January 2014 - 2013 Ethics Year in Review
by Members of the Orange County Bar Association Professionalism & Ethics Committee
The OCBA’s Professionalism & Ethics Committee authors the Ethically Speaking column and ethics opinions regarding topics of interest to OCBA members. This year, as in past years, Committee members collectively selected for your attention the following ethics-related cases and opinions that highlight many important and diverse developments from 2013. We begin this year in review with several decisions regarding the attorney-client privilege. We then summarize two State Bar ethics opinions from the Committee on Professional Responsibility and Conduct (COPRAC) concerning inadvertent disclosure and refunds of advance fees. Next, we turn our focus to two significant decisions on demand letters. Finally, we spotlight decisions about conflicts of interest and contact with corporate constituents in the class action context. While at times the law of ethics follows somewhat predictably from common sense, we find it sometimes surprises and invite you to refresh your familiarity with the nuances described below. As always, the Committee continues to invite ethics-related inquiries from OCBA members.
Attorney-Client Privilege in the Insurance Context
In Trabakoolas v. Watts Water Technologies, Inc., 2013 U.S. Dist. LEXIS 53224 (N.D. Cal. Apr. 12, 2013), a toilet part allegedly manufactured by the defendants failed, damaging the plaintiffs’ homes. Plaintiffs’ insurer paid claims for water damage and then investigated whether to pursue subrogation claims against the defendants. During the investigation, the insurer’s attorney called the plaintiffs regarding the water damage. The plaintiffs testified that, before the call, they had no interest in pursuing any legal claims against the defendants. They later became named plaintiffs in a products liability class action filed by a different law firm.
The court held that the attorney-client privilege did not cover communications during the plaintiffs’ call with the insurer’s lawyer because the plaintiffs were not “clients” at that time. The court rejected an argument that a “blanket privilege arises because the communications arose within the tripartite” relationship between an insurer, its attorney, and an insured. Id. at 11. In the typical insurance context, the court noted, the insurer and insured have a “common interest in defeating or settling [a] third party’s claim.” Id. But here, no such interest was present. Rather, the purported clients testified that, when the insurer’s attorney called them, they were not interested in making a legal claim. Thus, they were not “clients” for privilege purposes because they “had neither a purpose for retaining a lawyer, nor is there any indication that they intended to secure legal services or advice during the phone call.” Id. at 16.
In Melendrez v. Superior Court, 215 Cal. App. 4th 1343 (2013), the court addressed control over the attorney-client privilege of a bankrupt corporation. In its Chapter 11 reorganization plan, SECO was reduced to a shell entity whose sole purpose was to forward asbestos injury claims to its insurers. While being defended in such claims by appointed insurance defense counsel, the company had no remaining shareholders, officers, or directors.
SECO’s attorneys served unverified discovery responses because there was no officer to verify them. They declined to sign verifications because to do so would constitute a limited waiver of privilege under California Civil Procedure Code section 2030.050, and the attorneys claimed they had no authority to waive privilege. In denying a motion to deem the unverified request for admissions responses admitted, the trial court instead ordered that SECO’s responses be “deemed” verified.
The court of appeal granted a petition for writ of mandate. It held that only the client is the holder of the attorney-client privilege, and the attorney may not waive it without client authority. With a corporate client, that authority rests with the officers and directors. Where the corporation has none and is truly no longer in existence, the control over waiver of the privilege passes to those persons authorized to act on its behalf—in this case, its insurers.
Attorney-Client Privilege Waiver
In Citizens for Ceres v. Superior Court, 217 Cal. App. 4th 889 (2013), the city conducted an environmental review of, and ultimately approved, the construction of a shopping center including a Walmart store. The group Citizens for Ceres (“challengers”) issued a challenge under the California Environmental Quality Act (CEQA), which obligated the city to provide an administrative record. The city produced a record that contained none of the communications between the city and the developer (all of which were made between legal counsel) either before or after the city reviewed and approved the project. The city refused to produce these documents, claiming they were all protected by the attorney-client privilege and/or the attorney work-product doctrine.
