Gates Corp. v. CRP Industries, Inc.

          ORDER

          Kristen L. Mix United States Magistrate Judge

         This matter is before the Court on Defendant's Objection to Report and Recommendation of Special Master on Gates Corporation's Motion to Pierce Attorney/Client Privilege [#139]^[1] (the “Objection”). The Court has reviewed and considered the following pleadings in connection with ruling on the Objection: Plaintiff's Motion to Pierce the Attorney/Client Privilege [#88]; Defendant's Opposition to Motion to Pierce Attorney/Client Privilege [#91]; Plaintiff's Reply to CRP's Response to Motion to Pierce the Attorney/Client Privilege [#95];^[2] Defendant's Surreply Memorandum of Law in Further Opposition to Plaintiff's Motion to Pierce Attorney/Client Privilege [#98-1]; Discovery Master's Preliminary Report and Recommendation on Plaintiff Gates Corporation's Motion to Pierce Attorney/Client Privilege [#134] (the “Discovery Master's Report”), the Objection [#139] and Plaintiff's Response to Defendant's Objection [#148], and is otherwise fully advised in the premises. For the reasons explained below, the Objection is OVERRULED.

         I. Procedural Background

         As discussed in detail in the Discovery Master's Report [#134], the dispute at issue involves Plaintiff's desire for compelled production of documents Defendant has identified as protected by the attorney-client privilege. Despite this protection, the crime-fraud exception vitiates the attorney-client privilege “where the client consults an attorney to further a crime or fraud.” In re Vargas, 723 F.2d 1461, 1467 (10th Cir. 1983). The parties do not disagree about the procedural framework for determination of whether the crime-fraud exception applies, so I mention it only briefly here. The United States Supreme Court held in United States v. Zolin, 491 U.S. 554 (1989), that in camera review is permissible to adjudicate the applicability of the crime-fraud exception to the attorney-client privilege when there is a “showing of a factual basis adequate to support a good faith belief by a reasonable person that in camera review of the materials may reveal evidence to establish the claim that the crime-fraud exception applies.” Id. at 572 (citation omitted). In his lengthy and thorough analysis, the Discovery Master concluded that in camera review of the disputed documents is appropriate because of a showing of “wrongful conduct [that] may well, upon a close reading, qualify as prima facie crime or fraud.” Discovery Master's Report [#134] at 32 (internal quotation marks omitted).

         Defendant objects to the Discovery Master's Report on two general bases: first, that the Discovery Master erroneously evaluated Defendant's actions in hindsight and not based on what Defendant knew at the time of those actions; and second, that the Discovery Master erroneously ordered in camera review on grounds not raised by Plaintiff. Objection [#139] at 10-17. More specifically, Defendant asserts that the Report's conclusion that Defendant engaged in concealment by omitting material facts which it had a duty to disclose is unsupported. Defendant also contends that the law does not hold that a flawed or inadequate document preservation effort is grounds for piercing the privilege. Id. at 13-32. In response, Plaintiff asserts that Defendant “has failed to offer any meaningful explanation as to why in camera review should be precluded, ” thus suggesting that it “has something to hide.” Response to Objection [#148] at 8-9. Further, Plaintiff asserts that Defendant's fraudulent intent can be inferred from evidence that a company official contemporaneously knew that an employee stole Plaintiff's proprietary information and that she was using it, yet the company denied those facts when responding to Plaintiff's inquiry about the theft. Id. at 15-18.

         II. Analysis

         A. The Evidence Asserted by Plaintiff of Defendant's Wrongful Conduct

         At its core, this dispute centers around whether Defendant's actions in response to Plaintiff's inquiry about its former employee's theft of proprietary information can serve as the basis for invocation of the crime-fraud exception to the attorney-client privilege.^[3]Defendant, a corporation alleged to be “a direct competitor of” Plaintiff, describes its conduct as reasonable under the circumstances considering what it knew when confronted by Plaintiff with concerns about the theft. Second Am. Compl. [#84] ¶ 10; Objection [#139] at 10-13. Defendant appears to suggest that its course of action in response to Plaintiff's inquiry may have been conservative or less than perfect, but that there is no basis for a reasonable person to conclude that a crime or fraud was underway. However, the evidence presented by Plaintiff sufficiently suggests otherwise.

