Outside Inhouse Lawyer Blog : New York & Seattle Corporate Dispute Lawyer & Attorney : Grace M. Healy : Outside counsel : King County, Tacoma, Bellevue

Last week the New York Law Journal featured two decisions regarding attorney-client and work product disputes in litigation between Gucci America and Guess?.

In the first decision, the protection of the attorney-client privilege was denied because Gucci’s in-house lawyer was not an active member of any bar – he only maintained inactive status in California.

Active bar membership is necessary for the benefit of the attorney client privilege. There is an exception to this rule where: the lawyer fraudulently held himself out to the client as an attorney; the clients genuinely and reasonably believe that the person is an attorney; and if, pursuant to this belief, the client made confidential communications to the person. Here, Gucci’s belief that the in-house counsel was a lawyer was unreasonable – it never tried to confirm the extent of the counsel’s qualifications.

This decision has implications for everyone: clients must take steps to confirm that their lawyers maintain active bar membership; litigators, in disputes where attorney client privilege is asserted, should confirm that the communications involved a licensed attorney as well as substance protected by the privilege. The information regarding bar status is usually available on-line.

The second decision involves work product privilege and choice of law issues between United States and Italian law. Gucci was instructed to revise its privilege log, and to meet and confer with opposing counsel before returning to the court for decision.
 

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Responding to discovery requests is expensive, but – in all likelihood -- will cost less than the $8,000,000 default judgment sanction that the Washington Supreme Court reinstated today in Magana v. Hyundai.

This decision is a must-cite for anyone moving for or opposing discovery sanctions. There is a two-judge dissent.

The case – which the court said involves “unique facts and circumstances” -- was commenced in 2000 and arises from an auto accident that took place in 1998. An  $8,000,000 jury verdict was set aside by the Court of Appeals in 2005. Upon remand, plaintiffs requested that defendant update discovery responses prepared in 2000. A motion to compel was filed about three months before the second trial was scheduled to begin.  Documents involving similar problems came to light.

The  trial court determined that the additional documents should have been produced long before the motion to compel. Defendant, apparently, had only reviewed law department files for complaint documents; there were others in defendant’s consumer affairs department. Plaintiffs argued that they were prejudiced in trial preparation; the court agreed, and the sanction was imposed because of false responses, spoliation and substantial prejudice to plaintiffs.

That is a gross simplification of the facts in the opinion.

The bottom line for businesses is: when responding to discovery requests, you must search outside your legal department for responsive documents. In addition, when you think that discovery requests are over-broad (not really a “unique fact or circumstance” in my experience) consider the pros and cons of moving for a protective order instead of simply objecting in your responses and waiting for a motion to compel.

The irony here is that defendant won the appeal of the $8,000,000 jury verdict but has now been assessed with the same judgment, plus an obligation to pay plaintiffs’ attorneys fees and expenses, and, just a guess, there are going to be some insurance issues. Of course, with the additional disclosures, plaintiffs probably think they could have done much better if they had time to get ready for a second trial. 

Whatever, it is crystal clear that Washington courts will not tolerate incomplete discovery responses.
 

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Many corporations have accident reporting policies which require their employees to draw conclusions about the cause of an accident or whether it could have been avoided. The goal is improved safety, but the result is often heartburn for in-house counsel because documents prepared in the ordinary course of business generally must be produced in litigation. With the goal of improved safety, reports are often -- rightly or wrongly -- very self-critical.

Corporate counsel who hope to keep conclusions in confidence will often promptly hire outside counsel to assist in an accident investigation when litigation is anticipated.  They should be encouraged by last week’s decision of Magistrate Smith in Byrd v Wal-Mart Transportation, LLC, in the US District Court, Southern District of Georgia, which found the conclusions in a report were privileged even if the report was prepared pursuant to a corporate policy.

 Following a fatal truck accident, Wal-Mart’s in-house lawyers immediately hired outside local counsel because litigation was anticipated. Counsel was involved in the investigation of the accident. In the ordinary course of business, Wal-Mart has its safety personnel perform an investigation, which is then reviewed by a “Serious Accident Committee.” The committee issues an opinion as to whether the accident was “preventable” or “non-preventable.”

 During Wal-Mart’s corporate deposition plaintiff inquired about the conclusions of the Serious Accident Committee. Wal-Mart claimed privilege; plaintiff argued that the conclusions were reached in the ordinary course of business, rather than in anticipation of litigation, and had to be disclosed. The court granted Wal-Mart a protective order noting that this line of inquiry involved mental impressions that are privileged. Plaintiffs’ lawyers might take heart from a foot note that suggests that the deponent would have had to have been privy to counsel’s deliberations in order for the privilege to apply.

