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Whether a party has impliedly waived the attorney-client privilege poses a mixed question of law and fact. Twin City Fire Insurance Co. v. Burke, 204 Ariz. 251, 254, 63 P.3d 282, 285 (2003). In State Farm v. Lee, the Arizona Supreme Court adopted the following criteria, referred to as the Herntest, in determining whether the attorney-client privilege had been waived when a litigant’s mental state was at issue:
(1) [The] assertion of the privilege was a result of some affirmative act, such as filing suit [or raising an affirmative defense], 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.
199 Ariz. 52, 56, 13 P.3d 1169, 1173 (2000) (quoting Hern v. Rhay, 68 F.R.D. 575, 581 (E.D. Wash. 1975)).[1]
Under the Hern test, when a litigant advances “a subjective and allegedly reasonable evaluation of the law ... that necessarily incorporates [the advice of counsel],” confidential attorney-client communications relevant to that evaluation are discoverable. Id. at 58, 13 P.3d at 1175; see also Leeat 62, 13 P.3d at 1179 (explaining that no waiver results unless the party asserting the privilege “has asserted some claim or defense, such as the reasonableness of its evaluation of the law, which necessarily includes the information received from counsel.”).
The Arizona Supreme Court emphasized in Lee, however, that merely filing an action or denying an allegation does not waive the privilege. Id.at 58, 62, 13 P.3d at 1175, 1179. Rather, the party claiming the privilege must affirmatively “interject the issue of advice of counsel into the litigation.” Id. at 62, 13, P.3d at 1179. In addition, neither the “relevance or pragmatic importance alone [of the information sought] will support a finding that the attorney-client privilege has been waived.” See Twin City, 204 Ariz. at 256, 63 P.3d at 287; see also Lee, 199 Ariz. at 58, 13 P.3d at 1175.
Recently, in Empire W. Title Agency, L.L.C. v. Talamante ex rel. Cnty. of Maricopa, 234 Ariz. 497, 323 P.3d 1148 (2014), in an opinion written by Justice Pelander, the Arizona Supreme Court vacated a decision of the Arizona Court of Appeals, Division One, which had found an implied waiver of the attorney-client privilege in a contract case. Reversing the Court of Appeals, the Supreme Court held that merely alleging the reasonableness of one’s beliefs does not, in itself, waive the privilege; rather, the litigant must advance a subjective evaluation or understanding that incorporates the advice of counsel.
The facts leading up to the Court’s decision in Empire West are as follows: In 2006, while pursuing the purchase of a vacant lot in Mesa, Jannett discovered a recorded Quit Claim Deed abandoning an access easement essential for developing the property. Empire West, acting as title agent for Fidelity National Title, allegedly informed Jannett that the Quit Claim Deed would not affect his claim to the easement. Jannett later decided not to complete the transaction and informed Empire that DOS Land Holdings would instead purchase the property.
On August 3, 2007, DOS’s attorneys, Chester & Shein, sent Empire a closing instruction letter which attached a legal description of the property that included the access easement. In an email accompanying the closing instructions letter, Chester & Shein asked Empire to make sure that the legal description attached was the same legal description that would be attached to the conveyance deed. Under the closing instruction letter, Empire acknowledged that, by signing, it agreed to comply with the letter’s terms. Empire signed and returned the closing instruction letter, and the transaction closed in August 2007. Contrary to the closing instruction letter’s terms, however, the closing documents omitted the easement from the property’s legal description. In 2008, DOS sued the owners of the adjacent property to establish its right to the easement. The case was dismissed as time barred, and DOS filed the instant lawsuit naming Fidelity and Empire as Defendants, alleging claims of bad faith against Fidelity and breach of contract and breach of the covenant of good faith and fair dealing against both Defendants.
Empire moved to compel DOS to disclose any attorney-client communications indicating whether it knew before close of escrow that the easement had been abandoned. The superior court denied the motion, finding that the matter could be litigated and decided without breaching the attorney-client privilege. Empire filed a Petition for Special Action in the Court of Appeals, arguing that DOS had impliedly waived the attorney-client privilege. In an unpublished decision, the Court of Appeals agreed, holding that “[b]y pleading a contract claim based on its ‘reasonable belief’, DOS put in issue all information in its possession at the time ... bear[ing] on the reasonableness of its belief that Empire West agreed to provide coverage of the easement.” Empire West, 323 P.3d at 1149. The Court of Appeals ordered DOS and Chester and Shein to provide all attorney-client communications for which the privilege was claimed for the superior court’s in camera inspection and instructed that the superior court order the disclosure of communications found “relevant to the reasonableness of DOS’s expectations of coverage.”
