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Judge Pushes Back on SAD Scheme Sealing Requests

A signature feature of SAD Scheme cases is that rightsowners typically try to seal defendants’ identities. The sealing helps rightsowners in several ways, including preserving their ability to proceed without defendant involvement, springing account and cash freezes on defendants to maximize their pain, and hindering the ability of defendants to coordinate their actions and fight back. But sealing defendants’ identities directly conflicts with courtroom transparency, a foundational principle essential for trust in our judicial system.

Recently, Judge Seeger in the Northern District of Illinois surprisingly refused to grant rightsowners’ defendant identity sealing requests in at least two cases (1, 2), but there may be more. In very similar opinions, Judge Seeger explained why defendant sealing is inappropriate. (This blog post tracks the Goorin Bros. ruling). I say the sealing refusal is “surprising” because judges have routinely acquiesced to rightsowners’ sealing requests with little fanfare.

Judge Seeger starts by reinforcing the importance of judicial transparency: “A party who wants to depart from that longstanding tradition, and litigate in secret, must carry a heavy burden.”

The rightsowner said that without sealing, “the likely result would be the destruction of relevant documentary evidence and the hiding or transferring of assets to foreign jurisdictions.” This is a factually threadbare allegation, without any defendant-specific facts. Judge Seeger characterizes it as “the same cut−and−paste boilerplate offered in countless Schedule A cases, often word for word.”

The judge rejects the rightsowner’s concern about document destruction because document production is rarely ordered in SAD Scheme cases. Instead, “almost all of [the defendants] fail to participate in the suit and eventually get tagged with a default judgment. The simple reality is that defendants in Schedule A cases tend to be foreign sellers who do not produce documents at all, so sealing a case to protect documents is likely to be a moot point.”

I partially disagree with the judge’s assertion about how SAD Scheme cases are resolved. Many defendants settle after the ex parte TRO, after which the rightsowner voluntarily dismisses them from the case. Those defendants never reach the default judgment stage. Still, the judge’s broader point is correct: rightsowners often only care about getting online marketplaces to disclose how much money the defendant has in the online marketplace’s account, so that rightsowners can calculate the highest possible settlement demand that the defendant is likely to pay. If the rightsowner gets that data from the online marketplace, usually the rightsowner doesn’t need any other documents from defendants.

The judge also rejects the concern about defendants’ potential asset expatriation because SAD Scheme rightsowners typically seek statutory damages, not equitable monetary relief. “The Supreme Court has made clear that courts lack the power to issue an asset freeze at the beginning of a case, unless that party is seeking equitable monetary relief.” The judge explains:

An equitable restraint at the outset of the case might be doable if a plaintiff requested and received equitable monetary relief at the end of the day, like an accounting of profits. See Deckers Outdoor Corp. v. Unincorporated Associations Identified on Schedule A, 2013 WL 12314399 (N.D. Ill. 2013). But as a practical matter, in Schedule A cases, that recovery almost never happens. Schedule A plaintiffs typically don’t request and receive equitable relief. Instead, Schedule A plaintiffs rush into court, request and receive an asset freeze, obtain a default judgment, and then ask district courts to unfreeze the money and award statutory damages, not equitable relief. In that scenario, it is not clear to this Court that it would be appropriate to use any frozen funds for any recovery of statutory damages, because statutory damages are a remedy at law, not a remedy in equity. Truth be told, the Schedule A plaintiffs’ bar asks district courts in this district to lock down assets through an asset freeze on day one of a case, and do so under seal. And then, at the end of the case, Schedule A plaintiffs receive a remedy at law, not a remedy in equity, which means that there was no justification for an asset freeze in the first place. Putting it all together, this Court might entertain a request to file under seal if Plaintiff were seeking an asset freeze that this Court could grant, meaning an asset freeze for the limited purpose of allowing equitable relief down the road. But in the case at hand, Plaintiff has not made a showing that it will seek equitable monetary relief at the end of the case, so there is no basis for an asset freeze now. And if there is no basis for an asset freeze now, then there is no reason to proceed under seal now. If you can’t freeze it, you can’t seal it.

(The last line brought to mind Johnnie Cochran’s refrain: if it doesn’t fit, you must acquit).

While the judge’s concern applies to virtually all SAD Scheme cases, rightsowners can easily address it. Rightsowners typically don’t care about the damages awarded at the end of the process. The real money is in quick defendant settlements forced by the freezes on the merchants’ accounts, and that action occurs extrajudicially immediately following issuance of the ex parte TRO. Thus, to address Judge Seeger’s concerns, rightsowners might modify their formulaic relief requests to seek equitable monetary relief–really, whatever it takes to get the case to the ex parte TRO. More likely, other judges will not pay close attention to this issue and keep approving sealing requests as a matter of course.

Meanwhile, Judge Seeger’s pushback reinforces my concern that the Northern District of Illinois judges still have not yet fully internalized that granting the ex parte TRO is the case’s major and possibly only significant milestone. Subsequent proceedings, like default judgments, won’t redress any damage done in the wake of that TRO. Until judges recognize the centrality of the ex parte TRO to the SAD Scheme, it will keep working.

 

The post Judge Pushes Back on SAD Scheme Sealing Requests appeared first on Technology & Marketing Law Blog.

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