«ZURICH AMERICAN INS. CO. : CIVIL ACTION : : v. : : : RITE AID CORPORATION : NO. 04-1759 MEMORANDUM OPINION November 23, 2004 PRATTER, District Judge. ...»
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
ZURICH AMERICAN INS. CO. : CIVIL ACTION
RITE AID CORPORATION : NO. 04-1759
MEMORANDUM OPINIONNovember 23, 2004 PRATTER, District Judge.
I. INTRODUCTION The substance of this case involves a petition filed pursuant to the Federal Arbitration Act (the “FAA”) to vacate, modify or correct an arbitration award regarding an insurance coverage dispute and a cross-petition to uphold the arbitration award. However, the Court is presently addressing, sua sponte, the issue of whether it is appropriate for this case to remain shrouded under seal. Both the docket and the record for this matter are currently sealed. By Order dated May 7, 2004, following the filing of Zurich’s Petition to Vacate, Modify and Correct Arbitration Award, the court before which the parties then appeared granted a motion to maintain all documents filed under seal, but only to the extent that there was a private agreement between the parties who assented to it. (Sealed Docket Entry No. 6). The private agreement between the parties involves two previous and related arbitration matters. The motion was unopposed and was entered into prior to any opportunity of the court to evaluate how the parties
-1would avail themselves of the seal or whether the case ultimately would merit such treatment.
The case was subsequently reassigned to this Court on July 1, 2004. Promptly thereafter, the Court inquired of the parties whether they continued to believe that the extraordinary “seal” treatment was necessary for this case. The parties in this litigation are Zurich American Insurance Company (“Zurich”) and Rite Aid Corporation (“Rite Aid”), both of whom informed the Court that the sealing of the record was at the behest of Beth Kaplan, a former Rite Aid employee, whose claims against Rite Aid were the subject of the underlying arbitrations, during which various evidence was introduced that Ms. Kaplan desired to be kept under seal.
After reviewing the facts of the case and the underlying legal arguments, the Court, having raised the issue sua sponte of whether the record and the docket for this case should remain sealed, found little justification in the record for sealing the entire record. Thus, the Court informally raised the issue of unsealing the record with the parties, Zurich and Rite Aid.
Neither of the parties objected to unsealing the record. However, by letter dated September 17, 2004, Beth Kaplan, a former management employee of Rite Aid, and a party to the previous underlying insurance coverage-related matter (the “Liability Arbitration Panel”), indicated through counsel for Rite Aid,1 that she and her husband, Bruce Sholk, would not consent to unsealing the record in this case. Thereafter, during the oral argument addressing the petition by Zurich to vacate, modify and correct the arbitration award granted to Rite Aid and Rite Aid’s Cross-Petition to Confirm the Arbitration Award, once again, neither Zurich nor Rite Aid indicated any opposition to unsealing the record.
Following the hearing, Rite Aid was instructed by the Court, orally and by notice dated
Counsel for Ms. Kaplan subsequently contacted the Court acknowledging notice of the oral argument with regard to the Court’s interest in unsealing the record. The argument regarding unsealing the record was not briefed by the parties. Additionally, despite being given ample notice of the oral argument regarding the seal, the Court did not receive any written submissions providing legal support for her arguments from Beth Kaplan, the interested party who opposed unsealing the record. Thus, no party provided substantive materials to the Court regarding the seal issue. Consequently, the Court held a hearing on October 18, 2004, attended by both the parties and counsel for Ms. Kaplan, during which only Ms. Kaplan endeavored to justify maintenance of the sealed status of the record. Counsel for Ms. Kaplan provided no statutory support or persuasive, much less controlling, case law in support of her argument that all or any of the records should remain sealed.
Thereafter, by letter dated November 15, 2004, counsel for Ms. Kaplan indicated that there are no documents that she is requesting to remain inaccessible to the public that both Zurich and Rite Aid are willing to withdraw from the record. In other words, Ms. Kaplan continues to want documents sealed which Zurich and Rite Aid believe should remain as part of the record, whether under seal or not. Thus, Ms. Kaplan, Zurich and Rite Aid have not managed to reach an accommodation whereby the court procedures would be unburdened from the elaborate machinations attendant to sealed records and Ms. Kaplan would be absolved from her concerns about the availability of the underlying documents to public scrutiny.
