Commercial Litigation and Arbitration

Implied Waiver of the Attorney-Client Privilege — Assertion of Good Faith Defense and Mention of Consultation with Counsel

From Henry v. Quicken Loans, Inc., 2008 U.S. Dist. LEXIS 112025 (E.D. Mich. Dec. 24, 2008):

Magistrate Judge Pepe did *** find that statements by the defendants in their Good Faith Motion provided what he called the "plus factor" that pushed the defendants' assertions into an area of implied waiver. Specifically, in their Good Faith Motion, the defendants, when describing Mr. Carroll's efforts to classify Quicken's mortgage brokers, stated that Mr. Carroll relied upon a number of sources and that "Mr. Carroll confirmed his understanding of these sources with in-house and outside legal counsel. *** Magistrate Judge Pepe found that assertion of the opinions by in-house and outside legal counsel "confirmed" Mr. Carroll's understanding on the exempt status question and "reveal[ed] by direct implication the content of those communications." *** From this statement, Magistrate Judge Pepe found that Quicken had "made the decision and taken the affirmative step in the litigation to place the advice of the attorney in issue" and had made the content of the opinions of in-house and outside legal counsel "a factual basis in support of Mr. Carroll's good faith in his understanding on the exempt status question. It reveals that these opinions confirm the position and understanding of Mr. Carroll. 'Thus, it is the content of the privileged communications that is used as a sword' as stated in Ross." Id. at 15 (quoting Ross v. City of Memphis, 423 F.3d 596, 604-05 (6th Cir. 2005)). ***

The court in Rhone-Poulenc [Rorer Inc. v. Home Indemnity Co., 32 F.3d 851, 861 (3rd Cir. 1994)] articulated the reasoning behind finding an implied waiver when a party places the advice of its attorney at issue:

[In cases where the privilege was deemed waived] "the client had made the decision and taken the affirmative step in the litigation to place the advice of the attorney in issue. Courts have found that by placing the advice in issue, the client had opened to examination facts relating to that advice. Advice is not in issue merely because it is relevant, and does not necessarily become in issue merely because the attorney's advice might affect the client's state of mind in a relevant matter. The advice of counsel is placed in issue where the client asserts a claim or defense, and attempts to prove that claim or defense by disclosing or describing an attorney client communication. "

Rhone-Poulenc, 32 F.3d at 863 (citations omitted). ***

[C]ourts have found that when a party offers an affirmative defense involving state of mind that is in some way predicated on the advise of counsel, such an action may waive by implication the attorney client privilege as to the subject matter of such advice. See, e.g., United States v. Bilzerian, 926 F.2d 1285 (2d Cir. 1991). In United States v. Bilzerian, the defendant was convicted of securities fraud, making false statements to the Securities and Exchange Commission (SEC) and conspiracy to defraud the SEC and the Internal Revenue Service. At trial, the defendant argued that he did not intend to violate the securities laws, but believed that the financing structure of the transactions would allow him to legally avoid disclosure to other investors, and that describing the source of the funds used as "personal" was also legal. Bilzerian filed a motion in limine seeking a ruling that he could testify regarding his belief that his actions were lawful without being subject to cross-examination on communications he had with his attorney on the subject. The trial court declined to rule on the subject in the abstract and held that if Bilzerian testified as to his good faith regarding the legality of the disclosures, that would open the door to cross-examination regarding the basis for his belief and such cross examination would allow inquiry into communications with his attorney on this subject. As a result, Bilzerian did not testify as to his good faith belief that his actions were lawful and he was convicted. On appeal, Bilzerian argued that the testimony that he sought to introduce would not have disclosed the content, or even the existence, of any privileged communications or assert a reliance on counsel defense, and that the attorney client privilege would not be waived and that it was therefore reversible error for the trial court to deny his motion in limine to protect the privilege.

The Court of Appeals *** held that the waiver principle was applicable because "Bilzerian's testimony that he thought his actions were legal would have put his knowledge of the law and the basis for his understanding of what the law required in issue. His conversations with counsel regarding the legality of his schemes would have been directly relevant in determining the extent of his knowledge and, as a result, his intent." ... The court *** found that the district court's ruling Bilzerian "did not prevent defendant from denying criminal intent; the district judge merely said that Bilzerian's own testimony as to his good faith would open the door to cross-examination, possibly including inquiry into otherwise privileged communications with his attorney." ***

Finally, Chevron Corp. v. Pennzoil Co., 974 F.2d 1156 (9th Cir. 1992) was a suit by Chevron challenging the adequacy of Pennzoil's disclosures under Section 13(d) of the Securities and Exchange Act of 1934 and the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The Ninth Circuit found that when Pennzoil moved for summary judgment on Chevron's claim of failure to comply with Schedule 13D, and asserted that it was reasonable to acquire stock in Chevron for investment purposes only — and that it took this position in part in reliance on the advice of their tax attorneys — that Pennzoil had waived the attorney client privilege as to the tax advice it received. In support of this conclusion, the court of appeals cited Bilzerian, and held that insofar as Pennzoil relied upon the advice of counsel to support the reasonableness of its Schedule 13D, Pennzoil waived the attorney-client privilege with respect to those communications. ... See also Cox v. Administrator U.S. Steel & Carnegie, 17 F.3d 1386, 1419 (11th Cir. 1994) (citing Bilzerian and stating that "[s]imilarly, in the present case, USX could have denied criminal intent without affirmatively asserting that it believed that its change in pension fund policy was legal. Having gone beyond mere denial, affirmatively to assert good faith, USX injected the issue of its knowledge of the law into the case and thereby waived the attorney-client privilege.").

While Bilzerian and Chevron are not binding precedent here, they are persuasive authorities and fully consistent with the standards outlined in [In re Lott, 424 F.3d 446, 450 (6th Cir. 2005)]. Together, they stand for the principle that when a party asserts a defense of good faith or reasonableness, and affirmatively offers testimony that the party consulted with their attorney as factual support for the defense, and when counsel's advice in some way supports the defendant's good faith belief, the defendant has put his counsel's advice "at issue" and thereby waives the attorney client privilege on the narrow subject matter of those communications.

Applying the principles of these cases to the facts at issue here, the Court holds that Quicken's motion for summary judgment on the issue of good faith waived its attorney client privilege with respect to communications between Carroll and the Quicken attorneys on the issue of classification of the mortgage bankers for purposes of the administrative exemption in the FLSA. By accompanying the motion with the Carroll affidavit that stated that the decision to classify the mortgage bankers as exempt was made in ongoing consultation with counsel and arguing in the motion that Quicken's attorneys confirmed Carroll's understanding of the regulations, Quicken has affirmatively asserted advice of counsel as a basis for its good faith. The statement that counsel "confirmed" Carroll's understanding merely makes explicit the reason Quicken included the consultations with attorneys in the affidavit in the first place — because it reinforces Quicken's good faith efforts to comply with the applicable regulations.

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