Who Bears The Burden Of Proving Waiver Of Attorney-Client Privilege?

This week, in an Opinion in Safety Test & Equipment Co. v. American Safety Utility Corp., 2014 NCBC 40, Judge Gale made a significant ruling on which party bears the burden of proof in showing a waiver of the attorney-client privilege (or showing the absence of a waiver)..

The elements that must be shown to make out the privilege are pretty well established.  Communications between lawyer and client are protected by the privilege if:

(1) the relation of attorney and client existed at the time the communication was made, (2) the communication was made in confidence, (3) the communication relates to a matter about which the attorney is being professionally consulted, (4) the communication was made in the course of giving or seeking legal advice for a proper purpose although litigation need not be contemplated[,] and (5) the client has not waived the privilege.  

Op. 11 (quoting Isom v. Bank of America, N.A., 177 N.C. App. 406, 411, 628 S.E.2d 458, 462 (2006))(emphasis added).

Case Of First Impression In North Carolina

But as to that requirement that "the client  has not waived the privilege," does the party asserting the privilege need to prove that there has been no waiver?  That's the difficult task of proving a negative, and as Judge Gale observed, no North Carolina appellate decision has clearly considered whether "the party claiming privilege has an initial burden to prove the negative of a waiver or whether the privilege proponent need only prove absence of waiver in response to an adequately supported challenge."  Op. 12.

The case before Judge Gale involved a letter from the counsel for Defendant American Safety to one of the individual Defendants (Price) regarding that Defendant's possible employment with American Safety.  As you might guess, this is a case between competing businesses alleging misappropriation of trade secrets.

Curiously, the Plaintiff already possessed a redacted copy of the otherwise privileged letter, though the parties disputed how Plaintiff had obtained the redacted copy.  Plaintiff said that Price had voluntarily given it the letter, but Price denied that.  The Defendants implied that the letter had been stolen.

The Plaintiff also sought by motion to compel to obtain another letter from the same counsel for American Security written about two weeks later, which was identified on a privilege log.

So who wins this skirmish?  The party claiming the letter is protected by the privilege and denying any waiver, or the opposing party, with disputed evidence of waiver?

The Court Adopts A Burden-Shifting Approach

In resolving this question, the Court adopted a "burden-shifting approach," which it said was "'[t]he prevalent, albeit unstated, practice' in the federal courts where issues of potential waiver arise."  Op. Par. 13 (quoting 2 Paul R. Rice, Attorney-Client Privilege in the United States, §9:22, at 82 (2013-2014 ed. 2013).

That approach goes like this:

Under this burden-shifting approach, courts impose the initial burden of establishing the basic elements on the privilege proponent. This initial burden does not require the privilege holder to affirmatively negate waiver. Rather, once the proponent of the privilege establishes the basic elements of privilege, the burden of production of evidence shifts to the opponent to establish a prima facie case of waiver.  If the privilege opponent establishes a prima facie case of waiver, the burden of going forward with evidence shifts back to the proponent to rebut the prima facie case by demonstrating that the privilege is still viable.  Ultimately, the privilege proponent bears the burden of persuasion.

Op. 13 (citations omitted).

Given that the parties submitted conflicting evidence on the waiver issue, Judge Gale applied the principle that "[w]here the weight of the evidence is equal, the adverse ruling must be against the party with the ultimate burden of proof."  Thus, the Defendant lost on its claim of privilege, and it was directed to produce an unredacted copy of the letter already in the Plaintiff's possession.

Subject Matter Waiver Applies When The Waiver Is Not Intentional

The Defendants were also ordered to produce the second letter, the one which was not in the Plaintiff's possession.  Judge Gale said that he could not conclude that the waiver as to the first letter was inadvertent and that the waiver of privilege in the first letter therefore extended to the second.  Op. 19.

The result would have been different if the waiver had been inadvertent.  The Business Court has previously held that

[T]he general rule that a disclosure waives not only the specific communication but also the subject matter of it in other communications is not appropriate in cases of inadvertent disclosure . . . .

Morris v. Scenera Research, LLC, 2011 NCBC 34 at *33.

Judge Gale stanched the flow of blood there.  He ruled that he would not require the Defendants to produce any other communications from their counsel.

 

 

Who Doesn't Like Reading About A Ruling On A Motion To Compel?

I probably enjoy reading a ruling on a motion to compel a whole lot more than the judge does in writing it.  So of course I enjoyed reading Judge Murphy's Order on a Motion to Compel yesterday in County of Catawba v. Frye Regional Medical Center.  It's actually pretty interesting.  It's got discovery issues, a 30(b)(6) issue, and an attorney-client privilege issue too.