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Failure to fully respond to a non-party subpoena may now create a risk greater than sanctions in New York -- it might create tort liability.  In IDT Corporation v. Morgan Stanley Dean Witter & Co., the First Department has ruled that claims for fraudulent misrepresentation and fraudulent concealment may be based upon intentional spoliation of evidence.

The spoliation claim arises from defendant, Morgan Stanley’s purported failure to fully respond to a subpoena in an arbitration between two of its clients (Morgan Stanley was not a party to the arbitration).  Morgan Stanley had represented in writing that its production of approximately 2,000 pages of documents fully complied with the subpoena.

In this action, the remainder of which was dismissed by the Court of Appeals in March,  plaintiff asserts that it learned that only a small number of responsive documents had been produced by Morgan Stanley in response to the subpoena.  Allegedly, 500,000 pages were not produced, and the omitted documents included some “smoking guns” -- which would have resulted in an increased arbitration award if plaintiff had known of them at the time.

The trial court had dismissed the claims for fraud and fraudulent concealment because of an earlier Court of Appeals case, Ortega v. City of New York, which did not allow a claim of negligent spoliation against a third party.

The Appellate Division distinguished Ortega and ruled that claims for fraud and fraudulent concealment had been sufficiently alleged – a material misrepresentation of fact was made when Morgan Stanley represented that it had fully complied with the subpoena; the misrepresentation had been intentionally made to mislead plaintiff; that plaintiff had reasonably relied on the misrepresentation, and had suffered damages as a result (more would have been awarded in the arbitration).  Because plaintiff stated a claim under existing tort principles, there was no reason to dismiss it because it involved spoliation of evidence in an action in which the defendant was a non-party.   

There are a number of facts in this case that arguably present unusual (or, distinguishable) circumstances, including whether this is limited to third-parties who have fiduciary relationships with the other parties.   But, the fact is that this is one more reason to pay close attention to those non-party subpoenas.
 

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Two big lessons can be learned from an interesting decision by Magistrate Payson in Tailored Lighting, Inc. v. Osram Sylvania Products, Inc., decided last week in the US District Court for the Northern District Court of New York.  First, an in-house lawyer can anticipate a deposition notice if he or she verifies interrogatories, and second, make sure that the witnesses produced in response to a Rule 30(b)(6) notice of deposition can answer all questions asked.

As for the in-house counsel's deposition, the opinion discusses the factors that should be present before a lawyer will be deposed, and, after deciding that the deposition should go forward, states that the questions are to be limited to:

(1) identifying the information provided to and relied upon by [the in-house lawyer], whether through communications with individuals or review of documents, in answering the interrogatories; (2) identifying the particular source (person or record) of that information; (3) non-privileged communications between [the in-house counsel] and his human sources about that information that occurred in the course of investigating and answering the interrogatories.

In other words, there is a good chance – as anyone who has ever attended a deposition knows – that there will be a lot of going back and forth about privilege with threats to call the judge the day that the deposition takes place. It seems easier to have someone outside of the legal department sign the verification.

Second, the decision addresses the scope of Rule 30(b)(6) witnesses – and orders that two of the identified witnesses to be re-deposed to answer certain questions that they could not answer in their initial testimony. 

In no way am I critical of the parties in this case because I know from experience that you pretty much have to be in a case to understand the how and why that litigation unfolds, and when I unsuccessfully looked for a free copy of this opinion on-line, I could see that this case has been a siege for the parties. 

But, I see literally dozens of articles each week about concern regarding outside counsel fees in these days of financial sturm und drang.  Avoiding motions to compel by anticipating arguments like those made on this motion seems like a good way to go.




 

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A recent opinion of Judge Pechman of the Western District of Washington in Aecon Buildings, Inc. v. Zurich North America, illustrates the importance of good in-house litigation management, complying with discovery, and supplying a detailed privilege log on time.  Defendant appears to have failed on all counts and the result is that defendant must pay into the court the amount that it was billed by its attorneys from the time its initial disclosures were filed through the date that defendant produced a relevant file – a period of more than eight months – as a discovery sanction.

The underlying case set forth a claim of bad faith refusal to defend and indemnify by a plaintiff who had been named as an additional insured on a policy.  At the time the insurance claim initially was tendered, it was rejected by an adjuster and the file was closed.  About one year later, and one month after the suit was started, a second adjuster reviewed the claim and noted that coverage had been triggered.  That adjuster was instructed not to continue work on the claim, and was not named in defendant’s initial disclosures as an individual who might have discoverable information. The second adjuster’s work came to light when her deposition was noted – she had signed declarations authenticating documents.  It seems that no one could state with certainty who ordered the second review, or why it was performed.

The court stated that defendant’s “failure to include in its responses to requests for production any documentation of [the second adjuster’s] work on the claim file, and its failure to produce, until the eleventh hour, a privilege log documenting those portions of the claim file attributable to her that it withheld on the basis of privilege, are clear violations of the discovery rules.”  That is a summary – the details run to almost eight pages.

