Opinion
CASE NO. C13-0611JLR
07-22-2014
MKB CONSTRUCTORS, Plaintiff, v. AMERICAN ZURICH INSURANCE COMPANY, Defendant.
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION TO COMPEL
I. INTRODUCTION
Before the court is Defendant American Zurich Insurance Company's ("Zurich") motion to compel the production or in camera review of certain documents that Plaintiffs MKB Constructors ("MKB") has withheld from discovery based on assertion of the work production doctrine. (Mot. (Dkt. # 59).) Zurich asserts both that the documents do not constitute work product under Federal Rule of Civil Procedure 37(a)(3)(B) and that, even if they do, Zurich has a substantial need for them and MKB must, therefore, produce them. (See generally id.) The court has reviewed the motion, all submissions filed in support of and opposition thereto. Being fully advised, the court GRANTS in part and DENIES in part Zurich's motion.
II. BACKGROUND
This case concerns an insurance coverage dispute involving a "Builders Risk" policy. MKB contracted with the Lower Yukon School District ("LYSD") for a project, which included "the procurement, delivery and placement of gravel fill" for a new building pad and driveway upon which a school building would be built. (Am. Compl. (Dkt. # 35) ¶ 6.) The project had a final completion date of September 15, 2012. (See Videa Decl. (Dkt. # 62) Ex. F.) Defendant American Zurich Insurance Company ("American Zurich") issued a "Builders Risk" policy to MKB for the period June 15, 2012, to October 31, 2012. (Am. Compl. ¶ 8.) Following a dispute concerning the amount of gravel fill required for the project and an alleged earth movement or settlement problem, LYSD terminated its contract with MKB. (Id. ¶ 18.) MKB notified American Zurich (see id. ¶¶ 16, 18), but American Zurich ultimately denied MKB's claim (id. ¶ 20). This lawsuit ensued.
Zurich presently moves to compel the production or in camera review of certain documents that MKB has withheld on the ground that they are protected by the work product doctrine. (See generally Mot.) In its motion, Zurich asserts that MKB's estimate of the quantity of gravel required for the project was in error because MKB had based its estimate on a distorted printout of the project's plans. (See Mot. at 2-3 (citing Videa Decl. Ex. A (Jensen Dep. Vol I) at 115:10-20).) As a result, Zurich argues that MKB underbid the project and purchased too little gravel to timely complete the project. (See id.)
On the other hand, in its response to Zurich's motion, MKB asserts that the building pad settled substantially more than either it or LYSD expected and, as a result, MKB did not expect to have sufficient gravel on site to meet the substantial completion date set forth in the parties' contract. (See Resp. (Dkt. # 74) at 2-3.) Mark Jensen, the President and owner of Derian, Inc., a joint venture partner of MKB, testifies that on approximately August 24, 2012, MKB learned from its surveyor that the building pad under construction had settled and immediately sent a "Contractor Request for Information" to LYSD advising LYSD of the situation and requesting direction. (Jensen Decl. (Dkt. # 75) ¶ 3.) LYSD directed MKB to continue placing fill. (Id.)
On August 29, 2012, MKB retained attorney Steven Nourse "to get his legal advice and representation in connection with MKB's disputes with LYSD." (Id. ¶ 4.) On this same day, MKB directed its insurance broker to give notice of the problem to Zurich under MKB's Builder's Risk insurance policy. (Id.)
On September 6, 2012, MKB sent LYSD its "Request for Information Number 29," requesting additional compensation for the extra gravel and expense and additional time to perform its contract. (See Jensen Decl. (Dkt. # 75) ¶ 5, Ex. A.) On September 10, 2012, LYSD denied the request. (Id.)
Based upon its communications with LYSD and LYSD's refusal to grant either additional compensation for or time to complete the project, by September 16, 2012, MKB had concluded that "there was a probability" that MKB would "be required to pursue a litigated claim in arbitration with LYSD." (Id. ¶¶ 6-7.) On September 17, 2012, Mr. Jensen sent an email to MKB personnel asking for internal accounting codes to be able to trace the project's costs related to obtaining and placing the extra gravel. (Id. ¶ 8.) MKB states that over the next several weeks various MKB personnel sent internal emails relating to project cost documentation and obtaining information for use in meetings with MKB attorneys. (Id.)
