Ashley Robinson Article: “Don’t Fumble Privilege – Tips And Recent Case Law To Guard Privilege” Featured in the ABA Fidelity & Surety Newsletter

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D’Arcy Vicknair Special Counsel, Ashley Robinson, authored an article, “Don’t Fumble Privilege – Tips and Recent Case Law to Guard Privilege” that was recently featured in the American Bar Assocaition’s Fidelity & Surety Newsletter.

 

Protecting privilege is part of every attorney’s playbook.  Surety professionals, however, need to be aware of the players involved, the types of privileges that need to be guarded, and how to protect them.   The lines of privilege are often blurred in the field of surety claims by the surety’s obligations to its principal, the surety’s duty to investigate claims, the ever-present potential for litigation to arise out of a claim, and the layers of counsel involved in a variety of roles.

The precepts of privilege are simple. Attorney-client privilege encourages clients to make full disclosure to their attorneys but limits the protection of that disclosure to only the information necessary to obtain informed legal advice.[1]  The work product doctrine “is intended to preserve a zone of privacy in which a lawyer can prepare and develop legal theories and strategy with an eye toward litigation, free from unnecessary intrusion by his adversaries.”[2]  The work product doctrine is broader than the attorney client privilege and extends beyond confidential communications between the attorney and client to “any document prepared in anticipation of litigation by or for any attorney.”[3]

Of course, these privileges are muddled in surety claims by investigations performed by attorneys and decisions resulting from the investigation that are both legal and business in nature.  The surety privilege issues are further mired by the fact that few courts have addressed suretyship privilege and most that do rely on the factually similar insurance cases to provide guidance even while admitting that “[S]uretyship is not insurance.”[4]

While there is no perfect playbook to address every potential situation and case law is not consistent in all jurisdictions, there are guidelines surety professionals can follow.  First, before the surety even receives a claim, it needs to have a plan for protecting privileged communication and documents because the burden of establishing that the information or document is privileged will be on the surety asserting the privilege.  All personnel involved in the claims process need to understand two basic concepts:

  • Privilege protection is limited.
  • Privilege can be waived.

1.     Privilege Protection is Limited

Attorney client privilege extends only to communication for the purpose of obtaining or conveying legal advice, not to the facts conveyed.[5]  While there is no question that legal advice sought from an attorney is protected, questions arise when an attorney conducts an investigation into the claim.  The mere involvement of an attorney, whether in-house or outside counsel does not create “a blanket obstruction to discovery of its claims investigation”[6] When determining whether privilege will apply, courts will consider “whether the attorney functioned as a mere conduit, claims adjustor or claim investigator, or rather, whether the attorney functioned in the attorney’s professional capacity in dispensing legal advice.”[7] “If ‘the attorney functioned as a mere conduit, claims adjustor or claim investigator,’ then attorney-client privilege does not attach to protect the communication.”[8].

Factual information gathered during an attorney’s investigation of an incident is discoverable, even if the information became known solely through the attorney’s efforts.[9]   “‘[C]ommunications related to the claims handling functions (such as investigation, gathering and summarizing information, and valuation of the claim) are ordinary business activities of the insurance company typically handled by an adjuster or investigator and thus are not entitled to attorney client privilege[,]’ but ‘communications related to the actual provision of legal advice are still protected by the attorney-client privilege’”[10]   This analysis and conclusion has been applied to surety investigations.[11]

Challenges arise when communications from counsel serve the dual purposes of both ordinary business activities and conveying legal advice. While ideally counsel and sureties would abstain from dual-purpose communication, the reality is that the lines between legal and business advice are not clear and the two are often combined.  This is especially true because in-house lawyers perform both legal and business functions.

There is a split in the federal appellate courts on the proper test to determine privilege protection for dual-purpose communications. The Ninth Circuit applies the “primary purpose test,” wherein privilege will apply if the primary purpose of the communication was to seek legal advice.[12] The District of Columbia on the other hand applies the “significant purpose test” under which communication will be privileged if “one of the significant purposes” of the communication is to obtain legal advice.[13]  The significant purpose test is the least restrictive of the two tests. Lastly, the Seventh Circuit held that dual-purpose communications involving business/tax advice and legal advice are never privileged.

