By Brooks Magratten
While the question of what discovery is permitted in litigation involving the Employment Retirement Income Security Act (ERISA) after the Supreme Court’s decision in MetropolitanLife Ins. Co v. Glenn, 554 U.S. 105 (2008), looms, an equally intriguing question is emerging in various federal circuits about what privileges apply in ERISA discovery.
Growing recognition of the fiduciary exception to the attorney-client privilege, and in some cases the attorney-work-product doctrine, has resulted in an erosion of the privileges and protections ERISA fiduciaries formerly enjoyed. Understanding the contours of the fiduciary exception may help today’s fiduciaries understand when legal advice they receive may end up in the hands of opponents in litigation.
ATTORNEY-CLIENT PRIVILEGE BASICS
The attorney-client privilege is the oldest privilege recognized under common law. The elements of the attorney-client privilege appear in a commonly-cited decision of the U.S. District Court for the District of Massachusetts:
The privilege applies only if (1) the asserted holder of the privilege is or sought to become a client; (2) the person to whom the communication was made (a) is a member of the bar of a court, or his subordinate and (b) in connection with this communication is acting as a lawyer; (3) the communication relates to a fact of which the attorney was informed (a) by his client (b) without the presence of strangers (c) for the purpose of securing primarily either (i) an opinion on law or (ii) legal services or (iii) assistance in some legal proceeding, and not (d) for the purpose of committing a crime or tort; and (4) the privilege has been (a) claimed and (b) not waived by the client.
United States v. United Shoe Machinery Corp., 89 F. Supp. 357, 358-59 (D. Mass. 1950).
The 3rd Circuit has recognized that “because the privilege obstructs the search for truth and because its benefits are, at best, ‘indirect and speculative,’ it must be ‘strictly confined with the narrowest possible limits consistent with the logic of its principle.’” In re Grand Jury Investigation, 599 F.2d 1225, 1235 (3d Cir. 1979)(quoting 9 Wigmore on Evidence §2291 at 554 (McNaughton rev. 1961)).
The 9th Circuit, on the other hand, has held that “where attorney-client privilege is concerned, hard cases should be resolved in favor of privilege.” U.S. v. Mett, 178 F.3d 1058, 1063 (9th Cir. 1999).
THE FIDUCIARY EXCEPTION
Where the attorney-client privilege is established, it is not absolute. It may yield to the fiduciary exception to that privilege. The fiduciary exception bars a fiduciary from asserting the attorney-client privilege against those to whom fiduciary duties are owed.
Hence, the fiduciary exception marks the collision of two important policies. First is the policy encouraging individuals to make full and candid disclosures to their counsel in order to obtain informed legal advice. Second is the policy obligating fiduciaries to disclose all relevant information to beneficiaries, shareholders, and others to whom duties are owed. In certain circumstances, the attorney-client privilege must yield to the fiduciary exception.
As explained by the 9th Circuit, “the [fiduciary] exception is rooted in two distinct rationales.” United States v. Mett, 178 F.3d 1058, 1063 (9th Cir. 1999). First, as the 2nd Circuit observed in In re Long Island Lighting Co., 129 F.3d 268 (2d Cir. 1997), a trustee is generally obligated to disclose to beneficiaries all information regarding plan administration; to allow a trustee to hide information behind a privilege may encourage and conceal fraudulent activity.
Alternatively courts have viewed the fiduciary exception as not an exception at all, but the strict application of attorney-client privilege criteria in cases where a fiduciary is acting on behalf of beneficiaries and it is therefore the beneficiaries who are the true clients who can assert or waive the privilege. United States v. Evans, 796 F.2d 264, 266 (9th Cir. 1986).
One of the earliest courts to recognize a fiduciary exception was the 5th Circuit in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970). The court examined the invocation of the attorney-client privilege in response to document requests and deposition questions concerning a life insurance company’s securities transactions. The underlying action was a class action by the life insurer’s shareholders alleging various counts of securities fraud. While acknowledging the time-honored attorney-client privilege, the court recognized an exception:
[W]here the corporation is in suit against its stockholder on charges of acting inimically to stockholder interests, protection of those interests as well as those of the corporation and of the public require that the availability of the privilege be subject to the right of the stockholders to show cause why it should not be invoked in the particular instance.