On October 15, 2012, LYSD sent a letter to MKB stating its position that MKB had substantially and materially failed to meet its contractual obligations by October 1, 2012. (Id. ¶ 9, Ex. B.) "At this point, it was apparent to MKB that . . . LYSD was preparing to terminate [the] contract." (Id. ¶ 9.) On November 8, 2013, LYSD formally terminated MKB's contract. (Id. ¶ 12, Ex. D; Videa Decl. Ex. I.) On November 29, 2012, MKB filed its Demand for Arbitration. (Jensen Decl. ¶ 14, Ex. E; see Videa Decl. Ex. K.) On October 23, 2013, the arbitration settled with LYSD paying the remaining contract price to MKB. (Videa Decl. Ex. A (Jensen Dep. Vol II) at 22:7-9.)
On April 4, 2013, during the course of MKB's arbitration with LYSD, MKB filed the present suit for coverage against Zurich. (See generally Compl.) As a part of this lawsuit, MKB asserts that when Zurich denied its claim, Zurich forced MKB to sue LYSD in arbitration. (Videa Decl. Ex. A (Jensen Dep. Vol. II) at 137:12-22.) Accordingly, MKB asserts that Zurich is responsible for the legal fees and other expenses MKB paid in pursuit of its arbitration against LYSD. (Id.)
Zurich's first request for documents sought all documents concerning the project, LYSD, the construction contract between LYSD and MKB, the LYSD arbitration, and MKB's insurance coverage claim to Zurich. (Videa Decl. ¶ 2, Ex. V.) MKB produced a privilege log for documents it withheld from production. (Id. Ex. M.) After discussions between counsel for Zurich and MKB, MKB produced a revised privilege log. (Id. Ex. P.) On its revised privilege log, MKB lists 50 internal MKB emails, which MKB withholds under the work product doctrine. (Id.) The emails are between various MKB employees, and the earliest date for any of the withheld emails is September 17, 2012. (See id. Ex. P at 1.) There are 47 such emails. (See generally id.) In addition, MKB withheld a document titled, "Hard Copy Draft Demand for Payment from LYSD." (Id. at 4.) The parties were unable to resolve their dispute concerning the production of these documents, and Zurich has now moved to compel either their production or in camera review. (See generally Mot.)
III. ANALYSIS
A. MKB's Assertion of the Work Product Doctrine
Application of the work product doctrine in diversity cases is determined under a uniform federal standard embodied in Federal Rule of Civil Procedure 26(b)(3). Frontier Refining, Inc. v. Gorman-Rupp, Inc., 136 F.3d 695, 702 n.10 (10th Cir. 1998); United Coal Cos. V. Powell Constr. Co., 839 F.2d 958, 966 (3d Cir. 1988). Rule 26(b)(3) provides, in pertinent part:
(3) Trial Preparation: Materials.
(A) Documents and Tangible Things. Ordinarily, a party may not discover documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative (including the other party's attorney, consultant, surety, indemnitor,
insurer, or agent). But, subject to Rule 26(b)(4), those materials may be discovered if:
Fed. R. Civ. P. 26(b)(3).(i) they are otherwise discoverable under Rule 26(b)(1); and
(ii) the party shows that it has substantial need for the materials to prepare its case and cannot, without undue hardship, obtain their substantial equivalent by other means.
Work product is divided into two general categories: (1) ordinary work product, which is governed by the provisions found in Rule 26(b)(3)(A) and (2) opinion work product, which is governed by the provisions found in Rule 26(b)(3)(B). Opinion work product, which represents an attorney's mental impressions, conclusions, legal strategies, and opinions developed in anticipation of litigation, is "virtually undiscoverable." Republic of Ecuador v. Mackay, 742 F.3d 860, 869, n.3 (9th Cir. 2014.) Neither MKB nor Zurich alleges that the documents or emails at issue here contain opinion work product. (See generally Mot.; see generally Resp.) Thus, the special rules governing this type of work product are not at issue in Zurich's motion.
