Appendix — Arthur Andersen & Co. v. Ohio

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J A JUN 23 1978

Supreme Court of the United Brates ne cuca

October Term, 1977

ARTHUR ANDERSEN & CO..

Petitioner.

STATE OF OHIO, ET AL..

Respondents.

SUPPLEMENTAL APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

(Containing Opinions Below)

CuHariLes W. Boanp

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

INDEX

Opinion of Tenth Circuit Court of Appeals,

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

Judgment of Tenth Circuit Court

of Appeals (unreported) _

Order of Tenth Circuit Court of Appeals

on Petition for Rehearing and Suggestion

for Rehearing en banc (unreported) —.

Opinion of United States District Court for the

District of Colorado, 75 F.R.D. 12 (1977)

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S-17

S-1

OPINION OF TENTH CIRCUIT COURT

OF APPEALS — 570 F.2d 1370 (1978)

STATE OF OHIO, Plaintiff-Appellee,

ARTHUR ANDERSEN & CO.,

Defendant-A ppellant.

ARTHUR ANDERSEN & CO.,

Petitioner,

Vv,

Honorable Sherman G. FINESILVER,

Respondent.

Nos. 77-1571 and 77-1591.

United States Court of Appeals, Tenth Circuit.

Argued and Submitted November 17, 1977.

Decided Feb. 9, 1978.

Rehearing Denied March 22, 1978.

(570 F.2d 1371)

H. Thomas Coghill, Denver, Colo. (Paul E. Goodspeed

and Jay Horowitz of Coghill, Goodspeed & Horowitz, Den-

ver, Colo., and Charles W. Boand of Wilson & McIlvaine,

Chicago, IIl., were with him on the brief), for Arthur An-

dersen & Co., defendant-appellant in No. 77-1571 and peti-

tioner in No. 77-1591.

Miles M. Gersh, Denver, Colo. (Harry L. Hobson,

Luke J. Danielson and Holland & Hart, Denver, Colo.,

were with him on the brief), for plaintiff-appellee in No.

77-1571 and respondent in No. 77-1591.

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Before McWILLIAMS, BREITENSTEIN and

DOYLE, Circuit Judges.

BREITENSTEIN, Circuit Judge.

Defendant- Appellant Arthur Andersen & Co. seeks re-

lief from preclusionary and ‘monetary sanctions imposed

discovery orders. In Arthur Andersen & Co. ? v. Finesilver,

10 Cir., 546 F.2d 338, cert. denied, 429 U.S. 1096, 97 S.Ct.

1113, 51 L.Ed.2d 543, we upheld the validity of the dis-

covery orders. The basic facts are outlined in that opinion

and will not be repeated here. Motions by plaintiff-appellee,

the State of Ohio, for imposition of sanctions were held in

abeyance pursuant to our stay order. 546 F.2d at 340. After

denial of certiorari to review our decision, the district court

held a hearing on the imposition of sanctions and emered

a comprehensive order finding specific facts. This order is

reported as State of Ohio v. Crofters, Inc., D.C.Colo., 75

F.R.D. 12. The facts there found will be discussed here only

insofar as is necessary to an understanding of this opinion.

The district court said, Ibid. at 24-25:

“It is inescapable that Andersen has followed a willful,

deliberate and flagrant scheme of delay and resistance

in discovery matters. In light of the opportu-

[570 F.2d 1372)

nities to

provide discovery of relevant separ Andenen'’s

and unjustified.”

The court ordered, 75 F.R.D. at 25-26, that Andersen

reimburse Ohio $59,949 for costs and expenses incurred in

securing production and that Andersen was precluded from

opposing Ohio's claims on two specified matters.

Our number 77-1571 is Andersen’s direct appeal from

the order imposing sanctions. No. 77-1591 is its petition for

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power. = tomy emanate ner

that compliance was not required because it would violate

the law of Switzerland. After reference to Societe Interna-

tional v. Rogers, 357 U.S. 197, 78 S.Ct. 1087, 2 L.Ed.2d

1255, we said, 546 F.2d at 341:

“Societe implies that consideration of foreign law

problems in a discovery context is required in dealing

with sanctions to be imposed for disobedience and not

in deciding whether the discovery order should issue.”

We also said, Ibid. at 342:

“When and if a subsequent order of the court

imposes a harmful sanction, that order may then be

reviewed.”

The district court has now imposed sanctions. It makes

no practical difference whether its order be reviewed on

direct appeal or mandamus. Andersen is entitled to a re-

view. We have here “a final disposition of a claimed right

which is not an ingredient of the cause of action and does

not require consideration with it.” Cohen v. Beneficial Loan

Corp., 337 U.S. 541, 546-547, 69 S.Ct. 1221, 1226, 93 L.Ed.

1528. Although the order may be collateral, we are con-

vineed that under Cohen v. Beneficial Loan Corp., it is ap-

pealable. Accordingly, No. 77-1591, the petition for manda-

mus, is dismissed.

The sole issue concerns the validity of the sanctions.

The as yet untried case was filed in April, 1972, and was

transferred to the District of Colorado on November 17,

1972. See In re King Resources Company Securities Litiga-

tion, Jud.Pan.Mult.Lit., 352 F.Supp. 975. On the compar-

a record of approximately 3,000 pages plus six large en-

velopes of material. Briefs of 172 pages, plus appendices,

have been filed. The briefs are replete with invectives, male-

dictions, and denunciations which we ignore. We also ignore

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Andersen's persistence in disparaging and derogating the

trial judge and his actions.

Ohio loaned King Resources Company, KRC, eight

million dollars allegedly in reliance on financial statements

prepared by Andersen, 546 F.2d at 339-340. Fund of Funds,

Ltd., FOF, an important customer of KRC, was a subsi-

diary of Investors Overseas Services, Ld., IOS, a Canadian

corporation with its place of business in Geneva,

Switzerland. 75 F.R.D. at 15. Ohio claims that the relation-

ship between KRC and FOF was not noted by Andersen

in the KRC financial statements. Andersen denies any lia-

bility or yTongdoing. Its knowledge of the KRC-FOF-IOS

connection is relevant and important to the lawsuit. 75

F.R.D. at 15.