Frye Regional moved to compel because the County hadn't organized and labelled its document production to respond to the request to which the documents were responsive.  Frye Regional's co-defendant re-served the same document requests to which the County had already responded, demanding labelling.  Rule 34 requires labelling, but it also allows a party in the alternative to produce documents as they are kept in the "ordinary course of business."  Judge Murphy accepted the County's representation that it had produced its documents as they were kept in the ordinary course of business, and denied that aspect of the motion to compel. 

The County was more successful on its own Motion to Compel.  Frye Regional had refused to produce a witness on some of the topics listed in the County's 30(b)(6) deposition notice.  The Defendant had argued that a number of the topics in the notice requested information not "known or reasonably available" to it.  Frye Regional said that the proposed topics -- on its financial performance -- would require its witness to make burdensome calculations and compilations that it did not ordinarily perform.

Judge Murphy said:

While the Court is cognizant of the fact that the Rule 30(b)(6) Notice, by its nature, imposes a heavy burden on Frye and its designee, this burden does not relieve Frye of its obligation to appoint a designee to provide deposition testimony on behalf of the company. Rule 30(b)(6) clearly states that, upon notice from the requesting party, the organization “shall designate” a representative to “testify as to matters known or reasonably available to the organization.” N.C. R. Civ. P. 30(b)(6). Having considered Plaintiff’s Motion and the arguments of counsel, the Court finds no basis to relieve Frye of its obligation under Rule 30(b)(6). Therefore, the Court concludes that Frye must respond to the Rule 30(b)(6) Notice [and] designate a witness to testify on the company’s behalf.

Order ¶20.

The County also sought documents from Frye Regional by its Motion to Compel.  These were "Quarterly Certifications" prepared by Frye Regional's parent to prepare filings required by the federal government under the Sarbanes Oxley Act.

Frye Regional had withheld those documents on the basis of attorney-client privilege, but Judge Murphy said that any privilege belonged to Frye Regional's parent company (Tenet), not to Frye Regional.  He held:

the documents in question reflect communications between a Tenet employee and Tenet executives and counsel.  Although Frye appears to be a subsidiary of Tenet, Frye remains a third party to any privileged communications between Tenet and its counsel, and therefore, has no standing to assert a claim of privilege over such communications. . . . Therefore, the Court concludes that only Tenet or an attorney on its behalf may raise a claim of privilege over the requested portions of the Quarterly Certifications and accompanying memos.

Op. ¶22.

If the issue of the invocation of the parent's attorney-client privilege by a subsidiary is ringing a distant bell in your mind, you might be thinking of Judge Gale's recent opinion in SCR-Tech v. Evonik Energy Services LLC, 2013 NCBC 42,which I wrote about in August.  Though the issue in SCR-Tech wasn't precisely whether a subsidiary can claim its parent company's privilege, that certainly seemed assumed in the opinion.  At the hearing in this case, Frye Regional's counsel stated that the privilege belonged to Tenet, not Frye Regional. Op. ¶22.

But all is not lost for the privilege  -- Judge Murphy ordered that Tenet should be given notice of his ruling and be allowed to intervene to protect its privilege.

The County is represented by Brooks Pierce lawyers Jimmy Adams, Forrest Campbell, and Justin Outling.

 

"Common Interest" Privilege Considered By The NC Business Court

How much of an ownership interest does a parent have to have in a subsidiary for the attorney-client  privilege to extend to communications between the susidiary and the lawyer for the parent company?

Judge Gale pondered that question in SCR-Tech v. Evonik Energy Services LLC, 2013 NCBC 42, and wrote on a clean slate, given that he found no applicable North Carolina precedent.  Op. 8.

The Plaintiff, SCR-Tech, had been owned by a holding company in which Ebinger had a minority (37.5%) interest.  The communications withheld on the basis of privilege covered a three year period during which SCR-Tech, Ebinger, and counsel were negotiating the sale of SCR-Tech.

Defendants said that to be considered SCR-Tech's "parent," Ebinger needed to be a majority owner with a greater than 50% interest.

That argument launched Judge Gale into distinguishing the "joint client" aspect of the attorney-client privilege from the "common interest" doctrine.  He said:

The “joint client” privilege focuses on client identity as defined by the extent of corporate relationship between two entities. The “common-interest” doctrine depends more on common legal interests between the separate entities, although the fact of corporate affiliation between them can factor into the analysis of that common legal interest.  The common-interest doctrine has arisen by expanding the joint-defense doctrine in criminal law, which was not controlled by any ownership relationship.

