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Wearly v. Federal Trade Commission

decided as amended february 13 1980.: February 8, 1980.

WEARLY, W. L., INGERSOLL-RAND COMPANY, THE TORRINGTON COMPANY,
v.
FEDERAL TRADE COMMISSION, MICHAEL PERTSCHUK, CHAIRMAN, CALVIN J. COLLIER, DAVID A. CLANTON, M. ELIZABETH HANFORD DOLE, PAUL RAND DIXON, MEMBERS WEARLY, W.L., INGERSOLL-RAND COMPANY, THE TORRINGTON COMPANY, APPELLANTS IN 78-1115 & 78-1827 FEDERAL TRADE COMMISSION, MICHAEL PERTSCHUK, CHAIRMAN, CALVIN J. COLLIER, DAVID A. CLANTON, M. ELIZABETH HANFORD DOLE, AND PAUL RAND DIXON, MEMBERS, APPELLANTS IN 78-116, 78-1117, 79-1311 & 79-1976



APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (D.C. Civil No. 77-1860)

Before Hunter, Weis and Garth, Circuit Judges.

Author: Weis

Opinion OF THE COURT

Reflecting litigants' growing dissatisfaction with the Federal Trade Commission's alleged inadequate protection of trade secrets, plaintiffs sought injunctive relief against enforcement of a Commission subpoena duces tecum. The district court in New Jersey found serious deficiencies in the FTC practices but refused to stay enforcement of the subpoena. The court did order, however, that plaintiffs' documents be placed in custodia legis, permitting the FTC to proceed with its investigation only under protective measures designed to insure the safety of trade secrets. Like the district court, we do not understand the Commission's reluctance to agree to an order that would protect plaintiffs' proprietary interests without restricting the agency's investigation. Nevertheless, we vacate the district court's order and direct that the complaint be dismissed because the matter was not ripe for judicial review.

The Commission issued a subpoena duces tecum in 1976 to plaintiff, W. L. Wearly, Chairman of the Board of plaintiff Ingersoll-Rand Company. The subpoena sought documents bearing on the corporate acquisition policy of Ingersoll and was part of a Commission investigation into possible antitrust violations by that company and its subsidiary, plaintiff Torrington Company.

Wearly moved before the FTC to quash or limit the subpoena, alleging, among other matters, that some of the documents contained sensitive trade information justifying confidentiality. The Commission refused to quash the subpoena, and after negotiations failed to resolve the issue satisfactorily, plaintiffs sought declaratory and injunctive relief in the United States District Court for the District of New Jersey. The complaint, filed in September 1977, sought a declaration that the FTC did not have the ability to protect the confidentiality of trade secrets properly; documents passed onto Congress might be revealed to competitors; the subpoena was overly broad; and it encroached upon fourth and fifth amendment rights. Plaintiffs also asked that the enforcement of the subpoena be enjoined.

The district court denied the request for a preliminary injunction but issued a stay of enforcement pending appeal. Soon thereafter, the court refused defendants' motion to dismiss. After this court on the FTC's application lifted the stay of enforcement, the Commission precipitously moved to enforce its subpoena in the District Court for the District of Columbia rather than awaiting the outcome on appeal. While the agency's petition was pending in the District of Columbia, the New Jersey district court denied plaintiffs' renewed motion for a preliminary injunction. In response to the Commission's request for discovery, the court ordered that the disputed documents be placed in custodia legis.

On April 27, 1978, the District of Columbia district court issued an order enforcing the subpoena. Four days later, partially in response to that action, the New Jersey district court handed down a more detailed protective order. Under its terms, the FTC was permitted to inspect the documents only at the plaintiffs' offices. The hearings continued in New Jersey but the Commission, in a most curious stance for a governmental agency, refused to participate, relying instead on a res judicata defense grounded on the enforcement order it had obtained in the District of Columbia. That order was eventually vacated by the Court of Appeals for the District of Columbia Circuit.*fn1

