State Farm Mut. Auto. Ins. Co. v. Lee

• Decision Date: 05 August 1999
• Docket Number: No. 2 CA-SA 99-0022.,2 CA-SA 99-0022.
• Citation: 197 Ariz. 347,4 P.3d 402
• Parties: STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Petitioner, v. Hon. Kenneth LEE, Judge of the Superior Court of the State of Arizona, In and For the COUNTY OF PIMA, Respondent, and James and Phyllis Martin, husband and wife, and Daryl Leonard, a single man, on behalf of themselves and all other similarly situated individuals, Real Parties in Interest.
• Court: Arizona Court of Appeals

4 P.3d 402

197 Ariz. 347

STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Petitioner, v. Hon. Kenneth LEE, Judge of the Superior Court of the State of Arizona, In and For the COUNTY OF PIMA, Respondent, and James and Phyllis Martin, husband and wife, and Daryl Leonard, a single man, on behalf of themselves and all other similarly situated individuals, Real Parties in Interest.

No. -0022.

Court of Appeals of Arizona, Division 2, Department A.

August 5, 1999.

Review Granted February 8, 2000.

Brown & Bain, P.A. By Lawrence G. Scarborough and Kelly A. O'Connor, Phoenix, and By Philip R. Higdon, Tucson, for Petitioner.

Gabroy, Rollman & Bosse, P.C. By John Gabroy and Richard Brown, and Law Offices of Garry B. Bryant By Garry B. Bryant, and Law Offices of John L. Tully, P.C., By John L. Tully and Barbara S. Burstein, Tucson, for Real Parties in Interest.

OPINION

PELANDER, Presiding Judge.

¶ 1 In this special action, petitioner State Farm Mutual Automobile Insurance Company challenges the respondent trial judge's order compelling it to produce files and other documents in the underlying class action against it for bad faith and other related claims. State Farm contends that portions of the requested documents are protected by the attorney-client privilege and that the respondent judge erred when he determined State Farm had waived that privilege.

¶ 2 Although acceptance of special action jurisdiction is discretionary, jurisdiction properly may be exercised in cases such as this that involve the assertion of a privilege against an order compelling discovery for which there is no equally plain, speedy, or adequate remedy by appeal. See, e.g., Arizona Dep't of Econ. Sec. v. O'Neil, 183 Ariz. 196, 901 P.2d 1226 (App.1995); Blazek v. Superior Court, 177 Ariz. 535, 869 P.2d 509 (App.1994); State ex rel. Romley v. Superior Court, 172 Ariz. 232, 836 P.2d 445 (App.1992); see also Ariz. R.P. Spec. Actions 1 and 3, 17B A.R.S. Moreover, this special action presents us with a question of law that is of statewide significance: What is the test for determining whether a party has impliedly waived the attorney-client privilege and how does that apply here, when an insurance company denies it is relying on the advice of counsel as a defense to bad faith and related claims? See City of Tucson v. Superior Court, 167 Ariz. 513, 513, 809 P.2d 428, 428 (1991) (special action jurisdiction properly accepted when "the issue presented is a pure issue of law that is of statewide significance"). We, therefore, accept jurisdiction.

¶ 3 Trial courts are afforded broad discretion with respect to discovery issues. Blazek. We will not disturb a trial court's resolution of such issues absent an abuse of discretion. Id. "A trial court abuses its discretion when it misapplies the law or predicates its decision upon irrational bases." Id. at 537, 869 P.2d at 511. The question of whether a privilege exists is a question of law, which we review de novo. Id. Similarly, "[w]hether a party has waived the attorney-client privilege is a mixed question of law and fact which we review de novo." Home Indem. Co. v. Lane Powell Moss and Miller, 43 F.3d 1322, 1326 (9th Cir.1995). See also Reed v. Baxter, 134 F.3d 351 (6th Cir.1998). Because we find that the respondent judge misapplied the law and accordingly abused his discretion, we grant relief. Ariz. R.P. Spec. Actions 1 and 3.

FACTS AND PROCEDURAL BACKGROUND

¶ 4 In 1995, the real parties in interest, representing approximately one thousand Arizona State Farm automobile liability insureds (collectively, plaintiffs), filed a class action against State Farm, alleging claims of breach of contract, fraud, bad faith, consumer fraud, and engaging in unlawful acts in violation of A.R.S. § 13-2301(D).¹ These claims were based on State Farm's refusal, between 1988 and 1995, to allow plaintiffs who had suffered a single loss to "stack" benefits under the uninsured (UM) and underinsured motorist (UIM) provisions of multiple policies. State Farm based its refusal on the "anti-stacking" provision contained in the policies. The provision limited an insured's recovery for any one accident resulting in death or bodily injury to one policy, preventing the insured from aggregating benefits of multiple policies. Plaintiffs contend in the underlying action that State Farm knew or should have known that its anti-stacking provision did not comply with A.R.S. § 20-259.01(H), then numbered as § 20-259.01(F), see 1996 Ariz. Sess. Laws, ch. 164, § 1, which allows an automobile liability insurer to prohibit stacking. State Farm maintains that, until our supreme court decided State Farm Mutual Automobile Insurance Co. v. Lindsey, 182 Ariz. 329, 897 P.2d 631 (1995), it reasonably believed that its policies did comply with the statute, insisting the law was unsettled at the time it refused to pay these claims.