On October 24, 1975, Ohio served on Andersen a re-

for production of documents including, as Request

Eos ccshhcdube w hahambenabednel ae

after January 1, 1967. During a November 7 conference,

held pursuant to a local court rule, Andersen objected to

ay ete ee Ee eS

Ohio moved to compel response to its requests. On Decem

ber 16 ie cout cule’ Gt Ge QED wee Eee

from its files within the United States. With regard to for-

eign secrecy laws, the court said:

“® © © if there is going to be any question of foreign

secrecy laws, they are going to have to be specified

with great particularity and specificity.”

On April 15, 1976, Ohio filed another discovery mo-

tion related to documents in An-

[570 F.2d 1373}

dersen’s Geneva office and

concerned with the relationship between KRC and IOS.

Andersen's April 30 reply to this request had attached a

10 AR HA

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memorandum of Swiss counsel stating in general terms the

requirements of Swiss law. Ohio then obtained, and ten-

dered to Andersen, consents of FOF, and other related com-

panies, to the production of the documents. Andersen filed

a memorandum reasserting the Swiss law probiem and re-

jecting the consents.

A May 27 order of the court directed Andersen to com-

ply with the discovery requests. On June 17, Andersen

moved for withdrawal of the May 27 order saying that it

had been taken by surprise. In support of the motion it

said that one of its lawyers was going to Geneva to consult

with Swiss counsel:

ane keane ie ae

ing Swiss criminal law, e. g., the opportunity to con-

sult with Swiss counsel as to the legal effect of the

consents filed by Ohio and determine what, if any,

documents and information sought may legally be pro-

vided pursuant to such consents.”

Earlier, it had represented to the court that the docu-

ments were not producible because of Swiss law and that

the consents were inadequate. It is incomprehensible and

inexplicable how Andersen could make such

tions when it did not know what the documents contained

and still had to send a lawyer to Switzerland to get the in-

75 F.R.D. at 17, that Andersen's conduct

“places in substantial doubt the credibility of both the

written opinion of Swiss counsel and Andersen's own

insistence that it had ‘proceeded in good faith to do

the best it can.’ ”

On June 25 the court denied Andersen's motion to

stay the May 27 order and directed counsel to mect and

discuss the discovery problems. On June 28 Andersen filed

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a notice of appeal from the May 27 order. The court modi-

Meare) io = «os

“every effort” to produce the documents by July 12. On

July 9 Andersen appealed from that order. Ohic then

moved for sanctions for noncompliance and Andersen filed

in the court of appeals a petition for mandamus relief. At

a hearing on July 22, ten days after the deadline set by the

court, Andersen finally produced 84 newspaper clippings

from its Geneva files and filed a status report saying that

110 additional documents were on their way from Geneva

and were expected within the week. The explanation for

delay in producing the newspaper clippings is unconvinc-

ing. See 75 F.R.D. at 18 n. 4. Andersen explained its failure

to produce the 194 concededly producible documents by

saying that it had failed to “focus” on the problem of delay,

75 F.R.D. at 18. That failure does not excuse disobedience

of the court's order. On July 23, the court entered a pro-

tective order and directed that production be had by Au-

gust 20. Documents trickled in for several months. Some

came from sources other than Geneva, and some pursuant

to an IOS consent that Ohio had presented to Andersen in

May. See 75 F.R.D. at 19. The court said, Ibid., that the

“dilatory response to our December 16, 1975 order hardly

bespeaks of the good faith compliance which Andersen re-

peatedly asserts.”

The facts in the instant case are distingui from

those considered in Jn re Westinghouse Mlesteis Corparation

Uranium Contracts Litigation, 10 Cir., 563 F.2d 992. In

that case Rio Algom was found in contempt for failure to

obey a discovery order. It asserted that it could not comply

because of Canadian law. In reversing we said that it had

acted in good faith and had made a diligent effort to com-

ply. Ibid. at 998. We also noted that the trial court had

conducted no balancing of interests as required by Societe.

Ibid. at 999. In the instant case Andersen acted in bad faith

and the balancing was heavily on Ohio's side.

S-7

Another opinion relating to the same Westinghouse

litigation, No. 77-1833, filed January 31, 1978, 570 F.2d

899, involved a protective order relating to the taking of a

(570 F.2d 1374)

deposition. We reversed on the peculiar facts of that case

which are in no way comparable with those presented in

On July 23 we granted a temporary stay of the May

27 and July 2 orders. 546 F.2d at 340. Our opinion up-

holding those orders was filed on December 1, 1976, and

the mandate issued on January 10, 1977. The Supreme

Court denied certiorari on February 22, 1977. See 429

U.S. 1096, 97 S.Ct. 1113, 51 L-Ed.2d 543. On January 19

Ohio renewed its request for the imposition of sanctions.

At an April 15 hearing Andersen conceded that some of

the documents ultimately produced after much delay were

from sources other than Geneva and said that on th advice

of Swiss counsel, it had decided to take the “risk” of vio-

lating Swiss law by producing the other requested docu-

ments. In its May 23, 1977 order, 75 F.R.D. at 20, the court

found that “Andersen deliberately and willfully refused

discovery for an unreasonable period of time without jus-

tification.” The finding has overwhelming support in the

record.

Andersen argues that the court failed to consider

and recognize Swiss law. In its December 16, 1975, order

the court referred to “foreign secrecy laws” and said that

any questions in that regard should be specified with “par-

ticularity and specificity.” The specification did not occur

for many months. Without the specifics the court had no

need to determine Swiss law. Andersen could not supply

the specifics because it waited until the latter part of June

to have one of its counsel travel to Switzerland to examine

the requested documents and “consult with Swiss counsel

to determine what documents and information could and

could not be made available in view of the applicable Swiss

S-8

secrecy laws.” After the consultation, documents began to

come in slowly. At the April 15, 1977 hearing, Andersen in

effect withdrew its reliance on Swiss law. No occasion ever

arose for the court to decide a specific point of Swiss law.

Indeed, the record convinces us that Andersen's claims with

reference to Swiss law were no more than diversionary

tactics.

In opposing the sanctions, Andersen emphasizes that

it finally produced the documents. Final production is not

determinative. The Rule permits a sanction when a party

“fails to obey an order.” Andersen refused willfully to obey

for an unreasonable time on the contrived excuse, eventu-

ally abandoned, of the Swiss secrecy laws. The ultimate,

and reluctant, production of documents, more than a year

after a legitimate request, does not absolve Andersen of the

charge that it willfully failed to obey a valid court order.