430 F.2d at 1103-04.
Accordingly, the court ordered that the insurance company’s President, who formerly acted as the company’s in-house counsel and advised the company on the transactions in question, could be compelled to testify about his advice to the company.
Not long thereafter the Delaware Chancery Court overturned a trustee’s assertion of the attorney-client privilege in ordering the production of a legal memorandum obtained by the trustee concerning the administration of the trust.
The court found that the memorandum had been prepared, ultimately, for the benefit of trust beneficiaries and, especially because outside counsel preparing the memorandum had been paid out of the trust res, the trust beneficiaries were the real clients at interest and were entitled to view the document. Riggs National Bank of Washington v. Zimmer, 355 A.2d 709, 713-14 (Del. Ch. 1976).
Citing Garner, the Northern District of Illinois ordered production of documents withheld on the basis of attorney-client privilege by the First National Bank of Chicago to the sole shareholder of a corporation managed by the bank. The fact that certain documents contained or reflected advice from the bank’s in-house counsel was of no avail. The court reasoned that “[w]here the client asserting the privilege is an entity which in the performance of its functions acts wholly or partly in the interests of others, and those others, or some of them, seek access to the subject matter of the communications, access should be permitted.” Hashim v. The First National Bank of Chicago, 1987 WL 6563 (N.D. Ill. 1987).
Also citing Garner, the Delaware Chancery Court in Deutsch v. Cogna, 580 A.2d 100, 107 (Del. Ch. 1990), fashioned an approach to dealing with the attorney-client privilege in stockholder suits:
[I]f the corporation objects to discovery and successfully establishes that the material sought is a confidential communication as to legal services between it and its attorney, then discovery is not authorized, unless the plaintiff stockholder seeking discovery shows ‘good cause’ why the privilege should not attach.
The court went on to note that a law firm’s conflict of interest, in representing the corporation as well as minority shareholders, can support a finding of “good cause” to defeat the assertion of privilege.
As the Supreme Court recently recognized, “[t]he fiduciary exception is now well recognized in the jurisprudence of both federal and state courts, and has been applied in a wide variety of contexts, including in litigation involving common law trusts, disputes between corporations and shareholders, and ERISA enforcement actions.” United States v. Jicarilla Apache Nation, 131 S.Ct. 2313, 2332-33 (2011)(Sotomayor, J., dissenting).
PARTY SEEKING DISCOVERY MUST SHOW GOOD CAUSE
Some courts have imposed the requirement that those asserting the fiduciary exception have good cause for doing so. The Garner court articulated some of the considerations that might support a showing of “good cause” in the context of a stockholders’ class action:
• The number of shareholders seeking disclosure and the percentage of stock they represent;
• The bonafides of the plaintiffs and their claims; the articulated need for discovery of the otherwise privileged information;
• Availability of the information through other sources;
• The gravity of plaintiff’s claims (i.e. criminal v. non-criminal corporate wrongdoing);
• Whether the communication relates to past or prospective conduct; whether the communication is advice as to pending litigation;
• Whether production of the communication results from targeted discovery or a fishing expedition; and
• Whether the communication involves otherwise confidential or proprietary information.
430 F.2d 1093-94.
Other courts have imposed a “good cause” requirement on parties seeking production of privileged information in addition to establishing grounds for the fiduciary exception, particularly in shareholder actions. See, e.g., Ryskamp v. Looney, 2011 WL 3861437, *11 (D. Colo. 2011); In re JP Morgan Chase & Co. Securities Litigation, 2007 WL 2363311 (N.D. Ill. 2007); RMED Intern. Inc. v. Sloan’s Supermarkets Inc., 2003 WL 41996 (S.D.N.Y. 2003); Arcuri v. Trump Taj Mahal Assoc., 154 F.R.D. 97 (D.N.J. 1994).
