MONTGOMERY v. ETREPPID TECHNOLOGIES, LLC Nos. 3:06-CV-00056-PMP-VPC, 3:06-CV-00145-PMP-VPC.
548 F.Supp.2d 1175 (2008)
MONTGOMERY, et al., Plaintiffs, v. ETREPPID TECHNOLOGIES, LLC, et al., Defendants. And All Related Matters.
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.
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
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).
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).
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,
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.
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.
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.
In support of his position, Montgomery cites Wortham & Van Liew v. Superior Court, 188 Cal.App.3d 927, 233 CaLRptr. 725 (1987), in which the court analyzes California's joint client exception (# 428). The Wortham court held that in the context of a partnership, partners owe each other fiduciary duties. Wortham, 188 Cal. App.3d at 932, 233 CaLRptr. 725. Further, the court held that since all partners are entitled to a wide range of documents related to the partnership, an attorney who represents the partnership also represents each partner jointly as to any partnership business. Id. However, while this may be true regarding partnerships, Wortham fails to enlighten the court as to whether an LLC should be treated as a partnership or a corporation for purposes of the attorney-client privilege.
The court is aware of only two cases, neither of which is factually on point, that have addressed how an LLC is treated with respect to the attorney-client privilege. See Moore v. Commissioner of Internal Revenue, T.C. Memo.2004-259, 2004 WL 2580601 (2004) (federal tax court applying the law of corporations to an LLC for the purposes of the attorney-client privilege); see also In re Tri-River Trading, LLC, 329 B.R. 252 (8th Cir. BAP 2005) (Eighth Circuit bankruptcy appellate panel treating an LLC as a corporation for the purposes of the attorney-client privilege).
In In re Giampietro, 317 B.R. 841, 845-47 (D.Nev.2004), a bankruptcy court applying Nevada law held that an LLC should be treated as a corporation for purposes of the "alter ego" doctrine, which results in "piercing the corporate veil" and finding the individuals behind the corporation personally liable. Id. at 845-47. The court stated: "Even though the Bankruptcy Code does not explicitly mention limited liability companies, as the Code was adopted before such entities were widelyused, most courts and commentators agree that they are analogous to corporations...." Id. at n. 3; see also Ditty, 973
A number of states have also applied corporate law to LLCs. In PacLink Communications v. Superior Court, 90 Cal.App.4th 958, 109 Cal.Rptr.2d 436 (2001), a California court held that LLC members must bring a derivative action against the LLC, similar to corporate shareholder derivative actions, where the claim is that LLC assets were injured. Id. at 963-64, 109 Cal.Rptr.2d 436; see also Blanton v. Prins, 938 So.2d 847, 852-53 (Miss.App. 2005) (applying corporate shareholder derivative rules to an LLC). Further, a Virginia court applied the corporate "business judgment rule" to the managers of a Virginia LLC, stating "there is no basis to apply a different rule to managers seeking protection from liability...." Flippo v. CSC Assoc. III, L.L.C., 262 Va. 48, 56-7, 547 S.E.2d 216 (2001); see also In re Tri-River Trading, LLC, 329 B.R. 252, 267-68 (8th Cir. BAP 2005) (treating an LLC like a corporation pursuant to Missouri law for the purposes of the business judgment rule). Additionally, an appellate court in Ohio applied corporations law to an LLC in determining whether to disqualify an attorney on the basis of a conflict of interest. Legal Aid Society of Cleveland v. W & D Partners I, LLC, 162 Ohio App.3d 682, 834 N.E.2d 850, 854-55 (2005). California has codified the corporate "alter ego" doctrine for LLCs, see Cal. Corp. Code § 17101(b) (2004), while other states have applied the doctrine to LLCs through the common law. Milk v. Total Pay and H.R. Solutions, Inc., 280 Ga.App. 449, 634 S.E.2d 208 (2006).
Montgomery argues that an LLC is more closely analogous to a partnership because, like partners in a partnership, members of an LLC owe each other fiduciary duties (# 428, p. 4). Montgomery cites a New York District Court case for the proposition that "co-members of an LLC owe fiduciary duties to each other." Id. (citing At the Airport, v. ISATA, LLC, 438 F.Supp.2d 55, 65 (E.D.N.Y.2006)). Regardless of the truth of that statement, Montgomery has not cited one case that holds that an LLC is similar to a partnership based on the fiduciary duty members owe each other. Indeed, Montgomery fails to cite any case law applying the law of partnerships to an LLC. Instead, Montgomery supports his argument only by generally comparing eTreppid's LLC organizational structure to a partnership.