Rule $7(b)(2), F.R.Civ.P., provides in pertinent part:

“If a party * * * fails to obey an order to provide

or permit discovery * * the court in which the action

is pending may make such orders in regard to the

failure as are just, and among others the following:

(B) An order refusing to allow the d disobedie

ee as eae tin San Se

nated matters in evidence.”

The court ordered that Andersen “shall not oppose or

sweden: any oles ee Se

on and before April 10, 1970 Andersen had informatior

seleting two the financidd condidlen and quill of SOP

which should have led it to realize that FOF “would im-

minently cease to purchase natural resource interests from

KRC,” and (2) that on and before April 24, 1970, Ander-

sen knew that KRC was committed “to provide financing

S-9

to IOS and was negotiating an agreement to give KRC

control of the operation of IOS.” 75 F.R.D. at 25-26.

Andersen argues that the use of preclusionary sanctions

is premised on the presumption that the information with-

held would have supported its opponent’s case and that the

presumption is not applicable here because of final pro-

duction. The presumption rationale is explained in Ham-

mond Packing Co. v. Arkansas, 212 U.S.

(570 F.2d 1375}

322, 350-351, 29

S.Ct. 370, 53 L.Ed. 530, which upheld a default judgment

entered after disobedience of a discovery order. The Advis-

ory Committee’s Note to Rule 37, 28 U.S.C.A. Rule 37, p.

225, says that the Rule accords with Hammond.

In Societe Internationale v. Rogers, 357 U.S. 197, 78

S.Ct. 1087, 2 L.Ed.2d 1255, the Court disapproved the sanc-

tion of dismissal for noncompliance with a discovery order.

In so doing it distinguished between inability to comply and

willful or bad faith non-compliance. Ibid. at 212, 78 S.Ct.

1087. In Norman v. Young, 10 Cir., 422 F.2d 470, we dis-

cussed both Hammond and Societe and upheld the sanction

of dismissal, noting, Ibid. at 474, that the disobedience was

“willful” and “a direct flaunting of the Court’s authority.”

The instant case presents a similar situation.

In National Hockey League v. Metropolitan Hockey

Club, 427 U.S. 639, 96 S.Ct. 2778, 49 L.Ed.2d 747, the

Court, in upholding the sanction of dismissal for disobedi-

ence of a discovery order, discussed Rule 37(b) (2). It held

that the trial court Jid not abuse its discretion in ordering

dismissal because of a party’s “flagrant bad faith” and its

counsel’s “callous disregard” of their responsibilities. Ibid.

at 643, 96 S.Ct. 2778. The Court emphasized that sanctions

must be available “in appropriate cases, not merely to pen-

alize those whose conduct may be deemed to warrant such

a sanction, but to deter those who might be tempted to

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such conduct in the absence of such a deterrent.” Ibid. In

the circumstances presented, the preclusionary sanctions

were just and authorized by the Rule.

In addition to the preclusionary sanctions, the court

ordered Andersen to pay Ohio “$59,949 as a reasonable

reimbursement for costs and expenses.” 75 F.R.D. at 25.

Rule 37(b)(2), F.R.Civ.P., lists several sanctions which

may be imposed for failure to comply with a discovery

order and concludes with this provision:

“In lieu of any of the foregoing orders [for sanc-

tions] or in addition thereto, the court shall require

the party failing to obey the order or the attorney ad-

vising him or both to pay the reasonable expenses, in-

cluding attorney's fees, caused by the failure, unless

the court finds that the failure was substantially justi-

fied or that other circumstances make an award of

expenses unjust.”

Ohio filed a statement of its expenses, the details of

which are not attacked by Andersen. The breakdown of

these expenses shows, 75 F.R.D. at 22 n. 8:

Incurred to July 23, 1976... __-________ $16,460

Incurred in connection with

Tenth Circuit proceedings _ 27,997

Incurred in connection with

Supreme Court proceedings ... _ .... 15,492

TOTAL $59,549

Andersen argues that the expenses for the period be-

fore July 23 should not be awarded because the delay did

not prejudice Ohio and because during that period Ander-

sen did not fail to obey a court order. In October, 1975,

Ohio moved for production. Many conferences and hear-

ings were held to resolve the dispute over production. On

May 27, 1976, the court entered its order compelling pro

duction. Rule 37(a)(4) provides that if a motion to compel

discovery is granted,

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“The court shall * * * require the party * * *

whove conduct necessitated the motion * * * to pay

to the moving party the reasonable expenses incurred

in obtaining the order, including attorney's fees, un-

less the court finds that the opposition to the motion

was substantially justified or that other circumstances

make an award of expenses unjust.”

This provision for the payment of reasonable expenses

to secure an order compelling production applies. The

record facts justify the award.

Andersen's next objection goes to the appellate ex-

penses. It says that the award conflicts with Rule 38,

F.R.A.P., pertaining to the award by the court of appeals

of damages and costs resulting from frivolous appeals.

There is no conflict. Rule 37(b) permits the district court

to award

[570 F.2d 1376]

reasonable expenses and attorneys’ fees for dis-

obedience of a discovery order. Andersen unsuccessfully

attacked the discovery orders both in the court of appeals

and the Supreme Court. Its argument that the court of

appeals recognized the seriousness of the problem of the

Swiss secrecy laws does not impress us. Conflicts arising

from the interaction of domestic law relating to discovery

and foreign secrecy laws are important and troublesome.

When the case was here before, we did not know that An-

dersen had waited until the end of June, 1976, to inves-

tigate the Swiss documents to determine the applicability

of the Swiss laws and the adequacy of the consents which

Ohio had provided. We rejected Andersen's general reli-

ance on Swiss law and now learn that we should have

awaited the specifics.

To secure production, Ohio had to oppose Andersen

in both the court of appeals and the Supreme Court. The

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award of the appellate expenses and attorneys’ fees was

just and proper under Rule 37(b)(2).

The record before us shows both flagrant bad faith and

callous disregard. Rule 1, F.R.Civ.P., provides that the

Rules “shall be construed to secure the just, speedy, and in-

expensive determination of every action.” The trial courts

must administer the rules to attain the proclaimed objective.

See Robison v. Transamerica Insurance Co., 10 Cir., 368

F.2d 37, 39. Enforcement of the rules requires sanctions for

disobedience of valid court orders. The trial court did not

abuse its discretion when it imposed the sanctions.

