A 7th Circuit panel reversed a
district court judgment granting a stay of
discovery. Bond owners had filed a class
action against a Wisconsin city that had
issued the bonds after it had defaulted. The
owners alleged that the city had violated
the federal securities laws by failing to
disclose material information about the
project that the bonds were intended to
finance. The named plaintiff, a bank,
obtained an order in state court commanding
the city to comply with an earlier request
under Wisconsin's public record law to
inspect specified records concerning the
project. The city then asked the district
court for and was granted a stay under
Exchange Act Section 21D(b)(3)(D).
The question on appeal was
whether Section 21D(b)(3)(D) authorizes a
district court "to
enjoin a private securities plaintiff from
gaining access to records that a state's
public-records law entitles members of the
public to see and copy at their own
expense." Judge Posner, writing for
the panel, first observed that discovery
orders are generally not appealable in
federal courts, but there are exceptions,
such as the collateral-order doctrine, which
allows an appeal to resolve an important
issue that is separate from the action's
merits. Judge Posner also suggested, as
argued by the bank in this case, an
additional exception for the appeal of
discovery orders that have the effect of
preempting state law.
The panel concluded that the
inspection of public records pursuant to a
state statute is not discovery and that the
stay of the inspection was an injunction and
therefore appealable. Judge Posner observed
that "much of the
information-gathering that litigants do is
not "discovery" as the term is understood in
the law," giving as an example the
investigation of corporate records and SEC
filings that are freely accessible online.
"Case law," he
continued, "uniformly
refuses to define requests for access to
federal or state public records under public
records laws...as discovery demands, even
when as in this case the request is made for
the purpose of obtaining information to aid
in a litigation and is worded much like a
discovery demand." Further,
settlement extortion, or the use of
discovery to impose costs on defendants and
force a settlement, was not an issue
because, under Wisconsin law, the costs
associated with producing the public records
are charged to the person making the
request. It was happenstance, stated the
judge, that the records' custodian and the
defendant were the same, and the city should
not be allowed to use its
"dual status" to
gain an advantage.
□ American Bank v. City of
Menasha (7thCir) is reported at ¶95,965.