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94 Civ. 5587 (PKL) (RLE)
January 3, 2003
LEHMAN GIKOW, P.C., New York, New York, David H. Gikow, Esq., Arthur R. Lehman, Esq., Attorneys for Plaintiffs
JAFFE ASHER LLP, New York, New York, Gregory E. Galterio, Esq., Joan M. Perryman, Esq., Mark P. Monack, Esq., Attorneys for Defendants
OPINION AND ORDER
Plaintiffs RMED International, Inc. ("RMED") et al. bring this class action alleging violations of Section 10(b) of the Securities Exchange Act of 1934, Rule 10(b) promulgated thereunder, and common law fraud by defendant Sloan's Supermarkets, Inc. ("Sloan's") and John Catsimatidis. Plaintiffs allege that defendants failed to disclose material information and made material misstatements regarding an FTC investigation in connection with the acquisition of supermarkets in the metropolitan New York area. The trial in this matter is scheduled to commence on January 6, 2003. Plaintiffs now move pursuant to Rule 45 of the Federal Rules of Civil Procedure for an order compelling the production of certain documents subpoenaed by plaintiffs. For the reasons set forth below, plaintiffs' motion is granted.
BACKGROUND
The factual and procedural background of this case is explained in detail in RMED Int'l. Inc. v. Sloan's Supermarkets. Inc., 185 F. Supp.2d 389 (S.D.N.Y. 2002), familiarity with which is assumed. For purposes of this motion, it is only necessary to add a few additional facts.
Plaintiffs served defendants with a request for production on June 5, 1995. Defendants served their response in May 1996 and provided a privilege log on June 25, 1997. Plaintiffs' attorney claims that he made numerous demands that defendants produce a privilege log between May 1996 and June 1997. Defendants contest this claim.
Plaintiffs provided these dates and defendants have given no indication that they are inaccurate. At first glance, the length of time between the request and the initial response seems problematic. However, in light of the various adjournments of both parties' time to respond to discovery requests and the contemporaneous motion practice, the delay is not an issue.
When defendants did produce a privilege log, plaintiffs did not contest the timeliness. However, on January 7, 1998, plaintiffs' counsel, Arthur R. Lehman, Esq., sent a letter to defendants' former counsel in this matter, Jonathan Honig, Esq., taking the position that defendants had waived any privilege by producing the log in an untimely fashion. In the January 7, 1998 letter, Mr. Lehman also contended that there was not a valid basis for which to assert the attorney-client privilege for various reasons. After the exchange of several letters addressing these issues, the parties met with Magistrate Judge Ronald L. Ellis, to whom the case was referred for discovery. On June 12, 1998, Judge Ellis ordered defendants to produce a revised privilege log by June 18, 1998. Defendants complied with that Order.
On May 18, 2000, the Court signed a Stipulation and Order substituting the Jaffe Asher law firm as attorney of record for defendant Catsimatidis. On March 21, 2001, Jaffe Asher was substituted as attorney of record for defendant Sloan's.
The parties dispute whether Judge Ellis decided the question of waiver. The Order does not indicate whether it was intended to resolve the waiver issue. Because the Court today finds plaintiffs' waiver argument unavailing, the lack of clarity in the June 12, 1998 Order is not a problem.
Apparently, the parties did not concern themselves with the privilege issue again until four years later when plaintiffs brought an in limine motion requesting that this Court order defendants to produce the documents on the privilege log in response to a subpoena to be served by plaintiffs. On December 3, 2002, the Court denied the motion on procedural grounds.
The December 3, 2002 Order did not address the merits of the motion and expressly stated that it did not preclude later consideration of a motion to enforce a subpoena requesting the documents on the privilege log.