Op. 12.

The extent of Ebinger's interest in SCT-Tech really didn't make much difference to the analysis, given the two companies' common legal interest in the matters discussed in the withheld communications.

The Court held that the documents in question were privileged and denied the Defendants' motion to compel their production.

Judge Gale cautioned that "the court here does not intend to set rigid parameters for applying the common-interest doctrine, and this Order must be read in the context of the particular facts of this case."  Op. 12 & n.1.

If You Are Proposing An In Camera Review, Try To Make It As Easy As Possible For The Judge

When lawyers are arguing over whether documents were properly withheld from production on the basis of attorney-client privilege, one side or the other will often say "let's have the Judge do an in camera review."  (Translation for nonlawyers reading this blog: let's drop all these documents on the Judge and let him or her decide).

Judges love this procedure, right? That would not be so.

A very short opinion the other day from the Business Court in Crockett Capital Corp. v. Inland American Winston Hotels is a good illustration. The decision suggests it is a good idea for both sides to take steps to make such a review as easy as possible for the Judge. There's also a good point on the scope of attorney-client privilege.

The Documents For The In Camera Review Were Highly Repetitive

The parties were arguing over redactions made to a number of emails on claimed grounds of privilege. In the ensuing in camera review. The parties provided what the Court described as "two large three-ring binders," one of which had clean copies of the claimed-to-be-privileged emails and the other of which had redacted copies of the emails produced.

We all know that emails proliferate like bunnies. The problem for the Court was that the emails in the binders had done exactly that. They were repeated over and over, in what the Court described as "repetitive strings of the same email time and time again." 

There's a process in e-discovery called "deduplication," which eliminates redundant copies of electronic documents. The lack of deduplication did not make the Court happy. Here's a quote:

Seldom has the Court been called upon to waste so much of its time because counsel did not fulfill their responsibilities in the meet and confer required by the Court's Local Rule 18.6. . . . It is apparent that counsel did not sit down and look at the documents. If so, they surely would have realized that the Court was being asked to look at repetitive strings of the same email time and time again. . . . If counsel had met and conferred they would have provided the Court with one copy of each email string rather than the copy for each recipient and saved the Court hours of wasted time. Eighty percent of the  documents would not have required Court review if counsel had done their job.

That the documents were in electronic format was not an excuse. The Court said:

Discovery in a digital age is expensive and difficult. That does not relieve counsel  of their obligation to carefully review documents and to sit down with the documents before them in a meet and confer and reduce to the fullest extent work required by the Court. Such scrutiny obviously did not occur in this case.

Privilege Issues

The Court also questioned some of the claims of privilege, which involved documents exchanged between businesspeople but copied to lawyers. The Court described these as "emails on which lawyers were simply copied with information about business decisions and no advice was sought or given."

It said: "[b]usiness decisions are not protected just because a lawyer is copied on a memo. Businessmen making business decisions may not hide behind their lawyers. Lawyers making business decisions cannot hide behind a privilege."

The Business Court Says That Disclosing Privileged Documents Was "Just Not Smart"

If you have privileged documents, you shouldn't share them with your wife and daughter.  You should also be careful with technology, which lets you do "dumb things".  Those are the lessons of Judge Tennille's very short opinion last week in Crockett Capital Corp. v. Inland American Winston Hotels, Inc.

An executive of the Defendant had sent his wife and daughter emails which included attorney-client communications.  The reason for sending the emails to his wife was to "vent frustration" about work-related matters.  The daughter was apparently asked for grammatical advice.

The Plaintiff said that the privilege had been waived by this intentional production.  Judge Tennille determined that the privilege had not been waived, emphasizing that his decision was based on the specific circumstances before him.  Here's what he said:

Technology multiplies the opportunities for man to do dumb things and increases the speed at which he can do them.

Venting one’s frustrations about work to a spouse is an everyday occurrence.  Attaching a string of emails containing attorney client information to an email to a person’s spouse venting one’s frustration at work is just not smart. The Court does not believe it constitutes a waiver of the attorney client privilege under these circumstances.

Using a child as a grammarian with the result that attorney client privileged information is included in emails to her is just not smart. The Court does not believe it constitutes a waiver of the attorney client privilege under these circumstances.

There isn't much discussion in the opinion, so if you are looking for some law on the issue of privilege waiver, you might want to look at the briefs.  The principal brief was filed under seal, but the brief on why privilege hadn't been waived and the reply brief in support of the waiver argument are available.

I don't think Bart Simpson would carelessly share privileged documents.  Homer?  Probably.

