Montgomery v. Etreppid Technologies, LLC

• Decision Date: 18 April 2008
• Docket Number: No. 3:06-CV-00056-PMP-VPC.,No. 3:06-CV-00145-PMP-VPC.,3:06-CV-00056-PMP-VPC.,3:06-CV-00145-PMP-VPC.
• Citation: 548 F.Supp.2d 1175
• Parties: MONTGOMERY, et al., Plaintiffs, v. ETREPPID TECHNOLOGIES, LLC, et al., Defendants. And All Related Matters.
• Court: U.S. District Court — District of Nevada

548 F.Supp.2d 1175

MONTGOMERY, et al., Plaintiffs, v. ETREPPID TECHNOLOGIES, LLC, et al., Defendants And All Related Matters.

No. 3:06-CV-00056-PMP-VPC.

No. 3:06-CV-00145-PMP-VPC.

United States District Court, D. Nevada.

April 18, 2008.

Deborah A. Klar, Ryan M. Lapine, Tuneen E. Chisolm, Liner Yankelevitz Sunshine & Regenstreif, LLP, Los Angeles, CA, Mark H. Gunderson, Law Office of Mark H. Gunderson, Reno, NV, for Plaintiffs.

Adam G. Lang, Jerry M. Snyder, J. Stephen Peek, Hale Lane Peek Dennison and Howard, Reno, NV, Brian M. Heberlig, Reid H. Weingarten, Robert A. Ayers, Steptoe & Johnson LLP, Washington, DC, Jacquelyn A. Beatty, Karr, Tuttle, & Campbell, Brian C. Park, Douglas F. Stewart, J. Nicole Trotta, Robert Crowley, Dorsey & Whitney LLP, Seattle, WA, for Defendants.

ORDER

VALERIE P. COOKE, United States Magistrate Judge.

Before the court is eTreppid Technologies, LLC's ("eTreppid") points and authorities in support of its assertion of the attorney-client privilege against Dennis Montgomery (# 427). Also before the court is Dennis Montgomery ("Montgomery") and the Montgomery Family Trust's ("the Trust") (collectively the "Montgomery Parties") memorandum of points and authorities showing that eTreppid's attorney-client privilege objections should be overruled in their entirety (# 428 and # 429). Both eTreppid and Montgomery filed replies (# 438 and # 439). eTreppid additionally filed a supplement and errata to their supplement (# s443-445). The court has thoroughly reviewed the record and the parties' submissions and concludes that eTreppid may withhold attorney-client privileged communications from Montgomery.

I. HISTORY & PROCEDURAL BACKGROUND

Plaintiffs in this action are Dennis Montgomery and the Montgomery Family Trust, members of eTreppid (# 7). Defendants and counter-claimants are eTreppid Technologies, LLC, a limited liability company registered in the State of Nevada, and Warren Trepp, a member of eTreppid. Id. eTreppid is "in the business of developing and marketing software for various applications" (# 393).¹

The Montgomery Parties' main claim is that eTreppid unlawfully used and sublicensed certain software that Montgomery invented and developed, and for which the Trust owns copyrights (# 7). eTreppid's primary counter-claim is that between December 2005 and January 2006, Montgomery knowingly destroyed and/or deleted software from eTreppid's computers and servers, and also stole a complete copy of the software for his personal use and benefit (# 393). eTreppid claims that by stealing the software, Montgomery misappropriated eTreppid's trade secrets. Id.

This dispute involves the Montgomery Parties' discovery requests, which eTreppid asserts implicate the attorney-client privilege. Montgomery claims that as a member and former manager of eTreppid, he is a "joint client" with eTreppid for the purposes of the attorney-client privilege; as such, eTreppid may not assert the attorney-client privilege against him with respect to privileged communications created during the time he was a manager and member of eTreppid (# 428). eTreppid's position is that it is the sole client for the purposes of the attorney-client privilege, that the ability to assert or waive the privilege belongs to current management, and that Montgomery is no longer current management as he is adverse to eTreppid and has been since 2006 (# 427). As the parties were unable to resolve this issue, the court ordered that the parties file simultaneous briefs setting out their respective views (# 419).

II. DISCUSSION

A. Attorney-Client Privilege

"The attorney-client privilege is one of the oldest recognized privileges for confidential communications." Swidler & Berlin v. U.S., 524 U.S. 399, 403, 118 S.Ct. 2081, 141 L.Ed.2d 379 (1998). Its main purpose is "to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and the administration of justice." Upon Co. v. United States, 449 U.S. 383, 389, 101 S.Ct. 677, 66 L.Ed.2d 584 (1981). The privilege extends to "confidential disclosures made by a client to an attorney in order to obtain legal advice ... as well as an attorney's advice in response to such disclosures." U.S. v. Chen, 99 F.3d 1495, 1501 (9th Cir.1996).