Plaintiffs served three subpoenas, each dated December 13, 2002, on Sloan's; the law firm of Wolf, Block, Schorr Solis-Cohen, LLP and Martin Bring, Esq., an attorney that represented Sloan's in connection with the FTC investigation. Each of the subpoenas requested the same seven types of documents. Plaintiffs have subpoenaed all of the documents on defendants' privilege log, Sloan's law firm's billing records for work done on various matters from August 1, 1991 until June 2, 1994, the revised draft of a proposed consent agreement between the FTC and Red Apple, the July 2, 1992 letter agreement between Sloan's Supermarkets, Inc. and Supermarket Acquisition Corp., and all drafts of Sloan's Form 10KSB for the fiscal year ended February 27, 1994. Defendants and the subpoenaed non-parties responded to the subpoenas with objections dated December 24, 2002.
Wolf, Block, Schorr Solis-Cohen, LLP represented defendants in this matter before the substitution of counsel.
Defendants and the subpoenaed non-parties have not objected to this request and have stated that they will produce the documents.
The attorneys for the defendants are also representing the subpoenaed non-parties in this discovery dispute.
DISCUSION
A. Documents on Defendants' Privilege Log
The issues with respect to this request are the same issues that were briefed with respect to plaintiffs' in limine motion. Therefore, the parties have agreed to rely on their memoranda of law filed in connection with the previous motion. Because of this agreement, this motion was ready for disposition sooner than it otherwise would have been; and given the immediate proximity of trial, the Court appreciates counsels' cooperation.
Plaintiffs' request for the documents on the privilege log is the most substantial issue in this motion and, as such, requires the most discussion. The attorney-client privilege is the oldest of the confidential communication privileges. United States v. Bilzerian, 925 F.2d 1285, 1292 (2d Cir. 1991). It applies so that
"(1) [w]here legal advice of any kind is sought (2) from a professional legal advisor in his capacity as such, (3) the communications relating to that purpose, (4) made in confidence (5) by the client, (6) are at his instance permanently protected (7) from disclosure by himself or the legal advisor (8) except the protection be waived . . .In re Richard Roe, Inc., 68 F.3d 38, 39-40 (2d Cir. 1996) (quoting United States v. Kovel, 296 F.2d 918, 921 (2d Cir. 1961)). The purpose of the privilege is to "`encourage full and frank communication between attorneys and their clients.'" United States v. Zolin, 491 U.S. 554, 562 (1989) (quoting Upjohn Co. v. United States, 449 U.S. 383, 389 (1981)).
Several legal scholars have questioned whether the attorney-client privilege actually achieves this goal. See, e.g., Deborah L. Rhode,Institutionalizing Ethics, 44 Case W. Res. L. Rev. 665, 674 (1994); Harry I. Subin, The Lawyer as Superego: Disclosure of Client Confidences to Prevent Harm, 70 Iowa L. Rev. 1091, 1163-66 (1985).
While it serves an invaluable purpose, the attorney-client privilege "operates to obstruct access to otherwise discoverable evidence, contrary to the precept that `the public has a claim to every man's evidence.'" In re Bairnco Corp. Sec. Litig., 148 F.R.D. 91, 96 (S.D.N.Y. 1993) (quoting 8 Wigmore, Evidence § 2192 at 71 (McNaughten rev. ed. 1961)); Bowne of New York City, Inc. v. AmBase Corp., 150 F.R.D. 465, 473 (S.D.N.Y. 1993) ("[E]nforcement of a claim of privilege acts in derogation of the overriding goals of liberal discovery and adjudication of cases on their merits."). Therefore, it must be "strictly confined within the narrowest possible limits consistent with the logic of its principle." In re Horowitz, 482 F.2d 72, 81 (2d Cir. 1973) (Friendly, J.); see also Fisher v. United States, 425 U.S. 391, 403 (1976).