¶ 5 Discovery in the underlying action has been extensive. State Farm has produced numerous documents from its claims files, but has refused to produce correspondence with counsel and notes relating to communications from counsel, on the ground that they are protected by the attorney-client privilege.² These documents are apparently contained in fifty-seven binders, which State Farm has catalogued in privilege and redaction logs. The documents for which State Farm has asserted the privilege are not contained in the record before us and, according to counsel at oral argument, have not been reviewed by the respondent judge.

¶ 6 Plaintiffs filed a motion to compel discovery and for in-camera review in which they argued, inter alia, that, by claiming that it had a good faith, reasonable belief that its policies complied with the statute, State Farm had placed its corporate knowledge or state of mind at issue and had thereby impliedly waived the attorney-client privilege. Plaintiffs further contended that State Farm had also waived the privilege by implicitly relying on the advice of counsel as a defense to the claims against it. In its opposition to the motion, State Farm denied that it would defend its refusal to permit the stacking of UM and UIM benefits based on the advice of counsel.

¶ 7 After a hearing, the respondent judge granted the motion to compel discovery, finding, in relevant part, as follows:

Plaintiff next argues that the attorney-client privilege has been impliedly waived by Defendants[³] based upon a corporate knowledge/advice of counsel defense. If a defendant sets forth a defense that it is not liable because it based its decisions on the advice of counsel then it has impliedly waived the attorney-client privilege by placing the advice of its counsel at issue. Defendants in this case claim that it [sic] has not expressly raised the defense of advice of counsel.

In this case, Defendants have claimed that its managers held a good faith belief in their interpretation that stacking was not permitted under its insurance policies. While not expressly setting forth the advice of counsel defense, the facts in this case demonstrate that the Defendants' position on stacking was made after having its counsel review the applicable statutes and developing cases and advise the corporate decision makers. Thus, the advice of its counsel was a part of the basis for Defendants' position that was taken. The advice of counsel defense is impliedly one of the bas[e]s for the defense Defendants maintain in this action. Defendants have, therefore, impliedly waived the attorney-client privilege.

The respondent judge ordered State Farm to review and revise its privilege logs in light of his ruling, requiring it to produce items that were no longer protected within forty-five days and to revise the privilege logs to include any documents State Farm still believed were privileged. The judge instructed plaintiffs to file a new motion to compel production of any documents State Farm continued to withhold, in the event of a dispute as to those documents, and ordered the parties to agree on a special master to review the documents and, presumably, to determine whether they are discoverable. This special action followed. Plaintiffs and State Farm stipulated that State Farm could withhold the documents pending the outcome of this proceeding.

THE LAW: WAIVER OF THE ATTORNEY-CLIENT PRIVILEGE

¶ 8 This case illustrates what we believe is a recurrent clash between two evidentiary principles: the notion that relevant evidence should be discoverable on the one hand, and the fact that privileged communications or materials are not discoverable. See generally Ariz. R. Civ. P. 26, 16 A.R.S. Undoubtedly, the communications between State Farm and the attorneys from whom it has sought advice about the enforceability of the anti-stacking provision of its policies are relevant to whether State Farm had a reasonable basis for denying plaintiffs' claims. And, if it were determined that State Farm acted contrary to the advice of counsel, that would be highly relevant to plaintiffs' claims that State Farm had acted fraudulently, in bad faith, or unlawfully. But that evidence is relevant, even highly probative, is not enough to justify compelled disclosure of that which is privileged. See Ariz. R. Evid. 402, 501, 1101(c), 17A A.R.S.; see also Ariz. R. Civ. P. 26(b)(1). It is precisely because evidentiary privileges "exclude relevant evidence and impede the fact-finder's search for the truth," however, that they are construed narrowly. Blazek, 177 Ariz. at 537, 869 P.2d at 511. See also Morris K. Udall et al., Arizona Law of Evidence, § 71 (3d ed.1991).

¶ 9 When the holder of a privilege has waived it, there is, of course, no longer a clash between these two evidentiary principles. To determine whether the attorney-client privilege has been waived, courts generally have taken one of three approaches. In their actual application, however, these approaches are confusing, and the lines distinguishing one method from another blurred. See Frontier Refining,...