The work product doctrine is not an evidentiary privilege, but rather a qualified immunity protecting from discovery documents and tangible things prepared by a party or his representative in anticipation of litigation. Admiralty Ins. Co. v. U.S. Dist. Court for Dist. Ariz., 881 F.2d 1486, 1494 (9th Cir. 1989.) The primary purpose of the work product doctrine is to "prevent exploitation of a party's efforts in preparation for litigation." Id. Thus, the party asserting the privilege must demonstrate that the threat of litigation was impending at the time the document was created. Phillips v. C.R. Bard, Inc., 290 F.R.D. 615, 635 (D. Nev. 2013). When the issue comes before the court, it necessarily requires a case-by-case inquiry. Id. (citing Garcia v. City of El Centro, 214 F.R.D. 587, 592 (S.D. Cal. 2003). The burden of proof lies with the proponent of the privilege and each document must be tested against the adequacy of the party's privilege log and supporting material. The log should conform to the guidelines set forth in the Federal Rules of Civil Procedure. See, e.g., Fed. R. Civ. P. 26(b), advisory committee notes to 1993 amendments ("The party must provide sufficient information to enable other parties to evaluate the applicability of the claimed privilege or protection.").
The Ninth Circuit has stated that "a document should be deemed prepared in anticipation of litigation and thus eligible for work product protection under Rule 26(b)(3) if in light of the nature of the document and the factual situation in the particular case, the document can be fairly said to have been prepared or obtained because of the prospect of litigation." In re Grand Jury Subpoena (Mark Torf), 357 F.3d 900, 907 (9th Cir. 2004). If a document would have been created in substantially similar form in the normal course of business, however, the fact that litigation is afoot will not protect it from discovery. Id. at 908. Where a document serves a dual purpose—i.e., the document "was not prepared exclusively for litigation"—the Ninth Circuit applies the "because of test:
Dual purpose documents are deemed prepared because of litigation if in light of the nature of the document and the factual situation in the particular case, the document can be fairly said to have been prepared or obtained because of the prospect of litigation. In applying the "because of standard, courts must consider the totality of the circumstances and determine whether the document was created because of anticipated litigation, and would not have been created in substantially similar form but for the prospect of litigation.United States v. Rickey, 632 F.3d 559, 567-68 (9th Cir. 2011) (internal quotations omitted); see also In re Grand Jury Subpoena, 357 F.3d 900, 907-08 (9th Cir. 2004).
Although the doctrine is often referred to as the attorney work-product doctrine, under the plain language of Rule 26(b)(3), work product created by non-attorneys can also be protected. See Fed. R. Civ. P. 26(b)(3). To warrant protection, the plain language of the Rule only requires two things—that the document is "prepared in anticipation of litigation or for trial" and that it is prepared "by or for" a "party or its representative (including the other party's attorney, consultant, surety, indemnitor, insurer, or agent)." Id.
Nevertheless, the degree to which counsel is involved in preparation of a document can obviously ease the burden of establishing that the document was created "in anticipation of litigation or for trial." It is, after all, lawyers who typically conduct litigation and try cases. As one court has explained:
[A]lthough materials prepared by non-attorneys supervised by attorneys are capable of enjoying work-product protection, the degree to which counsel is involved in creating the document bears directly on whether the document was prepared in anticipation of litigation. This relationship can be thought of as a sliding scale, whereby a party's burden to demonstrate a document's litigious purpose increases—all other things being equal—as attorney involvement in creating the document decreases. This simple principle recognizes the reality that attorneys are the ones who actually litigate cases, and whether or not a company involves attorneys in creating a document is a telling indication about whether the document was prepared in anticipation of litigation.U.S. v. ISS Marine Servs., Inc., 905 F. Supp. 2d 121, 134-35 (D.D.C. 2012).
Zurich argues that "MKB must show that each email was prepared by an MKB employee at the request of an attorney to prepare for litigation" (Mot. at 9), and that the emails at issue are not protected if MKB's employees were simply "talking" about the LYSD claim (id. at 10). Zurich asserts that such documents would be created in MKB's "normal course of business," and thus not protected under the work product doctrine, (Id.)