It is well settled that "`the burden is on a party claiming the protection of a privilege to establish those facts that are the essential elements of the privileged relationship.'" von Bulow v. von Bulow, 811 F.2d 136, 144 (2d Cir. 1987) (quoting In re Grand Jury Subpoena Dated Jan. 4, 1984, 750 F.2d 223, 224 (2d Cir. 1984)); United States v. Stern, 511 F.2d 1364, 1367 (2d Cir. 1975); Bowne, 150 F.R.D. at 470; Grossman v. Schwarz, 125 F.R.D. 376, 380 (S.D.N.Y. 1989). This burden must be met with an evidentiary showing based on competent evidence, Bowne, 150 F.R.D. at 70, and is not "discharged by mere conclusory or ipse dixit assertions, for any such rule would foreclose meaningful inquiry into the existence of the relationship, and any spurious claims could never be exposed." In re Bonanno, 344 F.2d 830, 833 (2d Cir. 1965).
With these principles in mind, the Court will now address the parties' various contentions regarding the applicability of the attorney-client privilege.
1. Waiver
As a threshold issue, plaintiffs contend that defendants have waived any right they may have had to assert the attorney-client privilege because of their belated production of the privilege log. Defendants respond that the log was served in a timely fashion and even if it was late, there has been no showing of prejudice.
Former Local Civil Rule 46 governs this waiver dispute. The rule states that all objections to a document request, including any privilege, must be stated "within the time provided by the Federal Rules of Civil Procedure, or any extensions thereof." Former Local Civil Rule 46(e)(1). Failure to object timely leads to a waiver of the objection.Id. Therefore, defendants should have supplied the privilege log in May 1996 when they responded to the document requests. Because the privilege log was withheld until June 25, 1997, defendants are in technical violation of Former Local Rule 46.
Former Local Civil Rule 46 was in effect until April 15, 1997, at which time it was replaced by Local Civil Rule 26.2. The substance of the two rules is essentially the same. Large v. Our Lady of Mercy Med. Ctr., No. 94 Civ. 5986, 1998 WL 65995, at *4 n. 2 (S.D.N.Y. Feb. 17, 1998).
It appears that two lines of cases have developed in this District with regards to untimely submissions of privilege logs. The first line has held that the rule should be strictly interpreted and any violation leads to a waiver of the privilege. See PKFinans Int'l Corp. v. IBJ Schroder Leasing Corp., No. 93 Civ. 5375, 1996 WL 525862, at *3-4 (S.D.N.Y. Sept. 17, 1996); Wilson v. New York City Housing Auth., No. 96 Civ. 1765, 1996 WL 524337, at *2 (S.D.N.Y. Sept. 16, 1996); Baron Philippe De Rothschild, S.A. v. Paramount Distillers, Inc., No. 87 Civ. 6829, 1995 WL 86476, at *1 (S.D.N.Y. Mar. 1, 1995); John Labatt Ltd. v. Molson Breweries, No. 93 CV 75004, 1995 WL 23603, at *1 (S.D.N.Y. Jan. 20, 1995); Smith v. Conway Org., Inc., 154 F.R.D. 73, 76 (S.D.N.Y. 1994);ATT v. New York City Human Res. Admin., No. 89 Civ. 4569, 1991 WL 79461, at *4 (S.D.N.Y. May 6, 1991); Bank v. Mfrs. Hanover Trust Co., No. 89 Civ. 2946, 1990 WL 155591, at *2 (S.D.N.Y. Oct. 9, 1990). The second line is more forgiving and requires a showing of prejudice before finding waiver. See Strougo v. BEA Assocs., 199 F.R.D. 515, 522-23 (S.D.N.Y. 2001) (interpreting current Local Civil Rule 26.2); Hurst v. F.W. Woolworth Co., No. 95 Civ. 6584, 1997 WL 61051, at *4 (S.D.N.Y. Feb. 11, 1997); D 56, Inc. v. Zuckers Gifts, Inc., No. 95 Civ. 9327, 1996 WL 280797, at *1 (S.D.N.Y. May 24, 1996); In re In-Store Advertising Sec. Litig., 163 F.R.D. 452, 457 (S.D.N.Y. 1995) (Leisure, J.); AFP Imaging Corp. v. Pilips Medizin Sys., No. 92 Civ. 6211, 1993 WL 541194, at *3 (S.D.N.Y. Dec. 28, 1993).