On review, the Arizona Supreme Court found Empire West differed fromLee, though not for the reason advanced by the Court of Appeals. The Supreme Court found that Lee was an “unusual case” involving waiver of the attorney-client privilege when “the mental state of a litigant [was] at issue. Empire West, 323 P.3d at 1151. It further noted that in Lee, it had considered the waiver issue “only in light of the bad faith and fraud counts” in the plaintiffs’ complaint.” Id. (quoting Lee, 199 Ariz. at 55, 13 P.3d at 1172).
In contrast to State Farm’s defense against the bad faith claims in Lee, the breach of contract claim in Empire West did not depend on DOS’s mental state or subjective knowledge. And, unlike State Farm, DOS had not affirmatively put those matters at issue. The Empire West Court found that DOS simply alleged that Empire had breached the parties’ contract by failing to comply with the closing instruction letter’s terms. The Supreme Court found that DOS had done nothing to inject that issue into the litigation. Justice Pelander wrote that “merely pleading a claim, as we noted in Lee, does not waive the attorney-client privilege.” Id.
Empire West found that the Arizona Court of Appeals had erred in ruling that DOS impliedly waived the privilege by pleading its “reasonable belief” in the breach of contract case. It further found that “[e]ven if DOS’s state of mind were at issue, Empire had not demonstrated that denying it access to the requested communications would undermine its defense.” Id. (citing Twin City, 204 Ariz. at 256-257, 63 P.3d at 287-288) (finding no implied waiver in part because “[t]he evaluation of Twin City’s counsel is not vital to General Star’s defense”). The Empire West court found that Empire had other means of obtaining information about what DOS knew or should have known regarding the easement’s purported abandonment.
Finally, the Empire West court held that the policy concern that motivated the court’s decision in Lee was not implicated here. “Unlike State Farm, DOS has not ‘thrust [its] lack of knowledge into the litigation’ as a basis for its claim, while at the same time asserting the privilege so as to frustrate discovery of what it actually knew.” Empire West, 323 P.3d at 1151 (quoting Lee, 199 Ariz. at 58-59, 13 P.3d at 1175-1176). See also Ulibarri v. Superior Court in and for the County of Coconino (Gerstenberger), 184 Ariz. 382, 385, 909 P.2d 449, 452 (App. 1995).
Importantly, Lee makes clear that merely seeking the advice of counsel during the claims process is inadequate to support a waiver of the attorney-client privilege. See also, Accomazzo v. Kemp, ex rel. County of Maricopa, 34 Ariz. 169, 319 P.3d 231, 234 (App. 2014) (“the bare assertion of a claim or defense does not necessarily place privileged communications at issue in the litigation, and the mere fact that privileged communications would be relevant to the issues before the court is of no consequence to the issue of waiver.”).
Aside from Lee, a party seeking attorney-client privileged communications under an implied waiver theory will undoubtedly cite to the Arizona Court of Appeal’s decision in Mendoza v. McDonald’s Corporation, 222 Ariz. 139, 213 P.3d 288 (App. 2009). In Mendoza, a former employee of McDonald’s brought an action against her former employer for breach of the covenant of good faith and fair dealing in administering her workers’ compensation claim. Id. at 142, 213 P.3d at 291. On appeal, Mendoza argued that the superior court should have ordered McDonald’s to produce attorney-client privileged materials from its claim file that had been redacted because of the implied waiver. Id. at 151, 213 P.3d at 300. The Mendoza court found there was an implied waiver of the attorney-client privilege, noting that McDonald’s did not defend by arguing its subjective evaluation of the law was reasonable. Id.at 153, 213 P.3d at 302. But neither Lee nor Mendoza stand for the proposition that the privilege is waived merely because client and counsel confer or trade information for advice. Lee makes clear that counsel’s evaluation of “an insurance company’s reasonableness under the Statutes, the case law, and the policy language does not put counsel’s advice to the claims managers at issue.” Id. at 60, 13 P.3d at 1177.
[1] The Court in Lee also adopted the test set forth in Restatement (Third) of the Law Governing Lawyers § 80 (1) (2000), which states in relevant part:
The attorney-client privilege is waived for any relevant communication if the client asserts as to a material issue: (a) the client acted upon the advice of a lawyer or that the advice was otherwise relevant to the legal significance of the client’s conduct.
199 Ariz. at 62, 13 P.3d at 1179. Although that test provided additional support for the Arizona Supreme Court’s decision in Lee, it applies when a litigant’s legal knowledge is at issue.
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