There and Back Again - Protective Agreements in the Federal Court

25 March 2019

A recent decision of the Federal Court has once again shifted the approach a party must take to keep their documents and information confidential during litigation.

In Canadian National Railway Company v. BNSF Railway Company, 2019 FC 281 both parties sought a protective order defining the various restrictions on their confidential documents that were to be disclosed to the other side. Justice Locke dismissed the motion on the basis that it was unnecessary; the parties could instead enter into a protective agreement. As there was no disagreement between parties on how to handle the confidential information, the Court's involvement was deemed unnecessary.



This case is yet another shift in the Federal Court's approach to the protection of confidential information disclosed during litigation. It appears that the Court's recent preference towards Protective Agreements, rather than Protective Orders issued by the Court on consent, may be here to stay.

Types of Protection in the Federal Court

As a starting point, it is helpful to understand the different terms used by the Federal Court when it discusses the protection of a party's confidential information. There are three main categories of Orders/Agreements at issue: i) Protective Orders, ii) Protective Agreements, and iii) Confidentiality Orders.

Protective Orders

Protective Orders are an Order of the Court setting out how the documents exchanged between parties shall be handled. They typically include terms setting out: the number of individuals to whom documents can be disclosed; how documents should be marked to indicate confidentiality; how disputes should be raised over confidentiality; and in some cases provide for enhanced protection of certain documents by way of a Counsel's Eyes Only provision.

Protective Orders were previously very common in the Federal Court, and typically issued on consent of the parties. Parties would negotiate the terms they believed were warranted, the Court would review for any major concerns, and then an Order would issue governing the exchange of documents between parties.

Protective Agreements

A Protective Order is, as expected, an official Order of the Court. A Protective Agreement, meanwhile, is a written agreement between the parties which typically sets out all of the same elements as a Protective Order. As a Protective Agreement does not need to be issued by the Court, the Court does not receive a copy and would otherwise be unaware of its terms.

Both Protective Orders and Protective Agreements only address the exchange of material between parties. There is no guarantee that the designation of a document as "confidential" under a Protective Order or Agreement will permit it to be filed confidentially with the Court.

Confidentiality Orders

Confidentiality Orders differ from Protective Orders and Agreements in that they determine how a party may file its confidential materials with the Court. When filing confidential documents with the Court, a party can seek to file it "under seal" (that is, in a sealed envelope not available to the public) which requires the Court to first issue a Confidentiality Order. To issue a Confidentiality Order the Court must be satisfied that: i) the information is truly confidential, ii) that it would be detrimental to the parties if publically disclosed, and iii) that this detriment outweighs the principle of public access to the Court.

This can be a difficult bar to meet, as the Court often restricts the information covered by a Confidentiality Order. Even where a Confidentiality Order issues, the Court will require a party to file a public version of their materials with the limited confidential information redacted.

Finally, though not a distinct category, in years past the Court had issued Protective Orders which also included provisions commonly found in Confidentiality Orders. These were often referred to as hybrid orders, however the Court has moved away from this practice over the last few years.

A Change in Practice - Live Face and Seedlings

Live Face

In September 2017, Prothonotary Tabib issued a sweeping change to Protective Orders in Live Face On Web v Soldan Fence, 2017 FC 858 [Live Face], and concluded that "the Court ought no longer to routinely issue protective orders on consent of the parties." A detailed analysis of Live Face was previously discussed here.

The foundation of this marked departure lay in the implied undertaking rule. It was the Court's view that the implied undertaking rule could be supplemented by a Protective Agreement. This would preserve Court resources, while allowing the parties to enter into any additional obligations not covered by the implied undertaking rule.

Live Face represented a major change in practice, with parties now shifting negotiations from a Protective Order to a Protective Agreement.

Seedlings

Live Face was revisited in April 2018 in Seedlings v Pfizer, 2018 FC 443 [Seedlings 1], where Prothonotary Tabib again dismissed an unopposed motion for a Protective Order. She held that the implied undertaking rule affirms that documents exchanged in the context of a pre-trial discovery "constitute an undertaking to the Court that such information will not be used by the parties for purposes other than the litigation." A breach of this undertaking would be punishable as contempt of court.

In Seedlings 1, Pfizer argued that the two-part test set out in Sierra Club of Canada v Canada (Minister of Finance), 2002 SCC 41 [Sierra Club] applied: such an order requires the applicant to demonstrate: 1) that the information in question has been treated at all relevant times as confidential and, 2) that on a balance of probabilities its proprietary, commercial and scientific interests could reasonably be harmed by the disclosure of the information.