         A brief recitation of only a portion of that evidence suffices to make the point. Defendant admits that after Plaintiff's counsel notified Defendant of the potential theft of proprietary information by Plaintiff's former and Defendant's then-current employee, Laura Bale (“Bale”), the company eventually commenced an “investigation.” Bale's supervisor throughout her employment with Defendant was David Hirschhorn (“Hirschhorn”), Defendant's Director of Brand Management. Scheduling Order [#23] at 4. At an early point in Defendant's investigation, a non-lawyer human resources executive performed a keyword search of Hirschhorn's emails but “did not find any evidence that [Hirschhorn] had received any proprietary information from Bale.” Objection [#139] at 4 (citing Depo. of Rahael Sobon [#88-7] at 30:19-32:15; Depo. of Sabine Gilson [#88-6] at 43:8-22, 60:21-61:9).^[4]

         Despite Defendant's contemporaneous conclusion that Hirschhorn did not “receive” any of Plaintiff's proprietary information from Bale, it is now undisputed that this conclusion was incorrect. Defendant has acknowledged that Hirschhorn subsequently admitted to the FBI that he received and opened the file containing Plaintiff's confidential information, and Defendant has made no argument that Hirschhorn lied to the FBI. Objection [#139] at 5; Plea Agreement [#88-15] at 18. More importantly, at the time of its “investigation, ” Defendant appears to have stopped short of attempting to determine the extent to which the information stolen by Bale was actually being used for the company's benefit. For example, Bale (whose credibility is of course blemished) subsequently testified under oath that Hirschhorn knew about her possession of Plaintiff's proprietary database approximately six months after she started working for Defendant, long before the “investigation” began. Depo. of Laura Bale (the “Bale Depo.”) [#95-2] at 246:22-247:6. Moreover, despite Bale's compromised credibility, her testimony in this regard has been amply confirmed by other evidence. As mentioned above, Hirschhorn himself later admitted to the FBI that Bale sent him Plaintiff's proprietary information and that he discussed her access to Plaintiff's and Defendant's systems and use of Plaintiff's data. Response to Objection [#148] at 16-18; Plea Agreement [#88-15] at 18. Instant messages between Bale and Hirschhorn during their employment confirm that months before Plaintiff's first inquiry to Defendant about the theft, Bale essentially told Hirschhorn that she was obtaining proprietary information from Plaintiff. One message further confirms that Hirschhorn understood that Bale's actions were wrong, but he nevertheless encouraged them. Reply [#95] at 5-6; Plea Agreement [#88-15] at 18; Bale Depo. [#95-2] at 268:9-11. Bale unequivocally testified in her deposition that Hirschhorn knew she had access to Plaintiff's database as of September of 2011, and that he used information she provided to him from the database. Bale Depo. [#95-2] at 256:2-5, 271:6-13, 277:13-24, 296:21-297:3, 298:3-8.

         Defendant contends that because Plaintiff's counsel's letter about the alleged theft “implicated Bale alone, [Defendant] reasonably focused its investigation on Bale, who worked off of her own laptop and used a personal email address, instead of launching a company-wide investigation.” Objection [#139] at 21. Based on the information currently provided to the Court, I cannot agree that so limiting the investigation was reasonable or prudent.

         First, although Bale worked from her home in Colorado and the Defendant's main office is in New Jersey, she was not a solitary or isolated employee. The evidence demonstrates that her work contemplated and required frequent interactions with other company employees. Bale stipulated in her Plea Agreement that during her 25-year employment with Plaintiff prior to working for Defendant, her job had been to develop part of the information she later took from Gates. Plea Agreement [#88-15] at 10. According to the Second Amended Complaint, Hirschhorn admitted to the FBI that Bale was hired by Defendant to integrate data used by Plaintiff into Defendant's database and to make this information accessible and easy to use. Second Am. Compl. [#84] ¶ 54. In addition, Bale had regular email contact with supervisors in the company, including Hirschhorn. Id. ¶¶ 40-48; Answer [#86] at 6-7; Bale Depo. [#95-2] at 212:19-213:10, 247:11-249:22. She also communicated “almost daily” by Instant Message with Hirschhorn. Reply [#95] at 5; Bale Depo. [#95-2] at 293:2-10. To suggest that Defendant was somehow unaware of the extent of Bale's company interactions is not credible.

         Moreover, Defendant's protest that Hirschhorn did not admit any knowledge of wrongdoing at the time of the investigation and that the company only learned several years later that he received and opened the file containing Plaintiff's confidential information is unavailing. Objection [#139] at 5. Defendant seems to suggest that for purposes of the crime-fraud exception, its conduct must be evaluated in terms of what only certain chosen corporate officials knew at the time of the alleged wrongdoing, not what other corporate employees knew. Defendant fails to account for the evidence of Bale's and Hirschhorn's knowledge of the wrongful use of confidential information and their undisputed failure to disclose it, as if their status as corporate employees and agents is meaningless. This argument cannot be correct.

         First, if Defendant were correct, corporate parties to litigation could avoid scrutiny of their attorney-client communications by simply contending that although some employees did bad things, the wrongdoers neither admitted it to select company representatives nor did those representatives otherwise find out about it, so the crime-fraud exception does not apply. The core of this assertion appears to be that although there was fraud, as long as it was committed by only a few employees without evidence of other corporate actors' involvement, the crime-fraud exception ...