Lane v. SHARP PACKAGING SYSTEMS, INC.,

• Decision Date: 20 March 2002
• Docket Number: No. 00-1797.,00-1797.
• Citation: 2002 WI 28,251 Wis.2d 68,640 N.W.2d 788
• Parties: Harold C. LANE, Jr., Plaintiff-Respondent, v. SHARP PACKAGING SYSTEMS, INC., Paul W. Scarberry and Virginia Scarberry, Defendants-Appellants, John H. NIEBLER and Niebler, Pyzyk, Klaver & Wagner, LLP, Intervening-Appellants.
• Court: Wisconsin Supreme Court

251 Wis.2d 68

2002 WI 28

640 N.W.2d 788

Harold C. LANE, Jr., Plaintiff-Respondent, v. SHARP PACKAGING SYSTEMS, INC., Paul W. Scarberry and Virginia Scarberry, Defendants-Appellants, John H. NIEBLER and Niebler, Pyzyk, Klaver & Wagner, LLP, Intervening-Appellants.

No. 00-1797.

Supreme Court of Wisconsin.

Oral argument November 5, 2001.

Decided March 20, 2002.

For the defendants-appellants there were briefs by Larry J. Britton, William J. Richards and Vlasak & Britton, S.C., Milwaukee, and James Reiher, Terrance E. Nilles and von Briesen, Purtell & Roper, Milwaukee, and oral argument by Larry J. Britton and James C. Reiher.

For the intervening appellants there were briefs by Terry E. Johnson, Maria D. Sanders and Peterson, Johnson & Murray, S.C., Milwaukee, and oral argument by Terry E. Johnson.

For the plaintiff-respondent there was a brief by James O. Huber, Maureen A. McGinnity, David W. Simon and Foley & Lardner, Milwaukee, and oral argument by Maureen A. McGinnity.

s 1. N. PATRICK CROOKS, J.

This case is before the court on certification by the Court of Appeals, District II, pursuant to Wis. Stat. § 809.61 (1999-2000).¹ While this case arises from the termination of Harold C. Lane (hereinafter Lane) by his employer, Sharp Packaging Systems, Inc. (hereinafter Sharp), the issues before this court relate to the parties' discovery dispute. During discovery, Lane filed a subpoena duces tecum, requesting documents from Attorney John Niebler (hereinafter Niebler) and his law firm, Niebler, Pyzyk, Klaver & Wagner, LLP, (hereinafter the Niebler law firm) regarding their representation of Sharp. Lane also filed a subpoena duces tecum requesting production of documents from third parties, including M&I Mortgage Co. Sharp and the Scarberrys, the sole shareholders, filed motions to quash both subpoenas. The circuit court denied both motions and we now address the discovery issues in dispute. Specifically, we address: (1) whether a corporation can invoke the lawyer-client privilege against a former member of the corporation's board of directors; (2) whether an attorney's billing records are protected by the lawyer-client privilege; (3) whether the circuit court erred in ordering production of documents reflecting communications with third parties; (4) whether the circuit court should conduct an in camera review of records when otherwise privileged records are sought under the crime-fraud exception to the attorney client privilege; and (5) whether documents created prior to an employee's termination are protected as work product. We also review the circuit court's award of attorneys' fees.

s 2. Recognizing that the discovery issues in this case are matters of first impression and that the issues "go to the very core of the lawyer-client relationship and the reach of the lawyer-client privilege" the court of appeals certified the case to this court. We review the Waukesha County Circuit Court's decision, the Honorable Kathryn W. Foster, presiding, regarding the lawyer-client privilege, the work product doctrine, and the award of attorneys' fees.

s 3. We first address whether the circuit court erroneously exercised discretion in concluding that the documents requested from Niebler and his law firm are not protected by the lawyer-client privilege. We first conclude that Sharp can effectively assert the lawyer-client privilege against Lane. Lane's status as a former director does not allow him to waive the lawyer-client privilege as a representative of Sharp, nor does Lane's status preclude the current board of directors from asserting the lawyer-client privilege against him regarding documents prepared during his tenure. Second, we conclude that attorney billing records are protected by the lawyer-client privilege. The circuit court erroneously exercised its discretion by failing to examine the nature of the billing records in this case, specifically, that the billing records reveal the nature of legal services provided and the substance of lawyer-client communications. Third, we conclude that the circuit court did not erroneously exercise its discretion in ordering production of non-privileged documents reflecting communications with third parties. The circuit court carefully examined the relevant facts, applied the proper standard of law, and reached a reasonable conclusion on that issue. Finally, we conclude that the circuit court did not erroneously exercise its discretion in concluding that Lane established a prima facie case that the crime-fraud exception to the lawyer-client privilege applies. We further conclude, however, that the circuit court did err in failing to conduct an in camera review. Rather than considering the appropriate factors, the circuit court simply allowed Lane to overcome the lawyer-client privilege by establishing a prima facie case. Upon remand, we instruct the circuit court to conduct an in camera review to determine if the crime-fraud exception applies.