Prothonotary Tabib distinguished this test as applying only to Confidentiality Orders. She held that, while the Court has the discretion to issue Protective Orders, given the protection afforded by the implied undertaking rule in the absence of a Protective Order it should not do so unless the parties can demonstrate the "necessity of an express order" or "other unusual circumstances."

Seedlings 1 was appealed, with Justice Ahmed reversing Prothonotary Tabib's decision (Pfizer v Seedlings, 2018 FC 956 [Seedlings 2]). Justice Ahmed held that Prothonotary Tabib failed to apply the correct legal test, and did not agree that a difference existed under Sierra Club between Protective Orders and Confidentiality Orders. In reversing the decision, Justice Ahmed found that the Sierra Club test had been met and issued the Protective Order sought.

After Justice Ahmed's decision, Protective Orders were back on the table. That said, in our experience the Court was requiring a more detailed motion to satisfy the requirements of Sierra Club, and many parties continued to rely upon Protective Agreements.

Back to the Future - CN Railway

Despite suggestions that Protective Orders were back in action, Justice Locke distinguished Justice Ahmed's decision in Seedlings 2 and endorsed Prothonotary Tabib's comments in both Live Face and Seedlings 1. Justice Locke confirmed Justice Ahmed's view that the test for Protective Orders is the Supreme Court's decision in Sierra Club, however noted that Justice Ahmed did not correctly apply this test in Seedlings 2. The change in practice was here to stay.

Justice Locke noted that there is typically little dispute that the parties will exchange highly sensitive and confidential information during litigation, and that there is a desire to keep that information protected. However, the Court noted that the Sierra Club test further requires there be no other reasonable means of protecting this information. This requirement was not met as the implied undertaking rule, including the specific provisions adopted by the parties in their proposed Protective Order, would sufficiently protect the information without requiring assistance from the Court.

Justice Locke reiterated Prothonotary Tabib's earlier statements in respect of the implied undertaking rule, unequivocally stating: "[t]here is also no dispute that the implied undertaking is made to the Court, and therefore it may be enforced by contempt of court proceedings in the event of a breach. The implied undertaking arises even in the absence of any order of the Court."

The Parties' Concerns with a Protective Agreement

Both parties raised a number of arguments and concerns for why a Protective Agreement was not sufficient, and a Protective Order should be issued. Specifically, the parties raised six main concerns:

  1. Enforceability of a Protective Agreement;
  2. Applicability of a Protective Agreement to third parties;
  3. Imprecision and lack of certainty in the scope of the implied undertaking rule;
  4. Parties' discomfort in the absence of a Protective Order;
  5. Added heft of a Court Order; and
  6. Important change to longstanding practice.

Justice Locke noted that many of these same concerns were canvassed by the Court in Live Face and readily dismissed.[1] In any event, he addressed each of these positions in detail.

A) Enforceability of a Protective Agreement

As the Federal Court is a statutory court, and cannot typically address contract matters, the first concern raised by the parties was the Court's inability to resolve any dispute over the Protective Agreement Additionally, the parties argued it was uncertain how the Court would enforce any breach in a Protective Agreement, as it did not have the same remedies available as in the case of breach of a Court Order.

In response, the Court noted that a Protective Agreement is simply a means of particularizing the implied undertaking rule, which acted to fill any gaps or adjustments that parties felt were necessary. Justice Locke adopted statements from Live Face, where Prothonotary Tabib held that a Protective Agreement was not a contract so much as a manner in which the Court could control the litigation process. As such, a Protective Agreement is enforceable by the Federal Court in the same way as the implied undertaking rule - via a contempt proceeding. As such, this concern had no merit.

B) Applicability of a Protective Agreement to Third Parties

The second concern raised by the parties related to the impact of a Protective Agreement on third parties, who would not be privy to the agreement. In Seedlings 2, Justice Ahmed had raised concerns of the inability of a Protective Agreement to bind a third party, supporting his position that an Order was the preferred approach.

Justice Locke dismissed Justice Ahmed's concerns, and that of the parties, noting that the law was sufficiently clear that a third party is subject to contempt proceedings for interfering with the Federal Court's process. Having found that a Protective Agreement is a manner for the Court to control its process, Justice Locke found there to be sufficient control over third parties.

