The Sword and the Shield Revisited: Developments in the Implied Waiver of Privilege

by Jonathan I. Handler, Jillian B. Hirsch, and Emily Zandy

Legal Analysis

Recently, the Massachusetts Supreme Judicial Court ( “SJC”) and the United States District Court for the District of Massachusetts both issued important decisions addressing implied waiver of the attorney-client privilege and work product doctrine under Massachusetts law.  The decisions turned on application of the “at issue” doctrine:  the implied waiver of privilege that occurs when a party puts otherwise privileged information “at issue” in litigation.  Massachusetts courts have previously held that privilege waiver occurs when the privilege holder affirmatively interjects the substance of otherwise privileged information into a claim, counterclaim or defenses and an opposing party needs access to that information to respond properly.[1]

But Massachusetts courts have not, until now, explored in detail the considerations of fairness that factor into whether waiver has occurred.  The courts’ decisions in Clair v. Clair, No. SJC-11256, 2013 Mass. LEXIS 10 (Mass. Jan. 25, 2013), and Columbia Data Products v. Autonomy Corp. Ltd., C.A. No. 11-12077-NMG, 2012 U.S. Dist. LEXIS 175920 (D. Mass. Dec. 12, 2012), provide practitioners with much-needed guidance on those considerations by making clear that litigants cannot use privileged material as both a sword and a shield.  In other words, litigants may not base their legal positions on privileged material while simultaneously denying their opponent access to that information on the ground that it is privileged.

The “At Issue” Waiver Doctrine

Under the “at issue” waiver doctrine, the attorney-client privilege is waived where a litigant affirmatively places the subject of its own privileged material at issue in litigation so that the opposing party must access that privileged material to defend the claim asserted against it.  As the First Circuit noted in In re Keeper of Records, the logic behind the doctrine is most apparent in cases involving an “advice of counsel” defense where a client asserts reliance on his or her attorney’s advice as a defense to another’s claim.[2]  According to the First Circuit, “when such a defense is raised, the pleader puts the nature of its lawyer’s advice squarely in issue, and, thus communications embodying the subject matter of the advice typically lose protection.”[3]

Outside the “advice of counsel” context, the reach of the “at issue” doctrine is less predictable and, as a result, perhaps more controversial.  In interpreting “at issue” waiver, many courts have adopted some permutation of the standard articulated by the U.S. District Court for the Eastern District of Washington in Hearn v. Rhay, in which the Court concluded that implied waiver should be found when three conditions exist:

(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.[4]

However, this approach has been much criticized on the grounds that it conflates the question of waiver with separate issues  of relevance.

Previous Massachusetts Cases Addressing The “At Issue” Doctrine

The SJC first addressed the “at issue” waiver doctrine in Darius v. Boston.[5]  In Darius, the SJC recognized that “a litigant may implicitly waive the attorney-client privilege, at least partly, by injecting certain claims or defenses into a case.”[6]  However, the court emphasized that  application of the doctrine was subject to certain limitations.  First, the court stated that “[a]n ‘at issue’ waiver, in circumstances where it is recognized, should not be tantamount to a blanket waiver of the entire attorney-client privilege in the case.”[7]  By definition, “it is a limited waiver of the privilege with respect to what has been put ‘at issue.’”[8]  Second, the court made clear that “there can be no ‘at issue’ waiver unless it is shown that the privileged information sought to be discovered is not available from any other source.”[9]

Relying on Darius, other Massachusetts courts have since addressed the “at issue” doctrine, applying the two-part framework set forth above in deciding whether to find waiver.[10]  However, not until Clair and Columbia Data did the courts offer much guidance on how considerations of fairness bear on the judicial application of the “at issue” doctrine.

The Clair Case

Clair involves the dissolution of Clair Auto Group, a chain of automobile dealerships owned by four brothers.  In 2007, the brothers sold the majority of the companies’ dealerships, real estate, and other assets to Prime Motor Group (“Prime Motors”).  In coordination with that sale, the brothers devised a plan to transfer corporate life insurance policies on their lives from the Clair companies to the brothers individually.  Following the sale, and at the death of two of the four brothers, familial relations deteriorated.  The two surviving brothers refused to recognize their deceased brothers’ widows as partial owners in the remaining assets, and the widows, in turn, suspected that the brothers were using post-sale assets for personal rather than business-related purposes.

On April 9, 2010, Claire M. Clair (“Claire”), the executrix of the estate of her husband, James E. Clair, Jr., and Jane M. Clair, the executrix of the estate of her husband, Mark J. Clair (together, the “Plaintiffs”), brought an action in Superior Court against the two surviving brothers, individually, Clair International Inc., and Clair LP  (collectively, the “Defendants”), challenging the post-sale disposition of the business assets and seeking a declaratory judgment as to their ownership rights in the companies.  The Defendants filed counterclaims alleging, among other things, that Claire’s deceased husband had breached his fiduciary duty to them.

During the course of discovery, Claire sought access to all privileged communications regarding valuation, purchase, and sale of the life insurance policies, including legal advice from corporate counsel.  She argued that she was entitled to this information because the Defendants had waived the attorney-client privilege by placing such information “at issue” in their counterclaim.  Relying heavily on its decision in Darius , the court agreed.