The trial court upheld the privilege claim, finding that once the attorney-client relationship was established, the burden was entirely upon the challengers to show that the privilege was inapplicable. The challengers petitioned the court of appeals for writ relief. First, the appellate court rejected the challengers’ assertion that CEQA section 21167.6(e) was intended to abrogate all evidentiary privileges including the attorney-client privilege. Second, the court found that any attorney-client privilege was waived as to communications between the developer and the city before the city approved the project. At that point, the parties’ had divergent interests and there could be no common interest privilege protection, so the city was required to disclose pre-approval communications. The court found no waiver, however, of the attorney-client privileged communications between the city and the developer after the city approved the project, holding those were protected by the common interest doctrine.
In Theranos, Inc. v. Fuisz Tech., Ltd., No. C-11-5236, 2013 WL 2153276 (N.D. Cal. May 16, 2013), the court held that a party’s disclosure of attorney-client communications waived the attorney-client privilege not only for the specific communications disclosed, but also for all attorney-client communications concerning the same subject matter, under Federal Rule of Evidence 502(a).
Fuisz Technologies, in an effort to stave off litigation regarding alleged misappropriation of Theranos’s proprietary information, sent Theranos a sheaf of emails between it and its patent attorney, purporting to show that the allegedly purloined information was not used in preparing or prosecuting Fuisz’s patent application. The effort proved unsuccessful, and Theranos sued Fuisz.
In response to a document request, Fuisz submitted the emails it had voluntarily disclosed to Theranos, acknowledging the privilege waiver as to those documents. Fuisz, however, withheld previously undisclosed attorney-client communications relating to the prosecution of the patent application, asserting that the waiver did not extend to those undisclosed communications.
In granting Theranos’ motion to compel, the court relied on Rule 502(a), which provides that an intentional waiver extends to undisclosed communications only if “the disclosed and undisclosed communications ... concern the same subject matter; and ... they ought in fairness to be considered together.” Id. at 1. The court readily found that the undisclosed communications related to the same subject matter as the voluntarily disclosed emails. Observing that the party asserting the privilege has the burden of showing that it has not been waived, the court found that Fuisz had not met its burden. The court concluded that allowing Fuisz to produce (and possibly rely on) only those communications that supported its case, while withholding possibly damaging communications, would permit it to “employ the favorable communications as a sword, while guarding possibly damaging emails with the shield of the privilege,” thereby creating “an unfair prejudice to Theranos.” Id. at 4.
Conflict of Interest and Ethical Screen
In Nextdoor.com, Inc. v. Abhyanker, 2013 WL 3802526 (N.D. Cal. July 19, 2013), the court considered ethical screening in the context of a former client conflict. The plaintiff sought a judicial declaration that its Nextdoor.com domain name did not infringe defendant’s trademark rights. The defendant counterclaimed, alleging misappropriation of trade secrets relating to implementation of the Nextdoor.com website. The plaintiff’s law firm in the litigation previously had represented the defendant in other matters, and the defendant moved to disqualify the plaintiff’s firm.
The court denied the motion, finding that the law firm’s files and billing records established that the law firm had represented the defendant only in connection with forming the defendant’s corporation. This work was not substantially related to the litigation and therefore did not warrant disqualification. The defendant alleged that the law firm had represented him in connection with additional matters, including matters directly related to the trade secrets involved in the counterclaims. The court, however, did not credit this allegation because it was unsupported by the documentary evidence. In addition, the law firm implemented an ethical screen around all attorneys who actually or allegedly had performed any work for the defendant in the past. The court found that this screen alleviated any concern that the defendant’s former attorneys would provide confidential information to the plaintiff’s attorneys.
