Attorney-Client Privilege — Negligent Misrepresentation Claim Does Not Place “at Issue” Advice of Plaintiff’s Counsel, Which Is Relevant on the Issue of Plaintiff’s Reasonable Reliance

From Morande Auto. Group, Inc. v. Metropolitan Group, Inc., 2009 U.S. Dist. LEXIS 19804 (D. Conn. Mar. 12, 2009):

According to Morande's Fourth Amended Complaint, Morande contracted with the General American defendants for services relating to the implementation of an Employee Stock Ownership Plan ("ESOP"). Although the General American defendants made representations to Morande that requisite manufacturer approval to establish the ESOP was easily obtainable, they were ultimately unable to obtain that necessary approval. Morande also alleges that the General American defendants misrepresented the content and results of a "repurchase liability study" upon which Morande relied when deciding how to structure the proposed ESOP.

***

Morande's pending motion to quash concerns the deposition of Carl Andros, which was noticed by the General American defendants. Morande retained Andros as part of his attempts to create and implement an ESOP. The record indicates that Andros worked with banks and other entities to effectuate the ESOP and also that he counseled Morande regarding the ESOP-creation process. The General American defendants have asserted that they noticed Andros's deposition in search of evidence in support of their argument that, in light of advice and information Andros communicated to Morande, Morande could not have reasonably relied on the General American defendants' alleged misrepresentations. Morande moves to quash the Andros deposition, arguing that communications between Andros and Morande are protected by the attorney-client privilege.

***

As a general matter, "[c]ourts have found waiver by implication when a client testifies concerning portions of the attorney-client communication, . . . when a client places the attorney-client relationship directly at issue, . . . and when a client asserts reliance on an attorney's advice as an element of a claim or defense. . . ." Sedco Int'l S.A. v. Cory, 683 F.2d 1201, 1206 (8th Cir. 1982). For instance, a client's reliance on an attorney's advice as an element of a claim or defense, such as the assertion of a good faith defense to fraud or negligent misrepresentation charges, places otherwise privileged attorney-client communications at issue and implicitly waives the privilege. Because a fact finder would be unable to evaluate the merits of the good faith defense without evidence of what legal advice the defendant relied on — a jury could not evaluate the defense without the protected information — the privilege must give way. When that individual asserts his good faith defense, he squarely places at issue otherwise protected legal advice, and affirmatively waives the attorney-client privilege.

Here, the General American defendants argue that, by virtue of the plaintiffs' negligent misrepresentation claims, Morande has placed at issue the communications between Morande and Andros and has, accordingly, implicitly waived the protections of the attorney-client privilege. Under Connecticut law, Morande must prove reasonable reliance on the General American defendants' alleged misrepresentations to prove its claims…. Information and advice that Andros communicated to Morande is relevant to the question of whether Morande's reliance on General American's alleged misrepresentations was reasonable. In other words, if Andros warned Morande that manufacturer approval of the proposed ESOP would be difficult or impossible to obtain, despite the General American defendants' representations to the contrary, a jury could find that Morande's reliance on those representations was unreasonable in light of Andros's warnings. The question that Morande's motion to quash raises, then, is whether Morande's negligent misrepresentation claims implicitly waive the attorney-client privilege with regard to communications between Andros and Morande because those communications are relevant to the claims.

Until the Second Circuit recently addressed the scope of the "at issue," or "implied," waiver of the attorney-client privilege in Erie, the contours of that waiver were unclear. Prior to Erie, the Court of Appeals had primarily cited Hearn v. Rhay, 68 F.R.D. 574 (E.D. Wash. 1975), which imposed a three-pronged test to determine whether a party implicitly waived the attorney-client privilege because he placed otherwise privileged communications at issue. A court applying the Hearn test would find implicit waiver when "(1) assertion of the privilege was a result of some affirmative act, such as filing suit, by the asserting party; (2) through this affirmative act, the asserting party put the protected information at issue by making it relevant to the case; and (3) application of the privilege would have denied the opposing party access to information vital to his defense." Hearn, 68 F.R.D. at 581. ***

Applied broadly, Hearn implicates waiver of attorney-client privilege any time that privileged communications are relevant to a claim at issue. "Hearn is problematic insofar as there are very few instances in which the Hearn factors, taken at face value, do not apply and, therefore, a large majority of claims of privilege would be subject to waiver." Pereira v. United Jersey Bank, 1997 WL 773716, at *3 (S.D.N.Y. Dec. 11, 1997). Accordingly, in Erie, the Second Circuit recognized that "[c]ourts in our Circuit and others have criticized Hearn and have applied its tests unevenly" and clarified "the scope of the at-issue waiver and the circumstances under which it should be applied." Erie, 546 F.3d at 227-28.

The Erie decision states that: "According to Hearn, an assertion of privilege by one who pleads a claim or affirmative defense 'puts the protected information at issue by making it relevant to the case.' But privileged information may be in some sense relevant in any lawsuit . . . . We hold that a party must rely on privileged advice from his counsel to make his claim or defense." *** This reasoning is consistent with the reasons, discussed above, that the attorney-client privilege should only be found waived in narrow circumstances, as well as with past Second Circuit decisions applying Hearn.

***Here, Morande's negligent misrepresentation claims do not depend on Morande's reliance on privileged advice from Andros. Morande must prove reliance on the defendants' alleged misrepresentations. Although privileged communications between Andros and Morande are relevant to the negligent misrepresentation question, Morande's reliance on Andros's counsel is not a question upon which the negligent misrepresentation claims depend. "There must be 'some showing by the party arguing for a waiver that the opposing party relies on the privileged communication as a claim or defense or as an element of a claim or defense.'" Weiss v. National Westiminister Bank, PLC, 2008 WL 5115027, at *2 (E.D.N.Y. Dec. 3, 2008) (quoting Erie, 546 F.2d at 228).

Although it would be helpful for the General American defendants to know what advice Andros gave Morande, because it would be relevant to whether Morande reasonably relied on the General American defendants' representations, Morande has not placed that advice at issue. When the plaintiffs asserted negligent misrepresentation claims against the General American defendants, they raised the question of Morande's reliance on the General American defendants, not the question of Morande's reliance on Andros's advice. Knowing Andros's advice would ostensibly make the General American defendants' defense case an easier one, but that advice is neither integral to nor necessary for the resolution of Morande's negligent misrepresentation claims.

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