Denied discovery in electric vehicle class action in Ohio, Labaton turns to Delaware

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A "Ride With Lordstown" sign is seen outside the Lordstown Assembly Plant in Lordstown, Ohio, U.S., June 21, 2021. REUTERS/Rebecca Cook - RC245O9WMI1S

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(Reuters) - As lead counsel in an Ohio federal court securities fraud class action against electric vehicle company Lordstown Motors Corp, Labaton Sucharow tried -- and failed -- to get early discovery before any ruling on Lordstown’s motion to dismiss the case.

So Labaton went to Delaware Chancery Court, where Lordstown is enmeshed in two shareholder derivative cases, with petitions asking Chancery Court judges to order the disclosure of inside information redacted from the public version of the derivative complaints.

The tactic is already a success. This week, Vice Chancellor Morgan Zurn rejected Lordstown’s motion to maintain confidentiality for some of the documents cited in a derivative suit accusing Lordstown board members of breaching their duties by approving false disclosures about, among other things, the company’s development of a saleable electric vehicle.

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Labaton is still waiting for Vice Chancellor Lori Will to decide whether to order the disclosure of an unredacted complaint in the second case, which alleges that sponsors and board members of the special purpose acquisition company DiamondPeak Holdings Corp breached their duties by failing to conduct an adequate investigation of Lordstown before agreeing to acquire the company. But as you would expect, the shareholder firm wasted no time telling Will about Zurn’s decision to release the unredacted complaint in the parallel derivative case.

I can’t say whether information from the Chancery Court complaints will ultimately make a difference in the securities class action in federal court in Youngstown, Ohio. Labaton first tried to get ahold of the unredacted Delaware complaints before the deadline for its brief opposing Lordstown’s motion to dismiss the Ohio class action. Unfortunately for the shareholder firm, Zurn’s ruling came too late: Labaton filed the dismissal opposition brief on Jan. 17. And if the shareholder class action survives dismissal, Labaton's Delaware win could be superfluous, since class action plaintiffs will be entitled to their own discovery.

Nevertheless, it’s worth looking at Labaton’s play for Delaware derivative documents to bolster the related securities class action – and, of course, at the (so far unavailing) opposition mounted by Lordstown’s lawyers at BakerHostetler. Delaware plaintiffs are increasingly likely to obtain corporate books and records before filing Chancery Court lawsuits, which means their complaints may contain confidential information that’s otherwise unavailable to plaintiffs' lawyers in the preliminary stages of securities class actions asserting similar claims. It makes good sense for lead counsel in shareholder class actions to wring every bit of information they can from related Delaware cases.

Lordstown and BakerHostetler urged Zurn and Will not to let Labaton get away with what they called an end-run around the Private Securities Litigation Reform Act, which precludes plaintiffs in federal shareholder class actions from obtaining discovery before their cases have survived defense dismissal motions.

The company’s Delaware briefs requesting confidentiality in the lawsuit against its board members and the complaint against DiamondPeak insiders cite different explanations for why particular information in each case merits confidentiality. But both briefs include warnings that Labaton’s sole motive is to mine the unredacted complaints for information to use in the shareholder class action.

Countenancing such a tactic, Lordstown said, would contradict the public policy Congress advanced when lawmakers restricted discovery in the preliminary stages of securities class actions. It would also, Lordstown argued, undermine the purpose of Delaware’s books-and-records statute, Section 220 of the state’s corporate code, because companies rely on confidentiality agreements when they turn over internal corporate records.

Labaton’s petition for disclosure of documents produced under a confidentiality order “is nothing more than an attempt to improperly derive discovery vicariously,” Lordstown claimed. “Ordering disclosure of the redacted Information would be repugnant to the purposes of both the [Private Securities Litigation] Reform Act and Section 220 and would prejudice Lordstown's rights in the securities action.”

Labaton, of course, disputed Lordstown’s characterization in its briefs opposing the company’s motions to retain redactions. In adopting a discovery bar in securities class actions, the firm said, Congress was worried about shareholders weaponizing discovery costs to extract nuisance settlements. That policy concern, Labaton said, is irrelevant to its petitions to unseal the Delaware complaints. In fact, Labaton argued, the discovery stay in federal-court class actions makes it all the more important that shareholders obtain information through other means, including access to court documents filed in other jurisdictions.

The shareholder firm said the key question is not its motivation but the public right of access to court materials. Shareholders, after all, are members of the public, Labaton said. Delaware law requires parties to show good cause for redactions. Labaton argued that the keen public interest in Lordstown, which disclosed last year that it is under investigation by federal authorities, weighs heavily against confidentiality in the Delaware complaints.

Zurn agreed in her four-paragraph order denying Lordstown’s motion to retain redactions. The redacted information, she said, “goes to the nature of the dispute, and the press has already shown a public interest.” Lordstown’s vague predictions of competitive harm, she said, did not outweigh the public’s right of access to the disputed corporate records.

The judge was equally unimpressed with Lordstown’s policy arguments about circumventing the discovery stay in federal-court securities class actions. The redacted material sought by Labaton “is not tantamount to discovery,” she said, “and the policies supporting a PLSRA stay are not undermined by this court fulfilling its mandate for public access.”

I emailed Carol Villegas and Christine Fox of Labaton but didn’t hear back. Lordstown counsel Douglas Greene of BakerHostetler also didn’t respond to my email.

As I mentioned, there’s no ruling yet on Lordstown’s motion to retain redactions in the DiamondPeak derivative suit. The vice chancellor in that case may have a different view of Labaton’s tactic. But for now, it looks like good strategy. Shareholder lawyers, take note.

Read more:

U.S. federal prosecutors investigating Lordstown Motors

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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.