State Compensation Ins. Fund v. WPS, Inc.

• Decision Date: 04 March 1999
• Docket Number: No. B112133,B112133
• Citation: 70 Cal.App.4th 644,82 Cal.Rptr.2d 799
• Court: California Court of Appeals Court of Appeals
• Parties: , 99 Cal. Daily Op. Serv. 1695, 1999 Daily Journal D.A.R. 2149 STATE COMPENSATION INSURANCE FUND, Plaintiff and Respondent, v. WPS, INC., Defendant and Appellant; Adam J. Telanoff et al., Objectors and Appellants.

Page 799

82 Cal.Rptr.2d 799

70 Cal.App.4th 644, 99 Cal. Daily Op. Serv. 1695,

1999 Daily Journal D.A.R. 2149

STATE COMPENSATION INSURANCE FUND, Plaintiff and Respondent, v. WPS, INC., Defendant and Appellant Adam J. Telanoff et al., Objectors and Appellants.

No. B112133.

Court of Appeal, Second District, Division 4, California.

March 4, 1999.

Telanoff & Telanoff, Santa Monica, and Adam J. Telanoff, in pro. per., for Defendant and Appellant and Objectors and Appellants.

Ronald M. Telanoff, in pro. per., for Objector and Appellant.

Barger & Wolen LLP, Los Angeles, Richard de Saint Phalle, San Francisco, John C. Holmes, Los Angeles, Ethan A. Miller, San Francisco, and Andrew S. Williams, Beverly Hills, Charles W. Savage, Richard A. Krimen, San Francisco, and Isabel Lallana, for Plaintiff and Respondent.

CHARLES S. VOGEL, P.J.

INTRODUCTION

Adam Telanoff, counsel for WPS, Inc., received copies of State Compensation Insurance Fund's ("State Fund") internal documents containing privileged attorney-client communications because State Fund's outside lawyers inadvertently sent them along with other documents produced for use at trial. Adam Telanoff gave some of the privileged documents to an expert witness he consulted for the WPS matter. The expert witness then provided those documents to another lawyer who was adverse to and pursuing a different claim against State Fund. When State Fund's counsel discovered the error and requested that the documents be returned, Adam Telanoff refused. The trial court found that such conduct was in bad faith and contrary to the ethical standards governing the legal profession. Accordingly, the trial court imposed monetary sanctions against appellants WPS, Inc., Telanoff & Telanoff, Adam Telanoff, and Ronald Telanoff, in favor of respondent State Fund pursuant to Code of Civil Procedure section 128.5. Appellants filed this appeal.

Although we agree in principle with the trial court, we vacate the award of sanctions because, as respondent concedes, there is no established California law governing what the obligation of a lawyer is upon receiving obviously privileged materials through the

inadvertence of another. However, because it is probable that similar circumstances will reoccur in the ebb and flow of discovery and litigation matters, this opinion provides a standard for future application by lawyers confronted with a predicament comparable to the one presented here.

FACTUAL AND PROCEDURAL BACKGROUND

In October 1993, National Commercial Recovery, Inc., State Fund's assignee, brought the underlying action against WPS for underpayment of the premium for workers' compensation insurance. WPS was represented by Attorney Adam Telanoff, and the law firm of Telanoff & Telanoff. WPS filed a cross-complaint against State Fund alleging bad faith.

During the litigation, the parties agreed to stipulate to a protective order regarding documents which State Fund deemed to be of a confidential or proprietary nature, whereby such documents were to be placed under seal with the court.

Pursuant to discovery requests propounded by WPS, State Fund produced on April 4, 1996, approximately 7,000 pages of documents. ¹ On or about August 23, 1996, approximately four months after the discovery cut-off date, counsel for State Fund sent to the offices of Telanoff & Telanoff three boxes of documents, which were the same documents originally produced during discovery. In addition, 273 pages of "Civil Litigation Claims Summary" forms prepared by employees of State Fund were erroneously included with those previously produced documents. The heading at the top of each claim summary form reads: "ATTORNEY-CLIENT COMMUNICATION/ ATTORNEY WORK PRODUCT," followed by: "DO NOT CIRCULATE OR DUPLICATE," and "(Complete and Return to SCIF Civil Litigation Center)." The word "CONFIDENTIAL" is repeatedly printed around the perimeter of the first page of the form. All of the pages of documents, including the "Civil Litigation Claims Summary" documents, were sequentially numbered.

After Adam Telanoff received the boxes of documents, in his words, he "called Ethan Miller, counsel for [State Fund] and asked what the boxes were. Mr. Miller told me that they were documents for use at trial."

