LIFESCAN, INC., et al., Plaintiffs, v. JEFFREY C. SMITH., et al., Defendants ROCHE DIAGNOSTICS CORPORATION, et al., Plaintiffs, v. JEFFREY C. SMITH., et al., Defendants Civil Action No. 17-5552 (CCC)(JSA), CV 19-8761 (CCC)(JSA) United States District Court, D. New Jersey Filed August 15, 2022 Cavanaugh, Dennis, Special Master (Ret.) ORDER & OPINION OF THE SPECIAL MASTER JUDGE DENNIS CAVANAUGH, RET. *1 Before the Special Master is a motion filed by Plaintiffs, LifeScan, Inc. and Roche Diagnostics Corp./Roche Diabetes Care Inc. (“LifeScan” or “Roche” or “Plaintiffs”). Plaintiffs seek an order to resolve two discovery disputes as to Defendant, Jeffrey Smith. Plaintiffs contend that Smith has (1) improperly withheld responsive, non-privileged text messages and (2) has refused to answer Plaintiff LifeScan's interrogatories as to financial entities Smith purportedly created as a depository for proceeds from the “Alliance fraud.” In reaching findings as to this motion, the Special Master has reviewed the following items: (1) Plaintiffs’ letter motion and attachments (17-cv-5552, ECF 576 and 19-cv-8761, ECF 353); (2) Defendant's letter brief in opposition to the motion; and (3) Plaintiffs’ reply letter-brief (17-cv-5552, ECF 579 and 19-cv-8761, ECF 357). For the reasons to be set forth below, the Special Master finds that Plaintiffs’ motion is DENIED in part and GRANTED in part within the parameters described. I. Procedural and Factual History Again, the litigants are fully familiar with the facts which form the basis of this motion. Therefore, the Special Master will only briefly address pertinent procedural and factual events. This lawsuit arises out of what Plaintiffs describe as the “Alliance fraud.” That is, it concerns the distribution, sale and reimbursement of diabetic test strips (“DTS”) manufactured by Plaintiffs. LifeScan and Roche charge that a now defunct entity known as Alliance Medical Holdings, LLC (“Alliance”) through its officers, directors and investors schemed to sell non-retail DTS to patients but were reimbursed by pharmacy benefit managers (“PBMs”) for sales of retail DTS, thereby substantially profiting from the difference. Plaintiffs further contend that, as retail DTS manufactures, they reimbursed the PBMs for rebates paid out to pharmacies to their financial detriment. Essentially, Alliance did this through a series of covertly held pharmacies and distributors which the parties generally refer to as the “Alliance-affiliated entities.” Smith was the chief executive officer of Alliance and an investor in the Alliance-affiliated entities. He is a defendant in this lawsuit and, like the other parties, is a participant in ongoing discovery. This motion involves two aspects of discovery – the production of text messages and responses to interrogatories propounded on Smith. As to the first, on June 1, 2022, Smith produced a supplemental privilege log which indicated that a series of ten text messages with another defendant, Sahily Paoline, were withheld on the grounds that these messages were shielded by “common-interest and/or co-client privilege in connection with joint representation by Connell Foley LLP.” After attempts at resolving this dispute, including a meet and confer session in July 2022, the parties reached an impasse and this motion followed. As to the second dispute, on March 22, 2022, LifeScan propounded a set of interrogatories to Smith. Interrogatory numbers 17 and 18, respectively, asked Smith to identify all trusts, LLCs or other corporate entities “created on or after the date of your purchases of an interest in MedSource Direct or any other Alliance entity, in which Sandee Smith had an ownership interest and for which [Smith] participated in, requested, or directed the creation of the entity.” Smith has objected to the interrogatories on the grounds they are “irrelevant, premature, sought highly sensitive information and overbroad.” *2 Plaintiffs now move to have the Special Master resolve these two issues. II. Plaintiffs’ Argument As to the text messages, Plaintiffs say Smith bears the burden of demonstrating the applicability of the privileges he asserts, citing Louisiana Mun. Police Emps. Ret. Sys. v. Sealed Air Corp., 253 F.R.D. 300, 309 (D.N.J. 2008). Plaintiffs say Smith cannot meet that burden for two reasons. First, the common-interest privilege does not apply since it requires that communications must be shared with the attorney of another member of the community of interest, not a communication between represented parties themselves. Here, the communications were strictly between Smith and Paoline, neither of whom are lawyers.