Furthermore, following oral argument regarding the seal, and at the direction of this Court, Ms. Kaplan and her counsel reviewed the documents in the record to provide a submission in support of her position that some or all of the record should remain sealed in this
166 exhibits in the record remain under seal. Those exhibits include the following:
1. The Coverage Arbitration Award, dated March 26, 2004 (Exhibit A to the Appendix for the above-captioned matter);
2. The Interim Award in the Liability Arbitration, dated November 13, 2002 (Exhibit C to Exhibit B and Joint Exhibit 8);
3. Settlement Agreement and Release between Rite Aid and Beth Kaplan, dated January 22, 2003 (Exhibit F to Exhibit B and Joint Exhibit 9);
4. Rite Aid’s Pre-Hearing Statement from the Liability Arbitration Hearing, dated March 7, 2002 (Joint Exhibit 7); and
5. Federal tax returns for Bruce Sholk and Beth Kaplan (for the years 1996 through 1999) (Joint Exhibits 134 to 137).
For the reasons stated below, including the unambiguous precedents handed down by the United States Supreme Court and the Court of Appeals for the Third Circuit, this Court orders that the entire docket and record be unsealed in this matter, with the single exception of the federal tax returns for Ms. Kaplan and Mr. Sholk, Joint Exhibits 134 to 137, which shall remain under seal.
It is well-settled that the Court “has supervisory power over its own records and files,” see In re Cendant Corp., 260 F.3d 183, 192 (3d Cir. 2001) (quoting Nixon v. Warner Communications, Inc., 435 U.S. 589, 598 (1978)), and this Court has the discretion to decide issues regarding the sealing of the record, by balancing factors both for and against access, see Bank of Am. Nat’l Trust and Sav. Ass’n v. Hotel Rittenhouse Assocs., 800 F.2d 339, 344 (3d Cir. 1986). Moreover, the Court retains the power to modify or lift confidentiality orders that it has entered....
Nevertheless, simply because the courts have the power to grant orders of
See Pansy v. Borough of Stroudsburg, 23 F.3d 772, 784-85 (3d Cir. 1994) (citations omitted).
Similarly, the Court of Appeals for the First Circuit has held that, a protective order, like any ongoing injunction, is always subject to the inherent power of the district court to relax or terminate the order, even after judgment.
This retained power in the court to alter its own ongoing directives provides a safety valve for public interest concerns, changed circumstances or any other basis that may reasonably be offered for later adjustment.
Poliquin v. Garden Way, Inc., 989 F.2d 527, 535 (1st Cir. 1993) (emphasis added). Thus, it cannot be disputed that the Court “retains the power to modify or lift protective orders that it has entered.” See In re “Agent Orange” Prod. Liab. Litg., 821 F.2d 139, 145 (2d Cir. 1987), cert denied sub nom, 484 U.S. 953 (1987).
To put the matter of this sealed record in perspective, a summary of the facts of the underlying liability and insurance coverage arbitration matters are stated below.
Zurich issued an Employment Practices Liability Policy (the “Policy”) to Rite Aid for the policy period of July 10, 1999 to July 10, 2000. Pursuant to her employment contract, Beth Kaplan, Rite Aid’s former senior executive vice president of marketing, commenced an arbitration proceeding, the “Liability Arbitration Panel”, against Rite Aid asserting, inter alia, claims for breach of contract, fraud and negligent misrepresentation. The Liability Arbitration Panel is the immediate predecessor to the “Coverage Arbitration Panel” and the issues considered by the two panels are similar and interwoven. The proceedings in both of these matters were kept confidential pursuant to the rules of the American Arbitration Association (the “AAA”). However, because a dispute arose between Rite Aid and Zurich regarding the ruling
attempt to vacate, modify and correct the arbitration award. The parties appear now to be in the process of settling the dispute arising from the ruling by the Coverage Arbitration Panel.
The Liability Arbitration Panel was explicitly charged to determine whether Rite Aid could be held liable to Ms. Kaplan on her allegations of fraud and misrepresentation stemming from the misdeeds of two high-ranking corporate insiders who were also members of the Rite Aid’s board of directors. Later, the Coverage Arbitration Panel was charged with determining whether Zurich, under its policy insuring Rite Aid and pursuant to Pennsylvania law, must indemnify Rite Aid for the amounts awarded to Ms. Kaplan by the Liability Arbitration Panel.
