In re XL Specialty Ins. Co.

• Decision Date: 29 June 2012
• Docket Number: No. 10–0960.,10–0960.
• Citation: In re XL Specialty Ins. Co., 373 S.W.3d 46, 55 Tex. Sup. Ct. J. 1081 (Tex. 2012)
• Parties: In re XL SPECIALTY INSURANCE COMPANY and Cambridge Integrated Services Group, Inc., Relators.
• Court: Texas Supreme Court

373 S.W.3d 46

55 Tex. Sup. Ct. J. 1081

In re XL SPECIALTY INSURANCE COMPANY and Cambridge Integrated Services Group, Inc., Relators.

No. 10–0960.

Supreme Court of Texas.

Argued Nov. 10, 2011.

Decided June 29, 2012.

David L. Brenner, Belinda May Arambula, Burns Anderson Jury & Brenner LLP, Austin, TX, for XL Specialty Insurance Company.

Michael P. Doyle, Jeffrey L. Raizner, Patrick Mason Dennis, Doyle Raizner LLP, Alan B. Daughtry, Attorney–at–Law, Houston, TX, for Real Party in Interest Jerome Wagner.

David L. Brenner, Burns Anderson Jury & Brenner LLP, Austin, TX, for Other Interested Party Melissa Martinez.

Chief Justice JEFFERSON delivered the opinion of the Court, in which Justice HECHT, Justice WAINWRIGHT, Justice MEDINA, Justice GREEN, Justice JOHNSON, Justice GUZMAN, and Justice LEHRMANN joined.

We must decide whether, in a bad faith action brought by an injured employee against a workers' compensation insurer, the attorney-client privilege protects communications between the insurer's lawyer and the employer during the underlying administrative proceedings. We hold that the privilege does not apply.

I. Background

XL Specialty Insurance Company is Cintas Corporation's workers' compensation insurer. XL's policy included standard provisions requiring Cintas to cooperate in the investigation, settlement, and defense of a claim. The policy also provided for a one million dollar deductible per claim.

Jerome Wagner, a Cintas employee, sought workers' compensation benefits for a work-related injury. Melissa Martinez, a claims adjuster with XL's third party administrator, Cambridge Integrated Services Group, Inc., denied the claim. In a contested case hearing before the Division of Workers' Compensation, the hearing officer determined that Wagner sustained a compensable injury and was entitled to medical and temporary income benefits. During the course of the administrative litigation, XL's outside counsel, Rebecca Strandwitz of Flahive, Ogden & Latson, P.C., sent communications about the status and the evaluation of the proceedings to Cambridge and Cintas.

After the workers' compensation dispute was resolved, Wagner sued XL, Cambridge, and Martinez for breach of the common law duty of good faith and fair dealing and violations of the Insurance Code and Texas Deceptive Trade Practices Act. During discovery, Wagner sought the communications made between Strandwitz and the insured, Cintas, during the administrative proceedings. XL and Cambridgeargued that the attorney-client privilege protected those communications. After an in-camera inspection, the trial court held that the privilege did not apply.

XL and Cambridge sought mandamus relief from the court of appeals, which denied the petition. 368 S.W.3d 549, 550. They then petitioned this Court for a writ of mandamus, arguing that the attorney-client privilege protects the communications.

II. Attorney–Client Privilege in Multi–Party Litigation

Confidential communications between client and counsel made to facilitate legal services are generally insulated from disclosure. SeeTex.R. Evid. 503(b); Huie v. DeShazo, 922 S.W.2d 920, 922 (Tex.1996). Recognized as “the oldest of the privileges for confidential communications known to the common law,” United States v. Zolin, 491 U.S. 554, 562, 109 S.Ct. 2619, 105 L.Ed.2d 469 (1989) (citation omitted), the attorney-client privilege promotes free discourse between attorney and client, which advances the effective administration of justice. Republic Ins. Co. v. Davis, 856 S.W.2d 158, 160 (Tex.1993). But a strict rule of confidentiality may also suppress relevant evidence. Id. For that reason, “[c]ourts balance this conflict between the desire for openness and the need for confidentiality in attorney-client relations by restricting the scope of the attorney-client privilege.” Id. The privilege belongs to the client and must be invoked on its behalf. West v. Solito, 563 S.W.2d 240, 244 n. 2 (Tex.1978).

Texas evidentiary rules define the privilege as follows:

A client has a privilege to refuse to disclose and to prevent any other person from disclosing confidential communications made for the purpose of facilitating the rendition of professional legal services to the client:

(A) between the client or a representative of the client and the client's lawyer or a representative of the lawyer;

(B) between the lawyer and the lawyer's representative;

(C) by the client or a representative of the client, or the client's lawyer or a representative of the lawyer, to a lawyer or a representative of a lawyer representing another party in a pending action and concerning a matter of common interest therein;

(D) between representatives of the client or between the client and a representative of the client; or

(E) among lawyers and their representatives representing the same client.