[1] Secondly, Plaintiffs say the communications are not protected by the co-client or joint defense privilege. The joint defense privilege merely protects communications between an individual and an attorney for another when there is an ongoing, joint effort to set up a common defense strategy. Here, no attorney-client, and therefore no co-client privilege, attaches to conversations between two non-privileged persons “and could not have been for the purpose of obtaining legal advice.” As to Smith's objections to the interrogatories, Plaintiffs maintain that the information sought is relevant to this lawsuit and the burden rests with Smith, as the party resisting production, to establish a lack of relevancy under Federal Rule of Civil Procedure 26(b)(1). Plaintiffs say these lawsuits concern a far reaching fraud perpetrated by Defendants, including Smith. Plaintiffs, citing an email exchange with Kevin Plumb (the subject of the prior motion), maintain it is evident that Smith recognized the risk posed by the fraudulent Alliance business model by “stashing his ill-gotten gains in various entities.” Therefore, these early efforts to hide assets are relevant to Smith's understanding that he was involved in illegal activities. Additionally, citing United States v. Battle, 473 F. Supp. 2d 1185 (S.D.Fla. 2006), Plaintiffs argue that evidence of a RICO participant's efforts to hide money generated by the RICO enterprise “is itself evidence of RICO liability.” Moreover, say Plaintiffs, the interrogatories are not premature despite Smith's contention that they are unripe because motions to dismiss are pending. Smith's position ignores prior rulings in this case that discovery will go forward and ignores case law which stands for the principle that the mere filing of a dispositive motion does not constitute good cause for a discovery stay. Plaintiffs go on to say that Smith cannot refuse to answer the interrogatories because they seek personal financial information or are highly sensitive, i.e., there is no exception to discovery based upon these objections. If Smith is concerned about public disclosure, this concern is addressed through the operative confidentiality agreement between the parties. Finally, as to Smith's “boilerplate objections” as to the breadth and temporal scope of the interrogatories, Plaintiffs maintain the questions are tailored both in subject matter and in temporal scope and are designed to elicit information regarding Smith's efforts to hide his assets from a judgment against him. *3 In short, Plaintiffs request an order compelling Smith to produce the text messages and to fully answer the two interrogatories. III. Defendant's Argument. In a letter brief, Defendant Smith opposes Plaintiffs’ motion. As to the text exchange between Smith and Paoline, Smith, citing the Special Master's March 22, 2022 opinion regarding the email exchange between Smith and Kevin Plumb, concedes that the “common interest privilege” does not apply to these messages. However, says Smith, the co-client privilege does apply. Smith asserts that a communication between co-clients that relates to a matter of common interest is privileged as against third persons even when an attorney is not a party to that exchange, i.e., the communication does not have to be authored by or addressed to a lawyer. Smith heavily relies upon MGA Ent., Inc. v. Nat'l Prod. Ltd., 10-cv-7083, 2012 WL 3150532 (C.D.Cal. Aug. 2, 2012). Essentially, Defendant says this case stands for the proposition that when parties who share a common interest and share the same attorney engage in communications to assist legal counsel which are intended to be confidential and in which the litigation is discussed, these communications are privileged. Smith argues that this situation is analogous. That is, two individuals represented by the same attorneys communicated about the underlying litigation outside the presence of their counsel. Without describing the contents of the text messages, Smith says that the texts were sent with the intent of furthering his and Paoline's joint lawyer's legal advice and strategy. In short, the two were engaged in confidential communications regarding their shared interest in a uniform litigation strategy.[2] As to Smith's objections to Plaintiffs’ interrogatories, Defendant emphasizes that the interrogatories seek highly personal information primarily involving Smith's wife and children who are non-parties to these actions. There are two reasons that the objections should be sustained. First, Smith asserts that the information sought is irrelevant to any of Plaintiffs’ claims so this effort constitutes a “proverbial fishing expedition” into personal financial information. Defendant maintains that none of the elements required to sustain Plaintiffs’ causes of action here necessitate providing this discovery. Those causes of action include a racketeering claim, a racketeering conspiracy claim, a common law fraud claim and an aiding and abetting fraud claim. Nowhere, says Defendant, do the elements of these claims require evidence demonstrating that Smith understood that he was involved in illegal activity so as to give rise to personal financial liability. Accordingly, the identity of any trusts or corporate entities “primarily involving non-parties” are not needed to prove or disprove any of these claims and the mere establishment of these financial vehicles is not evidence, in and of itself, of an individual's knowledge of participating in racketeering or fraud. Secondly, Defendant insists that the motion is an attempt to obtain discovery to support Plaintiffs’ claims of punitive damages which, at this juncture, Plaintiffs are not entitled to under law. Relying primarily on a New Jersey Supreme Court case, Herman v. Sunshine Chem. Specialties, 133 N.J. 329 (1993), Defendant asserts that a plaintiff may not take discovery of a defendant's financial condition without first establishing a prima facie case of the right to recover punitive damages. Defendant also cites other decisions which stand for the proposition that discovery of information