Zurich American Insurance Co. v. Watts Industries, Inc., ___Cal.Rptr.3d___, 2007 WL 2949155 (Cal.App. 2 Dist. 2007)

Brief Summary
The court concluded that corporate attorney-client privilege may extend to conversations between non-lawyers about corporate legal advice or strategy if the non-lawyers in the conversation need access to the legal advice or strategy as a part of their work for the corporation.

Complete Summary
Watts Industries, Inc. (“Watts”) sued Zurich American Insurance Company (“Zurich”) for an alleged bad faith breach of the duty to defend and indemnify Watts against claims made by the Los Angeles Department of Water and Power and others. During discovery, Watts requested documents from the Zurich claims file. Zurich objected; claiming attorney-client privilege and attorney work product doctrine. Id. at *1.

The discovery dispute led to an agreement that a referee would review the documents in camera and provide recommendations to the court. The court adopted the referee’s report and held that “the attorney client privilege is limited to communications by counsel to a client, and by a client to counsel. The fact that many of the disputed items contain discussion of legal matters, strategy, and status of the bad faith litigation, cannot be used to cloak them with either the attorney-client privilege or the work product privilege for that reason alone.”  Id. at *2. Zurich sought a writ of mandate or prohibition from the Court of Appeal.

The appellate court noted that the issue was “whether the corporate attorney-client privilege extends to confidential communications between agents of the client regarding legal advice and strategy, in which the corporation’s attorneys are not directly involved or which do not include excerpts of direct communications from the attorneys.” Id. at *3. The court asserted that the trial court’s definition of privilege was “inadequate because it fails to take into account language of Section 952 expressly contemplating that confidential communications include information transmitted to persons ‘to whom disclosure is reasonably necessary for the transmission of the information,’ and those to whom disclosure is reasonably necessary for ‘the accomplishment of the purpose for which the lawyer is consulted.’” Id. at *5.

The landmark California case on corporate attorney-client privilege is D.I. Chadbourne, Inc. v. Superior Court, 388 P.2d 700 (1964). This decision recognized that the fact that the privilege may be waived by the corporation “does not mean that the privilege is waived simply because the communication was made through an agent of the client or of the attorney.” Id. at 735. The Chadbourne court addressed the extent to which the corporation should be allowed to disseminate the privileged information and still claim confidentiality, and concluded that it is the “intent of the person from whom the information emanates that originally governs its confidentiality.”  Id. at 737.

In this case, the Court of Appeal recognized the need to communicate legal advice to others within a corporation in order to successfully implement it. In rejecting the lower court’s reasoning, it stated, “[I]t is neither practical nor efficient to require that every corporate employee charged with implementing legal advice given by counsel for the corporation must directly meet with counsel or see verbatim excerpts of the legal advice given.” 2007 W.L. 2949144 at *7.

The Court of Appeal also added that “[T]he key concept here is need to know. While involvement of an unnecessary third person in attorney-client communications destroys confidentiality, involvement of third persons to whom disclosure is reasonably necessary to further the purpose of the legal consultation preserves confidentiality of communication.” Id. at *12 quoting Insurance Co. of North America v. Superior Court, 166 Cal.Rptr. 880 (1980). The decision below was vacated and the case remanded for the lower court to determine whether the Zurich employees who were told of the legal advice and strategy fit within this category.

Significance of Case
This decision recognizes the practical necessity of extending the privilege beyond those employees who have direct verbal or written contact with counsel. In order to implement legal strategy, at least some employees will need to share the information provided. This does not mean, however, that the privilege will be interpreted so broadly that it cannot ever be waived by excessive and inappropriate dissemination of the information received by counsel.

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