State Bar Formal Opinion No. 2013-188 concluded that, even when it appears that the crime-fraud exception to the attorney-client privilege may apply to an inadvertently disclosed confidential communication, an attorney’s ethical duty is to (1) read no more than necessary to ascertain that the communication is confidential and sent without consent of its owner, and (2) notify opposing counsel as soon as possible that the attorney has possession of the communication.
Rico v. Mitsubishi Motors Corp., 42 Cal. 4th 807 (2007), and State Comp. Ins. Fund v. WPS, Inc., 70 Cal. App. 4th 644 (1999), outlined the ethical obligations of an attorney when he receives materials that “obviously appear” to be privileged or “otherwise clearly appear to be confidential and privileged” and “it is reasonably apparent that the materials were inadvertently disseminated.” The State Bar Opinion is premised on a hypothetical in which a third party sender tells the receiving attorney that “the attached document is a confidential communication between Company and your opposing counsel,” that is, a communication that clearly appears to be confidential and privileged, which is described as proving that the opposing party has committed a fraud. The Formal Opinion concludes that an attorney’s duties not to read the confidential document, and to notify opposing counsel as soon as possible of the inadvertent disclosure, are not excused by the attorney’s belief that the crime-fraud exception under Evidence Code section 956 likely applies. Because the burden is on the party claiming the crime-fraud exception applies, and the burden cannot be met with the use of privileged information like the inadvertently disclosed document (even in camera review of privileged information is prohibited), the attorney would need to use non-privileged information to meet his burden. Thus, the attorney cannot ethically read the document even though he suspects that the crime-fraud exception applies. Instead he must stop, and notify opposing counsel.
Refund of Advanced Fees
State Bar of California Formal Opinion No. 2013-187 considered the issue of who is entitled to the refund of remaining advanced fees at the end of a case where fees were paid by a non-client. The hypothetical involved a parent who paid legal fees to an attorney to represent his adult child (i.e., the client) in the child’s marriage dissolution proceeding. Both the parent and child had legal services agreements with the lawyer, but neither writing addressed the issue of return of funds upon termination or withdrawal, and both the parent and the child made competing claims for return of the remaining funds on account. The duty to the client under Rule 4-100(B)(4) to “promptly pay or deliver, as requested by the client, any funds ... in the possession of the member which the client is entitled to receive” raises the question of whether the client is entitled to receive the money. Id. at 2. The same committee, in State Bar Formal Opinion 2008-175, concluded that rule 4-100(B)(4), although it refers to the duty to deliver funds to the client, also includes the duty to deliver funds to a third party who is entitled to receive them. After looking at bar opinions from other jurisdictions, the ABA Model Rules, and the definitions of the words used, the committee concluded that the matter should be analyzed and handled like a third-party lien, concluding that the attorney must return the balance to the payor (here, the parent) who was the source of the funds, unless the agreement specifies otherwise. The opinion also suggested the lawyer could file an interpleader as a safer alternative to paying the third party over the client’s objection.
Anti-SLAPP Motions and Pre-Litigation Demand Letters
In 2013, two opinions from the Second District Court of Appeal addressed the question: How far is too far when writing pre-litigation demand letters? In Mendoza v. Hamzeh, 215 Cal. App. 4th 799 (2013), an attorney sent a letter to the adverse party’s attorney demanding cooperation and repayment of damages and making the threat, “If your client does not agree to cooperate with our investigation and provide us with a repayment of such damages caused, we will be forced to proceed with filing a legal action against him, as well as reporting him to the California Attorney General, the Los Angeles District Attorney, the Internal Revenue Service regarding tax fraud, the Better Business Bureau, as well as to customers and vendors with whom he may be perpetrating the same fraud upon [sic].” Id. at 802. The adverse party filed an action against the attorney for civil extortion and other torts. The defendant attorney’s anti-SLAPP motion under Civil Procedure Code section 425.16 was denied by the trial court and this was affirmed on appeal by the Second District Court of Appeal. The Mendoza court held that the demand letter was not subject to the anti-SLAPP statute because the threats made, coupled with a demand for money (here an unspecified sum exceeding $75,000), constituted criminal extortion as a matter of law under the rationale of the Supreme Court opinion in Flatley v. Mauro, 39 Cal. 4th 299, 305 (2006).