This decision is must reading for anyone who believes that work done on a matter after a lawsuit has been started is privileged. 

 

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Historically, and I stress “historically,” New York State Court orders compelling discovery were not received with great concern.  In fact, it usually took three of them before there were serious consequences.  Things have been changing, and, if you doubt it, read Wilson v. Galicia Construction & Restoration Corp.,  which was decided by the Court of Appeals in April.   The court has spoken: discovery orders must be obeyed. The decision upholds a judgment of $700,000 against a defendant whose answer was stricken as a sanction for resisting discovery, even though the defendant had what appeared to be a strong fraud defense against the claim.  

Wilson was a personal injury claim.  Plaintiff alleged that he was injured by an object that fell from a scaffold into his eye.  The company that erected the scaffold and multiple others were named as defendants.  The scaffold company resisted discovery, and the trial court issued an order directing that discovery requests were due by a date certain or the scaffold company’s answer would be automatically stricken.  The answer was stricken.  

One month later, in response to a discovery request from another party, plaintiff produced the object that injured his eye.  It was an air-gun pellet that, apparently, had been fired into plaintiff's eye, rather than falling from the scaffold.  In other words, the facts supporting liability in the complaint were incorrect.  All of the defendants, except for the scaffold company, were dismissed. 

Over the next few years, the scaffold company tried to vacate the order striking its answer for several reasons.  It argued “justifiable excuse” without success.  It argued that the underlying claim should be dismissed because it was fraudulent.  This failed on the grounds that the sanction was a result of the scaffold company’s own behavior, not the plaintiff’s.

In the Court of Appeals, the scaffold company also argued that plaintiff had not satisfied the statutory requirements for proof after a default.  The court ruled that the argument was not preserved and did not reach it – and noted the unfairness to plaintiff if the court did rule in the scaffold company's favor. Two judges dissented on the grounds that evidence of fraud by plaintiff was compelling and it was an abuse of discretion for the trial court not to address it in order to preserve the integrity of the judicial system.

Seven hundred thousand dollars is a huge sanction. One might be tempted to argue that the court of appeals thought that resisting discovery was a strategic decision that should be punished.  Or, that the court might have ruled otherwise if the argument was preserved.  Or, that the dissent is correct.  No matter.  Powerful message delivered by the court.  The days of delay are over, and ignoring the message can be very expensive.  The $700,000 judgment represents a reduction of the trial court's award of  more than $1,000,000.

 

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A few weeks ago I listened to a continuing legal education presentation focused on taking depositions.  One of the presenters said that one reason for taking a deposition was to cause pain in order to possibly leverage a settlement.  Frankly, I was amazed.  Who would ever admit that there was any purpose for a deposition outside of trying to discover information that could lead to the discovery of admissible evidence? 

In any event, it raised the issue of the problems facing counsel when the deposition of a senior manager must go forward – and you strongly suspect that the primary purpose of the deposition is to make that manager look unprepared, unaware, unkind, unfeeling, unsophisticated and/or unintelligent; in other words, the purpose of the deposition is to leverage a settlement, or to make a jury intensely dislike your client. 

This type of deposition is a different experience for the witness and defense counsel.  Generally, the witness is used to being in charge and has very little time, or inclination, to prepare for the deposition experience.  The witness may have had limited involvement with the underlying facts.  Both inside and outside counsel may have perspectives that differ from the normal discovery deposition.  Outside counsel may want to build a relationship with senior management to keep the client and broaden the relationship.  Inside counsel may want to build a relationship with management and keep her job.

A good beginning for the witness’s preparation is a column by George Anders that was published in the Wall Street Journal on July 26, 2005. information and suggestions provided by non-lawyers and uninvolved lawyers who point out that a deposition is not a standard business situation and requires a different mind-set. Ideally, a copy of the column would be given to the witness before the preparation session.  For testifying, Mr. Andros suggests that a senior manager be advised to keep four key guidelines in mind.  1.) Keep answers brief and tightly focused and avoid the temptation to expand beyond what is asked. 2.) Prepare diligently beforehand. 3.) Stay calm and truthful. 4.) Understand your strategy well enough so that you don’t undermine your value as a witness if the case goes to trial. 

Obviously, given the concerns of in-house and outside counsel, teamwork is critical; however, both counsel should be prepared for surprises in how the other deals with the preparation and defense.

Because of the potential for a far ranging examination -- no matter how limited the time for preparation, or a court order limiting the scope of the exam -- a difficult, far ranging preparatory exam should be given so that the manager has some idea of what he may be up against in advance.  At best, if the deposition goes well, the litigation team will be seen as well prepared and extremely capable.  If it goes poorly, well, there are no guarantees in litigation.  In any event, make sure someone discreetly suggests that the witness dress appropriately for the deposition.

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