PARTY INVOKING THE PRIVILEGE MUST SHOW GOOD CAUSE
Relatively few courts have imposed a “good cause” requirement on litigants invoking the attorney-client privilege against a fiduciary exception challenge. The Delaware District Court has done so in the context of a shareholder derivative suit in Valente v. Pepsico Inc., 68 F.R.D. 361, 367 (D. Del. 1975).
Citing Garner and Bailey v. Meister Brau Inc., 55 F.R.D. 211 (N.D. Ill. 1972), the court noted that “where a corporation seeks advice from legal counsel, and the information relates to the subject of a later suit by a minority shareholder in the corporation, the corporation is not entitled to claim the privilege as against its own shareholder, absent some special cause.” 68 F.R.D. at 367.
An Ohio bankruptcy court similarly imposed a “good cause” requirement on a creditor’s committee asserting the attorney-client privilege against a constituent creditor. In re Baldwin-United Corp., 38 B.R. 802, 805 (Bankr. S.D.Oh. 1984).
Finally, the District of Connecticut noted that “[t]he burden of establishing immunity from discovery rests with the party asserting the privilege” in a trust beneficiary’s suit against the trustee. Parker v. Stone, 2009 WL 1097914 (D. Conn. 2009)(quoting Babcock v. Bridgeport Hosp., 251 Conn. 790, 847, 742 A.2d 322 (1999)).
NO SHOWING OF GOOD CAUSE REQUIRED
One of the earliest decisions recognizing the fiduciary exception in the ERISA context is the Northern District of Illinois’ Donovan v. Fitzsimmons decision, 90 F.R.D. 583, 585 (N.D.Ill. 1981). The court, citing Garner and Riggs, held that where beneficiaries sue their fiduciaries alleging a breach of fiduciary duty, the attorney-client privilege does not attach to legal advice provided to the fiduciary in the course of performing fiduciary duties. The court also imported Garner’s “good cause” requirement on the party seeking to defeat the privilege.
Courts in fiduciary duty cases since Donovan, however, have refused to impose a “good cause” requirement outside of shareholder actions. The rationale suggests that corporate officers and directors, while still acting in fiduciary capacities, may have legitimate divergences of interests with individual stockholders, whereas the interests of trustees and plan fiduciaries are more commonly aligned with the beneficiaries they serve.
The District Court for the District of Columbia explained:
Such a [good cause] requirement…is properly limited to a corporate setting, in which the management of a sizeable corporation clearly cannot ‘pleas(e) all of its shareholders all of the time,’ and management requires ‘protection from those who might second-guess or even harass in matters purely of judgment.’… In a trustee relationship, on the other hand, there exists no legitimate need for a trustee to shield his actions from those whom he is obligated to serve.
Washington-Baltimore Newspaper Guild v. Washington Star Co., 543 F. Supp. 906, 909, n.5 (D.D.C. 1982)(quoting Garner, 430 F.2d at 1101).
Other courts, particularly in the ERISA context, have dispensed with the “good cause” requirement for the reasons addressed in Washington Star Co. See, e.g., Solis v. Food Employers Labor Relations Assoc., 644 F.3d 221, 229 (4th Cir. 2011); Lawrence v. Cohn, 2002 WL 109530, *5 (S.D.N.Y. 2002); Helt v. Metropolitan Dist. Comm’n, 113 F.R.D. 7 (D. Conn. 1986).
THE FIDUCIARY EXCEPTION IN RELATION TO ERISA
As discussed, the Northern District of Illinois’s Donovan decision, building on Garner and Riggs, is among the first to apply the fiduciary exception in the ERISA context. The 2nd Circuit in In re Long Island Lighting Co., also citing Riggs, acknowledged that “[a]n ERISA fiduciary cannot use the attorney-client privilege to narrow the fiduciary obligation of disclosure owed to the plan beneficiaries.” 129 F.3d 268, 272 (2d Cir. 1997).
Accordingly, it found that “an employer acting in the capacity of ERISA fiduciary is disabled from asserting the attorney-client privilege against plan beneficiaries on matters of plan administration.” Id.