In No. 77-1571, the orders of the district court are af-

firmed. No. 77-1591 is dismissed.

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JUDGMENT OF TENTH CIRCUIT

COURT OF APPEALS

JANUARY TERM — FEBRUARY 9, 1978

UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

Appeal from the United States District Court for the Dis-

trict of Colorado (D.C. No. C-4628)

Before Honorable Robert H. McWilliams, Honorable Jean

S. Breitenstein and Honorable William E. Doyle, Circuit

Judges

STATE OF OHIO,

Plaintiff-A ppellee,

CROFTERS INCORPORATED, a

corporation; DEE GEE COMPANY;

SIDNEY D. GRIFFITH; HARRY A.

GROBAN; GERALD A. DONAHUE;

KING RESOURCES COMPANY;

JOHN M. KING; WILLIAM V.

COFFEY; THE COLORADO

CORPORATION; REGENCY

INCOME CORPORATION; ELLIOT

KEEN WOLCOTT; DUN &

BRADSTREET, INCORPORATED;

FINANCIAL DATA RELATIONS

INCORPORATED; RONALD R.

r No. 77-1571

HOWARD,

Defendants,

ARTHUR ANDERSEN & COMPANY,

Defendant-Appellant. |

JUDGMENT

This cause came on to be heard on the record on ap-

peal from the United States District Court for the District

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of Colorado, and was consolidated with a petition for writ

of mandamus filed by appellant as No. 77-1591 in this

Court for purposes of record, briefing and oral argument.

The appeal was argued by counsel.

Upon consideration whereof, it is ordered that the

judgment of that court is affirmed. The mandate shall issue

forthwith.

/s/

HOWARD K. PHILLIPS

Clerk

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ORDER OF TENTH CIRCUIT COURT

OF APPEALS ON

PETITION FOR REHEARING AND SUGGESTION

FOR REHEARING EN BANC

MARCH TERM — MARCH 22, 1978

Before Honorable Oliver Seth,

Circuit Judge

Honorable Jean S. Breitenstein,

Circuit Judge

Honorable Robert H. McWilliams,

Circuit Judge

Honorable James E. Barrett,

Circuit Judge

Honorable William E. Doyle,

Circuit Judge

Honorable Monroe G. McKay,

Circuit Judge

Honorable James K. Logan,

Circuit Judge

STATE OF OHIO,

Plaintift-A ppellee,

CROFTERS INCORPORATED, a

corporation; DEE GEE COMPANY;

SIDNEY D. GRIFFITH; HARRY A. No. 77-1571

GROBAN; GERALD A. DONAHUE;

KING RESOURCES COMPANY:

JOHN M. KING; WILLIAM V.

COFFEY; THE COLORADO

CORPORATION; REGENCY

INCOME CORPORATION; ELLIOT |

S-16

KEEN WOLCOTT; DUN &

BRADSTREET, INCORPORATED;

FINANCIAL DATA RELATIONS

INCORPORATED; RONALD R.

HOWARD. > No. 77-1571

Defendants,

ARTHUR ANDERSEN & COMPANY,

Defendant-A ppellant.

This matter comes on for consideration of the ap-

pellant Andersen’: petition for rehearing, together with a

suggestion for rehearing en banc, which was ordered filed

on March 8, 1978 following the recall of the mandate.

Upon consideration whereof, it is ordered that the

petition for rehearing is denied by Judges McWilliams,

Breitenstein and Doyle, to whom the cause was argued and

submitted.

The petition for rehearing having been denied by the

original panel to whom the case was argued and submitted

and no member of the panel nor judge in regular active

service on the Court having requested that the Court be

polled on rehearing en banc, Rule 35, Federal Rules of Ap-

pellate Procedure, the suggestion for rehearing en banc is

denied.

Judge William J. Holloway, Jr. did not participate in

any matters in this appeal, nor in the rehearing matters

reflected by this order.

/s/

HOWARD K. PHILLIPS

Clerk

S-17

OPINION OF U. S. DISTRICT COURT FOR THE

DISTRICT OF COLORADO — 75 F.R.D. 12 (1977)

In re King Resources Company Securities Litigation.

STATE OF OHIO, Plaintiff,

Vv.

CROFTERS, INCORPORATED, Dee Gee Company, a

partnership, Sidney D. Griffith, Bernice S$. Groban as

Executrix of Harry A. Groban, Deceased, Gerald A.

Donahue, King Resources Company, John M. King,

William V. Coffey, the Colorado Corporation, Re-

gency Income Corporation, Robert B. Crew, Jr., Elliot

Keene Wolcott, Arthur Andersen & Company, a part-

nership, Dun & Bradstreet, Incorporated, Financial

Data Relations, Incorporated, and Ronald R. Howard,

Defendants.

Civ. A. No. C-4628, M.D.L. Docket

No. MDL-79-1.

United States District Court, D. Colorado.

May 23, 1977.

(75 F.R.D. 14]

SHERMAN G. FINESILVER, District Judge.

ORDER NO. 1977-14

ORDER IMPOSING SANCTIONS AGAINST DEFEN-

DANT ARTHUR ANDERSEN & COMPANY

Pursuant to Rule 37, Federal Rules of Civil Procedure,

Plaintiff, State of Ohio, has moved the Court to impose

sanctions against defendant Arthur Andersen & Company

for failure to comply with discovery orders and reasonable

requests of Ohio for discovery, including production of

documents.

On April 17, 1972, Ohio filed this action in the United

States District Court for the Southern District of Ohio

against Andersen and others. Jurisdiction is based on § 22(a)

S-18

of the Securities Act of 1933 as amended; 15 U.S.C.

§ 77v(a), and on § 27 of the Securities Exchange Act of

1934, 15 U.S.C. § 78aa. King \esources Company (KRC)

is one of the defendants. The Judicial Panel on Multidistrict

Litigation transferred the case to the District of Colorado

for coordinated proceedings with other cases arising out of

the affairs of KRC. In re King Resources Company Securi-

ties Litigation, 352 F.Supp. 975 (Jud.Pan.Mult.Lit.1972).

Suit against King Resources Company has been stayed by

an order in bankruptcy proceedings. Several of the numerous

cases relating to King Resources are listed in the appendix.