Recently, the United States Supreme Court was poised to resolve the split, but after receiving many amicus briefs on the issues and hearing oral argument, the Supreme Court allowed the split to continue and dismissed the writ as “improvidently granted.”[14]

Based on the Supreme Court’s failure to address the circuit split, sureties should make an effort to preserve privilege by:

  1. Separating communication on legal advice from business advice.
  1. Complying with the stricter test and ensure that the “primary purpose” of each communication to and from its counsel is legal advice.
  1. Labeling privileged communication from the outset as “confidential and privileged.”
  1. As early in the claims process as possible, establishing the date when the surety reasonably anticipates litigation over the claim, to trigger the work product privilege.  A decision to deny the claim or a threat of litigation by the claimant would be determinative, but the date can be pushed earlier if properly documented.

2.     Unguarded Privilege Can Be Waived

The privileges granted to attorney-client communications and work product are limited and should be strongly guarded because the privilege can be easily waived.  Given our technological advances, it is easier than ever for electronically stored privileged communications and work product to fall into unintended hands.  Party’s have a duty to take reasonable measures to ensure and maintain the privilege.[15]

     a.     Waiver of privilege by disclosure

Generally, the attorney-client privilege is waived if it is voluntarily disclosed to third parties.[16] Voluntary waiver occurs when it is purposefully disclosed to third parties or produced in litigation.

What if the disclosure is inadvertent? Federal courts have determined that the disclosure of privileged documents does not operate as a waiver 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 notifying the other side and following Federal Rule of Civil Procedure 26(b)(5)(B), if applicable.[17]  Under this three part analysis, courts will consider whether the disclosure was truly inadvertent or if the disclosing party simply failed to the review the documents for privileged communication before they were disclosed.  An additional consideration in electronic disclosures is whether the disclosing party failed to reasonably test the reliability of the keyword searches by appropriate sampling of the documents before production.[18]

Another exception to the general rule of waiver is the “common interest doctrine” or “joint defense privilege.” While these terms are often used interchangeably, some jurisdictions have distinguished them.[19]  Under the common interest doctrine or joint defense privilege, disclosure of privileged communications to a party who shares a common legal interest does not waive the privilege.[20]   The common legal interest doctrine or joint defense privilege merely extends the privilege to communications with parties with a common legal interest.[21] The doctrine of common legal interest is narrowly construed and does not extended to shared business interests.[22]

In the context of suretyship, the common interest doctrine or joint defense privilege can be assert between a surety and its principal.[23]   course, this can also be problematic “because ‘the surety and principal are at war and in alliance at the same time.’”[24] While the common interest doctrine applies to some communications between the surety and its principal, it does not provide a blanket protection over all communication.[25] The common interest privilege is limited to communication regarding their aligned interest made in anticipation of litigation.[26] Thus, if the surety is working with the principal regarding investigation and defense of the claim but is also seeking collateral or indemnity, the communications regarding defense of the claim should be separate from the indemnity communications.

     b.     Waiver of one equals waiver of all

 Once a privileged attorney-client communication is revealed to a third party or otherwise waived, then the party waives privilege as to all communications on the same subject matter.[27]  This is why it is important to carefully guard privilege and restrict who receives the privileged communications.

This argument of waiver as to all communications on the same subject matter was recently addressed in a wrongful termination and subcontractor performance bond case, Cornerstone Pavers, LLC v. Zenith Tech., Inc.[28]  In Cornerstone, it was argued that a waiver occurred when an email sent by an employee of the general contractor was produced in discovery and included the line “[f]rom conversations below, . . .  I feel that at this point in the project that it would be unwise to kick [subcontractor] off and try to completely bring in someone new as there isn’t [sic] enough time.” The referenced “conversation below” had been redacted as privileged communication with the general contractor’s attorney.  The subcontractor sought to compel the production of the “conversation below” arguing that the disclosure of the reference to the conversation waived privilege as to all communications on the same subject matter.  The court disagreed, finding that a statement that a communication occurred is not a disclosure of that privileged communication.

