The common-law subject-matter waiver doctrine holds that, in certain circumstances, if a party discloses privileged information then it waives the attorney–client privilege as to undisclosed privileged information related to the same subject matter as the disclosed information. The doctrine’s consequences can be severe, as Baylor University and a Chattanooga school board learned when courts forced them to produce documents underlying internal investigations.
Federal Rule of Evidence 502(a) puts some structure around the subject-matter waiver doctrine in certain situations. The rule provides that, when a party discloses privileged information in a federal proceeding or to a federal agency, subject-matter waiver occurs only if (1) the disclosure was voluntary, (2) the undisclosed documents pertain to the same subject matter as the disclosed document, and (3) the disclosed and undisclosed documents “ought in fairness to be considered together.”
The rule is succinct and ostensibly straightforward, but how does it work in practice?
Judge Iain Johnston, always willing to tackle tough privilege issues, as you can see in his opinions on the self-critical analysis privilege and waiver of the psychotherapist–patient privilege for garden-variety emotional-damages claims, provided much-needed clarity on Rule 502’s application in McCullough v. Hanley, 2019 WL 3776962 (NDIL Aug. 12, 2019).
In sum, subject-matter waiver is dependent upon how one uses the disclosed privileged information. You may read the thoughtful opinion here.
Horribly Sad Situation
The Court recounted pieces of this “horribly sad” factual situation. In April 2012, an Illinois jury acquitted Jack D. McCullough, f/k/a John Tessier, of raping his sister decades earlier. But in September 2012, a jury convicted McCullough of the 1957 abduction and murder of 7-year-old Maria Ridulph.
After serving 5 years of a life sentence,
We know from the Vince Foster Supreme Court case that the attorney–client privilege survives an individual’s death. But does the privilege survive a corporation’s death by dissolution?
The Colorado Court of Appeals, in a matter of first impression, followed the “trending majority view” and held that the corporate attorney–client privilege expires when the corporation dissolves, has no ongoing dissolution proceedings, and no one with authority to invoke or waive the privilege remains. Affiniti Colo., LLC v. Kissinger & Fellman, P.C., 2019 WL 4309532 (Colo. Ct. App. Sept. 12, 2019). You may read the opinion here.
Opinion Letter or Inducement Letter?
A lawyer and his law firm, acting as outside general counsel for EAGLE-Net Alliance, made certain representations in an opinion letter to Affiniti Colorado, LLC. Based on this letter, Affiniti entered into a management agreement with EAGLE-Net and provided it with capital.
Affiniti sued EAGLE-Net claiming that its opinion-letter representations were inaccurate. EAGLE-Net’s Board of Directors dissolved the company and divested it of all assets. Shortly thereafter, EAGLE-Net ceased to exist.
Still looking for pockets of money, Affiniti sued the lawyer (Fellman) and his firm asserting a negligent-misrepresentation claim for the opinion-letter representations. Affiniti then sought communications between Fellman and EAGLE-Net, but the lawyer refused citing the attorney–client privilege.
Is It Dead?
The question for the appellate court was whether Colorado recognized a posthumous attorney–client privilege for corporate entities. Most states, including Colorado, have not decided this issue.
The court surveyed several federal district court decisions and found a “trending majority view” to reject a post-dissolution attorney–client privilege in situations where—
1. The corporate entity is dissolved;
2. There are no on-going post-dissolution proceedings; and
3. No one with authority to invoke or waive the corporation’s attorney–client privilege remains.
The Court noted that “[t]he key fact is whether the corporation is ‘dead’ as opposed to some other state, such as a windup phase, bankruptcy or liquidation, or having merged into or been acquired by a successor.”
Fellman noted that, under Colorado law, corporations can sue and be sued even after dissolution. But Fellman did “not develop the argument,” so the Court did not consider it.
Perhaps this is a future argument for a future dissolved corporation wanting to keep its privilege out of the grave.
Company’s Former Attorney and Ethical Obligations
Fellman asked the Court to adopt a “former general counsel” exception, effectively arguing that as a GC he had—and continues to hold—the authority to invoke the privilege. The Court rejected this argument with little analysis, perhaps because Fellman cited no authority in support.
The Court also rejected Fellman’s argument that Model Rule 1.6—which obligates lawyers to keep their clients’ information secret—required him to invoke the privilege. Noting that the rule gives way when another law or court order requires disclosure, the Court held that Fellman satisfied his Rule 1.6 obligation by seeking a protective order to oppose the discovery request.