(75 F.R.D. 15)

Defendant Arthur Andersen & Co. (Andersen) is a na-

tional accounting firm with its principal office in Chicago,

Illinois and having offices throughout the world.

The motion for sanctions arises out of defendant An-

dersen’s response to discovery requests and its response to

several court orders. The court orders involved were en-

tered on December 16, 1975, May 27, 1976, July 2, 1976

and July 22 and 23, 1976.

A matter relating to discovery of documents was pre-

viously filed by Andersen in the Tenth Circuit Court of

Appeals and rejected by that court. Arthur Andersen & Co.

v. Finesilver, 546 F.2d 338 (10th Cir. 1976), cert. denied,

429 U.S. 1096, 97 S. Ct. 1113, 51 L.Ed.2d 543 (1977).

One of several hearings on sanctions was commenced on

July 22, 1976. That hearing was held in abeyance pursuant

to a stay order entered by the Court of Appeals in Arthur

Andersen & Co. v. Finesilver, supra. A further hearing on

sanctions was held on April 15, 1977.

Upon review of the totality of evidence, and briefs and

statements of counsel we impose sanctions against Ander-

sen. We find that the actions of Andersen were without

good cause or substantial justification, have inordinately

delayed resolution of this litigation, and have resulted in

S-19

waste of time and unnecessary expense to the State of

Ohio. In a flagrant and deliberate way Andersen has under-

mined the basic aim of the Federal Rules of Civil Proce-

dure “to secure the just, speedy, and inexpensive determi-

nation of every action” brought before the federal courts.

Fed.R.Civ.P. 1. Plaintiff is entitled to reimbursement for

its reasonable expenses and attorneys’ fees in connection

with discovery and other relief as set forth below.

CHRONOLOGY OF EVENTS

In April and May of 1972, the State of Ohio purchased

two KRC notes in the total face amount of eight million

dollars. Plaintiff alleges that in deciding whether to pur-

chase the notes it relied upon certain KRC financial state-

ments and opinions prepared by Andersen. The notes were

not redeemed at maturity because of the financial collapse

of KRC.

In its complaint, Ohio contends that the financial

statements and opinions released by Andersen were false

and misleading. In particular, Ohio claims that Andersen’s

financial statements did not indicate the extent to which

KRC was dependent upon a single customer, the Fund of

Funds, Ltd. (FOF). FOF, it is alleged, accounted for 38%

of KRC’s gross profit in 1968 and 65% in 1969. FOF was

a mutual fund controlled by Investors Overseas Services,

Ltd. (IOS). Due to a series of questionable business prac-

tices both FOF and IOS were forbidden by the Securities

and Exchange Commission from doing business in the

United States. Plaintiff states that the SEC repeatedly an-

nounced that it opposed the development of ties between

FOF, IOS and American corporations, specifically men-

tioning KRC.

While IOS was a Canadian corporation, its principal

place of business was Geneva, Switzerland. Andersen pro-

vided various accounting services to FOF and IOS from its

S-20

Geneva office. It was in the Geneva office that Andersen

audited the books of FOF and IOS.

It is alleged that in the late 1960's KRC unsuccessfully

attemnted to take over FOF. The takeover activity resulted

in a substantial cash drain from KRC and FOF. Ohio con-

tends that it became quite likely that KRC would lose the

business of its largest customer, but this fact was not noted

in the KRC financial statements. Andersen denies any lia-

bility or wrongdoing in this suit. We note at the outset that

Andersen's knowledge of the KRS{sic]-FOF-IOS connection

is of obvious relevance and importance to the lawsuit.

Discovery has been extensive and has spanned the

United States and foreign countries. On October 24, 1975,

during the latter phase of discovery Ohio served Andersen

with a request for production of:

Reports of examination, draft reports, working papers,

workpapers, correspondence files and permanent files

of Andersen relative to examination after January 1,

1967 of IOS.

(75 F.R.D. 16]

On December 16, 1975, the court ruled that the re-

quest was meritorious and that Andersen should produce

the requested documents from its files within the United

States.

On April 15, 1976, plaintiff filed a “Motion to Compel

Further and Complete Discovery Concerning I.O.S.”. In

the motion Ohio asked for production of documents in the

Geneva, Switzerland office. Andersen opposed the Motion

to Compel by stating, inter alia, that the Swiss Code of Obli-

gations, the Swiss Penal Code and the Swiss Federal Banking

Law all prohibited release of the documents to plaintiff.

Andersen tendered an opinion of Swiss counsel, prepared at

Andersen’s request, to the effect that Andersen would be in

violation of Swiss Criminal law if it revealed any documents

S-21

in its Geneva file. Andersen flatly stated that if it “were

ordered to produce documents or obtain data from its

Geneva office, Andersen could not do so without subjecting

its personnel to the penal and civil sanctions imposed by the

laws of Switzerland”. Memorandum in Opposition to Plain-

tiff's Motion to Compel, filed April 30, 1976 at 23.

Plaintiff, on May 24, 1976, tendered certified con-

sents to disclosure of the IOS and FOF documents held in

Geneva on May 24, 1976. The FOF consents were signed by

all FOF directors, its president and secretary. The Cana-

dian liquidator of FOF and IOS, appointed by the Supreme

Court of Ontario, also signed consents to disclosure on be-

half of FOF and IOS. On the day that the Ohio consents

were filed with the court Andersen submitted a memoran-

dum in which it denied that the consents were of any sig-

nificance to the legal problems involved in disclosure of

the Swiss documents. Andersen stated:

Ohio now puts forth a few purported waivers and con-

sents. Initially, it is important to note that the court

cannot give any weight to the consents Ohio has sub-

mitted because it is purely an unsupported assump-

tion on Ohio's part that the consents have any binding

effect whatever upon the entities involved. . . . More-

over, even if they were proper and binding, the pur-

ported waivers and partial waivers and consents relied

upon by Ohio could not by any stretch of the imagina-

tion protect Andersen or its personnel against criminal

and civil liability under the laws of Switzerland. A

great many other consents would be required in

view of the multifaceted and far flung operations of

IOS and its 80 or more subsidiaries.

While we do not wish to go into extensive discussion of

Andersen's statements at this point, it should be noted, and

we find, that Andersen, by its later statements and conduct,

proved each of the objections to be illusory.

