No. 01-2373 MlV
November 6, 2003
ORDER DENYING PLAINTIFF'S MOTION TO COMPEL DEPOSITION TESTIMONY
Before the court is the October 14, 2003 motion of the plaintiff, Medtronic Sofamor Danek, Inc. ("Medtronic"), to compel the defendant, Gary Karlin Michelson, M.D. to answer questions propounded during his deposition regarding the identity of the parties funding the current litigation and information related to any fee agreements. Medtronic seeks an expedited ruling on its motion. The motion was referred to the United States Magistrate Judge for determination. For the reasons that follow, the motion is denied.
On August 6, 2003, Michelson was deposed by Medtronic. During the deposition, Michelson's attorney instructed Michelson not to answer questions pertaining to the funding of this litigation or any fee agreements on the grounds that such information is irrelevant to the current lawsuit and is also protected by the attorney-client privilege, Michelson's deposition is set to resume on Tuesday, November 4, 2003, and Wednesday, November 5, 2003.
The pivotal question is whether the identity of the parties funding the litigation ("the fee-payers") and any fee arrangements are relevant to the issues in this lawsuit. In general, "a party may obtain discovery regarding any matter, not privileged, that is relevant to the claim or defense of any party." FED. R. CIV. P. 26(b)(1). As the court has noted many times, once an objection to the relevance of information sought is raised, the burden shifts to the party seeking the information to demonstrate that the requests are relevant to the subject matter involved in the pending action. Here, Michelson has asserted that the deposition questions relating to the fee-payers and the fee arrangements in the instant litigation do not seek relevant information and are merely another attempt by Medtronic to pry into Michelson's personal finances.
Medtronic asserts the information is relevant to test the veracity of Michelson's statement under oath that competitors of Michelson are not funding Michelson's litigation. This information, Medtronic insists, is, in turn, relevant to determining if Michelson is in violation of the anti-competition clauses in his agreements with Medtronic. Medtronic avers that Michelson's deposition testimony in this regard is inconsistent with an earlier statement he made on May 8, 2001, in a telephone conversation secretly recorded by Medtronic that "I have companies who are willing to pay me $200 million outright for the technology if I can deliver it to them. And they'll fund the lawsuit."
One of the issues in this case is whether Michelson has competed with Medtronic. In its complaint, Medtronic alleges that Michelson and KTI have threatened to offer, and have represented that they offered, to other parties the technology owned by or licensed to Medtronic. (Am. Compl. at ¶¶ 2, 21, 31.) The complaint alleges that the December 31, 1993 License Agreement between KTI and Medtronic contains a covenant-not-to compete clause which prohibits KTI from competing either directly or indirectly with Medtronic with respect to the medical devices that are the subject of the agreement, (Am. Comp. at ¶ 20), and that the January 11, 1994 Purchase Agreement between Medtronic and Michelson has a similar clause, (Am. Comp. at ¶ 30). Based on the representations of Michelson and the non-compete clauses, Medtronic seeks in the complaint an injunction prohibiting Michelson and KTI from licensing or assigning to others the technology which it claims it is entitled to under the agreements.
Medtronic's position that the information is necessary to resolve conflicting statements by Michelson is without merit. Michelson's statements in regard to other companies funding this litigation are not conflicting. His statement in the secretly recorded conversation before the lawsuit was commenced was that other companies would be willing to fund a lawsuit. He testified unequivocally under oath that Medtronic's competitors are not funding the lawsuit and that he never asked them to do so. These statements are not inconsistent, and the court sees no reason to allow Medtronic discovery of personal financial information of Michelson and KTI based on Medtronic's speculation that its competitors may be funding Michelson. In addition, this information could easily be obtained by deposing competitors.