The Second Circuit has noted that "the failure to comply with [former Local Civil Rule 46] may result in a finding that the privilege has been waived." Chase Manhattan Bank, N.A. v. Turner Newall, PLC, 964 F.2d 159, 166 (2d Cir. 1992).
Certainly it is true that the importance of the local rules "should not be diminished by skirting their application when the results prove harsh to a party." Carte Blanche (Singapore) PTE. Ltd. v. Diners Club Int'l, 130 F.R.D. 28, 32 (S.D.N.Y. 1990) (Leisure, J.). However, in light of the importance of the attorney-client privilege, the Court finds the second line of cases more convincing. Given this determination, the Court must now examine "the nature of the violation, its willfulness or cavalier disregard for the rule's requirements, and the harm which results to other parties." AFP Imaging, 1993 WL 541194, at *3. see also D 56, 1996 WL 280797, at *1. None of these factors militates towards waiver.
The most important factor in this particular case is harm to other parties, or, more specifically, the lack thereof. RMED has supplied no convincing evidence of prejudice and indeed its actions belie any such claim. Plaintiffs first raised this issue over six months after the production of the privilege log. After a few months of skirmishes between the parties regarding the privilege claims, plaintiffs then waited four years to bring the issue to this Court. Now, on the eve of trial, it seeks these documents. The Court is confident that if plaintiffs faced any real prejudice from defendants' delay, it would have brought the issue to the Court's attention sooner than four years after it arose. Therefore, the Court finds defendants have not waived their right to assert the attorney client privilege.
2. Fiduciary Exception
Plaintiffs next argue that the fiduciary exception to the attorney-client privilege applies to this case and therefore defendants are barred from asserting the privilege against their own shareholders. Defendants contend the exception is inapplicable to the instant action.
The fiduciary exception to the attorney-client privilege was first enunciated by the Fifth Circuit in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970). In that case, the court began by noting that "management does not manage for itself," and, as such, "management judgment must stand on its merits, not behind an iron clad veil of secrecy which under all circumstances preserves it from being questioned by those for whom it is, at least in part, exercised." Id. at 1101. In light of these principles, the Firth Circuit stated that:
where the corporation is in suit against its stockholders on charges of acting inimically to stockholder interests, protection of those interests as well as those of the corporation and of the public require that the availability of the privilege be subject to the right of the stockholders to show cause why it should not be invoked in the particular instance.Id. at 1103-04. While the Second Circuit has never expressly adopted or applied Garner, numerous courts in this District have. See, e.g., In re Pfizer Inc. Sec. Litig., No. 90 Civ. 1260, 1993 WL 561125, at *11-14 (S.D.N.Y. Dec. 23, 1993); In re IBM Corp. Sec. Litig., No. 92 Civ. 9076, 1993 WL 760214 (S.D.N.Y. Nov. 30, 1993); Bairnco, 148 F.R.D. at 97-99;Quintel Corp., N.V. v. Citibank, N.A., 567 F. Supp. 1357, 1360-64 (S.D.N.Y 1983). Therefore, the Court is confident that the Garner rationale is alive and well in this Circuit.
The Court has found no cases in the Southern District of New York that have rejected the Garner rationale. Furthermore, in the only Second Circuit case that has cited Garner, the Court appears to assume that there is a fiduciary exception. See In re Dow Corning Corp., 261 F.3d 280, 286 (2d Cir. 2001) ("[T]he district court did not explicitly address, and we are unable to determine on this record, whether other grounds may exist for disclosure of the communications, for instance, waiver or the application of the shareholder `good cause' exception to the attorney-client privilege announced in [Garner].").