s 4. In addition to the lawyer-client privilege issues, we review the circuit court's decision that prior to May 31, 1999, litigation was not imminent and documents prepared during that time are not protected by the work product doctrine. We conclude that the circuit court erroneously exercised its discretion because it failed to apply the proper standard of law and did not conduct an in camera review to determine if the documents were prepared or obtained in anticipation of litigation.

s 5. Finally, we review the circuit court's award of attorneys' fees to Lane. Based on the record, we conclude that the circuit court's award of half the attorneys' fees and expenses pertaining to two motions was reasonable and not an erroneous exercise of discretion.

I. FACTS

A. Lane's Employment with Sharp

s 6. Sharp Packaging Systems, Inc. (Sharp) is a Wisconsin corporation of which Paul and Virginia Scarberry (hereinafter the Scarberrys) are, and at all relevant times have been, the sole shareholders. In 1992, Harold C. "Bud" Lane joined Sharp as Executive Vice President of Marketing and Sales. During his employment, Lane and Sharp maintained several agreements, including an employment agreement, a stock option agreement, a stock transfer restriction agreement, and a non-compete agreement.

s 7. In March 1995, Sharp, the Scarberrys, and Lane entered into an employment agreement defining the terms and conditions of Lane's continued employment with Sharp. The employment agreement allowed Sharp to terminate Lane's employment for any reason with ninety days written notice. The agreement also provided that Lane maintained his position as Executive Vice President of Sharp, received the same compensation as Paul Scarberry, and was elected a director of Sharp's board of directors.² Lane was also given an equal voice in selecting Sharp's professional service providers and Lane, as well as Paul Scarberry, had veto power to discharge any professional failing to provide satisfactory performance. Furthermore, in recognition of Lane's service to Sharp, the employment agreement referenced a Stock Option Agreement and a Stock Transfer Restriction Agreement s 8. The Stock Option Agreement gave Lane the option to purchase a 25% stock ownership in Sharp. Until Lane exercised the option, the agreement provided that he shall have no rights as a shareholder of the company, but shall be given at least forty-eight hours notice of, and shall be entitled to be present at, any meeting at which action is to be taken by shareholders. If Lane chose not to exercise his stock option, and his employment was terminated before the agreement expired, the agreement provided that Lane would be paid a sum of money according to an appraisal formula in the agreement, based on the present stock value.³

s 9. During the time of Lane's employment, Sharp prospered. From October 1992, to October 1998, Sharp's gross sales more than doubled and shareholders' equity more than quadrupled. The company's value increased from approximately $1.8 million in 1992 to approximately $11 million by October 1995.

s 10. On March 2, 1999, Sharp terminated Lane's employment, effective May 31, 1999. Lane had not exercised his stock option at the time of his termination. Accordingly, on May 26, 1999, pursuant to the Stock Option Agreement, Lane elected to surrender his stock options and receive his lump sum stock appreciation rights payments. Pursuant to the appraisal formula and procedure laid out in the Stock Transfer Restriction Agreement, Sharp and the Scarberrys retained Theodore F. Gunkel of Madison Valuation Associates to appraise the fair market value of Lane's stock appreciation rights. Lane received the appraisal in October 1999, which revealed that prior to Lane's termination, there was a distribution of profit to the shareholders. The appraiser concluded that the value of Lane's 25% interest in Sharp was $91,000. Lane disagreed with Gunkel's appraisal and retained Bryan Browning of Valuation Research Corp. to conduct an additional appraisal, as permitted under the parties' agreements.

B. Niebler's Relationship with Sharp and the Scarberrys

s 11. Since approximately 1985, Attorney John Niebler and his law firm, Niebler, Pyzyk, Klaver & Wagner, LLP (hereinafter "Niebler law firm"), have represented both Sharp and the Scarberrys in various legal matters. Since 1992, Niebler has advised Sharp and the Scarberrys about Sharp's employment agreements and relationship with Lane. At various times since 1994, Niebler and his law firm have also provided legal advice to Sharp and the Scarberrys about a proposed termination of Lane's employment with Sharp. Niebler and his law firm also did considerable legal work for Sharp regarding other matters. From at least 1995 through 1999, Niebler's firm sent monthly bills to Sharp, requesting payment and revealing the nature of legal services performed.

s 12. From 1993 to 1995, as Sharp's lawyer, Niebler served on Sharp's Board of Directors. Pursuant to...