The caveat “…matters of plan administration” is important. Courts have refused to recognize the fiduciary exception where the privilege is asserted with respect to non-fiduciary activities. See Kussman, Patricia A., Construction and Application of Fiduciary Duty Exception to Attorney-Client Privilege, 47 A.L.R. 6th 255, §12 (2009).
Some courts refer to this as the “settlor exception” where they distinguish between fiduciary and settlor acts, “the former being discretionary acts of plan administration and the latter involving the adoption, modification or termination of an employee benefit plan.” Wachtel v. Health Net, Inc. 482 F.3d 225, 233 (3d Cir. 2007).
Courts have also distinguished between legal advice sought purely on matters of plan administration from legal advice sought by fiduciaries with respect to their own personal liability as fiduciaries. The 9th Circuit in United States v. Mett, 178 F.3d 1058, 1064 (9th Cir. 1999), viewed this distinction through the lens of English common law. It ultimately held that legal memoranda advising plan fiduciaries of their own civil and criminal exposure for actions taken in the administration of plan assets were not subject to the fiduciary exception.
Accordingly, “courts have found that, ‘[w]hen an ERISA trustee seeks legal advice for his own protection, the legal fiction of trustee as representative of the beneficiaries is dispelled’ and therefore the fiduciary exception is not applicable.” Ascuncion v. Metro. Life Ins. Co., 493 F. Supp. 2d 716, 720-21 (S.D.N.Y. 2007)(quoting Black v. Bowes, 2006 WL 3771097 at *1 (S.D.N.Y. 2006)).
INSURERS IN RELATION TO EMPLOYEE WELFARE BENEFIT PLANS
There is a lively debate as to whether the fiduciary exception applies to insurers who fund plan benefits and administer claims. The 3rd Circuit in Wachtel v. Health Net Inc., 482 F.3d 225 (3d Cir. 2007), held as a blanket proposition that the fiduciary exception does not apply to ERISA plan insurers who also decide claims for plan benefits. The Wachtel ruling distinguished an insurer’s role from a traditional fiduciary’s role with respect to an employee welfare benefit plan.
The court first explained, unlike fiduciaries who hold plan assets in trust under ERISA, insurance companies generally retain legal title to the assets which may eventually be paid out as plan benefits. Id. at 234 (citing 29 U.S.C. §1103(b)(1)-(2)). The court also considered the structural conflict of interest that arises when an insurer both decides and funds benefit claims and the heightened standard of review courts may apply when reviewing such claim decisions. Id. at 234-35.
The court further considered “the additional conflict of handling multiple ERISA benefit plans at once, not to mention other, non-ERISA regulated customers.” Id. at 235. Finally, the court noted that the defendant insurer had paid for legal advice out of its own pocket, and not from plan assets, which undercut the notion that the legal advice was really for the benefit of plan beneficiaries. Given the significant differences between the role of a trustee and that of a plan insurer, the court concluded that there was no basis to extend the fiduciary exception to plan insurers.
The District of Massachusetts, on the other hand, has refused to follow Wachtel. The court in Smith v. Jefferson Pilot Financial Ins. Co., 245 F.R.D. 45 (D. Mass. 2007), found that the fiduciary exception applied to legal advice rendered to a plan insurer about the administration of the plaintiff’s claim. The Smith court reasoned: 1) that it was not persuaded that ERISA’s provision excepting insurance companies from holding plan assets in trust signaled an intention to exempt insurers from disclosure obligations; 2) that the attorney-client privilege should not be used to narrow ERISA’s disclosure obligations; and 3) that the interests of insurers and beneficiaries were not so divergent. The court said, “Under [ERISA]…insurers administering a plan owe the same duty to the beneficiaries as do other ERISA fiduciaries. The fact that an insurance company is a for-profit enterprise does not alter its fundamental obligations to ERISA.” 245 F.R.D. at 49 – 52.