The underlying matter was tried by a jury, resulting in a verdict in favor of State Fund in December 1996.

On December 19, 1996, the law firm of Sheppard, Mullin, Richter & Hampton, counsel for State Fund in a separate case pending in the Los Angeles Superior Court entitled Bonded Motors & Parts, Inc. v. State Compensation Insurance Fund (Super.Ct.L.A.County, No. BC082618) received from opposing counsel a request for production of the claim summary forms at issue here. The request for production had attached as an exemplar a civil litigation claims summary form pertaining to WPS.

On December 20, 1996, counsel for State Fund in the present matter received a copy of the claim summary attached as an exemplar to the request for production of documents in the Bonded Motors case. The exemplar claim summary bore Bates stamp numbers "SC/WP006606," "SC/WP006607," "SC/WP006600," "SC/WP006603," "SC/WP006604," and "SC/WP006605," which corresponded to the Bates stamp numbers on the documents received by Telanoff & Telanoff on August 23, 1996.

On December 23, 1996, State Fund's counsel, Ethan Miller, contacted Adam Telanoff and demanded the return of the "Civil Litigation Claims Summary" documents. Telanoff refused. Miller then gave Telanoff ex parte notice that he would appear and seek an order to compel return of the documents.

State Fund filed a memorandum of points and authorities in support of its ex parte application for an order (1) to show cause why appellants should not be held in contempt for violating a protective order, (2) compelling destruction or return of the documents, and (3) for sanctions against WPS and Adam Telanoff.

At the hearing on December 30, 1996, the trial court made the preliminary finding that State Fund had "made a prima facie showing that it has suffered or may in future suffer irreparable injury consisting in the dissemination to one or more third parties of one or more 'Civil Litigation Claims Summary' forms apparently intended by State Fund as a means of confidential communication between its [claims department and its in house lawyers], assuming, arguendo, the attorney-client privilege has not been waived [.][p] ... Good cause exists to warrant a preliminary determination that either WPS ... Adam Telanoff or Ronald Telanoff, both of whom are counsel of record for WPS in the matter at bench, (1) have certain privileged Fund documents in their possession, custody or control, and (2) have knowledge of facts relevant to the question of how, when, in what manner and for what consideration, if any, the [claims summary] ... came into the hands of counsel for plaintiff in the Bonded Motors action." Appellants filed written opposition, which included the declaration of Adam Telanoff.

At that hearing, the trial court indicated that it did not find that the protective order stipulated to by the parties had been violated by counsel for WPS, and that the court was not inclined to consider the matter as a contempt proceeding. However, the court deferred its decision regarding sanctions and the court ordered that evidence would be taken and argument heard on January 17, 1997.

The court received testimony from numerous individuals. Isabel Lallana, in-house counsel for State Fund, testified that the claim summary forms were created by her and others to identify litigation issues as they relate to the facts in a claim form, and to identify issues the legal department would like to know from the claims department. The forms would be shown to management within State Fund and to outside co-counsel to facilitate their understanding of the strengths and weaknesses of cases. Ms. Lallana and others in the legal department would send the forms to State Fund assistant claims managers as part of State Fund's investigative process when bad faith litigation was commenced against it; when completed the forms became part of the legal department's litigation file. She had sent the claims summary forms to outside co-counsel Victor Rosenblatt of Buchalter, Nemer, Fields & Younger with the intent that they be used as part of the litigation investigative process. She also forwarded to the Buchalter firm a large volume of documents from State Fund's claims files, for use in responding to WPS's request for production of documents.

Victor Rosenblatt, the attorney responsible for the initial document production, testified that he reviewed the documents sent to him by Ms. Lallana in order to identify privileged documents and mark them as confidential. He had numerous conversations with Ms. Lallana regarding the document production.

Ethan Miller, the attorney responsible for sending the three boxes of documents which contained the claim summary forms at issue here, testified that the content of the documents was intended to be identical to the documents previously sent, with the addition of Bates stamp numbers to facilitate reference to the documents at trial. He testified that he had personally reviewed the documents and was assisted in doing so by a paralegal to ensure they were identical to the documents previously produced. Nonetheless, he overlooked the presence of the claim summary forms. He did not intend to produce the forms to counsel for WPS.

State Fund's counsel used yellow coding sheets to identify privileged documents, and listed each document believed to be privileged on a log produced to WPS. However, the privilege log prepared by counsel for State Fund did not identify the claim summary forms.

H. Samuel Smith, retained by WPS as an expert witness in the underlying matter, was given portions of the claims summary forms by Adam Telanoff about two weeks before trial. Mr. Smith had not seen such forms before, which "pi...