The court explained, consistent with Darius, that Claire’s ability to raise a defense depended upon her access to otherwise privileged information.  Indeed, “at the heart of proving or disproving the counterclaim” were “disclosures that [Claire’s] [husband] may or may not have made to the Clair brothers and to corporate counsel” regarding the life insurance policies and transfer of ownership.[11]  The court concluded, therefore, that Defendants had “placed their otherwise privileged communications ‘at issue.’”[12]  Having determined that Claire had satisfied the first prong of the two-part test, the court turned to the second prong.  The Clair court found that the only sources of this information were corporate counsel and the surviving brothers, “all of whom were within the circle of privilege held by the companies.”[13]  The court emphasized that Defendants “cannot have it both ways”[14]; they may not rely on privileged communications as the basis of their counterclaim that Claire’s husband breached his fiduciary duty and simultaneously deny Claire a legitimate means to inquire into their assertions and raise a defense.  .

Although the court granted Claire access to certain privileged information, it adhered to the Darius court’s call for a “limited” rather than “blanket” subject matter waiver.  The court limited Claire’s  discovery only to those privileged communications between the companies and their counsel that related to the life insurance policies at issue.

The Columbia Data Case

In March 2005, Columbia Data, a software company, entered into a license agreement  with Connected Corporation (“Connected”).  Under the license agreement, Columbia Data granted Connected a license to “integrate, market and distribute” its backup software.  The parties agreed on the percentage of royalties to be paid and provided for Columbia Data’s right to retain an independent accounting firm to conduct an annual audit of Connected’s books and records.  Iron Mountain later acquired Connected.

As of 2008, Iron Mountain had yet to make any royalty payments under the license agreement, citing poor sales of products incorporating Columbia Data’s software.  In 2010,  Columbia Data allegedly discovered that Iron Mountain had in fact sold products listed in the license agreement.  Columbia Data confronted Iron Mountain, and the parties began negotiating over the payment of royalties.

Concerned that litigation was on the horizon, Columbia Data retained outside counsel, who in turn retained an accounting firm to conduct an audit of Iron Mountain’s books and records.  Significantly, Columbia Data did not inform Iron Mountain that the accounting firm had been hired by outside counsel.  The accounting firm ultimately concluded that Iron Mountain owed Columbia Data $23 million in royalty fees under the License Agreement.  Accordingly, Columbia Data filed a complaint against Iron Mountain, seeking redress for copyright infringement, breach of contract, breach of implied covenant of good faith and fair dealing, and unfair and deceptive trade practices.

In the early stages of litigation, Columbia Data represented that its accounting firm was independent and insisted that the royalty audit was conducted according to the terms of the license agreement.  But, six months after filing suit, Columbia Data took the opposite position when its litigation counsel retained the accounting firm as a testifying expert in the case.  At that point, Columbia Data argued that because the accounting firm was its expert, its discovery obligations were limited to those required by Fed. R. Civ. P. 26(b)(4), which governs disclosure of expert testimony.  In response, Iron Mountain filed a motion to compel.

The court ruled, as a threshold matter, that the materials at issue were not protected by either the work product doctrine or the attorney-client privilege; nonetheless, because the parties had briefed the “at issue” doctrine, the court addressed it.  The court concluded that Columbia Data had affirmatively placed the “audit report, the audit process, and [the] [accounting firm’s] status as an independent auditor directly at issue in [the] litigation,” and, therefore, “fairness require[d] the defendants be allowed to explore the full panoply of information available to [the] [accounting firm] for its ‘independent’ audit.’”[15]  As the court emphasized, “[Columbia Data] cannot use [the] [accounting firm’s] status and work as an independent auditor as a ‘sword’ against the defendants, while relying on the attorney-client privilege and the work product doctrine as a ‘shield’ to prevent disclosure of related materials.”[16]

The “At Issue” Doctrine Post-Clair and Company Data

In light of  Clair and Columbia Data, practitioners now have a much better understanding of what arguments a court will likely find persuasive in considering the application of the “at issue” doctrine.  While both courts applied the two-part framework set forth in Darius – namely, that waiver must be appropriately limited in scope and confined to instances where the information sought is not otherwise available – their analysis did not end there.  Rather, they focused heavily on considerations of fairness, taking particular note of whether the party invoking the privilege did so as a means to gain an unfair tactical advantage in litigation.  As the Columbia Data court aptly stated, litigants may not use protected information as “‘both a sword and a shield.’”[17]  Likewise, the Clair court emphasized that a party “cannot have it both ways.”[18]  Put another way, the courts will not tolerate, as a matter of fairness, a party relying on privileged material in support of a claim while simultaneously denying the opposing party access to that information because it is protected from disclosure.

Lawyers and clients must carefully weigh the risks of asserting a claim, counterclaim, or defense premised upon privileged material.  They should contemplate whether the opposing party will need access to that information to respond.  They should think about whether the opposing party can access that information from any other source.  They should consider the potential consequences of having to disclose that privileged material to their opponent because, once they have put that material “at issue,” it may be too late to turn back.  Finally, although courts to date have construed the scope of “at issue” waivers narrowly, there is always the risk that under certain circumstances, a court will adopt a more expansive construction.

Jonathan I. Handler is a partner in the Commercial Litigation department at Day Pitney LLP.

Emily A. Zandy is an associate in the Commercial Litigation department at Day Pitney LLP.

Jillian B. Hirsch is counsel in the Commercial Litigation and Probate Litigation departments at Day Pitney LLP.