If you want to the know the reason for the rule—rather than just the rule—then here goes.
In Swidler & Berlin v. United States, the Vince Foster case, SCOTUS applied a posthumous attorney–client privilege in the individual context, and the Colorado Supreme Court followed suit in Wesp v. Everson.
These courts reasoned that a posthumous privilege ensures that a person will provide full and frank communications to her lawyers, protects the person’s reputation, avoids civil liability, and avoids embarrassment and potential harm to her friends and family.
These considerations are either weak or non-existent in the corporate context. While a posthumous corporate privilege would encourage candid communications between a company’s current management and its lawyers, future managers can always waive the privilege, so that incentive is lessened.
Corporations, of course, have no friends or family that the exposure of privileged communications would embarrass or harm. And dissolved corporations have no reputation to protect.
The reasons justifying an individual’s posthumous privilege simply do not apply with anything close to equal force to a dissolved corporation and are outweighed by the truth-seeking goals of the justice system.
For further reading on similar issues, see these prior posts:
In many internal investigations, the first item on a lawyer’s checklist is to interview the employee making the complaint. After all, it is difficult to conduct a thorough investigation without knowing all aspects of the grievance.
But privilege and ethical issues may arise before the lawyer checks the first box. Does the attorney–client privilege protect the interview from discovery in subsequent litigation brought by the complainer? If the complainer informs company counsel that she has retained a lawyer, may the interview move forward within ethical guidelines?
An Ohio appellate court answered the former question and raised eyebrows at the latter. The court ruled that the privilege does not protect the interview from discovery, although the work-product doctrine protects the lawyer’s interview notes. And interviewing the complainer after learning she has counsel may implicate Model Rule 4.2. Smith v. The Technology House, Ltd., 2019 WL 2746868 (Ohio Ct. App. June 28, 2019). You may read the decision here.
By the Way, I have a Lawyer
While working at The Technology House in Northeast Ohio, Bud Gear allegedly approached employee Brandy Smith, asked her to “have sex in the back,” and told her she “had a nice ass.” On October 30, 2017, Brandy reported the alleged conduct to Nichole Gear, the HR Manager—and Bud’s daughter.
Nichole immediately retained counsel because, as she later said in a sworn declaration, she “believed that, given the nature of [Brandy’s] claims, … there was the prospect of litigation being filed.”
On Halloween morning, Technology House’s lawyer began his investigation, including interviewing Brandy. Brandy excused herself, contacted her lawyer, returned to the meeting, and informed the company’s lawyer that she was represented by counsel.
The interview continued for an hour, with a tape recorder running.
In a subsequent sexual-harassment lawsuit, Brandy moved to compel production of her recorded interview. Technology House objected, claiming that its lawyer conducted the investigation to provide it with legal advice, and the privilege covered his investigation interviews, including Brandy’s.
The court rejected this privilege assertion. Although Brandy was an employee at the time of her Halloween interview, Technology House knew before the interview began that Brandy could file suit. Moreover, she told the interviewing lawyer that she retained counsel. For these reasons, the Court found that—
Technology House could not reasonably expect that the substance of the interview would have the character of a confidential communication between an attorney and client which underlies the reason for the privilege.
The Court found that a “de facto adversarial relationship existed between the parties and, therefore, the substance of that interview falls outside the privilege.”
What about Work Product?
The Court recognized, however, that the work-product doctrine protected documents recording the lawyer’s assessment of the interview.
Model Rule 4.2 prohibits a lawyer from talking with an individual—about the subject of the representation—when he or she knows that person is represented by a lawyer. The exception is that an interview may proceed if the lawyer obtains consent from interviewee’s lawyer.
Although Brandy complained about it, the trial court apparently did not address whether continuing the interview after learning of the employee’s representation implicated this ethical rule. The appellate court likewise did not address the issue head-on, commenting only as follows:
We note a judge’s responsibility to perform the duties of the judicial office impartially, competently, and diligently, and, in particular Rule 2.15 of the Ohio Code of Judicial Conduct (“[a] judge having knowledge that a lawyer has committed a violation of the Ohio Rules of Professional Conduct that raises a question regarding the lawyer’s honesty, trustworthiness, or fitness as a lawyer in other aspects shall inform the appropriate authority”).
What does that mean? Is it an instruction to the trial judge? Is it a warning? Is it nothing?