While the decision in Cornerstone correctly held that the disclosure of the email was not a disclosure of the privileged communication, it is an example of the potentially snowball effect of disclosing even a portion of privileged communication in discovery.

     c.     Waiver of privilege by failing to provide a privilege log

The consequence for failing to timely produce a detailed privilege log may be severe including waiver of the privilege.  Courts consider several factors in determining if privilege has been waived including: (i) the length of the delay in asserting the privilege, (ii) the willfulness of the transgression, and (iii) the harm to the other parties caused by the delay.[29]  However, the length of the delay alone can result in a waiver.[30]  Similarly, a waiver can occur when the privilege log is deficient in describing the privilege.[31]  This is because broad or conclusory assertions of privilege are not sufficient.[32]

The reasoning behind waiver of privilege for failure to timely produce a privilege log is in the Federal Rules of Civil Procedure, which require that: “a party withholding otherwise discoverable information by claiming privilege must: (i) expressly make the claim; and (ii) describe the nature of the documents, communications, or tangible things not produced or disclosed–and do so in a manner that, without revealing information itself privileged or protected, will enable other parties to assess the claim.”[33]  The Ninth Circuit details that a privilege log should include “(a) the attorney and client involved, (b) the nature of the document, (c) all persons or entities shown on the document to have received or sent the document, (d) all persons or entities known to have been furnished the document or informed of its substance, and (e) the date the document was generated, prepared, or dated.”[34] Other courts have issued local rules to codify information that must be contained in a privilege log.[35]

Based on the level of detail required in some privilege logs, it is worthwhile to start preparing the privilege log from the moment the claim is made and at the very least include:

  1. The date of the document;
  2. The names of the sender and receiver, including the attorney involved;
  3. A brief description of the document; and
  4. The nature of the privilege.

     d.     “At issue” waiver

Another way that waiver can occur is when the privileged communication is “at issue” in the litigation meaning that the privileged communication will be required to evaluate the validity of the claim or defense.[36] In the context of suretyship, the “at issue” waiver was raised in an indemnity action, W. Sur. Co. v. PASI of LA, Inc.,[37] by the indemnitors, in an attempt to compel the correspondence by and between the surety and its attorneys and consultants related to the settlement of bond claims.[38] The court found that the privilege had not been waived by the indemnity action because under the terms of the indemnity agreement the surety had complete discretion to settle the claim. Therefore communications about the settlement decision were not “at issue” to prove the indemnity case.[39]

Absent such a strong indemnity agreement, another court found that by seeking indemnity, the basis for the liability and the reasonableness of the settlement paid, including the mental impressions and analysis of counsel, were at issue and thus privileged communications were discoverable.[40]

Similarly, in a recent payment bond case, Travelers Cas. v. Bunting Graphics, Inc.,[41] the court considered whether privileged communications and work product should be disclosed when the indemnitors asserted claims of bad faith against a surety in paying claims, which the indemnitors asserted should have been paid at a lower value. The court noted that the indemnitors’ claim that payment should have been made at a lessor amount does not give the indemnitors “carte blanche into Travelers’ claims decision without some initial showing regarding whether the [claim] should have been paid for a lower value.” However, this holding left open the possibility of discovering privileged communications related to “claims decisions” if the indemnitors provided sufficient evidence that the claim should have been paid for a lower value.

Tips to Avoid Waiver

Based on the many ways that waiver of privilege can occur either voluntarily or inadvertently, here are some tips for preserving privilege:

  1. Limit who is copied on communication with attorneys and ensure that the recipients are not forwarding the communication.
  1. When communicating with the principal or principal’s counsel regarding the claim, label each communication “joint defense privileged” and request that they do the same, and keep all indemnity communications separate.
  1. When producing ESI, include counsels’ (in-house, outside counsel, and principal’s counsel) names and email addresses in the keyword search so as to flag all potentially privileged communications and test the reliability of the keyword searches by sampling the documents before production.
  1. Restrict access to electronically stored privileged communications and work product, including password protection and restricted sharing capabilities.
  1. Clearly mark and store privileged communications and work product outside of the general file material.
  1. Create the privilege log once a claim is made and diligently maintain it.
  1. During litigation, take reasonable steps to ensure that privileged communications are not inadvertently disclosed.

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[1]   Fisher v. United States, 425 U.S. 391, 403, 96 S.Ct. 1569, 1577, 48 L.Ed.2d 39, 51 (1976).