Tex.R. Evid. 503(b).¹

Rule 503(b) protects not only confidential communications between the lawyer and client, but also the discourse among their representatives. It is an exception to the general principle that the privilege is waived if the lawyer or client voluntarily discloses privileged communications to a third party. SeeTex.R. Evid. 511(1).

XL ² relies primarily on the privilege defined in Rule 503(b)(1)(C)—which has been variously described as the “joint client” privilege, the “joint defense” privilege, and the “common interest” privilege. Courts sometimes use these terms interchangeably, but they involve distinct doctrines that serve different purposes. As we explain below, however, none of them accurately describes the privilege at issue in this case.

A. Joint Client Privilege

The joint client or co-client doctrine applies “[w]hen the same attorney simultaneously represents two or more clients on the same matter.” Paul R. Rice, Attorney–Client Privilege in the United States § 4:30 (2011). Joint representation is permitted when all clients consent and there is no substantial risk that the lawyer's representation of one client would be materially and adversely affected by the lawyer's duties to the other. 2 Restatement (Third) of the Law Governing Lawyers § 128 (2000). “Where [an] attorney acts as counsel for two parties, communications made to the attorney for the purpose of facilitating the rendition of legal services to the clients are privileged, except in a controversy between the clients.” In re JDN Real Estate—McKinney L.P., 211 S.W.3d 907, 922 (Tex.App.-Dallas 2006, pet. denied); see alsoTex.R. Evid. 503(d)(5) (noting that communications made by two or more clients to a lawyer retained in common are not privileged “when offered in an action between or among any of the clients”).

B. Joint Defense and Common Interest Doctrines

Representations involving multiple clients with separate counsel call for the application of what have been called the joint defense and common interest doctrines. Courts and parties often confuse the relevant nomenclature. See In re Teleglobe Commc'n Corp., 493 F.3d 345, 363 n. 18 (3d Cir.2007) ( “[M]uch of the caselaw confuses the community-of-interest privilege (which is the same as the ‘common-interest privilege’ ...) with the co-client privilege.”) (citation omitted).³ Unlike the joint client rule, the joint defense and common interest rules apply when there has been sharing of information between or among separately represented parties. See 1 Restatement (Third) of the Law Governing Lawyers § 75 cmt. c (“Co-client representations must also be distinguished from situations in which a lawyer represents a single client, but another person with allied interests cooperates with the client and the client's lawyer....”).

The joint defense rule applies when multiple parties to a lawsuit, each represented by different attorneys, communicate among themselves for the purpose of forming a common defense strategy. In re JDN, 211 S.W.3d at 923. Unlike the common interest doctrine, the joint defense doctrine applies only in the context of litigation. Vincent S. Walkowiak, The Attorney–Client Privilege in Civil Litigation 18 (4th ed.2008).

The common interest rule (also known as the “community of interest,” “pooled interests,” or “allied lawyer” doctrine) is more expansive than the joint defense doctrine.⁴ The parties must share a mutual interest, but unlike the joint defense doctrine, the common interest rule applies to “two or more separately represented persons whatever their denomination in pleadings and whether or not involved in litigation.” 1 Restatement (Third) of the Law Governing Lawyers § 76 reporter's note cmt. b; see alsoRice § 4:35, 474–75 (“The ‘community of interest’ rule is distinguished from the ‘joint defense’ rule by the fact that the collaboration between the parties need not be related to a pending legal action.”). Thus, plaintiffs and nonlitigating persons with common interests can assert this exception to the waiver rule. 1 Restatement (Third) of the Law Governing Lawyers § 76 reporter's note cmt. b (noting that common interest is the preferable term because it includes “both claiming as well as defending parties and nonlitigating as well as litigating persons”).⁵

III. Texas Rule of Evidence 503(b)(1)(C)—The Allied Litigant Doctrine

Courts of appeals have generally applied Rule 503(b)(1)(C) to joint defense situations where multiple defendants, represented by separate counsel, work together in a common defense.⁶ Notably, and in contrast to the proposed federal rule,⁷ Texas requires that the communications be made in the context of a pending action.⁸SeeTex.R. Evid. 503(b)(1)(C) (protecting from disclosure communications between a client “to a lawyer ... representing another party in a pending action and concerning a matter of common interest therein”) (emphasis added).⁹ Although criticized,¹⁰ the pending action requirement limits the privilege “to situations where the benefit and the necessity are at their highest, and ... restrict[s] the opportunity for misuse.” United States v. Duke Energy Corp., ...