relating to punitive damages may only be properly sought “if and when punitive damages are placed at issue.” In short, Smith says these interrogatories are a camouflaged attempt to buttress a punitive damage claim and are thus premature. IV. Plaintiffs’ Reply *4 In their reply, Plaintiffs note that Smith has conceded that the common interest privilege does not apply while the co-client privilege provides an exception to the general rule that attorney-client privilege communications disclosed to a third party are no longer privileged. Plaintiffs maintain that Smith's log provides no basis to conclude that the text messages were privileged since it fails to establish that the communication was made between privileged persons or for the purpose of obtaining legal advice. The only description of the content of the communication in the log states that Smith and Paoline discussed “litigation strategy” which, argue Plaintiffs, is a topic “that without more, is not protected...when discussed by two non-attorneys.” (Smith's brief in opposition merely adds that the two were “engaged in confidential communications regarding their shared interest in a uniform litigation strategy.” See, Smith's brief at p. 4.) As to the interrogatories, which seek information as to the asset-protection entities when the Alliance fraud was operational, Plaintiffs again insist this is relevant to Smith's state of mind in committing the fraud. Plaintiffs go on to say that, contrary to Smith's position, the names of these entities is not solely relevant to punitive damages and they emphasize that the interrogatories “do not yet ask for the value of these entities,” rather they seek to “understand the structure of the corporate entities” which is “an issue that goes to his understanding that Smith was involved in illegal activity.” In short, Plaintiffs again argue that the mere fact that the trusts were created constitutes evidence Smith was aware that his actions were illegal. Plaintiffs conclude by asserting that the entities should be identified before additional discovery is sought and prior to Smith's deposition. V. Findings The Special Master will address each of the two aspects of this motion separately. As to the ten text messages, Smith concedes that the common interest privilege is inapplicable here. Instead, he argues that the communications with Paoline are protected by the so-called co-client or joint defense privilege. See, Sealed Air Corp., 253 F.R.D. 300. Therefore, the question here is whether Smith has met that burden. Neither party seriously disagrees as to the foundations on which to make this determination. In order for the co-client or joint defense privilege to apply, there must exist an ongoing, joint effort to set up a common defense strategy. Therefore, the communications must be made between privileged persons or for the purpose of obtaining legal advice. Plaintiffs insist that the description contained in the privilege log, which merely states that the two engaged in “litigation strategy” is insufficient for Defendant to meet that burden. Smith, on the other hand, maintains that he was engaged in a confidential communication regarding their shared interest in a uniform litigation strategy. The Special Master finds that the only cogent and practical way to resolve this issue is to review the text messages in camera in order to assess their contents and to determine whether, in fact, the privilege applies. Accordingly, the Special Master orders defendant Smith to produce (in printed form) complete, readable copies of the ten text messages within seven (7) days of the date of this Order. The Special Master will then review the messages in camera to determine whether Defendant has met the burden of establishing that these communications are privileged. Accordingly, Plaintiffs’ motion is DENIED pending in camera review. As to the interrogatories, Plaintiffs’ motion is GRANTED. First, contrary to Smith's assertions, the two interrogatories at issue are hardly “overly broad,” nor are they unreasonably limited in time and scope or premature. Those interrogatories in full read: [17] Identify all Trusts created on or after the date of your purchase of an interest in MedSource Direct or any other Alliance Entity, of which You, Sandee Smith, or Your children is a beneficiary. *5 [18] Identify all LLCs or other corporate entities created on or after the date of your purchase of an interest in MedSource Direct or any other Alliance entity, in which Sandee Smith has an ownership interest and for which You participated in, requested, or directed the creation of the entity. The interrogatories are indeed rather specific and narrow as to what is sought providing a time frame, a “trigger” (a purchase of an interest in an Alliance entity), the beneficiaries, and specify Defendant's participation in the creation of these financial vehicles. Anyone involved in the creation of such entities would certainly know and understand what was being requested in the discovery demands and could easily identify the entities and respond appropriately to this limited request. Nor are the demands premature. As Plaintiffs argue, the fact that there are pending motions to dismiss is not a reason to, in effect, “stay” this aspect of discovery. Indeed, the Special Master has been assigned to this matter in an effort to move discovery