In November 2002, the Liability Arbitration Panel found that Ms. Kaplan was entitled to damages from Rite Aid for approximately $16,000,000, less certain offsets. Zurich Petition, 10 and 12. Thereafter, Rite Aid sought coverage under the Policy as a result of the Liability Arbitration Panel award. On November 20, 2002, Zurich disclaimed any obligation for coverage under the Policy. Zurich Petition, 12. Subsequently, on January 28, 2003, pursuant to the arbitration clause contained in the Policy, Rite Aid served Zurich with an arbitration demand seeking to recover for the award to Ms. Kaplan. Zurich Petition, 13.
The basis for the Coverage Arbitration Panel award included the following events.
During 1999, the Rite Aid Board of Directors (the “Board”) discovered massive fraud that it determined was committed by members of Rite Aid’s senior executive team, including Martin Grass, then-Chairman of the Board and Chief Executive Officer, and Franklin Brown, then-Vice Chairman of the Board and Chief Legal Officer. Memorandum of Law in Support of Petition of Zurich American Insurance Company to Vacate, Modify and Correct Arbitration Award (hereafter, “Zurich Petition Memo”), pp. 2-4. Grass and Brown represented the highest ranking
he had lied to the Board and materially overstated the Company’s financial position in its filings to the SEC and to the public. See Joint Stipulation, 10. Brown had executed guarantees for two non-recourse loans taken out by Kaplan which Kaplan believed had been approved by the entire Board (but which had not). Memorandum of Rite Aid Corporation in Opposition and In Support of Its Cross-Petition to Confirm the Arbitration Award (hereafter, the “Cross-Petition”), pp. 6-7.
As a result of the malfeasance hatched by Grass and Brown, twice during 1999, Rite Aid was forced to announce that it would need to restate its financials and earnings for the previous four years. As a result, Rite Aid announced a downward reporting of approximately $1.6 billion in earnings, which (until 2003) was the largest corporate restatement in United States history.
Zurich Petition Memo, p. 2. The Liability Arbitration Panel also found that, other than Grass and Brown, none of the Board members were aware of the Bank of America loans and that the Board had not approved the payments for LTIP I and LTIP II. Liability Arbitration Panel Award, at 9. Thereafter, the Securities and Exchange Commission (the “SEC”) instituted a public proceeding pursuant to the Securities and Exchange Act of 1934 (“the ‘34 Act”) against Rite Aid and implicated “former senior management” in this probe. Zurich Petition Memo, pp.
3-4. Grass and Brown were criminally indicted for, inter alia, massive accounting fraud.2 Zurich Petition Memo, pp. 3-4. Grass pled guilty to some of the criminal charges, while Brown was convicted of 10 out of 11 of the criminal counts with which he had been charged. Zurich Petition Memo, p. 4. It was these fraudulent acts and representations of Brown and Grass that Other senior executives were also indicted, but none of those other executives also served as members of the board of directors, as Grass and Brown did.
the fraudulent actions and gross misrepresentations by these members of the inside management team, to Kaplan personally and to the public generally, resulted in a breach of Rite Aid’s contractual obligations to her.
Ms. Kaplan and Rite Aid subsequently entered into a Settlement Agreement based on the above awards (including the offsets), pursuant to which Rite Aid paid Kaplan $4,945,436, plus interest. Zurich Petition Memo, p. 6.
Counsel for Ms. Kaplan argues generally that due to her stature in the business community, the ignominy of being involved with Rite Aid, a company that committed such wanton fraud, and the embarrassment of the allegations made against her personally by Rite Aid during arguments before the Liability Arbitration Panel, at least some of the documents related to both arbitration proceedings should remain under seal, supposedly to protect her reputation and integrity. Furthermore, counsel for Ms. Kaplan has asked that the Court consider (a) the confidentiality protections provided under the rules of AAA and (b) the policy implications that the disclosure of arbitration proceedings would have on the federal policy of encouraging arbitration as a means of dispute resolution.
There is a common law presumption of public access to judicial proceedings and records.