United States District Court, D. Colorado
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 ...