Only the holder of the attorney-client privilege may waive it. Tennenbaum v. Deloitte & Touche, 77 F.3d 337 340-41 (9th Cir.1996). The privilege is not absolute and may be waived or lost under certain circumstances. Weil v. Investment/Indicators, Research & Management, 647 F.2d 18, 24 (9th Cir. 1981) (privilege waived upon voluntary disclosure to third-party); see also In re Napster, Inc. Copyright Litigation, 479 F.3d 1078, 1090 (9th Cir.2007) (privilege lost due to crime-fraud exception). Because it impedes "the full and free discovery of the truth, the attorney-client privilege is strictly construed" and "`applies only where necessary to achieve its purpose.'" United States v. Talao, 222 F.3d 1133, 1140 (9th Cir.2000) (quoting Weil, 647 F.2d at 24 and Fisher v. United States, 425 U.S. 391, 403, 96 S.Ct. 1569, 48 L.Ed.2d 39 (1976)).

B. Analysis

The essential issue here is whether, over the objections of eTreppid, Montgomery has the right to access attorney-client privileged communications for the time period during which Montgomery served as a manager and active member of eTreppid. The issue turns this question: who is the client for purposes of the attorney-client privilege?

The parties generally agree that the attorney-client privilege belongs to the "client," and that only the "client" may assert or waive the privilege. However, the parties disagree as to who the client is. eTreppid takes the "entity is the client" position, arguing that eTreppid, as a limited liability company ("LLC"), is the sole client. Montgomery contends that the "joint client exception" applies here — he agrees that eTreppid is a "client," but argues that as an individual member and former manager of eTreppid, he is also a "client" such that eTreppid may not assert the privilege against him.

1. Preliminary Issues

Before delving into the principle issue, the court must address two preliminary matters. First, the parties disagree as to whether there exists federal common law sufficient to resolve the relevant issues. Second, the parties differ as to whether an LLC should be treated as a corporation or a partnership for the purposes of the attorney-client privilege.²

a. Jurisdiction and Applicable Law

Both parties agree that the federal law of privilege applies (# 428, p. 3; # 438, p. 6). However, Montgomery asserts that there is no applicable federal common law addressing the joint client exception to the attorney client privilege; therefore, the court should look to Nevada or California law (# 428, p. 3). eTreppid contends that there exists federal law sufficient to resolve the issues presented (# 427).

This case is before the court on the basis of federal question jurisdiction. In cases involving a federal question and pendant state law claims, the federal law of privilege applies. Agster v. Maricopa County, 422 F.3d 836, 839 (9th Cir.2005); see also Fed.R.Evid. 501. Although the court looks first to federal common law, the court may also look to state privilege law "if it is enlightening." Tennenbaum, 77 F.3d at 340. If neither state nor federal law is on point, the court should issue an opinion "in light of reason and experience." Roberts v. Heim, 123 F.R.D. 614, 622 (N.D.Cal.1988) (citing Trammel v. United States, 445 U.S. 40, 100 S.Ct. 906, 63 L.Ed.2d 186 (1980)); see also Fed.R.Evid. 501. Thus, the court will look primarily at federal common law, but may also rely on state law, particularly Nevada and California, in making a determination on the issues presented.³

b. Is a Limited Liability Company more analogous to a Corporation or a Partnership?

The second issue is whether eTreppid, as an LLC, should be treated as a corporation or a partnership for the purposes of the attorney client privilege. There is no case law, state or federal, that is directly on point; thus, this is an issue of first impression. eTreppid argues that federal courts have routinely treated LLCs as corporations; as such, the court should apply corporations law (# 427). Montgomery contends that, particularly on the facts of this case, an LLC is more like a partnership because co-members of an LLC owe each other fiduciary duties just as partners in a partnership owe each other fiduciary duties; therefore, the court should apply partnership law (# 428).

An LLC is a relatively new hybrid business entity that has the characteristics of both a corporation and a partnership, but is not characterized as either. Lattanzio v. COMTA, 481 F.3d 137, 140 (2d Cir.2007); see also In re Tri-River Trading, LLC, 329 B.R. 252, 267, n. 16 (8th Cir. BAP 2005). While LLCs offer members the same protection from personal liability as corporations offer their shareholders, see Ditty v. CheckRite, Ltd., 973 F.Supp. 1320, 1335 (D.Utah 1997), unless otherwise indicated, LLCs are generally treated as partnerships for tax purposes. McNamee v. Department of the Treasury, Internal Revenue Service, 488 F.3d 100, 107 (2d Cir.2007) (citing IRS rules and publications). One commentator has stated that an LLC borrows from a partnership the characteristics of informal operation, internal governance by contract, direct participation by members, and no taxation at the entity level. See William Meade Fletcher, 1A Fletcher Cyclopedia of the Law of Corporations, Classification and Kinds of Corporations, Limited Liability Companies § 70.50 (2007). From a corporation, an LLC borrows the characteristics of member protection from personal liability, the requirement that organizers file articles of organization with the secretary of state, a corporate form of governance if the LLC elects to be governed by managers, and an operating agreement analogous to...