eTreppid contends that even if the court found that eTreppid operates like a partnership, under federal common law, partnerships and limited partnerships are treated as corporations for purposes of the attorney-client privilege. The court agrees. See Hopper v. Frank, 16 F.3d 92, 94-7 (5th Cir.1994) (holding that the attorneys' representation was of the limited partnership "entity," and stating that "there is no logical reason to distinguish partnerships from corporations or other legal entities in determining the client a lawyer represents."); see also United States v. Campbell, 73 F.3d 44, 47 (5th Cir.1996) (holding that only the bankruptcy trustee for the limited partnership — not the general partner — had the power to assert or waive the attorney-client privilege on behalf of the limited partnership, and stating that a "limited partnership, like a corporation, is an inanimate entity
In addition to case law, the court also conducted an extensive review of eTreppid's 1998, 1999 and 2001 Operating Agreements ("OA") (# 429, Exhibits A-C).
In the original 1998 OA, Montgomery was designated as eTreppid's manager. Id., Exhibit A sec. 6.1.1. However, from January 1999 on, Douglas Frye was designated as eTreppid's manager, and Montgomery was designated as eTreppid's chief technology officer. Id., Exhibit B, sec. 6.1.1 and 6.1.3. As of January 1999, the management committee consisted of Douglas Frye, Warren Trepp and Dennis Montgomery. Id., Exhibits B-C, sec. 6.1.4. From inception, Warren Trepp acted as the chair of the management committee. Id., Exhibits A-C, sec. 6.1.5.
The Operating Agreement indicates that eTreppid conducts business more like a corporation than a partnership. eTreppid's organization is based on a corporate structure, with the Management Committee being compared to a corporate board of directors and a chief executive officer, and the manager being compared to a president and chief operating officer. The management committee acts by vote and makes policies and procedures, similar to a corporate board of directors. The committee then oversees eTreppid's manager in carrying out those policies and procedures, just as a board of directors oversees corporate officers. Members, like corporate shareholders, have no personal liability. eTreppid also has a resident agent similar to a corporation, had to file articles of organization with the Nevada Secretary of State like a corporation files articles of incorporation, and has an Operating Agreement akin to corporate bylaws. The
Further, while none of the cases the court reviewed is exactly on point, taken together with eTreppid's Operating Agreement, they are instructive. Federal and state courts have consistently applied the law of corporations to LLCs, including for the purposes of piercing the corporate veil, the "alter ego" doctrine, determining standing, the "business judgment rule," and derivative actions. Federal courts have also treated partnerships and limited partnerships as corporations for the purposes of determining the attorney-client privilege. Montgomery has not called to the court's attention any cases applying partnership law to an LLC. Therefore, the court concludes that eTreppid should be treated as a corporation pursuant to federal common law.
2. Main Issue
a. Corporations and the Attorney-Client Privilege
It is well established that the attorney-client privilege attaches to both individuals and corporations. Upjohn Co. v. United States, 449 U.S. 383, 390, 101 S.Ct. 677, 66 L.Ed.2d 584 (1981). However, "special problems" arise in the administration of the attorney-client privilege to corporations. Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343, 348, 105 S.Ct. 1986, 85 L.Ed.2d 372 (1985). With regard to this issue, the Supreme Court has stated:
Id. at 348-49, 105 S.Ct. 1986 (internal citations omitted).
b. The Joint Client Exception
Joint clients are clients who are represented by the same attorney on a matter of common legal interest. Paul R. Rice, Attorney-Client Privilege in the United States § 4:23 (2008). With respect to corporations, the joint client exception theory is that there is one collective corporate client which includes the corporation and each individual member of the board of directors rather than just the corporation alone. Id. The theory is that because directors are collectively responsible for the management of a corporation and a corporation is an inanimate entity that cannot act without humans, it is consistent with a director's role and duties that the director be treated as a joint client when legal advice is rendered to the corporation
c. Divergent Positions
(1) The "Entity is the Client"
Some courts have held that the sole client is the corporate entity or organization. In Milroy v. Hanson, 875 F.Supp. 646 (D.Neb.1995), a former director and minority shareholder of a closely held corporation sued the directors and majority shareholders seeking liquidation of the corporation. The plaintiff sought company documents, but the defendants refused to produce them, arguing that they were protected by the attorney-client privilege. Id. at 647. The court rejected a line of cases, which had held that the joint client exception applied to such a situation. Id. at 648-49. The court found that those cases:
Id. at 649. The Milroy court found that the fact that the plaintiff former director had not filed suit in his fiduciary role as a corporate director to benefit the company, but rather in his individual role to benefit himself, made it even less likely that the plaintiff was entitled to the company's privileged documents. Id. at 650.