The court agrees with Zurich that if MKB's employees are merely discussing a possible or even likely claim to be filed by LYSD in the emails at issue, then the emails would not necessarily be "prepared in anticipation of litigation or for trial" as required under Rule 26(b)(3). See Fed. R. Civ. P. 26(b)(3). Mr. Jensen has testified that "[a]ll of the documents withheld under a claim of work product were prepared with the expectation that there was a probability . . . that MKB would be required to pursue a litigated claim in arbitration with LYSD," (Jensen Decl ¶ 7.) The date of the first document the MKB has withheld on grounds of work product is September 17, 2012. (Videa Decl. Ex. P at 1.) Thus, for MKB to have properly withheld all of the documents on its log on grounds of work product, MKB would have had to have "anticipated litigation" with LYSD no later than this date. In addition, MKB employees would have had to create the emails at issue "because of MKB's anticipation of this litigation. If MKB employees would have created these emails in substantially similar form irrespective of any anticipated litigation with LYSD, then MKB has not properly withheld the emails. As the Ninth Circuit counsels, in making these determinations, the court considers the particular factual situation of this case and the development of the conflict between MKB and LYSD. During the course of his declaration, Mr. Jensen describes MKB's increasing awareness over time of the likelihood of litigation with LYSD and also describes varying levels of attorney involvement. Thus, there are two issues the court must evaluate here: (1) whether the emails were created after the point in time at which MKB anticipated litigation with LYSD, and (2) whether the emails were created because of the anticipated litigation with LYSD or would have been created in substantially similar form irrespective of MKB's anticipated litigation with LYSD. It is the details in Mr. Jensen's declaration that drive the court's conclusions with respect to Zurich's motion.
During the course of his declaration, Mr. Jensen describes MKB's increasing awareness over time of the likelihood of litigation with LYSD and also describes varying levels of attorney involvement. MKB provides testimony that as early as August 29. 2012, MKB had retained an attorney "to get his legal advice and representation in connection with MKB's disputes with LYSD." (Jensen Decl. ¶ 4.) Although retaining legal counsel can certainly be an important indication of a party's "anticipation of litigation," it is not necessarily dispositive. Interestingly, Mr. Jensen does not specifically state that MKB "anticipated litigation" by this date. Mr. Jensen further testifies that "[b]y the middle of September[,] MKB had concluded, based upon its communications with LYSD, that it would need to prepare and submit a formal claim to recover the costs and expenses it had incurred . . . and would need to complete the project." (Id. ¶ 6.) Again, Mr. Jensen does expressly state that MKB "anticipated litigation" at this point in time, and the court concludes that there is a distinction between concluding that one would need to submit a formal claim to a party to construction contract and anticipating the need to litigate that formal claim. Next, Mr. Jensen testifies that by October 15, 2012, "it was apparent to MKB that . . . LYSD was preparing to terminate [MKB's] contract," and that on November 8, 2012, LYSD sent "notice the [MKB] was being terminated for cause . . . ." (Id. ¶¶ 9, 12.) Finally, Mr. Jensen states that "[o]n November 29, 2012, MKB filed its formal Demand for Arbitration . . . ." (Id. ¶ 14.)'
With the foregoing timeline of events concerning the conflict between MKB and LYSD in mind, the court considers Mr. Jensen's testimony with respect to the specific emails at issue. Mr. Jensen states that "[b]etween November 19, 2012 and December 20, 2012, in consultation with [MKB's attorney], MKB employees exchanged numerous internal emails dealing with the preparation of a detailed claim document and backup spreadsheet that would be submitted to LYSD." (Id. ¶ 13.) Mr. Jensen also states that all of these emails, including MKB-Zurich ## 00512-514, 00519-26, 00529-30, 00551, 00565-98, 00612-16, and 00634-49, "discussed various issues involved in preparation of the LYSD claim." (Id.) The earliest of these emails was created just ten days before MKB filed its formal Demand for Arbitration and the last was created approximately three weeks after that date. In light of Mr. Jensen's testimony above concerning the involvement of counsel and the timeline of events with respect to MKB's dispute with LYSD, the court has little difficulty in concluding that MKB has met its burden with respect to the applicability of the work product doctrine to the emails dated between November 19, 2012 and December 20, 2012.
