Dolby Laboratories Licensing Corp. v. ArcSoft, Inc.		CASE NO. 112CV230794
DATE: 16 January 2015	TIME: 9:00	LINE NUMBER: 3

This matter will be heard by the Honorable Judge Socrates Peter Manoukian in Department 19 in the Old Courthouse, 2nd Floor, 161 North First Street, San Jose. Any party opposing the tentative ruling must call Department 19 at 408.882.2310 and the opposing party no later than 4:00 PM Thursday 15 January 2015.  Please specify the issue to be contested when calling the Court and counsel.

On 16 January 2015, the motion of defendant/cross-complainant ArcSoft, Inc. (“ArcSoft”) to quash a business records subpoena served by plaintiff/cross-defendant Dolby Laboratories Licensing Corporation (“Dolby”) on nonparty BDO USA, LLP (“BDO”) was argued an submitted. Dolby filed a formal opposition to the motion.

1. Statement of Facts

Dolby is in the business of licensing audio and video technology. ArcSoft is a software developer of multimedia imaging technologies used in devices such as smartphones, tablets, personal computer, and cameras. Beginning in 2004, ArcSoft entered into licensing agreements with Dolby for a variety of technologies used in personal computers. The license agreements required ArcSoft to report all distributions of Dolby’s intellectual property and to pay royalties thereon. According to Dolby, ArcSoft failed to report sales and pay royalties in connection with a number of its customers and refused to allow Dolby to conduct an inspection of ArcSoft’s records as provided for under the terms of the license agreements.

On 14 February 2012, Dolby instituted this action against ArcSoft, alleging that ArcSoft breached the parties’ licensing agreements. Dolby seeks damages and specific performance of its inspection rights.

ArcSoft filed a cross-complaint against Dolby, alleging that, subsequent to the signing of the license agreements, Dolby became a direct competitor of ArcSoft and launched an anticompetitive campaign against ArcSoft. In its cross-complaint, ArcSoft contends that Dolby is attempting to misuse the audit provisions contained in the licensing agreements in order to obtain confidential information for uses unrelated to the purpose of those agreements, i.e., to gain an unfair economic advantage over ArcSoft. In March 2013, ArcSoft filed the operative Third Amended Cross-Complaint against Dolby for breach of contract, violations of Business and Professions Code section 17200, intentional interference with contractual relations, intentional interference with prospective economic relations, negligent interference with prospective economic relations, and declaratory judgment.

The case is currently scheduled for trial to begin on 13 April 2015.

1. Discovery Dispute

On 2 December 2014, Dolby served BDO with a business records subpoena. BDO is a public accounting, tax, and advisory firm and was hired by ArcSoft to conduct annual audits on ArcSoft’s business from 2005 to 2010. (Dec. of Sean Bi in Support of ArcSoft’s Mot. to Quash, ¶¶ 4, 5.)

The subpoena improperly listed “BDO U.S.” rather than “BDO USA, LLP”—which is BDO’s actual name—as the entity to produce the records. This resulted in BDO’s attorneys not receiving the subpoena until 3 December 2014. The subpoena requested two categories of documents: (1) any financial statement audits and quarterly reviews conducted by BDO for ArcSoft; and (2) all accounting related documents provided to BDO by ArcSoft. (Decl. of Carmen Aviles in Support of ArcSoft’s Mot. to Quash (“Aviles Decl.”), Ex. 1.) The subpoena specified that the records were to be produced on 17 December 2014. (Id.)

Dolby mailed a copy of the subpoena to ArcSoft on 5 December 2014.

On 12 December 2014, counsel for Dolby and counsel for BDO met and conferred concerning the subpoena via telephone. (Decl. of George Morris in Support of Dolby’s Opp. to ArcSoft’s Mot. to Quash (“Morris Decl.”), ¶ 6.) During the call, counsel for BDO raised the issue that the subpoena was technically served on BDO US instead of BDO USA, LLP, and that he would have to note this in his responses and objections, but BDO would not refuse to produce documents on that basis. (Id.) Counsel for Dolby and BDO agreed to meet and confer again once Dolby received BDO’s responses. (Id.)

On 16 December 2014, counsel for ArcSoft called counsel for Dolby to discuss various discovery issues, including the subpoena served on BDO. (Morris Decl., ¶ 7.) Counsel for ArcSoft informed counsel for Dolby that, if Dolby did not withdraw the subpoena, ArcSoft would move to quash. (Id.) Counsel for Dolby inquired whether counsel for ArcSoft intended to meet and confer on the issue of the subpoena and ArcSoft’s counsel responded that, if Dolby did not withdraw the subpoena, she had been directed to file a motion. (Id.) Counsel for Dolby and ArcSoft did not engage in any further meet and confer efforts concerning the subpoena.