S-22

We ruled on the Motion to Compel at our May 26,

1976 hearing.' There we observed that plaintiff had made

a good showing for the need to discover the contents of the

Geneva files and granted the Motion to Compel. There-

after on June 17, 1976, Andersen filed a motion requesting

the court to withdraw the discovery order alleging that

Andersen was taken by surprise by the order directing dis-

covery in Geneva. In its motion, Andersen again asserted

that the waivers or consents to disclosure obtained by Ohio

were “obviously inadequate to cover the broad discovery

requests”. In the same motion, however, Andersen stated

that during the time between the filing of the consents by

Ohio, and the May 27th ruling, it “did not have adequate

time to determine the extent to which such limited con-

sents might enable it to produce any of the documents”.

Thus, between May 26, 1976, when we entered our

order, and June 17, 1976, when Andersen filed its motion

to stay, no serious attempts were made to comply with the

court’s order. It also became obvious as future events un-

folded that despite 15 months of protestations from defen-

dant Andersen, its American counsel had no clear under-

standing of the contents of the

(75 F.R.D. 17]

Geneva files. Without such

an understanding, the assertions of the illegality of produc-

tion of any documents and the denial of the import of the

consents obtained by Ohio revealed themselves as mere cha-

rades intended to prevent both Ohio and the court from ap-

proaching the discovery question in an informed and profes-

sional manner. The concession that Andersen had not exam-

ined its files upon receipt of the original request for produc-

tion places in substantial doubt the credibility of both the

Our bench order of May 26, 1976 was entered on the Court's

Registry of Action on May 27, 1976. We shall refer to the order, as

do the litigants, as the May 27th order.

S-23

written opinion of Swiss counsel and Andersen’s own insis-

tence that it had “proceeded in good faith to do the best it

can”. Supp. Memorandum in Opposition to Plaintiff's Mo-

tion to Compel at 4. Counsel for Andersen finally inspected

the Geneva files between June 18 and June 25, 1976.

On June 25, 1976, we denied Andersen’s Motion to

Stay our May 27th order. In the June 25, 1976 order, we

emphasized our concern that discovery had been inordi-

nately delayed. We observed that professional cooperation

among counsel would assist in the orderly progression of

the lawsuit and that cooperation should be forthcoming.

We directed a meeting between counsel to explore resolu-

tion of discovery matters. Prior to any meeting with plain-

tiff, Andersen filed a notice of appeal of our May 27, 1976

order.

As might be anticipated, the meeting between Ohio

and Andersen was not fruitful. Ohio proposed that as to

documents which Andersen claimed foreign law “privilege”

Andersen “exert every effort” to obtain the required con-

sents or waivers. As to those documents which could not be

produced without Swiss law problems, Ohio proposed that

Andersen list the documents and state with specificity the

ground for non-production. Andersen refused to agree to

this procedure. Instead, Andersen informed the court that

it intended to follow its own procedures. Report of Arthur

Andersen & Co., filed July 1, 1976. Andersen’s proposal

was that its Swiss counsel would inform the court of what

documents or portions of documents could be produced;

that those documents would only be produced upon Ohio

agreeing to a protective order acceptable to Andersen; and

that for documents not produced, Andersen would list the

reasons for non-production. Despite the similarity between

the proposals, Andersen refused to include a provision that

it would exert every effort to obtain the necessary consents.

On July 2, 1976, we withdrew our May 27, 1976 order.

In its place, however, we adopted the Ohio formulation

S-24

that Andersen exert every effort to obtain consents needed

to produce the totality of the documents. We set a dead-

line of July 12, 1976 for production of documents. We also

stated that the court would impose sanctions should it ap

pear that claims of foreign law privilege were not made in

good faith. Seven days later Andersen appealed the order to

the Tenth Circuit of Appeals. Andersen also filed for a

writ of mandamus.

Most revealing is the memorandum filed in this court

in support of the motion to stay. There, Andersen stated that

its search of the Geneva files identified approximately 220

documents which were responsive to Ohio’s discovery re-

quest. Of the 220, Andersen had determined that the “re-

sponsive portions” of 190 documents could be produced

without violating Swiss law as a result of “certain consents

recently furnished to [Andersen] by plaintiff”. (Emphasis

added) It was further stated that the responsive portions

of the 190 documents would be produced during the week

of July 12, 1976.

The week of July 12, 1976 arrived and passed without

production of a single document by Andersen.

A previously scheduled hearing was held on July 22,

1976. The original purpose of the hearing was the submis-

sion of a pretrial order.? The court's attention was soon

drawn away from the consideration of the

(75 F.R.D. 18)

pretrial order

and to various discovery disputes.’

2A satisfactory pretrial order was not filed on that date, in part,

because Andersen declined to stipulate to any facts as uncontro-

verted.

‘During this litigation there have been, and continue to be, a

myriad of discovery matters which have required court inter-

vention. Many of these disputes have been resolved favorably to

Arthur Andersen & Company.

S-25

On July 13, 1976, plaintiff had filed a motion for sanc

tions. It became obvious that the court would consider the

Geneva documents question at the pretrial conference. Two

days before the conference Andersen filed two memoranda

in Opposition to the imposition of sanctions. In one, Ander-

sen unequivocally stated “Prior to the service of Ohio’s

motion (for sanctions), the responsive portions of all those

documents, and the answers to interrogatories, had been

tendered to Ohio”. (Emphasis in original). Andersen also

accused Ohio of bad faith, saying:

Indeed, as Ohio is aware—although for its own pur-

poses, it has chosen to inform this court of the fact

in only the most elliptical terms—Andersen has pro-

duced for Ohio’s inspection a substantial portion of

the documents in question. Further, by virtue of its

most recent efforts to finally resolve this discovery

dispute . . . Andersen will have produced all the docu-

ments relating to (the issue). The net result: there are

no such documents left for this court to compel Ander-

sen to discover; there is no non-compliance to serve

as a predicate for sanctions. (Emphasis in original).

In fact, however, as of the date of filing the memoran-

da, Andersen had not produced a single document from its

Geneva file. What Andersen had done was to inform Ohio

by letter that if the court entered a protective order ac-

ceptable to Andersen, it would make available only the

responsive portions of relevant documents. Further, Ander-

sen stated that “production” would be made only at the

Geneva office.

On the morning of the pretrial conference Andersen

finally delivered some “documents” to counsel for Ohio.