More recent cases have rejected Wachtel and have followed Smith. See, e.g., Harvey v. Standard Ins. Co., 275 F.R.D. 629, 632 (N.D. Ala. 2011); Klein v. Northwestern Mutual Life Ins. Co., 806 F. Supp. 2d 1120, 1129-34 (S.D. Cal. 2011); Buzzanga v. Life Ins. Co. of N. Am., 2010 WL 1292162, *3 (E.D. Mo. 2010).
Among those cases rejecting a prophylactic exclusion of insurers under the fiduciary exception, an interesting issue arises as to when otherwise unprivileged legal advice pertaining to plan administration crosses the line and becomes privileged advice as to the fiduciary’s own liability. As articulated by the Western District of Pennsylvania, “[t]he critical inquiry with respect to the liability exception [to the fiduciary exception] is whether there exists a ‘divergence of interests and a threat of litigation’ such that it is warranted for the fiduciary to obtain confidential advice from counsel and assert attorney-client privilege on the matter against the beneficiary.” Cotillion v. United Refining Co., 2011 WL 6989832, *6 (W.D. Pa. 2011)(quoting Tatum v. R.J. Reynolds Tobacco Co., 247 F.R.D. 488, 498 (M.D.N.C. 2008)).
As the Southern District of California observed in Klein v. Northwestern Mut. Life Ins. Co., most courts now agree that the fiduciary exception no longer applies after the final denial of a claim for plan benefits. 806 F. Supp. 2d at 1132 (citing Allen v. Honeywell Retirement Earnings Plan, 698 F.Supp.2d 1197, 1202 (D. Ariz. 2010)). This is because “[t]he interests of plan participants and plan administrators undoubtedly diverge sufficiently upon the final denial of an administrative claim or upon the initiation of litigation.” Id. (quoting Allen, 698 F. Supp. 2d at 1202). “Courts have ‘considered it highly relevant that communications occurred after the challenged benefits determination took place,’ because, by that point, ‘there should be little need for administrators to consult counsel regarding a specific benefits determination.’” Asuncion v. Metropolitan Life Ins. Co., 493 F. Supp. 2d 716, 720 (S.D. N.Y. 2007)(quoting Black v. Bowes, 2006 WL 3771097, *3 (S.D.N.Y. 2006)).
While the Klein court found that whether the communication in question pre- or post-dated a final plan benefit determination is a “strong indicator” of whether the fiduciary exception applied, the court outlined other factors to be considered include evidence that:
1) The threat of litigation was more than a remote possibility; 2) the interests of the beneficiary and ERISA fiduciary had diverged significantly; 3) the documents or communications were not necessary to or relied upon in the administrative claim process; and 4) the documents relate to a settlor function (i.e. amendment of the plan) and were not considered in evaluating the claim at issue.
806 F. Supp. at 1133.
Courts also struggle with the application of the fiduciary exception at various stages of an administrative review. The Eastern District of Missouri, for example, held that the fiduciary exception applied to three otherwise privileged documents drafted before the claim fiduciary denied plaintiff’s claim for accidental death benefits. The court did not order production of a fourth document generated after plaintiff’s counsel requested an administrative appeal. It found that, “[b]y that time, ‘the prospect of litigation was sufficient to erect the attorney work product doctrine as a bar to the subject information.’” Buzzanga v. Life Ins. Co. of N. Am., 2010 WL 1292162, *4 (E.D. Mo. 2010)(quoting Geissal v. Moore Med. Corp., 192 F.R.D. 620, 625 (E.D. Mo. 2000)). Implicit in the court’s ruling, however, was that the fiduciary exception would not compel production of the document created after an administrative review commenced.
Contrast Buzzanga with Moore v. Metropolitan Life Ins. Co., 799 F. Supp. 2d 1290 (M.D. Ala. 2011), in which the Middle District of Alabama held that disputed documents, each created after the commencement of litigation, were subject to the fiduciary exception. The Moore ruling arises from the court’s in camera review of the documents, in which it found that the subject of the documents still addressed the administration of plaintiff’s claim and not the fiduciary’s potential liability. Id. at 1297. The District of Utah cautioned, in Gundersen v. Metropolitan Life Ins. Co., that the process of claim denial is an integral part of the overall claim administration process, and therefore the mere “’prospect of post-decisional litigation against the plan is an insufficient basis for gainsaying the fiduciary exception to the attorney-client privilege.’” 2011 WL 487755, *10 (D. Utah 2011)(quoting Lewis v. Unum Corp. Severance Plan, 203 F.R.D. 615, 620 (D. Kan. 2001)).