In addition, the court concludes that MKB has met its burden with respect to two emails on its amended privilege log that predate November 19, 2012. First, on October 16, 2012, Mr. Jensen testified that "MKB employees exchanged emails discussing LYSD's as-built survey [of the project] and gathering information to forward to [MKB's attorney]." (Jensen Decl. ¶ 10; see Videa Decl. Ex. P. at 2 (referencing MKB-Zurich # 00390).) This email exchange occurred after MKB had concluded that LYSD was preparing to terminate its contract, and Mr. Jensen confirmed in his testimony that the purpose of the email was to gather documents to pass onto counsel. (Jenson Decl. ¶¶ 9-10.) Second, on November 13, 2012. after LYSD had terminated MKB's contract for cause, there is an internal email exchange between Mr. Jensen and two other MKB employees, which MKB describes on its amended log as regarding "claim documents in preparation for meeting with attorney." (Videa Decl. Ex. P at 2 (referencing MKB-Zurich # 00428).) Particularly in light of the testimony concerning the involvement of counsel, combined with the timeline of events concerning MKB's conflict with LYSD, the court concludes that MKB has met its burden of establishing that these emails are protected under the work product doctrine.
Finally, the court also concludes that MKB has met its burden with respect to the last three emails on its amended privilege log—all of which are dated in January, 2013. Mr. Jensen testifies that these emails consist of exchanges between himself and MKB employees "discussing LYSD's position in [the] dispute." (Jensen Decl. ¶ 15.) They were created after MKB had filed its demand for arbitration and were not disclosed to anyone except for the MKB employees included in the emails and MKB's attorneys. (Id.) The court concludes that MKB has met its burden of establishing that these emails were properly withheld on grounds of work product.
Nevertheless, there are discrepancies in MKB's evidence concerning some of the earlier emails on MKB's amended privilege log. In his declaration, Mr. Jensen states that "[o]n September 17, 2012, the date of the first document withheld as work product, I sent an email (MKB-Zurich # 00389) to MKB accounting employees related to setting up internal accounting codes to be able to track [the project's] costs related to obtaining and placing of extra gravel." (Jensen Decl. ¶ 8.) Mr. Jensen goes onto testify that this assignment "was in addition to MKB's regular accounting codes for tracking of . . . project expense that MKB set up are part of its ordinary [project] job cost tracking." (Id.) Mr. Jensen implies that following this email and "over the next several weeks[,] various MKB personnel sent internal emails relating to [project] cost documentation, and obtaining information for use in meetings with MKB attorneys." (Id.) Yet, the document that Mr. Jensen identifies as his September 17, 2012 email—MKB-Zurich # 00389—is actually an email from him dated October 5, 2012. (Videa Decl. Ex. P at 2.) The only email on MKB's privilege log dated September 17, 2012 is from another MKB employee addressed to Mr. Jensen and others. (Id. at 1.) Indeed, there are at least four other internal emails listed on MKB's amended privilege log which predate Mr. Jensen's October 5, 2012, email. (See id. at 1 (referencing MKB-Zurich # 00377, 00380, 00381-82, 00388).)
The descriptions on MKB's amended log of the four emails that predate October 5, 2012, indicate that LYSD's claim is discussed in some way. (See Videa Decl. Ex. P at 1.) However, it is unclear to the court that these emails would not have been created "but for" the litigation between MKB and LYSD. Mr. Jensen has testified that by mid-September MKB had concluded that "it would need to submit a formal claim to recover costs and expense it had incurred . . . ." (Jensen Decl. ¶ 6.) Further, Mr. Jensen indicates in his declaration that he wanted to track the costs related to obtaining and placing extra gravel (see id. ¶ 8). Nevertheless, there is no firm indication in the evidence that Mr. Jensen's concern over costs at this point in time was specifically related to the likelihood of litigation as opposed to a more general business concern. Although Mr. Jensen testifies that all of the documents on the amended log were prepared with the expectation that litigation "was a probability" (id. ¶ 7), the court concludes that MKB has not met its burden of establishing that the emails "would not have been created in substantially similar form but for the prospect of litigation." See Rickey, 632 F.3d at 567-68.