In Malin v. Singer, 217 Cal. App. 4th 1283 (2013), the court addressed a similar issue involving a demand letter written by attorney Martin Singer (labeled the “Guard Dog to the Stars (Legally Speaking)” by the New York Times, May 21, 2011), accusing the recipient of, among other things, misappropriating company assets. The letter also allegedly accused the recipient of using company resources to facilitate sexual liaisons with male partners, and included a photograph of one such alleged sexual partner (a retired superior court judge). The demand letter attached a copy of a draft complaint, apparently leaving blank spaces in the portions dealing with the sexual partners, and promised that when filed “there will be no blanks in the pleading.” Malin, 217 Cal. App. 4th at 1289. The recipient sued the lawyer for extortion based on the demand letter, but also alleged computer hacking and wiretapping. The lawyer filed an anti-SLAPP motion. The trial court denied the anti-SLAPP motion, reasoning that the allegations of sexual misconduct were “very tangential” to the causes of action alleged in the complaint and therefore constituted criminal extortion as a matter of law. Id. at 1292.
The court of appeal reversed, emphasizing that “Singer’s demand letter did not expressly threaten to disclose Malin’s alleged wrongdoings to a prosecuting agency or the public at large.” Further, the alleged misconduct was “inextricably tied” to the pending complaint and, “[t]here is no doubt the demand letter could have appropriately noted that the filing of the complaint would disclose Malin had spent stolen monies on a car or a villa, if that had been the case. The fact that the funds were allegedly used for a more provocative purpose does not make the threatened disclosure of that purpose during litigation extortion.” Id. at 1299. Thus, the court found the communication fell within the anti-SLAPP motion and also was protected by the litigation privilege in Civil Code section 47(b). The wiretapping and computer hacking allegations, however, were outside the scope of the anti-SLAPP statute.
Corporate Counsel’s Contact With Constituents
Quezada v. Schneider Logistics Transloading and Distrib., 2013 WL 1296761 (C.D. Cal. Mar. 25, 2013), considered the propriety of pre-certification communications between a defendant-employer’s attorneys and potential employee class members. The proceeding arose from 106 declarations solicited by the employer’s attorneys from potential employee class members during interviews held shortly after the underlying suit was filed. The plaintiff-employees sought court orders barring the employer’s anticipated use of these declarations and preventing the employer from engaging in additional communications with potential class members absent the court’s permission.
While pre-certification communications between a class action defendant and prospective class members generally are permissible, a limitation exists where they are “misleading, coercive, or improper.” Id. at 4. In making this determination, the court considered: “(1) the details underlying the lawsuit, (2) the nature and purpose of the communications, and (3) the fact that any defense attorneys conducting the communications represent the employer and not the employee.” Id. The court also recognized that any violation of California Rule of Professional Conduct 3-600, which prohibits misleading corporate constituents, weighs in favor of finding improper communications.
Based on these factors, the court found the underlying communications both misleading and coercive. The court found the communications deceptive because the employees were never informed of the true nature and purpose of the interviews or of the document that they were asked to sign at the conclusion of the interviews. They were told that the meetings were simply part of an “internal investigation,” when, in reality, the interviews were adversarial in nature, focusing on the conduct alleged in the complaint and the employer’s defense. Id. at 5. The court further found that the employer’s failure to disclose the true purpose of the interviews violated Rule 3-600. The court also found that the interviews were coercive given the involuntary nature of the employees’ participation and the pressure employees felt to sign the declarations.
Holding for the plaintiff-employees, the court struck the declarations and ordered that the employer cease any and all communications with its employees regarding the lawsuit (without first obtaining the court’s permission).