This was the first time since the request for production

had been served ox Andersen on October 24, 1975, that

anything from the Geneva office had been submitted to

Ohio. At the hearing dealing with sanctions on July 22,

S-26

1976, Andersen represented to the court that it had pro-

vided Ohio with 84 of the 220 responsive documents.

What was the nature of these documents which might

subject Andersen and its European employees to severe

civil and criminal liability? What was the nature of these

documents which Andersen had withheld for ten months be-

cause of the extensive consents need [sic] for production?

The documents tendered to Ohio on the morning of July

22, 1976 included 84 newspaper clippings.‘ While Andersen

delivered these clippings and other documents in July, they

had been identified as responsive to the discovery request

over a month earlier when one of Andersen's counsel went

to Geneva to examine the files. Nonetheless, the documents

were not turned over until July because instead of hand

carrying the items on his return to the United States, coun-

sel mailed the documents from Geneva to Denver, which

necessitated the further delay intrinsic in clearance with

the United States Customs Office. This episode highlights

Andersen's tenuous argument of “good faith” in expediting

the discovery and is illustrative of its continued attempt to

thwart timely discovery.

At the July 22 pretrial conference, Andersen admitted

error in not producing any documents by the July 12, 1976

deadline. Asked by the court why had the documents been

delivered in such a tardy fashion, counsel replied that he

was not “focusing on delay” as an important consideration.

This statement was made despite the fact that the timetable

for discovery was of great importance to the court and a

‘At our April 15, 1977 hearing on the motion for sanctions, counsel

for Andersen told the court that the clippings had to be individu-

ally reviewed for writings or stray marks. A deposition of co-

counsel, however, revealed that there was never any document by

document review of newspaper clippings or interim financial

statements.

S-27

topic of con-

[75 F.R.D. 19)

cern at many of the court’s hearings and in its

written orders.

To move the case forward the court signed a protective

order. Order No. 1976-12 (July 23, 1976). The order was

not out of the ordinary. It merely stated that the use of

any of the Geneva documents would be limited to the pur-

poses of the immediate lawsuit. Upon request, the order

could have been entered on [sic] October 1975.

The fact that Andersen was willing to produce only

portions of relevant documents served as another impedi-

ment. Andersen, in consultation with its Swiss lawyer, as-

sumed the role of self-appointed censor, editor and arbiter.

It decided what documents (or portions thereof) would be

needed by Ohio and produced only those portions. The

stated reason was that by excising portions of the docu-

ments before production, Andersen would not need to ac-

quire certain additional waivers or consents for disclosure.

The effect of this censorship on the discovery time-

table can be seen by reviewing a typical example. Certain

edited documents were delivered to Ohio in late July, 1976.

In August, Ohio requested that the censored portions be

supplied. Andersen was unable to then respond to this re-

quest because the necessary consents had not been obtained.

On December 28, 1976, Andersen received the needed

waiver—a signed consent from the Canadian counsel for the

IOS court appointed liquidator. The complete copies of the

documents, however, were not delivered to Ohio for an-

other month.

What is curious about Andersen's four month attempt

to obtain the needed IOS consent is that the party con-

tacted was Canadian counsel for the IOS liquidator. Ohio

S-28

had presented Andersen with the consent of the liquidator

in May of 1976, at which time Andersen rejected any pos-

sibility that such a consent could be of any value.

Nearly a dozen of the documents eventually produced

were obtained not from Switzerland, but from file copies

maintained in the United States. In December of 1975 we

ordered Andersen to delve into its U.S. files and produce

copies of the Swiss documents which existed in this coun-

try. Although the court required prompt production, the

documents were not delivered, at the earliest, until July of

1976. Additional documents trickled in from Chicago,

Newark, New York and other offices—some as late as Janu-

ary, 1977. Such a dilatory response to our December 16,

1975 order hardly bespeaks of the good faith compliance

which Andersen repeatedly asserts.

On December 1, 1976, the Tenth Circuit entered its

opinion on the discovery matters on Andersen’s appeal.

Arthur Andersen @ Co. v. Finesilver, supra. The court

found the interlocutory appeal premature and that this

court had not usurped its authority in entering the discov-

ery orders. Thereafter, Andersen applied to the Court of

Appeals for a stay order. The Court denied the stay, noting

that the case had been filed in 1972, and that it was time

the action moved forward. Andersen’s petition for a writ

of certiorari was denied by the United States Supreme

Court. 429 U.S. 1096, 97 S.Ct. 1113, 51 L.Ed.2d 543

(1977). Thereafter, we scheduled a hearing on plaintiff's

motions for sanctions. That hearing was held on April 15,

1977, at which time both Ohio and Andersen were heard.

At the hearing we were informed by Ohio that Ander-

sen had produced, only the day before, “several thousand

BOER the bs aimee 0

S-29

pages of Andersen documents” which were the subject of a

stipulation of discovery entered on January 5, 1976.°

At the hearing Andersen, through its counsel, made

the surprising admission that production of the Gen-

eva documents represented no great threat of Swiss criminal

prosecution. The court was told that Andersen’s Swiss coun-

sel now believed that

[75 F.R.D. 20)

the waivers obtained were adequate

protection against criminal prosecution and that Andersen

was willing to take “the risk”. In May of 1976, however,

Andersen stated that the Swiss prosecutor would be obliged

to begin criminal proceedings should Andersen reveal the

contents of its Geneva files. Andersen now asserts its good

faith in producing portions of 218 of 220 relevant docu-

ments by April 15, 1977. In contrast to this assertion, Ander-

sen’s year and a half delay in production bespeaks of a will-

ful attempt to withhold production of producible docu-

ments. We find willful and flagrant bad faith and a callous

disregard of counsel’s responsibilities. Andersen could have

complied easily and expeditiously to the discovery orders

entered by the court and the reasonable discovery request

of Ohio.

Discovery rules are designed to inform each party of

the basis of his adversary’s claim or defense and to provide

access to all relevant information. C. Wright, Handbook on

the Law of Federal Courts § 81 (3d ed. 1976). Andersen’s

conduct in this matter has been marked by delay, excuse,

recalcitrance and indifference. It’s [sic] defense of good

faith and cooperation is ill-fitting.

* These documents are believed by the court to be from a source

other than the Geneva files. We comment only because their pro-

duction at this date is indicative of Andersen's response to the

duties of good faith and cooperation imposed under the Federal

Rules of Civil Procedure.