On 17 December 2014, counsel for BDO sent a letter to counsel for Dolby containing BDO’s responses and objections to the subpoena. (Aviles Decl., Ex. 2.) The next day, counsel for BDO and counsel for Dolby met and conferred on the objections. According to counsel for Dolby, an agreement was reached as to narrowing the scope of the requests and BDO agreed to produce documents. (Decl. of Timothy Scott in Support of Dolby’s Opp. to ArcSoft’s Mot. to Quash (“Scott Decl.”), ¶ 5.) More specifically, according to Dolby, BDO agreed to produce documents related to ArcSoft’s revenues and those reflecting ArcSoft’s description of its business to BDO.[1] (Id.)

On 19 December 2014, two days after the production date listed in the subpoena, ArcSoft filed the motion presently before the Court, seeking an order quashing the subpoena served by Dolby on BDO.

Dolby filed an opposition to the motion on 5 January 2015, and ArcSoft filed a reply on 9 January 2015.

III.           Discussion

ArcSoft moves to quash the business records subpoena on both procedural and substantive grounds. Procedurally, ArcSoft asserts that Dolby failed to comply with the timing requirements contained in the Code of Civil Procedure concerning the service of the subpoena on BDO as well as the notice given to ArcSoft. Substantively, ArcSoft claims that the requests in the subpoena are objectionable on various grounds.

Dolby opposes the motion to quash on several grounds, arguing that the motion is procedurally defective and that ArcSoft’s substantive arguments lack merit.

1.            Statutory Basis for Motion and Legal Standard

ArcSoft cites Code of Civil Procedure (“CCP”) section 2025.410 as the statutory basis for its motion to quash. That provision provides that, in addition to serving written objections to a deposition notice, a party may also file a motion to quash. (CCP, § 2025.410, subd. (c).) By its language, CCP section 2025.410 applies to deposition notices, which are served on parties—not deposition subpoenas, which are served on nonparties. Indeed, CCP section 2020.030 expressly identifies which Code sections apply to deposition subpoenas—Chapter 2 of Title 3 of the Code of Civil Procedure (CCP, §§ 1985 – 1997), portions of the Evidence Code, and portions of Chapter 6 of Title 4 of the Code of Civil Procedure (CCP, §§ 2020.010 – 2020.510). CCP section 2025.410 is not identified as being applicable to deposition subpoenas. In other words, the Code section cited by ArcSoft is not the proper statutory basis for the relief requested in its motion.

Of course, the Code of Civil Procedure authorizes motions to quash business records subpoenas, but the applicable Code section for such a motion is CCP section 1987.1, which provides that, upon motion reasonably made, the court may make an order quashing a subpoena entirely, modifying it, or directing compliance with it upon those terms or conditions as it shall declare, including protective orders. (CCP, § 1987.1, subd. (a).) The distinction between CCP section 2025.410 and CCP section 1987.1 is not without significance. Prior to filing a motion to quash a deposition notice under CCP section 2025.410, counsel for the parties must meet and confer, which is one of the procedural grounds on which Dolby attacks ArcSoft’s motion. In contrast, CCP section 1987.1 contains no meet and confer requirement.

Concerning the legal standard applicable to motions to quash under CCP section 1987.1, the statute is silent as to which party bears the burden of persuasion. However, case law indicates that the party objecting to the discovery, i.e., the party moving to quash the deposition subpoena, bears the burden of explaining and justifying its objections. (See Fairmont Ins. Co. v. Super. Ct. (2000) 22 Cal.4^th 245, 255.)

Given that ArcSoft’s citation to the wrong Code provision does not affect the substantive analysis (i.e., the parties’ arguments would not have changed if ArcSoft had cited the applicable Code section in the first instance), the Court will treat ArcSoft’s motion as being brought pursuant to CCP section 1987.1.

1. Procedural Arguments

As indicated above, both parties make procedural arguments concerning the business records subpoena and the motion to quash. Each of these arguments essentially boils down to the assertion that the other party failed to comply with the applicable provisions of the Code of Civil Procedure. The arguments also stem largely from ArcSoft’s failure to cite the applicable Code section in its notice of motion.

1. ArcSoft’s Procedural Arguments

ArcSoft directs the Court to CCP section 2020.410, subdivision (c), which provides that a business records subpoena may not command compliance by the custodian of records any earlier than 20 days after the subpoena is issued or 15 days after its service, whichever is later. ArcSoft points out that the subpoena at issue directed BDO to produce documents on 17 December 2014 and that, although Dolby served the subpoena on 2 December 2014, because Dolby did not use BDO’s correct name, the company’s attorneys did not receive the subpoena until the next day. Put another way, ArcSoft contends that Dolby only gave BDO 14 days to respond to the subpoena rather than the statutory minimum of 15 days.

