Court Denies Protective Order, Orders Allegedly Proprietary Data Produced Directly to Competitor

In re NVMS, LLC, 2008 WL 4488963 (Bankr. M.D. Tenn. Mar. 21, 2008)

In this case, the debtor, a medical services company, moved for expedited discovery of information contained in the database of a former billing partner.  In July of 2000, the debtor contracted with MBP to handle the debtor’s billing.  In February 2008, the debtor stopped doing business with MBP and started using Practice Resources Network, Inc. (PRN).  After switching, the debtor requested that MBP provide the debtor with a copy of its billing data so the debtor could determine the status of its claims. MBP refused.  Soon after filing for bankruptcy in March 2008, the debtor filed an expedited motion seeking copies of this data from MBP.  MBP objected and filed a motion for a protective order.

At a hearing on the issues, a representative of MBP testified that MBP’s use of a widely available billing program was unique and proprietary and that the company feared that the proprietary information could used by a competitor, including PRN, the debtor’s current billing company.  He further testified that the proprietary information could not be separated from the requested data in its current format.  Moreover, MBP had provided the debtor with a hard copy of its claims, as well as a CD containing with the information in an unformatted text file.

In response, the debtor’s representatives assured the court that they were not interested in MBP’s proprietary information.  They also testified that the debtor had its own licensed copy of the billing software but had no intention of doing its own billing or billing for others.  Likewise, a representative of PRN testified that PRN used different software and had no interest in changing.  Thus, they argued, PRN would gain no advantage by receiving the formatted information.  PRN’s representative also testified that there was no way to translate or convert the unformatted text on the CD without spending large amounts of effort, time, and money.

In analyzing the question of whether the information should be produced in its native format, the court looked to Federal Rule 34:

Fed.R.Civ.P. 34(a)(1)(A) was amended in 2006 to provide that a party may serve a request:

to produce and permit the requesting party or its representative to inspect, copy, test, or sample the following items in the responding party’s possession, custody, or control:

(A) any designated documents or electronically stored information-including writings, drawings, graphs, charts, photographs, sound recordings, images, and other data or data compilations-stored in any medium from which information can be obtained either directly or, if necessary, after translation by the responding party into a reasonably usable form.

Pursuant to Fed.R.Civ.P. 34(b)(1)(C), a party “may specify the form or forms in which electronically stored information is to be produced.”  This is what the debtor did here. According to the Advisory Committee’s Note to the 2006 Amendment, Rule 34(a) was “amended to confirm that discovery of electronically stored information stands on equal footing with discovery of paper documents.  The change clarifies that Rule 34 applies to information that is fixed in a tangible form and to information that is stored in a medium from which it can be retrieved and examined.”

Moreover, Fed.R.Civ.P. 34(b)(2)(E)(i) provides that “[u]nless otherwise stipulated or ordered by the court … [a] party must produce documents as they are kept in the usual course of business or must organize and label them to correspond to the categories in the request.”  The Advisory Committee explains that “[i]f the responding party ordinarily maintains the information it is producing in a way that makes it searchable by electronic means, the information should not be produced in a form that removes or significantly degrades this feature.”

In accordance with the rule, the court ruled that the formatted data files should be produced, but then considered that ruling in light of MBP’s motion for a protective order.

In support of its motion, MBP presented evidence that an employee of MBP resigned and went to work for the debtor shortly thereafter, that the same employee took a backup disk of debtor’s billing information with her, and that MBP’s clearinghouse software was accessed by the debtor’s Internet Protocol address on several occasions.  The court acknowledged MBP’s concerns, but noted that the hard copy and unformatted information already produced was of little use to the debtor and that requiring the debtor to decipher those sources and re-input the data could result in the expiration of time-sensitive claims.  Denying the motion for a protective order, the court ordered the formatted data to be produced, but provided specific instruction for production of the native files in a manner intended to protect the interests of MBP:

Accordingly, the Court finds that the information should be given directly to PRN to review and process the information regarding the status of the debtor’s claims by using the debtor’s licensed Medisoft software.  While PRN can share the data with the debtor, it is not to share the electronic version with the debtor or any potential competitors.  Moreover, PRN is not to use the formatted version for the purpose of processing any claims other than the debtor’s claims that are included in the produced file.  Finally, PRN shall return the electronic information, without retaining an electronic copy, once all claims have been reviewed, processed, and resolved.