S-30

In sum, we find that (a) the material sought by Ohio

from Andersen was relevant to the issues in the suit; (b)

Andersen had the ability to expeditiously comply with

Ohio's discovery request; (c) a court order was entered di-

recting Andersen to exert every effort to comply with the

discovery requests; and (d) Andersen deliberately and will-

fully refused discovery for an unreasonable period of time

without justification.

SANCTIONS UNDER FEDERAL RULES

OF CIVIL PROCEDURE

Rule 37 of the Federal Rules of Civil Procedure was

developed to give trial courts the tools they needed to en-

ferce discovery procedures. Discovery under the Rules are

designed to proceed at the initiative of the parties and

under their control. Generally, judicial management and

involvement in the discovery process is not required unless

one party challenges the activity of an adversary. The sanc-

tions aspect of Rule 37 provides for alternative approaches

by the court to ensure that the spirit and object of discovery

under the rules are maintained.

Under the Rule, where the court has once established

the right of the moving party to the information requested,

disobedience of the court's order is punishable without fur-

ther consideration of the objections presented. Fed.R.Civ.P.

37(b). The sanctions provided for in the Rule mirror the

degrees of involvement of the trial court in the pre-trial

procedure. Where the parties seek a ruling on the disputed

right to discovery, Rule 37(a) imposes no sanction unless

the objection of the reluctant party is without substantial

justification. In such a case, Rule 37(a)(4) provides for im-

position of costs against the recusant. But where the right

to discovery has once been established, and the request en-

forced by an order compelling discovery, disobedience is

punishable by contempt, by dismissal or default judgment,

S-31

by an order establishing the existence of certain facts al-

leged by the moving party, or by an order precluding the

delinquent from supporting or opposing designated claims

or defenses or prohibiting him from introducing designated

matters into evidence. Fed.R.Civ.P. 37(b)(2).

Within these broad parameters, the particular sanction

to be imposed is within the discretion of the trial court.

Rule 37 offers little guidance. The enumerated sanctions of

Rule 37(b) are not exclusive; the court may respond to non-

compliance by issuing “such orders in regard to the failure

as are just... .” Fed.R.Civ.P. 37(b)(2).

Without adequate sanctions the procedure for discovery

would be ineffectual. See 8 C. Wright and A. Miller, Fed-

eral Practice and Procedure, § 2281 (1970) ; 4 Moore, Fed-

eral Practice, § 37.03; and Rosenberg, Sanctions to Ef-

fectuate Pretrial Discovery, 58 Columbia L.Rev. 480

(1958).

In the usual litigation, the court need not resort to

Rule 37 because counsel recognize

[75 F.R.D. 21)

their duty to permit dis-

covery and, in a professional manner, regulate the progres-

sion of the lawsuit with minimal court intervention. Such

self-regulation is needed if the Federal courts are to be a

forum in which every litigant can receive close and careful

scrutiny of his claim.

In the last several years the caseload pressure placed

on the Federal courts has been tremendous. As social insti-

tutions lose their persuasive force, more reliance is placed

on the legal system for resolution of disputes. See E. Schuyr,

Law and Society, a Sociological View (1968); Selznick,

Legal Institutions and Social Controls, 17 Vand.L. Rev.

83 (1963). As an example, in 1971 this district experienced

S-32

294 case filings per judge. That number increased in 1975

to 443, forty-one cases over the national figure for federal

district courts. Management Statistics for United States

Courts (1976). We cannot hope to give each litigant his

due unless the courts can be aided by competent counsel

acting in a professional manner.

Over a decade ago, an observation was made in

Shapiro v. Freeman, 38 F.R.D. 308, 312 (S.D.N.Y.1965) :

The Federal Rules of Civil Procedure were designed

as an affirmative aid to substantive justice, and those

who choose to read them restrictively do so at their

peril. It is time that (discovery) be conducted by mem-

bers of the bar in a cooperative manner, in accord-

ance with both the letter and spirit of the rules, with-

out petty bickering and without intervention by busy

courts with more important matters pressing for atten-

tion. It is clear to us that (counsel) has no conception

of his obligation to observe the rules ‘as an officer of

the court’ or otherwise. Rather, he appears to be bent

on concealing vital facts, or, at best, waging a war of

[justification for his conduct] . . . . As a result, the co-

operative atmosphere envisaged by the federal rules

has been poisoned by antagonism.°

Cooperation among counsel is not only helpful, but

required, and the court has the duty to ensure that such

cooperation is forthcoming. See, e.g., Berger v. Brannan,

172 F.2d 241 (10th Cir. 1949).

¢Subsequent to our writing this opinion, the Tenth Circuit Court

of Appeals affirmed a dismissal for failure to comply with discov-

ery orders. The court stated: “The orders of the [trial] court must

be followed, and the Federal Rules must be followed in order for

the entire machinery to function at all.” Murphy v. Fatzer, un-

published, No. 76-1265 (10th Cir. June 1, 1977). See also, Stanley

v. Continental Oil Co., 536 F.2d 914 (10th Cir. 1976) and Glezos

v. Blackett, unpublished, No. 76-1225 (10th Cir. April 25, 1977).

at tas Re ilas ne inn Rial ae

S-33

II.

The necessary cooperation by Andersen envisioned by

Rule 37 has not been present in this case. Documents were

not disclosed in full. Attempts to obtain necessary consents

began in earnest only in August of 1976, a full eleven

months after the first notice was received from Switzerland

that such consents would be required. Even as late as April

15, 1977, the date of the most recent court hearing, not all

of the admittedly responsive documents have been pro-

duced. It is an understatement to say that this case has

unduly and unnecessarily taxed the judicial time available

to the court. Litigants in this and other cases had to be in-

formed that their causes could not be considered in a time-

ly fashion because of the commitments this court made in

response to Andersen's recalcitrant discovery practices.

Delay in the administration of justice has long been the

subject of criticism. In 1906 Dean Pound addressed the

American Bar Association in his now classic essay, The

Causes of Popular Dissatisfaction with the Administration

of Justice:

The idea that procedure must of necessity be wholly

contentious disfigures our judicial administration at

every point . . . It leads counsel to forget that they are

officers of the courts and to deal with rules of law and

procedures exactly as the professional football coach

with the rules of the sport.

29 Reports of the American Bar Association, 395 (1906).