[2]   Schaeffler v. United States, 806 F.3d 34, 43 (2d Cir. 2015) (citing United States v. Adlman, 134 F.3d 1194, 1196 (2d Cir. 1998) (internal quotation marks omitted)).

[3]   Barnard v. Powell Valley Elec. Coop., 2021 U.S. Dist. LEXIS 249430, at *8-9 (E.D. Tenn. Mar. 5, 2021).

[4]   United States v. Dobco Inc., 2023 U.S. Dist. LEXIS 145926, at *6 (S.D.N.Y. Aug. 17, 2023) (citing Pearlman v. Reliance Ins. Co., 371 U.S. 132, 140 n.19, 83 S. Ct. 232, 9 L. Ed. 2d 190 (1962)).

[5]   Upjohn Co. v. U.S., 449 U.S. 383 (1981).

[6]   St. Paul Reinsurance Co. v. Commercial Fin. Corp., 197 F.R.D. 620, 633-34 (N.D. Iowa 2000) (internal citations omitted).

[7]   Rodriguez v. Progressive Select Ins. Co., 2023 U.S. Dist. LEXIS 148422, at *9 (M.D. Fla. June 2, 2023) (citing Ranger Constr. Indus. Inc. v. Allied World Nat’l Assur. Co., No. 17-81226-CIV, 2019 U.S. Dist. LEXIS 17603, 2019 WL 436555, at *6 (S.D. Fla. Feb. 4, 2019)).

[8]   Id.

[9]   Hello Farms Licensing MI LLC v. GR Vending MI, LLC, 2023 U.S. Dist. LEXIS 164647, at *10 (E.D. Mich. Sep. 15, 2023)(citing Askew v. City of Memphis, No. 14-cv-2080-STA-tmp, 2015 U.S. Dist. LEXIS 180889, 2015 WL 12030096, at *2 (W.D. Tenn. July 23, 2015)).

[10]   Appalachian Cmty. Fed. Credit Union v. Cumis Ins. Soc’y, Inc., 2022 U.S. Dist. LEXIS 244909, at *31-32 (E.D. Tenn. Apr. 25, 2022)(internal citations omitted).

[11]   Safeco Ins. Co. of Am. v. M.E.S., Inc., 2014 U.S. Dist. LEXIS 205355, at *37 (E.D.N.Y. Apr. 11, 2014).

[12]   In re Grand Jury, 23 F.4th 1088, 1094-95 (9th Cir. 2022).

[13]   In re Kellogg Brown & Root, Inc., 410 U.S. App. D.C. 382, 388, 756 F.3d 754, 760 (2014).

[14]   See In re Grand Jury, 598 U.S. 15, No. 21-1397 (2023).

[15]   Harleysville Ins. Co. v. Holding Funeral Home, Inc., 2017 U.S. Dist. LEXIS 162058, at *16 (W.D. Va. Oct. 2, 2017).

[16]   Monterey Bay Military Hous., LLC v. Ambac Assurance Corp., 2023 U.S. Dist. LEXIS 9646, at *22 (S.D.N.Y. Jan. 19, 2023).

[17]   See, e.g., Shields v. Boys Town Louisiana, Inc., No. 15-3243, 2016 U.S. Dist. LEXIS 190695 at *2 (E.D.La. May 24, 2016); Pilot v. Focused Retail Prop. I, LLC, 274 F.R.D. 212, 8-9 (N.D. Ill. 2011); Audubon Soc’y of Portland v. Zinke, No. 1:17-cv-00069-CL, 2018 U.S. Dist. LEXIS 53570 at *12-13 (D. Or. Mar. 27, 2018).

[18]   Felman Prod. v. Indus. Risk Insurers, No. 3:09-0481, 2010 U.S. Dist. LEXIS 74970, *10 (S.D. W. Va. July 23, 2010).

[19]   In re Sealed Case, 29 F.3d 715, 719 n.5 (D.C. Cir. 1994). This distinction is not addressed for purposes of this article.

[20]   Monterey Bay Military Hous., LLC v. Ambac Assurance Corp., 2023 U.S. Dist. LEXIS 9646, at *25-26 (S.D.N.Y. Jan. 19, 2023).