For similar reasons, the court also finds that MKB has made an insufficient showing concerning the emails dated October 26, 2012 (MKB-Zurich § 00391-406), October 31, 2012 (MKB-Zurich ## 00407, 00408), and November 1, 2012 (MKB-Zurich # 00409-20). The descriptions of these emails simply indicate that the claim or the claim's "quantum" or "costs" are being discussed. MKB has provided insufficient evidence that these emails would not have been created in substantially similar form absent the prospect of litigation with LYSD.
Based on the foregoing, the court grants in part and denies in part Zurich's motion concerning MKB's production of the emails at issue for in camera review. The court orders MKB to produce the following emails for in camera review: MKB-Zurich ## 00377, 00380, 00381-82, 00388, 00389, 00391-406, 00407, 00408, 00409-20. The court further orders MKB to submit these documents to the court within seven days of the date of this order. After the court has reviewed the documents in camera, it will issue a further order concerning their production to Zurich or their protection under the work product doctrine.
B. Zurich's Assertion of Substantial Need for MKB's Work Product
Zurich also argues that, even if the emails MKB withholds are protected by the work product doctrine, Zurich has a substantial need for the documents that requires their production under Rule 26(b)(3)(A)(ii). (Mot. at 11 (citing Fed. R. Civ. P. 26(b)(3)(A)(ii)).) Under this portion of the work product doctrine, Zurich must "show[] that it has substantial need for the materials to prepare its case and cannot, without undue hardship, obtain their substantial equivalent by other means." Fed. R. Civ. P. 26(b)(3)(A)(ii); see also Upjohn Co. v. United States, 449 U.S. 383, 400 (1981). The party seeking the qualified work product has the burden of demonstrating a "substantial need" for the qualified work product, as well as an inability to obtain the information from other sources without undue hardship. Upjohn Co., 449 U.S. at 400. Thus, Zurich has the burden of establishing its "substantial need" for MKB's work product.
As noted above, opinion work product is not at issue in Zurich's motion. See supra Note 1. If this type of work product were at issue, Zurich would be required to demonstrate a compelling need for the documents. See Holmgren v. State Farm Mut. Ins. Co., 976 F.2d 573, 577 (9th Cir. 1992).
Zurich contends that "MKB's arbitration against LYSD is at the heart of [MKB's] insurance claim against . . . Zurich," and that "MKB's insurance claim is identical to its claim against LYSD." (Mot. at 11.) Zurich argues that "MKB contends that . . . Zurich's denial of the insurance claim 'forced' MKB to sue LYSD in arbitration," and that MKB "is . . . suing . . . Zurich to recover over $250,000 in legal costs MKB spent in the arbitration." (Reply (Dkt. # 77) at 5.) Consequently, Zurich asserts that it has "substantial need" for MKB's work product from the LYSD arbitration.
Zurich has not its burden of demonstrating "substantial need." Zurich does not explain how MKB's claims concerning the underlying LYSD arbitration places MKB's work product from that arbitration at issue here. If there was some allegation of improper conduct on behalf of MKB or its attorneys in pursuing MKB's claim against LYSD, or an allegation of excessive billing or malpractice, then the court might be willing to consider Zurich's claim of substantial need for MKB's work product. None of these issues, however, are at play here. Absent this type of allegation, the mere fact that MKB's arbitration against LYSD plays a role, even a significant one, with respect to MKB's claim for damages against Zurich, does not justify the wholesale disclosure of MKB's work product from the LYSD arbitration. MKB's work product is simply not at issue here. Even if the court were to conclude that Zurich had a substantial need for MKB's work product, Zurich has not met its burden of demonstrating that it cannot acquire the substantial equivalent of the information it needs concerning the LYSD arbitration elsewhere without undue hardship. Accordingly, the court denies this aspect of Zurich's motion to compel.
IV. CONCLUSION
As described above in detail, the court GRANTS in part and DENIES in part // // // Zurich's motion to compel the production or in camera review of documents from MKB's amended privilege log (Dkt. # 59).
Dated this 22nd day of July, 2014.
/s/_________
JAMES L. ROBART
United States District Judge