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Court of Chancery Addresses At-Issue Exception to Attorney-Client Privilege

May 1, 2013
Morris James LLP
Delaware Business Court Insider

In a little over a week, the Court of Chancery issued two decisions addressing the at-issue exception to the assertion of attorney-client privilege. The at-issue exception applies when: (1) a party injects privileged communications into the litigation; (2) a party injects an issue into the litigation, the truthful resolution of which requires analysis of privileged communications. Applying this standard, the Court of Chancery reached different conclusions regarding the applicability of the at-issue exception in In re Comverge Shareholders Litigation, C.A. No. 7368-VCP (Del. Ch. Apr. 10, 2013), and JPMorgan Chase & Co. v. American Century, C.A. No. 6875-VCN (Del. Ch. April 18, 2013).

In Comverge, Vice Chancellor Donald F. Parsons Jr. denied the plaintiffs' motion to compel documents based upon the at-issue exception. The plaintiffs were stockholders of Comverge and alleged that the Comverge directors breached their fiduciary duties by failing to enforce the terms of a standstill provision in a nondisclosure agreement (NDA) between Comverge and H.I.G. Capital LLC, Peak Holding Corp. and Peak Merger Corp. The plaintiffs sought documents relating to communications about the NDA, including documents discussing how to interpret the NDA. In response to the Comverge defendants logging these documents as privileged, the plaintiffs argued that the Comverge defendants had waived the attorney-client privilege by asserting a reliance on the advice of counsel defense at the preliminary injunction stage of the proceedings. The Comverge defendants had stated that they consulted counsel throughout the underlying transactions. Applying the first prong of the at-issue exception, the court found that the Comverge defendants had not injected or sought to inject specific attorney-client communications into the litigation. The plaintiffs, not the Comverge defendants, had initially raised whether the Comverge defendants consulted counsel at all and the Comverge defendants simply responded to that contention.

Turning to the second prong, the court considered whether examination of privileged communications was necessary for truthful resolution of the litigation. The court concluded such an examination was not necessary because the Comverge defendants were not relying on the substance of legal advice they had received to defend against the plaintiffs' claims. The Comverge defendants were simply contending that they consulted with attorneys. According to the court, these contentions were comparable to what would be disclosed on a privilege log and there was no waiver of the attorney-client privilege through the at-issue exception.

In JPMorgan, Vice Chancellor John W. Noble granted defendant American Century Cos. Inc.'s motion to compel discovery relating to plaintiff JPMorgan Chase & Co.'s setting of litigation reserve numbers pursuant to the at-issue exception. The litigation arose from a settlement agreement between American Century and JPMorgan and an arbitration between the parties regarding American Century's breach of contract claims against JPMorgan. In connection with the settlement agreement, American Century had the right to buy back its shares from JPMorgan. The share price was to be determined by an independent adviser, Duff & Phelps, which was employed by American Century. When American Century exercised its share purchase rights, the parties were awaiting a decision from the arbitration panel. The arbitration panel ultimately awarded an American Century subsidiary approximately $373 million. JPMorgan claimed American Century breached the implied covenant of good faith and fair dealing by failing to provide Duff & Phelps with information about the value of the pending arbitration claims. American Century sought discovery relating to JPMorgan's calculation of its litigation reserve numbers with respect to the arbitration claims, arguing that the information was not work product and, even if it were, JPMorgan had put this information at issue.

The court agreed with JPMorgan that the litigation reserve information was work product, but still had to address whether JPMorgan had put the litigation reserve information at issue. Applying the first prong of the at-issue exception, the court found JPMorgan had not injected any privileged communications into the litigation. Applying the second prong of the at-issue exception, the court concluded that truthful resolution of the litigation required disclosure of JPMorgan's litigation reserve numbers.

According to the court, JPMorgan should have foreseen that American Century would try to defend itself against JPMorgan's claims by arguing that JPMorgan knew about the potential value of the arbitration claims from its own internal analysis and failed to disclose those numbers to Duff & Phelps. Such a defense was reasonable in light of the facts of the case and JPMorgan had unfairly hindered this defense by denying American Century discovery on the issue of JPMorgan's litigation reserves. In reaching this decision, the court distinguished Comverge as factually dissimilar because the substance of privileged communications was not injected into that litigation. The court also found that American Century had met the burden for production of work product because it had demonstrated that the information was directed to a pivotal issue and a compelling need for the information.

These cases illustrate the careful analysis the Court of Chancery will perform in determining whether a party has waived the attorney-client privilege pursuant to the at-issue exception. Comverge reflects that if a party simply states it has consulted with counsel, but not that it relied upon counsel's advice, then the at-issue exception will not apply. JPMorgan reflects that if a party makes claims in which its own knowledge of an issue is relevant, then the at-issue exception could apply. Counsel should keep these distinctions in mind when bringing or defending against certain types of claims.