[21]   Tonti Mgmt. Co. v. Doggie, No. 19-13134, 2020 U.S. Dist. LEXIS 253052, at *10 (E.D. La. June 25, 2020)(quoting Power-One, Inc. v. Artesyn Tech., Inc., 2007 WL 1170733, at *2 n.2 (E.D. Tex. Apr. 18, 2007)).

[22]   Firefighters’ Ret. Sys. v. Citco Grp. Ltd., 2018 WL 2323424, *4 (M.D. La. May 22, 2018); Action Ink, Inc. v. Anheuser-Busch, Inc., 2012 WL 12990577, *2 (E.D. La. Dec. 19, 2012).

[23]   United States v.Dobco Inc., 2023 U.S. Dist. LEXIS 22891, at *4 (S.D.N.Y. Dec. 22, 2023).

[24]   Id. at *4 (citing Amy L. Fischer, The Attorney-Client/Work Product Privileges and Surety Investigative Information: Applying Old Rules to Turn New Tricks, 34 TORTS & INS. L.J. 1009, 1010 (1999)).

[25]   Id. 

[26]   Id. 

[27]   Barnard v. Powell Valley Elec. Coop., 2021 U.S. Dist. LEXIS 249430, at *8 (E.D. Tenn. Mar. 5, 2021) (Mooney ex rel. Mooney v. Wallace, No. 04-1190, 2006 WL 8434638, at *8 (W.D. Tenn. July 12, 2006) (quoting United States v. Skeddle, 989 F. Supp. 905, 908 (N.D. Ohio 1997)).

[28]   Cornerstone Pavers, LLC v. Zenith Tech., Inc  (In re Cornerstone Pavers, LLC), 2023 Bankr. LEXIS 2432, at *9 (Bankr. E.D. Wis. Sep. 28, 2023).

[29]   Huseby, LLC v. Bailey, 2021 U.S. Dist. LEXIS  141504, at *49 (D. Conn. July 29, 2021).

[30]   Id. (finding that waiver occurred when a privilege log was not provided for seven months after the discovery was issued). See also Monterey Bay Military Hous., LLC v. Ambac Assurance Corp., 2023 U.S. Dist. LEXIS 9646, at *50 (S.D.N.Y. Jan. 19, 2023) (finding the work product privilege waived when it had not been asserted in nine revised privilege logs over an extended period of time.) 

[31]   Allied World Ins. Co. v. Keating, 2022 U.S. Dist. LEXIS 31462, at *12-13 (D. Conn. Feb. 23, 2022) (noting that a single-row description of nearly 900 pages as emails, mediation statements and invoices, throughout various dates by various authors/creators and received by various recipients is  functionally equivalent to providing no privilege log at all.)

[32]   Preston Hollow Capital LLC v. Nuveen Asset Mgmt. LLC, 343 F.R.D. 460, 468-69 (S.D.N.Y. 2023).

[33]   GE v. APR Energy PLC, 2020 U.S. Dist. LEXIS 75658, at *1 (S.D.N.Y. Apr. 29, 2020) (citing Fed. R. Civ. P. 26(b)(5)(A)).

[34]   In re Google RTB Consumer Priv. Litig., 2023 U.S. Dist. LEXIS 40772, at *6-7 (N.D. Cal. Mar. 10, 2023) (citing In re Grand Jury Investigation, 974 F.2d 1068, 1071 (9th Cir. 1992)).

[35]   Allied World Ins. Co. v. Keating, 2022 U.S. Dist. LEXIS 31462, at *12-13 (D. Conn. Feb. 23, 2022).

[36]   Blackmon v. Bracken Constr. Co., 2020 U.S. Dist. LEXIS 190028, at *19 (M.D. La. Oct. 14, 2020).

[37]   2019 U.S. Dist. LEXIS 19710, at *6 (M.D. La. Feb. 7, 2019).

[38]   W. Sur. Co. v. PASI of LA, Inc., 2019 U.S. Dist. LEXIS 19710, at *6 (M.D. La. Feb. 7, 2019).

[39]   Id.

[40]   CONOCO INC. v. BOH Bros. Constr. CO., 191 F.R.D. 107, 111 (W.D. La. 1998).

[41]   2023 U.S. Dist. LEXIS 31369, at *3 (W.D. Pa. Feb. 22, 2023).