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Bids should never be sealed when a federal judge holds an auction to choose the lead counsel in a class action case because the public has a right to watch over the process and inspect all court papers, the 3rd U.S. Circuit Court of Appeals has ruled. The court in In Re: Cendant Corp. offered no opinion on the much larger question of whether auctions are a proper method for choosing lead counsel. Instead, the opinion focused only on the question of sealing because the appeal was brought by a lawyer who was hit with a $1,000 sanction for violating the court’s sealing order by discussing the bids in an interview with The New York Times. A unanimous three-judge panel found that U.S. District Judge William H. Walls of the District of New Jersey never should have sealed the bids because the public, including the class members, has the right to inspect such judicial records. The court also found that Walls erred when he imposed sanctions on attorney Howard Sirota since his remarks to the newspaper reporter merely referred to public documents. Sirota, who lost the bid for lead counsel in the Cendant securities litigation, was interviewed in May 1999 and commented that the lead lawyer’s request for $34 million in fees — nearly 10 percent of the $341 million settlement — was far in excess of his bid. In the appeal, the 3rd Circuit focused first on Walls’ decision to seal the bids. “We conclude that, in deciding to seal the bids, the district court failed to recognize that the bids were judicial records, subject to the common law presumption of public access,” 3rd Circuit Judge Julio M. Fuentes wrote in an opinion joined by Judges Anthony J. Scirica and Leonard I. Garth. “The right of public access is particularly compelling here, because many members of the ‘public’ are also plaintiffs in the class action,” Fuentes wrote. Fuentes found that the information in the sealed documents “was of the utmost importance in the administration of the case; it was directly relevant to the selection of lead counsel.” For the class members, Fuentes said, that stage of the litigation is critical since it is the only point at which they have any control. “Class members often have little input into the conduct of the class action and accompanying settlement negotiations because of the large scale of litigation and the disconnect between defendants’ possibly enormous liability and the relatively small recovery available to the individual plaintiffs,” Fuentes wrote. “The only stage at which class members can exercise effective control is in the selection of class counsel. Throwing a veil of secrecy over the selection process deprives class members of that opportunity.” The public’s right of access to judicial records can be overridden only by showing that disclosure would cause a “clearly defined and serious injury,” Fuentes said. AUCTIONS EVER ALLOWED? Fuentes commented that the practice of holding auctions to choose lead counsel gave the appellate court “serious reservations and concerns” but that the judges chose to put the question off for now. “We leave the decision as to whether competitive bidding is appropriate, justifiable, or desirable to the future case where that issue is directly raised,” he wrote. But on the narrower question of whether bids may be sealed, Fuentes said, “We can neither subscribe to nor affirm the district court’s ruling that the bidding auction the court conducted should have been closed, i.e., sealed and kept from the very parties to whom our precedents and logic advocate disclosure.” Instead, Fuentes said, if auctions are held, the bidding process should be open because it will “facilitate the monitoring of lead counsel by class members and others.” Fuentes found that Walls abused his discretion in sealing the bids. “Apart from one general and ambiguous reference to ‘adversarial integrity’ and ‘strategy and tactics,’ the district court did not provide any clear reason for why it sealed the bids. The court did not recognize the presumption of access, nor did it engage in a balancing process to determine whether the bids were the type of information normally protected or whether there was a clearly defined injury to be prevented,” Fuentes wrote. Before sealing the entire bid record, Fuentes said, the court “should have articulated the ‘compelling countervailing interests’ it found which would authorize the closure through sealing of the matters it sought to protect.” Turning to the sanctions against Sirota, the appellate panel found there was no basis for punishing the lawyer since he never truly violated the court’s confidentiality order and his remarks referred to information in a publicly filed brief. “While it would be improper for an attorney to divulge the substance of a case that the court has deemed confidential, the public’s right of access demands that the attorney must, at the very least, be able to refer a reporter to a public document,” Fuentes wrote. Attorney Judith E. Harris of Morgan Lewis & Bockius was appointed by the court to argue the case as a friend of the court supporting Walls’ rulings. Although the panel flatly rejected all of her arguments, Fuentes dropped a footnote to express the court’s thanks to Harris for taking the tough assignment. In her brief, Harris argued that the sanctions against Sirota should be upheld because he acknowledged that he divulged confidential information to the reporter.

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