The Court rejects this argument. Dolby has represented to the Court that BDO has agreed to a compliance date. A custodian of records and the party serving a business records subpoena are statutorily authorized to agree to a time for production different than that stated in CCP section 2020.410. (See Evid. Code, § 1560, subd. (b)(3).) In its reply brief, ArcSoft acknowledges that Dolby and BDO agreed to a date of compliance of 23 December 2014. (Reply, at p. 2:1-3.) Accordingly, ArcSoft has not carried its burden of justifying its challenge to the subpoena on this ground.

ArcSoft also argues that Dolby was required to serve it with notice of the subpoena at the same time it served the subpoena itself on BDO and that, because Dolby served ArcSoft with notice of the subpoena three days after it served BDO, the subpoena is “untimely.” ArcSoft is correct that copies of business records subpoenas must be served on all other parties who have appeared in an action. (CCP, § 2025.220, subd. (b).) That provision, however, does not contain a timing requirement and ArcSoft has not directed the Court to any authority to support the proposition that service of a business records subpoena and notice to the parties of the subpoena must be made simultaneously. Further, the Court is not persuaded that ArcSoft has suffered any prejudice due to the delayed notice. The Court therefore finds that ArcSoft has not carried its burden of justifying its challenge to the subpoena on this ground.

2. Dolby’s Procedural Arguments

Dolby attacks ArcSoft’s motion to quash on three procedural grounds. First, Dolby argues that ArcSoft’s motion is untimely. Second, Dolby argues that ArcSoft was required to file a separate statement in support of its motion and failed to do so in violation of California Rules of Court, rule 3.1345. Finally, Dobly argues that ArcSoft failed to meet and confer prior to filing the motion.

As to the first argument, Dolby directs the Court to CCP section 1987.1, which provides that a motion to quash a subpoena must be “reasonably made.” Dolby contends that “reasonably made” means that the motion must be filed prior to the date of production specified in the subpoena. This is incorrect. As ArcSoft points out, the Court of Appeal rejected this argument in Sagle v. Superior Court (1989) 211 Cal.App.3d 1309. There, the court held that the trial court does not lose jurisdiction to consider a motion to quash a business records subpoena that is brought after the date for production. (Sagle, supra, 211 Cal.App.3d at p. 1312.) Here, the motion to quash was made two days after the original date of compliance listed in the subpoena and four days prior to the amended date for production agreed upon by counsel for Dolby and counsel for BDO. Under these circumstances, the Court finds that the motion was reasonably made as far as that phrase applies to the timeliness of the motion.

Next, Dolby argues that ArcSoft’s motion is defective because it is not accompanied by a separate statement. Dolby is correct that rule 3.1345 of the California Rules of Court requires motions to quash to be accompanied by a separate statement that provides “all the information necessary to understand each discovery request.” (See Cal. Rules of Court, rule 3.1345(c).) The Court disagrees, however, that this is a ground upon which the motion should be denied. There are only two requests at issue, and those requests are attached to ArcSoft’s motion. Thus, the Court is not left guessing the exact language of the requests. Moreover, all of ArcSoft’s arguments apply to both requests. In other words, while a separate statement was technically required, the inclusion of a separate statement would not have significantly aided the Court in resolving the parties’ dispute in this instance.

Finally, Dolby argues that ArcSoft failed to meet and confer and that the motion should be denied on that ground. While the Code section cited by ArcSoft as the basis of its motion (CCP section 2025.410) requires a motion to quash a deposition notice to be accompanied by a meet and confer declaration, the Code section applicable to motions to quash a business records subpoena (CCP section 1987.1) does not. Because the Court is treating this motion as being brought pursuant to CCP section 1987.1, the fact that counsel for ArcSoft failed to meet and confer prior to filing the motion is not problematic.

1. Substantive Arguments

In the subpoena, Dolby asked BDO to produce the following two categories of documents: (1) any financial statement audits and quarterly reviews conducted by BDO for ArcSoft; and (2) all accounting related documents provided to BDO by ArcSoft. (Aviles Decl., Ex. 1.) Dolby also has informed the Court that, following meet and confer efforts between counsel for Dolby and BDO, the scope of the requests has been narrowed to papers in BDO’s possession related to ArcSoft’s revenues and documents reflecting ArcSoft’s description of its business to BDO. (Scott Decl., ¶ 5.)

ArcSoft does not address the narrowed scope of the requests. As to the original requests, ArcSoft argues that the requests are overly broad and not reasonably particularized (which appear to be the same argument in ArcSoft’s moving papers) and that, given the overbreadth of the requests, the information sought by Dolby is irrelevant. ArcSoft also contends that the information is protected by the right to privacy.