Whatever the meaning, it is scary stuff, indeed.
In a first-impression legal issue that the Fourth Circuit certified to it, the South Carolina Supreme Court held that an insurer does not waive the attorney–client privilege in a bad-faith tort action by simply denying liability or affirmatively asserting that it acted in good faith.
But the Court also opined that at-issue waiver applies when the insurer expressly—or impliedly—relies on a legal evaluation to deny an insured’s claim. In re: Mt. Hawley Ins. Co., 829 S.E.2d 707 (S.C. 2019). You may read the opinion here.
Bad-Faith Claim and the Answer
Subjected to a construction-defect lawsuit, ContraVest Construction Co. (C3) filed a claim with its excess commercial carrier, Mount Hawley Insurance Company. Mt. Hawley denied the claim and C3, after settling the underlying lawsuit, filed a bad-faith tort action against Mt. Hawley for its claim denial.
Mt. Hawley filed an Answer, which you may read here, denying bad-faith liability. It did not affirmatively assert that it acted in good faith by relying on any legal evaluation.
C3 asked for Mt. Hawley’s claims files for all of C3’s claims under excess liability policies. Mt. Hawley refused to produce portions of the files protected by the attorney–client privilege.
C3 responded that Mt. Hawley placed the privileged communications at issue—and therefore waived the privilege—by denying that it acted in bad faith.
The District Court, adopting the Magistrate Judge’s R&R (available here), held that Mt. Hawley waived the privilege over claims-file materials by denying bad-faith liability in its Answer. Read the District Court’s opinion, 273 F. Supp. 3d 607 (D.S.C. 2017), here.
Mt. Hawley filed a petition for writ of mandamus to the Fourth Circuit and asked the federal appellate court to certify the question to the South Carolina Supreme Court. The Fourth Circuit, in an Order available here, certified this narrow question:
Does South Carolina law support application of the “at issue” exception to attorney–client privilege such that a party may waive the privilege by denying liability in its answer?
The Supreme Court reviewed three at-issue waiver approaches taken by various courts around the country.
First, a “substantial minority” of jurisdictions hold that, like the crime–fraud exception, the privilege does not apply to communications made in furtherance of a tort such as bad-faith claim denial. Under this rule, the entire pre-denial claims file is discoverable.
Second, some jurisdictions apply the privilege unless the insurer expressly relies upon privileged communications in defending a bad-faith claim. These jurisdictions, led by the Third Circuit’s opinion in Rhone-Poulenc Rorer, Inc. v. Home Indem. Co., 32 F.3d 851 (CA3 1994), reject any implied privilege waiver in this context.
Mt. Hawley argued strongly for the Rhone-Poulenc approach, claiming “the attorney–client privilege is under attack” at oral argument.
Third, other jurisdictions, led by the Arizona Supreme Court’s opinion in State Farm Mut. Auto. Ins. v. Lee, 13 P.3d 1169 (Ariz. 2000), and adopted by the Restatement (Third) of the Law Governing Lawyers, § 80, engage in a case-by-case analysis. Here, the insurer waives the privilege if it expressly or impliedly asserts that it based its denial decision on law and facts as informed by legal counsel.
The Supreme Court provided two answers to the Fourth Circuit’s single question.
First, the Court rejected the “untenable proposition” that an insurer waives the attorney–client privilege by merely denying liability in its Answer.
Second, the Court went further and adopted the Arizona and Restatement approach, holding that an insurer waives the privilege over claims-file materials if it based its claim denial on (1) a good-faith belief that the law supported the denial and (2) its subjective belief following a legal evaluation.
The Court added a requirement not found in Arizona or the Restatement: the plaintiff–insured must make a prima facie showing of bad faith.
The insurer won the specific battle, but did it lose the ultimate war? It seems clear that simply denying bad-faith conduct or asserting good-faith conduct, without something more, is insufficient to constitute privilege waiver.
The broader question, then, is what is the “something more.” Certainly waiver occurs when the insurer expressly relies upon legal advice to prove a good-faith denial, but Mt. Hawley’s lasting effect is the implied-waiver concept.
The Court attempted to limit its holding, noting that conferring with counsel and making coverage evaluations based on that advice does not waive the privilege.
Privilege waiver, rather, occurs when the insurer asserts that its claim denial was the result of a reasonable belief that the law permitted the decision and a subjective belief based on a legal evaluation.