An unusual case arose in Moss v. Unum Life Ins. Co., 2011 WL 321738, *5 (W.D. Ky. 2011), in which the plaintiff commenced suit prior to receiving a final decision on her claim for life insurance benefits. The court found that documents created after litigation, but before a final benefit determination, were privileged and not subject to the fiduciary exception. The court’s determination turned on the contents of the documents themselves, as described in Unum’s privilege log, which focused on litigation, not plan administration.
An additional factor courts weigh in determining the application of the fiduciary exception is when in the process plaintiff retains counsel and threatens litigation. The Eastern District of North Carolina, in Fortier v. Principal Life Ins. Co., 2008 WL 2323918, *2 (E.D.N.C. 2008), took note of the fact that disputed documents were created after plaintiff had retained counsel and had made litigation threats to deny application of the fiduciary exception.
THE FIDUCIARY EXCEPTION AND THE ATTORNEY WORK PRODUCT DOCTRINE
While some courts have applied the fiduciary exception in the context of discovery arguably protected by the attorney work product doctrine (see, e.g., Harvey v. Standard Ins. Co., 275 F.R.D. 629, 636-37 (N.D. Ala. 2011); Riggs National Bank of Washington, D.C. v. Zimmer, 355 A.2d 709, 715 (Del. Ch. 1976)), others have refused citing material differences between the attorney-client privilege and attorney work product doctrine. The attorney-client privilege belongs to the client, whereas the work product doctrine is invoked by the attorney. Panter v. Marshall Field & Co., 80 F.R.D. 718 (N.D. Ill. 1978). The fiduciary exception arises where the parties – the trustee or fiduciary and beneficiary – share a common interest upon which a fiduciary duty rests. The work product doctrine, conversely, arises when the parties are in an adverse relationship. See In re International Systems & Controls Corp. Securities Litigation, 693 F.2d 1235 (5th Cir. 1982). Finally, as is typically required to pierce any work product claim, the party seeking production must show good cause and that the information sought is otherwise not practically available. As discussed above, a showing of good cause is not always required from the party seeking production in order to prevail against the fiduciary exception in the context of the attorney-client privilege.
When defending otherwise privileged documents from an assertion of the fiduciary exception, counsel should consider the following:
• To begin with, does the communication satisfy criteria for the attorney-client privilege or work-product doctrine. The fiduciary exception has relevance only as a means of piercing a privilege.
• Does the communication pertain to matters of plan administration as opposed to plan design (i.e. amendments to or termination of a plan)? The latter does not implicate fiduciary duties and the fiduciary exception has no relevance.
• Has the fiduciary paid for legal advice from plan assets or their own funds? The latter case supports a conclusion that the fiduciary, and not the beneficiaries, was the intended client and recipient of legal advice.
• Where in the claim administration process were the disputed communications written? Communications predating a final claim decision are more likely to have the fiduciary exception apply.
• Does the content of the communication address how to determine the claim under the terms of the plan (in which the fiduciary exception is more likely to apply) or litigation exposure or strategy (in which the fiduciary exception is less likely to apply).
• At the time the disputed communication occurred, had plaintiff retained counsel and/or made threats of litigation? If so, the argument that there has been a divergence of interests between the fiduciary and beneficiary is better supported.
Brooks Magratten is a partner of Pierce Atwood LLP. He works in the firm’s Providence, R.I., and Boston offices, concentrating on ERISA, insurance and commercial litigation in the northeastern United States. Brooks is a former DRI Director and Chair of DRI’s Life, Health & Disability Insurance Committee.
This alert was originally published in Thomson Reuters News and Insight Update.