Medtronic also asserts that the information concerning the identity of fee-payers and the structure of fee arrangements is relevant to determining the nature of the relationship between Michelson and the defendant GKM Trust ("the Trust"), particularly whether Michelson exercises control or authority over the Trust. The Trust is a defendant in the declaratory judgment action brought by Medtronic, which has been consolidated with this case. The Trust case arises out of Michelson and the Trust's attempts to collect on a convertible note provided by Medtronic. One of the issues in the Trust case, according to Medtronic, is whether Michelson exercises control or authority over the Trust. Medtronic insists that any agreement regarding payment of attorney fees between Michelson and the Trust would be probative of the degree of control Michelson exercises over the Trust.
In Leach v. Quality Health Services, Inc., 163 F.R.D. 499, 500 (E.D. Pa, 1995), a United States district court in Pennsylvania held that a law firm's billing records were relevant to prove control of the corporate defendants by the individual defendants. In their complaint, the plaintiffs had alleged that funds of the corporate defendants were used to pay the legal expenses of Hiser, one of the individual defendants. ( Id. at 500.)
The court finds this relevancy argument of Medtronic to be meritless under the facts of this case. Medtronic has failed to carry its burden to satisfy the court that control over the Trust is an issue in the Trust lawsuit. Rather, it appears that the issue is whether Medtronic's obligation to pay the convertible note is excused by an alleged breach of the Purchase Agreement by Michelson. Furthermore, it is not clear how a fee-splitting or fee-sharing arrangement or the payment of fees by the Trust would be indicative of Michelson's control over the Trust. The court presumes that the trustee of the Trust, whomever that may be, would have made the decision, if any, in regards to payment of legal fees. Accordingly, the court finds that the information is not relevant to the Trust action.
Even if the information were relevant, it is protected by the attorney-client privilege. The burden of establishing the existence of the attorney-client privilege rests with the party asserting the privilege. In re Grand Jury Investigation No. 83-2-35, 723 F.2d 447, 454(6th Cir. 1983). Because jurisdiction in this case is based on diversity of citizenship, state law supplies the rule of decision and the existence and limits of any testimonial privilege must be "determined in accordance with state law." Fed.R.Evid. 501.
The attorney-client privilege in Tennessee has been codified as follows:
No attorney, solicitor or counselor shall be permitted, in giving testimony against a client, or person who consulted the attorney, solicitor or counselor professionally, to disclose any communication made to the attorney, solicitor or counselor as such by such person, during the pendency of the suit, before or afterwards, to the person's injury.
Tenn. Code Ann. § 23-3-15 (1994). This statute is an embodiment of the common law principles of the privilege. See 21 Tenn. Juris. Privileged Communications § 3. The requirements for the privilege to apply have been stated by Tennessee courts as follows:
(1) the asserted holder of the privilege is or sought to become a client; (2) the person to whom the communication was made (a) is a member of the bar of a court, or his subordinate and (b) in connection with this communication is acting as a lawyer; (3) the communication relates to a fact of which the attorney was informed (a) by his client (b) without the presence of strangers (c) for the purpose of securing primarily either (i) an opinion on law or (ii) legal services or (iii) assistance in some legal proceeding, and not (d) for the purpose of committing a crime or tort; and (4) the privilege has been (a) claimed and (b) not waived by the client.Humpreys, Hucheson Moseley v. Donovan, 568 F. Supp. 161, 175 (M.D.TN. 1983) (construing the Tennessee statute).
Neither side, however, has cited any Tennessee cases dealing with the issue of whether a fee-payer's identity and fee arrangements with an attorney is protected by the attorney-client privilege. The court has not conducted any independent research and will therefore consider the relevant law from the Sixth Circuit and other federal courts of appeal cited by the parties.
In the absence of any clear Tennessee authority, it is the role of the federal court in diversity cases to consider all of the available legal sources in order to formulate a rule of decision. See Anderson Dev. Co. v. Travelers Indem. Co., 49 F.3d 1128, 1131 (6th Cir. 1995). The court takes no position as to whether there is clear Tennessee authority on point.