New Federal Rule of Evidence 502 Deals With Attorney-Client Privilege, Waiver, And Inadvertent Production

There's going to be a new Federal Rule of Evidence, approved by voice vote in the House this week and unanimously by the Senate earlier this year.  It's on President Bush's desk for signature (that's him signing the baseball in the picture at the left), and should be on the books in the next few weeks.  

The new addition to the Rules is Rule 502, titled "Attorney-Client Privilege and Work Product: Limitations on Waiver."  New Rule 502 covers the scope of a waiver of privilege and the issue of inadvertent production of privileged documents, among other waiver related issues. 

The full text of the Rule is at the bottom, but here's a synopsis:

  • If a waiver of privilege is found, the waiver extends to undisclosed communications or information only if (1) the waiver is intentional,  (2) the other communications involve the same subject matter, and (3) the communications "ought in fairness to be considered together."  Rule 502(a).
  • If the disclosure is inadvertent, it does not operate as a waiver in either federal or state court if (1) the disclosure was inadvertent, (2) the holder of the privilege took "reasonable steps to prevent disclosure," and (3) the holder "promptly took reasonable steps to rectify the error."  Rule 502(b)
  • If the disclosure was made in a state court proceeding, it doesn't operate as a waiver in a federal proceeding if either the disclosure wouldn't have been a waiver under the federal rule, or it wouldn't be a waiver under state law. Rule 502(c).
  • If the Court enters an Order (like a consent Protective Order) that a disclosure will not be a waiver, that Order will bar any determination by another federal court or a state court that a waiver has occurred.  In other words, such a judicially approved non-waiver provision will have effect beyond the pending litigation, which isn't the case now.  Since parties can provide by such an agreement that, for example, there will be no waiver irrespective of the care taken by the disclosing party, no-waiver provisions will no doubt become stock provisions in Protective Orders. An agreement between the parties on waiver issues won't be effective unless it becomes part of a Court Order.  Rule 502(d) and (e).

The new Rule resolves conflict between courts throughout the country on whether an inadvertent production results in waiver.  North Carolina's District Courts had reached different conclusions on that issue.  Scott v. Glickman, 199 F.R.D. 174 (E.D.N.C. 2001) and Parkway Gallery v. Kittinger/Pennsylvania H. Group, 116 F.R.D. 46 (M.D.N.C.1987) followed the flexible approach espoused by the new Rule, but the Western District had held that even an inadvertent production waived privilege, in Thomas v. Pansy Ellen Products, Inc., 672 F. Supp. 237 (W.D.N.C. 1987).

The Rule takes effect immediately upon the President's signature.  It applies to all cases filed after its enactment, and applies to pending cases "insofar as is just and practicable."

I read about Congress' passage of the Rule on the Electronic Discovery Law blog. The full text of the Rule is below, the explanatory note is here.

 

Rule 502. Attorney-Client Privilege and Work Product; Limitations on Waiver

                                                                                                   

The following provisions apply, in the circumstances set out, to disclosure of a communication or information covered by the attorney-client privilege or work-product protection.

 

(a)            Disclosure made in a federal proceeding or to a federal office or agency; scope of a waiver. When the disclosure is made in a federal proceeding or to a federal office or agency and waives the attorney-client privilege or work-product protection, the waiver extends to an undisclosed communication or information in a federal or state proceeding only if:

(1)            the waiver is intentional;

(2)            the disclosed and undisclosed communications or informa­tion concern the same subject matter; and

(3)            they ought in fairness to be considered together.

(b)            Inadvertent disclosure. When made in a federal proceeding or to a federal office or agency, the disclosure does not operate as a waiver in a federal or state proceeding if:

(1)            the disclosure is inadvertent;

(2)            the holder of the privilege or protection took reasonable steps to prevent disclosure; and

(3)            the holder promptly took reasonable steps to rectify the error, including (if applicable) following Fed. R. 25 Civ. P. 26(b)(5)(B).

(c)             Disclosure made in a state proceeding. — When the disclosure is made in a state proceeding and is not the subject of a state-court order concerning waiver, the disclosure does not operate as a waiver in a federal proceeding if the disclosure:

(1)            would not be a waiver under this rule if it had been made in a federal proceeding; or

(2)            is not a waiver under the law of the state where the disclosure occurred.

(d)            Controlling effect of a court order. — A federal court may order that the privilege or protection is not waived by disclosure connected with the litigation pending before the court – in which event the disclosure is also not a waiver in any other federal or state proceeding.

