine

135 South LaSalle Street

Chicago, Illinois 60603

(312) 263-1212

Counsel for Petitioner

Of Counsel:

Coghill Goodspeed & Horowitz

1600 Broadway

Denver, Colorado 80202

(303) 861-8336

June 15, 1978