The rationale of Garner is applicable to the instant case. RMED has charged that Sloan's acted against the interests of the stock purchasers. However, this is only the beginning of the analysis. The Court must now determine if plaintiffs have shown good cause to pierce the attorney-client privilege. The Fifth Circuit provided a number of considerations that might be relevant in this determination:
While the Ninth Circuit has limited Garner to shareholder derivative suits, the Fifth and Sixth Circuits have disagreed. See Ward v. Succession of Freeman, 854 F.2d 780, 786 (5th Cir. 1988); Fausek v. White, 965 F.2d 126, 130-31 (6th Cir. 1992). Several courts have appliedGarner to 10(b) cases. See, e.g., Ward, 854 F.2d at 786; Pfizer, 1993 WL 561125; IBM, 1993 WL 760214; Bairnco, 148 F.R.D. at 97-99. However, many of these same courts have noted that this information is relevant in the determination of good cause. See, e.g., Ward, 854 F.2d at 786; IBM, 1993 WL 760214, at *3.
[1] the number of shareholders and the percentage of stock they represent; [2] the bona fides of the shareholders; [3] the nature of the shareholders' claim and whether it is obviously colorable; [4] the apparent necessity or desirability of the shareholders having the information and the availability of it from other sources; [5] whether, if the shareholders' claim is of wrongful action by the corporation, it is of action criminal, or illegal but not criminal, or of doubtful legality; [6] whether the communication related to past or to prospective actions; [7] whether the communication is of advice concerning the litigation itself; [8] the extent to which the communication is identified versus the extent to which the shareholders are blindly fishing; [9] the risk of revelation of trade secrets or other information in whose confidentiality the corporation has an interest for independent reasons.Garner, 430 F.2d at 1104. The Court will discuss these factors seriatim.
Plaintiffs have indicated that the class contains nearly 1000 members. They have not indicated what percentage of stock these members either own now or previously owned. While the number of class members is substantial, not knowing the percentage of stock that they own diminishes the weight the Court can give this factor.
The bona fides of the shareholders point towards upholding the privilege claim because this is a class action seeking monetary compensation for the plaintiffs and is not a derivative action. See Ward, 854 F.2d at 786; IBM, 1993 WL 760214, at *3; supra note 13.
The plaintiffs' claim is colorable, having survived a motion to dismiss and a summary judgment motion. See Pfizer, 1993 WL 561125, at *13 (stating that plaintiffs' claim is colorable because it survived a motion to dismiss); Bairnco, 148 F.R.D. at 99 (same).
The apparent necessity of the information and its availability from other sources is considered the most important factor and is stressed by courts when undertaking the Garner analysis. IBM, 1993 WL 760214, at *5;see also In re Kidder Peabody Sec. Litig., 168 F.R.D. 459, 475 (S.D.N.Y. 1996); Miller v. Genesco, No. 93 Civ. 0096, 1994 WL 698287, at *1 (S.D.N.Y. Dec. 13, 1994). Plaintiffs have successfully shown necessity in this matter. The facts of this case are analogous to a 1993 case in this District before the Honorable William C. Conner. In In re Bairnco Corp. Sec. Litig., plaintiffs brought a class action alleging that the defendant made material misrepresentations about the effect numerous asbestos lawsuits would have on its financial position. Bairnco, 148 F.R.D. at 94. Judge Conner ruled that "[i]nformation given to [defendant] by its counsel concerning [defendant's] asbestos liability should be highly revealing as to the veracity and sufficiency of [defendant's] public disclosures concerning its economic exposure and, perhaps more important, particularly probative of [defendant's] good or bad faith in making such disclosures." Id. at 96. The same can be said in the present matter. The opinion of Sloan's attorneys regarding the FTC investigation is highly relevant to the determination of falsity, materiality and scienter. Defendants argue that because they are not relying on an advice of counsel defense, these communications are not only unnecessary but are also irrelevant. Their irrelevancy argument is plainly wrong. As to their unnecessary argument, they point to no case law that requires an advice of counsel defense in order to find need. Plaintiffs' demonstration of need is based on the nature of the claims and the facts underlying them. The defenses that defendants may or may not have interposed do not bear on this decision. Additionally, the information does not appear to be available from sources other than the privileged documents.