The Sixth Circuit has long recognized the general rule that "the identify of a client is, with limited exceptions, not within the protective ambit of the attorney-client privilege." In re Grand Jury Investigation, 723 F.2d at 451. This general rule applies equally to fee arrangements. "In the absence of special circumstances, the amount of money paid or owed to any attorney by his client is generally not within the attorney-client privilege. Id. (citing In re Michaelson, 511 F.2d 882, 888 (9th Cir. 1975)). The Sixth Circuit has held that "ministerial or clerical services of any attorney in transferring funds to or from a client is not a matter of confidence protected by the attorney-client privilege. United States v. Haddad, 527 F.2d 537, 538-539 (6th Cir. 1975) (citing United States v. Bartone, 400 F.2d 459 (6th Cir. 1968)). The reason that the receipt of fees from a client is not usually protected by the attorney-client privilege is because the payment of a fee is not normally a matter of a confidence. Id.
The Sixth Circuit, however, has recognized certain limited exceptions to the general rule that disclosure of the identity of a client is not within the protective ambit of the attorney-client privilege. In re Grand Jury Investigation, 723 F.2d at 452. One exception arises "where disclosure of the identity would be tantamount to disclosing an otherwise protected confidential communication." Id. at 453. Other circuits have recognized this exception as well. See, e.g., United States v. Jeffers, 531 F.2d 1001, 1115 (7th Cir. 1976) (holding "the privilege may be recognized where so much of the actual communication has already been disclosed [not necessarily by the attorney but by independent sources as well] that identification of the client [or of fees paid] amounts to disclosure of a confidential communication"); Baird v. Koerner, 279 F.2d 263 (9th Cir. 1960) (holding "if the identification of the client conveys information which ordinarily would be conceded to be part of the usual privileged communication between attorney and client, then the privilege should extend to such identification. . . ."). This exception turns on the link between a confidential communication and the fee arrangement itself.
Michelson insists that the legal fee arrangements in this case reflect confidential communications between the defendants and their mutual attorney and therefore falls within the narrow exception to the general rule of disclosure. In an affidavit submitted in opposition to Medtronic's motion to compel, Burton A. Mitchell, attorney for Michelson since 1979 and KTI since 1980, avows that the fee arrangements "made by Dr. Michelson and KTI for legal representation in this litigation reflect the legal advice rendered by me based on the confidential information communicated to me by Dr. Michelson and KTI." (Aff. of Burton A. Mitchell at ¶ 4.) Mitchell states in his affidavit that Michelson contacted him to obtain legal advice, both in his individual capacity and as Chairman of the Board of KTI, shortly after being served with the present lawsuit. ( Id. at ¶ 2.) Mitchell further states that Michelson communicated to him confidential factual information related to the issues in the lawsuit, and that based on these confidential communications, Mitchell provided legal advice to both Michelson and KTI, including advice on how to structure payment of legal fees. ( Id. at ¶¶ 3, 4.)
Both Michelson and KTI were named as defendants in the amended complaint filed by Medtronic. Some counts are solely against Michelson; others are directed only to KTI; and others are directed to both defendants jointly. Both defendants asserted counterclaims, some joint claims and other separate claims. It would be logical for these defendants to seek legal advice regarding joint representation and how the payment of fees should be structured. In addition, the Trust was named as a defendant in the consolidated action along with Michelson. The Trust too would be expected to seek legal advice on the proprietary of sharing joint counsel and on structuring the payment of its defense costs and of its legal fees for pursuing a counterclaim. Also, many factors may go into structuring or allocating legal fees among joint defendants, many of which may reflect confidential communications, such as the monetary exposure of each defendant, the chance of recovery for each party, the chance of success of each party, and the validity of claims and defenses.
Based on the affidavit of Mitchell and the other considerations set forth above, the court finds that the identity of the payer of legal fees in this litigation and the fee arrangement are inextricably intertwined with privileged communications between Michelson and Mitchell, and, as such, are protected by the attorney-client privilege.
Therefore, Medtronic's motion to compel is denied.
IT IS SO ORDERED.