Last week, a District Court in the Southern District of New York imposed a $40,000 sanction on SIMO Holdings, Inc. (“SIMO”) for violating a pretrial discovery protective order.  SIMO disclosed four documents covered under the protective order to persons not permitted to view those documents, and the Court determined that a $10,000 sanction for each document was warranted.

Several cases are at issue.  First, the S.D.N.Y. case was a patent dispute between SIMO and Hong Kong uCloudlink Network Technology Limited and its U.S. Subsidiary (collectively, “uCloudlink”).  The protective order expressly prohibited the disclosure of confidential material except to court personnel, stenographers, “counsel retained specifically for this action,” and persons “retained by a party to serve as an expert witness or [to] otherwise provide specialized advice to counsel in connection with this action.”

At the same time that the S.D.N.Y. case was underway, SIMO’s Chinese subsidiary was in the midst of a second patent suit pending in China.  On top of that, a third suit – and the genesis of the sanctions order here – was more recently filed in China by SIMO’s Chinese subsidiary against a uCloudlink subsidiary alleging trade secret misappropriation.

In December 2020, SIMO admitted that its outside counsel disclosed the four documents at issue here in November 2018 to the lawyers representing its subsidiary in the Chinese patent case.  This confession came as part of a request by SIMO seeking to use several of those same documents in the pending Chinese trade secret case.  uCloudlink not only opposed the request to disclose the documents, but also requested that the Court impose sanctions based on the disclosure in the Chinese patent case.

SIMO argued that the lawyers for SIMO’s Chinese subsidiary were “retained to provide specialized advice” for the S.D.N.Y. action regarding the interplay between the U.S. patent action and pending or potential intellectual property actions in China.  SIMO argued that this was necessary to “ensur[e] consistency in positions across pending and anticipated litigation and identifying appropriate entities and persons against whom trade secret misappropriation claims could be brought.”

The Court did not engage with the substance of this argument.  Instead, it rejected the premise that the lawyers for SIMO’s Chinese subsidiary could possibly qualify as persons retained to provide specialized advice: “If individuals providing ‘specialized advice’ in one lawsuit can include attorneys identifying potential bases and defendants for another lawsuit — or attorneys assessing whether one lawsuit might affect another” the Court stated, then the “limitation to lawyers retained in ‘this action’ becomes meaningless.”

This decision is notable for two reasons.  First, as just mentioned, the Court chose not to engage with the substance of SIMO’s argument about why the disclosure of the documents was consistent with the protective order.  Instead, the Court stated that lawyers cannot be retained in one lawsuit to obtain knowledge that may be beneficial in a separate suit.  While the precise impact of this ruling is not yet clear, at minimum, it reinforces the importance of staying well within the chalk line when it comes to protective order compliance.

Second, it shows that Courts are willing to impose significant sanctions for protective order violations.  The severity of the sanctions here may be in part due to the significant time between the 2018 disclosure and the 2020 admission to the Court.  They also may be due to the willful nature of the 2018 disclosure.  But a $10,000-per-document sanction anchoring point means that parties need to be wary when often voluminous numbers of documents are at issue.  A party with better facts might receive a windfall – or be at risk of very heavy financial penalties.  This again reinforces the importance of prudence when it comes to the disclosure of information received in litigation under a protective order.