The Court recently addressed, and rejected, these same arguments. On 16 November 2014, the Court issued an order granting Dolby’s motion to compel a further response to a document demand served on ArcSoft. (Order on Discovery Motions, attached to the Declaration of George Morris in Support of Dolby’s Opposition to ArcSoft’s Motion to Quash, Ex. 3.) The request at issue demanded that ArcSoft produce “[m]onthly, quarterly and annual income statements and balance sheets . . . from 2004 to present.” (Id., at p. 6.) ArcSoft objected to the request on the grounds of relevance, overbreadth, and privacy. The Court overruled each of these objections.

Concerning the relevance of the information, the Court noted that the documents were relevant to one of ArcSoft’s primary defenses. (Id., at p. 7.) More specifically, ArcSoft has alleged as a defense against Dolby’s breach of contract claim that, while ArcSoft did in fact distribute Dolby technologies to third parties without reporting or paying royalties to Dolby for the distributions, ArcSoft was not responsible for those royalties because it required the third parties to obtain a separate license from Dolby before the customer could distribute products containing Dolby technology. In the previous motion, Dolby argued that the information will reveal if ArcSoft did in fact create conditions on their sales and directed the Court to certain accounting standards that require financial statements in the software industry to note whether revenue is recognized immediately or if it is conditional. The Court agreed and found the information sought by the requests relevant.

The same analysis applies here. BDO is, among other things, a public accounting firm and was hired by ArcSoft to conduct annual audits on ArcSoft’s business from 2005 to 2010. (Dec. of Sean Bi in Support of ArcSoft’s Mot. to Quash, ¶¶ 4, 5.) If ArcSoft’s sales of software containing Dolby technology to third parties was conditioned upon the third parties obtaining a license directly from Dolby, such information would have been supplied by ArcSoft to BDO pursuant to the accounting standards cited by Dolby. Similarly, whether the sales were conditional would be reflected in the audits performed by BDO. ArcSoft has not contended otherwise. Thus, for the reasons stated in the Court’s 16 November 2014 order, and for the reasons stated above, the Court finds that the business records subpoena served on BDO seeks relevant information.

In the 16 November 2014 order, the Court also rejected ArcSoft’s privacy and overbreadth arguments. As to ArcSoft’s privacy objection, the Court noted that ArcSoft had failed to explain why it was entitled to invoke the right to privacy in the first instance. (See Nativi v. Deutsche Bank National Trust Co. (2014) 223 Cal.App.4^th 261, 314 n.16 [explaining that the question of whether a business entity—as opposed to a natural person—may object to discovery requests on the basis of privacy remains unsettled].) In the present motion, ArcSoft focuses on the legal question of whether a business entity may invoke the right to privacy. ArcSoft does not, however, explain why the information sought by Dolby in the business records subpoena falls within that protection or why the parties’ protective order would not be sufficient to protect ArcSoft’s alleged privacy interest. Thus, even if the Court were persuaded that a business entity could assert a privacy objection under the current state of the law, ArcSoft has nonetheless failed to justify why the subpoena should be quashed on the basis of privacy.

Finally, as to the overbreadth argument, ArcSoft contends that the requests attached to the subpoena are overly broad because “there is no relevance to any of ArcSoft’s financial information.” (ArcSoft’s Mem. of Ps & As, at p. 5.) As indicated above, the Court disagrees, and finds that the information is relevant for discovery purposes. Moreover, ArcSoft has failed to address the fact that the scope of the requests has been narrowed during the meet and confer efforts between counsel for BDO and Dolby. Accordingly, the Court finds that the subpoena should not be quashed on the basis of overbreadth.

In sum, ArcSoft has failed to demonstrate that the subpoena is procedurally defective or that the requests attached to the subpoena are objectionable on any substantive ground.

1. Conclusion and Order

ArcSoft’s motion to quash is DENIED.

 

 

________________­­­____________ DATED:

_________________________­­­________________________ HON. SOCRATES PETER MANOUKIAN Judge of the Superior Court County of Santa Clara

[1] ArcSoft claims that these representations are false and has attached a letter from counsel for BDO to its reply papers indicating that BDO has not agreed to produce documents. (Decl. of Anne-Marie Dao in Support of ArcSoft’s Reply, Ex. 4.) In the letter, counsel for BDO states the following:

Following your receipt of our Objections Letter you called on December 18, 2014 and asked that I confirm an agreement to produce documents along the lines of the general parameters I noted on our prior call. I declined the invitation to reach any agreement on production while ArcSoft’s motion was pending. Therefore, BDO’s Objections as articulated in our December 17, 2014 letter [] stand and no separate agreement on production has been reached. (Id.)