(e)             Controlling effect of a party agreement. — An agreement on the effect of disclosure in a federal proceeding is binding only on the parties to the agreement, unless it is incorporated into a court order.

(f)             Controlling effect of this rule. — Notwithstanding            Rules 101 and 1101, this rule applies to state proceedings and to federal court-annexed and federal court-mandated arbitration proceedings, in the circumstances set out in the rule. And notwithstanding Rule 501, this rule applies even if state law provides the rule of decision.

(g)            Definitions. — In this rule:

(1)            “attorney-client privilege” means the protection that applicable law provides for confidential attorney-client communications; and

(2)            “work-product protection” means the protection that applicable law provides for tangible material (or its intangible equivalent) prepared in anticipation of litigation or for trial.

Some Meaty (But Not North Carolina) Court Decisions On Business Issues

This post is about three significant business decisions from courts in other jurisdictions.  They involve an issue of attorney-client privilege for limited liability companies, whether an LLC member can waive his statutory right to seek dissolution of an LLC, and board duties in a merger context.

First, if there's litigation between a member-manager of an LLC and the LLC, does the LLC have an attorney-client privilege to assert against its own member-manager? This issue hasn't arisen in any case before the North Carolina Business Court, but it undoubtedly will. 

A federal court in Nevada confronted that question recently and held in Montgomery v. eTreppid Technologies, LLC, 2008 WL 1826818 (D. Nev. 2008), that the LLC should be treated, for privilege purposes, like a corporation.  It determined that the privilege belonged to the entity alone, and that the plaintiff was not entitled to discovery of privileged information even though he was a member of the LLC and a former manager.  Thanks to Peter Mahler and his New York Business Divorce Blog, where I read about this case.

Second, can a member of an LLC waive his or her right to dissolution by an anti-dissolution provision in the Operating Agreement?  The answer is yes, at least under Delaware law, as held by the Delaware Court of Chancery last week in R & R Capital, LLC v. Buck & Doe Run Valley Farms, LLC, 2008 WL 3846318 (Del.Ch., Aug. 19, 2008).  You can read the summary of the case, from the Delaware Corporate and Commercial Litigation Blog, here.  The Court rejected the argument that a member's agreement not to seek dissolution violated the public policy of Delaware, stressing instead the freedom of contract afforded those forming a limited liability company.

Third, also from Delaware, is a decision late last month about director duties in a merger context, Ryan v. Lyondell Chemical CoThe Court of Chancery held that a shareholder could proceed to trial against the directors of Lyondell on a claim for breach of fiduciary duty, even though the action challenged was the consummated sale of the company for a "blowout" market premium.  The Court found a "troubling board process," in the board's determination after only seven days to approve the sale of the company without any market check, without any post-agreement "go shop" period, and their approval of a merger agreement with strong deal protection measures and a substantial breakup fee. 

The Court said it was unable to find on the summary judgment record that that Board had satisfied its Revlon duties, or that the deal protection measures were reasonable and necessary to secure the offer per Unocal.  This case is also courtesy of the Delaware Corporate and Commercial Litigation Blog.

The picture of the Cook Out hamburger at the top of this post is by my daughter, Juliet, a sophmore at UNC-Chapel Hill.

I've been having trouble recently with the pictures and links on my blog, so if they are not working when you first read this please check back later.

Right To Discovery Regarding Expert Witness Trumps Attorney-Client Privilege

This short Order has a valuable nugget on the discoverability of communications between lawyers and their expert witnesses.

One of the Defendants moved to compel discovery from the Plaintiff to obtain documents exchanged between the Plaintiff's lawyers and their expert. 

The expert, however, was also the President of the client and the central fact witness.  Plaintiff resisted production on the grounds of attorney-client privilege. 

It made no difference to the Court that the expert was also the client.  It held:

"Plaintiff’s assertion of the attorney client privilege to shield discovery of any communications with counsel involving his expert opinions is misplaced. Expert witnesses are subject to specific rules of discovery under the North Carolina Rules of Civil Procedure. N.C.R. Civ. P. Rule 26(b). Generally, the facts known to and the opinions held by an expert are discoverable as well as the materials the expert relied upon in coming to his or her opinion. See id. at Rule 26(b)(4), 26(b)(1). If [the expert's] opinions are based upon any information supplied to him by counsel that information is discoverable and Plaintiff is required to make disclosures of that information."

There are no cases cited in the Court's Order, but Defendant's Brief contains references to a number of cases on the issue of discovery of communications between attorneys and their expert witnesses.

The earlier post on this case, Azalea Garden Board & Care v. Vanhoy, involved an issue of discoverability of settlement agreements.