The New Jersey district court ultimately agreed with plaintiffs that their proprietary rights in trade secrets and other confidential information would be jeopardized by surrendering the documents to the Commission. The court ordered that the documents remain in custodia legis, available for inspection by the FTC under conditions tailored to preserve confidentiality. The last activity in the district court occurred in July of 1979 when the defendants' posttrial motions were denied.*fn2 All appeals were subsequently consolidated in this court.*fn3

This statement of facts is severely compressed, but in view of our disposition, we find it unnecessary to review the considerable and to a large extent unnecessary prolongation of this controversy. The trial court found that the plaintiffs' fear that their confidential business secrets will be made available to competitors, both domestic and foreign, is real. The concern of the district judge that the constitutional rights of the plaintiffs would be violated by the FTC through the destruction by disclosure of valuable trade secrets is understandable. In response, the FTC contends that, as a matter of policy, it does screen documents, and as to those it considers confidential agrees to give ten-days notice to the owners before disclosing pursuant to Freedom of Information Act requests. If, however, a request comes from a congressional committee, the agency concedes it does not assure compliance with the ten-day practice. See FTC v. Anderson, -- - U.S.App.D.C. -- -, -- -, -- - F.2d -- , -- (D.C.Cir.1979). See generally Johnson, Treatment of Confidential Documents by the Federal Trade Commission, 46 Antitrust L.J. 1017 (1978).*fn4

Evidence introduced in the district court demonstrated that in the past the Commission has made inappropriate disclosures, and the trial judge noted a number of instances where "informal arrangements for confidential treatment of proprietary information were not strictly honored." Wearly v. FTC, 462 F. Supp. 589, 607 (D.N.J. 1978). He described the disclosures in one case as "an evasion, and a violation of the spirit of (an) order." Id. Although legitimate investigation should not be unduly delayed, we agree with the district judge that the unfortunate disclosures by the FTC of confidential information are the kind of governmental behavior that simply cannot be countenanced.*fn5

Nevertheless, while we acknowledge the serious and well-founded concerns that impressed the district court, the initial inquiry must be whether there was jurisdiction to entertain this suit. We start with the basic premise that a subpoena from the FTC is not self-enforcing. The agency must go to the district court and petition for an order directing compliance with the subpoena. In acting on that petition the district court's role is not that of a mere rubber stamp, but of an independent reviewing authority called upon to insure the integrity of the proceeding. "The system of judicial enforcement is designed to provide a meaningful day in court for one resisting an administrative subpoena." United States v. Security State Bank and Trust, 473 F.2d 638, 642 (5th Cir. 1973). In the discharge of that duty, the court has the power to condition enforcement upon observance of safeguards to the respondent's valid interests.*fn6

Characterizing its jurisdiction as "plenary," 462 F. Supp. at 604, the district court took strong measures to insure that confidential information would not be "leaked." Although there is evidentiary support for that action, the court erred in not according adequate significance to the possibility that its order might be premature because judicial intervention had been sought at such an early stage of the agency proceedings.

Resort to a court by recipients of investigative subpoenas before an action for enforcement has commenced is generally disfavored. In Reisman v. Caplin, 375 U.S. 440, 84 S. Ct. 508, 11 L. Ed. 2d 459 (1964), the Supreme Court held that a preenforcement order enjoining the use of an Internal Revenue subpoena could not be granted because the respondents had an adequate remedy at law: the enforcement hearing was an adversary proceeding affording a judicial forum for challenges to the summons and giving complete protection to the witness. Id. at 446, 84 S. Ct. at 512. Years before Reisman was decided, the Court, in FTC v. Claire Furnace Co., 274 U.S. 160, 174, 47 S. Ct. 553, 556, 71 L. Ed. 978 (1927), discussed in St. Regis Paper Co. v. United States, 368 U.S. 208, 225-26, 82 S. Ct. 289, 299, 7 L. Ed. 2d 240 (1961), declined to entertain a suit in equity challenging the scope of an FTC subpoena at the preenforcement stage. Several courts of appeals have followed the Claire Furnace/Reisman principle in dismissing similar suits brought against the Commission. E. g., ...


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