In Ward, the Fifth Circuit cautioned against "assuming that having a scienter element as part of one's burden of proof is a sufficient showing of apparent necessity." Ward, 854 F.2d at 786. The Court agrees with the Fifth Circuit that a necessity to show scienter does not equate to a necessity to pierce the privilege. However, in this case, the Court is not simply finding necessity based on the need to prove scienter.
The remaining factors listed in Garner can be dealt with summarily. The documents relate to past actions. The communications do not concern this litigation. The request identifies specific documents, those on the privilege log, and is not a fishing expedition. There has been no issue raised about trade secrets or other need for confidentiality (other than the attorney-client privilege, of course). Each of these factors militates towards piercing the attorney-client privilege.
The Court has omitted a discussion of the fifth factor because there is no need to determine the legality of defendants' actions at this time. Regardless of how the Court would have answered that question, it would not have changed the decision to find the fiduciary exception applicable in this matter.
The Court finds that the majority of the factors relevant to the determination of good cause, including the most important factor, indicate that the fiduciary exception to the attorney-client should apply in this matter. Therefore, the Court grants plaintiffs' motion to compel production of the documents listed in the privilege log.
RMED has put forth several other reasons why the documents are not privileged, some of which appear to have some merit. For example, given the descriptions of some of the documents on the privilege log, it is quite likely that the Court would have at least directed an in camera review. However, the Court need not address these contentions because the plaintiffs are entitled to the documents under Garner.
B. Other Subpoenaed Documents
Plaintiffs have also subpoenaed the revised draft of a proposed consent agreement between the FTC and Red Apple, the July 2, 1992 letter agreement between Sloan's Supermarkets, Inc. and Supermarket Acquisition Corp., and all drafts of Sloan's Form 10KSB for the fiscal year ended February 27, 1994. Defendants do not contest the relevancy of the documents. They contend that the motion to compel should be denied because of plaintiffs' delay in requesting them. However, defendants have stated that, "to the extent that it will not unduly interfere with trial preparation," they will attempt to locate and produce the documents. Plaintiffs have offered no explanation for its belated request.
Plaintiffs state that the documents were requested during discovery. However, RMED makes this claim without any substantiation such as pointing to a specific discovery request.
While somewhat hesitant to sanction plaintiffs' delay in requesting the documents, the Court directs defendants to comply with the subpoena. Plaintiffs have requested very few documents. Cf. U.S. v. IBM Corp., 83 F.R.D. 97 (S.D.N.Y. 1979) (ordering litigant to comply with a subpoena that litigant estimated required production of over five billion documents in the midst of trial). Furthermore, the production of these few documents should not hamper defendants' preparation for trial. Therefore, defendants must produce the subpoenaed documents.
There is little doubt that the actual search for these documents will be conducted by defendants' employees and will not substantially affect trial counsel. Indeed, the Court wonders if defendants' attorneys may have spent more time opposing this motion then they would have directing a search for the documents.
CONCLUSION
For the foregoing reasons, plaintiffs' motion to compel compliance with the three subpoenas dated December 13, 2002, is hereby GRANTED. Defendants shall produce the documents on the privilege log immediately and the remaining documents must be produced within a reasonable time.
The Court has previously directed the defendants to have the privilege log documents available so that production could be immediate if this motion was granted. However, the Court did not make the same request regarding the remaining documents. Therefore, defendants must be given a reasonable time to locate the other documents. However, the defendants are strongly cautioned that reasonableness will be interpreted in light of the fact that the trial is commencing within three days from the date of this Opinion and the Court will not tolerate dilatory tactics.