forward even with dispositive motions pending. No exception exists for providing answers to interrogatories. Additionally, and as Plaintiffs point out, while the interrogatories may, in fact, seek personal financial information that is “highly sensitive,” there is no recognized exception to providing discovery on this basis, nor does Defendant submit that such an exception exists. Further, as Plaintiffs also argue, if Smith is concerned about the possibility that this information may be disseminated publicly, that concern is addressed under the operative confidentiality agreement in place in this litigation. Now the Special Master turns to relevancy. As to this issue, Plaintiffs rely to some degree on Battle, 473 F. Supp. 2d 1185, for the proposition that efforts to hide money generated by a RICO enterprise is itself evidence of RICO liability. While Battle is not precisely on point, and while it did not involve an analysis of the discoverability of financial accounts used to hide assets, the court did find that evidence of hiding RICO-generated assets was an element of the Government's action against the [criminal] defendants in that matter. That is, [The defendants] continued to further the goals of the enterprise by concealing the money and protecting it, and thereby protecting themselves, from detection from law enforcement agencies. To “hide and conceal,” and to cause to “hide and conceal,” the illegal proceeds of an enterprise can be a legitimate purpose of a RICO enterprise conspiracy, together with those acts committed in furtherance of the conspiracy. Id. at 1202. Plaintiffs have demonstrated what amounts to a prima facie showing that Defendant Smith was at least concerned with personal and financial ramifications of the Alliance “business model” evidenced by the 2013 Smith-Plumb email exchange which was the subject of the prior motion and resulting Order in this litigation. The Special Master is also mindful of the fact that under the circumstances of this case – in which the corporate entity is defunct and in which a wide-ranging fraud is asserted – there is legitimate concern as to the continued existence of assets to satisfy in whole or in part any judgment. As Plaintiffs emphasize, the use of asset-protective devices is hardly novel and indeed was implemented in another matter involving one of the litigants entitled Roche v. Priority Healthcare Corp., 18-cv-1479, 2019 WL 5810312 (N.D.Ala. Nov. 7, 2019), an instructive decision. *6 While not nearly the same procedural posture as this matter, the underlying facts in Priority Healthcare are strikingly similar – indeed are nearly mirror-like to this matter. That is, Roche had filed suit against certain defendants arising out of a fraud as to the sale of diabetic test strips. Roche charged that the defendants, a small company and the individual owners and corporate officers associated with it, caused the manufacturer to pay millions of dollars in unwarranted rebates from which the defendants profited. Roche also asserted the proceeds of the fraud were held in investment accounts in the name of shell entities created by one of the defendants in an effort to conceal the assets. Proofs existed that principals of the defendant company withdrew millions of dollars from the business accounts within days after the lawsuit was initiated. Roche successfully moved to enjoin the defendants and thereafter to maintain the existing freeze on these accounts. Id. at *1. In deciding to keep the assets frozen, the court emphasized that the plaintiff may not even have known the full extent of the defendant's surreptitious actions and, given that the funds could be electronically transferred in a matter of seconds by a few keyboard strokes, the court refused to upset the status quo. Id. at *3. The point here is that Plaintiffs have raised a legitimate inference that Smith at a significant juncture may have created asset protection entities to hide proceeds derived from the alleged Alliance fraud. Significantly, however, the interrogatories merely request the identities of any trust or entities created following Defendant's purchase of an interest in the Alliance entities. The interrogatories do not request any financial information derived from those accounts, so this does not constitute a premature effort to support a claim for punitive damages. The Special Master concludes that this limited discovery is relevant within the broad scope of discovery permitted under Federal Rule of Civil Procedure 26(b)(1) and the cases interpreting this Rule. Accordingly, this aspect of Plaintiffs’ motion is GRANTED. Defendant is ordered to provide the identity of any trusts, LLCs or other entities responsive to interrogatory numbers 17 and 18. VI. Conclusion For the reasons previously set forth, the Special Master orders that (1) the ten text messages at issue are to be provided to the Court for in camera review within seven days of the date of this Order; and (2) Plaintiffs’ motion compelling Defendant Smith to answer interrogatory numbers 17 and 18 is GRANTED. Footnotes [1] Plaintiffs also rely on this Court's prior decision ordering production of communications between Smith and a former Alliance employee, Kevin Plumb, who was also not an attorney. [2] It is unstated as to which litigation Defendant is referring to – this matter or other litigation involving Alliance.