Further, while not discussed by the Court, Protective Orders have typically included an express undertaking given to experts or other third parties who are to receive confidential information. These express undertakings are equally relevant in a Protective Agreement. Given the Court's position that a Protective Agreement is an express undertaking to the Court, this additional express undertaking of a third party should alleviate concerns over enforceability against experts and consultants.

C) Imprecision and Lack of Certainty in the Scope of the Implied Undertaking Rule

The third concern raised by the parties was the limited case law regarding the scope of the implied undertaking rule, such that the exact requirements on a party may be uncertain.

This concern was readily dismissed by Justice Locke. The Parties had agreed upon the language of a Protective Order for the purposes of this case, and as a result there was little debate over a party's understanding of its obligations. To the extent there was uncertainty in the scope of the implied undertaking rule, the express undertaking by way of Protective Agreement would resolve any uncertainty.

The Court also noted that in any change of circumstances the parties can readily update a Protective Agreement in the same way as amending a Court Order - by agreement. Should any party disagree with any proposed amendment, the Court retained power to issue a Protective Order in relation to the issue in dispute, as such an Order would at that point become necessary and therefore satisfy the Sierra Club test.

D) Parties' Discomfort in the Absence of a Protective Order

The fourth concern related to a non-Canadian litigant's preference for a Protective Order. Unlike in Canada, intellectual property Courts in the United States do not contemplate an implied undertaking rule. Thus, parties to litigation are not restricted in their use of information unless a Protective Order is in place. As a result, Protective Orders on consent are routine in the United States.

The parties expressed a concern where clients are based in the United States and are accustomed to routine issuance of Protective Orders, but not their obligations under a Protective Agreement or the implied undertaking rule. The Court readily dismissed this concern, holding that it is incumbent on counsel to instruct its clients of the unique nature of the implied undertaking, as well as its obligations under a Protective Agreement.

E) Added Heft of a Court Order

The fifth concern of the parties, an argument which Justice Locke noted troubled the Court, set out that a Court-issued order is viewed more seriously by parties than an agreement. Justice Locke stated that, if true, this suggested parties to IP litigation in Canada have erroneous impressions of their obligations under the implied undertaking rule. Justice Locke noted that the routine issuance of Protective Orders would perpetuate this misunderstanding of parties' obligations in respect of discovery material.

F) Important Change to Longstanding Practice

The sixth (and final) concern raised was that a change to longstanding practice should not be made without a corresponding amendment to the Federal Courts Rules. Justice Locke found this to be the strongest argument for issuing a Protective Order, noting even he was required to revisit his understanding of the issue.

However, Justice Locke was satisfied that the test in Sierra Club was applicable, binding, and overcame this concern. The strength of the implied undertaking rule, and the fact that a Protective Agreement is an express statement of obligations of this undertaking to the Court, was sufficient.

Additionally, while not noted by Justice Locke, Protective Orders are not expressly contemplated under the Federal Courts Rules, and come instead from the Federal Court's ability to control its practice. As a result, no true amendment to the Federal Courts Rules is required for this change to be made.

Moving Forward

Despite some back and forth over the last year and a half, it appears that Protective Agreements are now the "new normal" in the Federal Court. Reassurance from the Court that a Protective Agreement is not a mere contract, and is instead an express undertaking to the Court, should alleviate many remaining concerns over enforceability in the event of breach by any party.

When possible, parties can draft protective language that they are comfortable with, and clarify or modify any requirements under the implied undertaking rule. This will provide a degree of certainty between the parties. In rare situations where parties cannot agree on the terms of an agreement, the Court retains the ability to issue a Protective Order. There will need to be a true dispute between parties to satisfy the Court that there is no other reasonable means to address the issue besides a Court Order. That said, the Court may limit its Protective Order to the specific issue in dispute, requiring a Protective Agreement on the remaining elements.

For clients accustomed to Protective Orders, the onus falls to counsel to ensure their clients are aware of the obligations of the implied undertaking rule and the enforceability of Protective Agreements. It will be important going forward for counsel to provide a thorough explanation of these obligations and be satisfied that all parties understand the application of the implied undertaking rule. The Court's reasoning in CN Railway and Live Face will be of significant assistance in addressing any concerns a client may have, and in explaining the unique Canadian approach to document disclosure.

As a final note, Justice Locke's decision has been appealed by the parties to the Federal Court of Appeal[2]. The fate of Protective Agreements now falls to the Court of Appeal, who will hopefully provide some finality to litigants moving forward.

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