In Dexia Credit Local v. Rogan, 231 F.R.D. 268 (N.D.Ill.2004), the largest creditor of a bankrupt corporation sued the corporation's former CEO and managers for fraud. Id. at 277. The former CEO moved to compel production of documents withheld under the attorney-client privilege. Id. The court held that "the [attorney-client] privilege does not belong to the individual agents of the corporation seeking the advice; the privilege belongs to the corporation because the corporation is the client. That is the rule in federal courts...." Id. (citing Weintraub). The court noted that once the former CEO left the corporation, his right to access attorney-client privileged documents terminated. Id. It was of no matter that he had been employed at the time the documents were originally created because the privilege belonged to the corporation and did not depart with former officers who left the company. Id.
Other courts have taken the same position. Bushnell v. Vis Corp., 1996 WL 506914, *8 (N.D.Cal.1996) (unreported) (stating that the suggestion that the corporation is a joint client with its directors is "erroneous" and holding that a former director has no right to the corporation's attorney-client privileged documents); In re Marketing Investors Corp., 80 S.W.3d 44, 50 (Tex.App.1998) (finding the Milroy
(2) The Collective Corporate Client
A second line of cases has embraced the joint client exception for corporations. In Gottlieb v. Wiles, 143 F.R.D. 241 (D.Colo. 1992), a former director and CEO sued the corporation. The corporation withheld documents from the plaintiff during discovery based on the attorney-client privilege. The court stated "It is certainly true that the attorney-client privilege belongs to the corporation, or its Trustee, and that [the plaintiff] has no power to either assert or waive it" on behalf of the corporation. Id. at 247. However, the court stated that whether the plaintiff could assert or waive the privilege on behalf of the corporation was not the dispositive issue — the issue was whether he could access those privileged documents that had been originally created during the time he had been a director and officer. Id. The court noted that while the plaintiff had been a director, he was "squarely within the class of persons who could receive communications" from the corporation's counsel "without adversely impacting the privileged or confidential nature of such material." Id. The court compared this situation to one in which two parties jointly retain a single attorney, and noted that when those joint clients later become adverse, neither is permitted to assert the attorney-client privilege against the other as to communications occurring while they had a common interest. Id. Thus, the court held that former director and CEO had the right to access the documents that had been created while he was a director and officer at the corporation. Id.
Other courts have come to the same conclusions as the Gottlieb court. Kirby v. Kirby, 1987 WL 14862, *7 (Del.Ch.1987) (unreported) (holding that the directors of a closely held corporation, collectively, were the client and that joint clients may not assert the attorney-client privilege against one another); Harris v. Wells, 1990 WL 150445, *3-4 (D.Conn.1990) (unreported) (holding that because the corporation's directors are entrusted with the responsibility of managing the corporation, the corporation's directors hold the attorney-client privilege and therefore cannot assert the privilege against each other); Glidden Company v. Jandernoa, 173 F.R.D. 459, 473-74 (W.D.Mich.1997) (directors have a right to access attorney communications relating to the time that they served as directors); Inter-Fluve v. Montana Eighteenth Judicial District Court, 327 Mont. 14, 112 P.3d 258, 264 (2005) (closely held corporation and directors were joint clients because a corporation can act only through its agents; therefore, the corporation could not assert the attorney-client privilege against its joint client directors),
d. Which Position is Most Persuasive?
The Ninth Circuit has not spoken on this subject. Indeed, none of the Circuit
The court acknowledges that Plache is a criminal, not a civil, case. Moreover, the Plache facts are the inverse of the present case: in Plache, the former director claimed he was a joint client in order to assert the attorney-client privilege on behalf of the corporation. In the present case, Montgomery does not seek to assert the attorney-client privilege on behalf of the corporation — instead, he seeks to prevent eTreppid from asserting the privilege against him. Despite the fact that Plache is the opposite of the present situation, the court finds the conclusion that the corporation is the client instructive. This court concludes that, given the opportunity, the Ninth Circuit would likely reject the premise that directors are joint clients with the corporation.
The court also finds Moore v. Commissioner of Internal Revenue, T.C. Memo. 2004-259, 2004 WL 2580601 (2004) instructive. In Moore, the petitioners argued that because an LLC is an entity and can act only through humans, the individual members of an LLC were the "clients" for the purposes of the attorney-client privilege. Id. at *4. The tax court rejected that position and held that the LLC was the sole client of the attorney. Id. at *3-4. Noting that the power to waive a corporation's attorney-client privilege normally belongs to the officers and directors, the court held that this power belonged only to the current management of the LLC. Id. at *3 (quoting Weintraub, 471 U.S. at 348-49, 105 S.Ct. 1986).
Additionally, while Milroy may not be the "majority" position, as eTreppid asserts, the court notes that many more courts have rejected the reasoning in Gottlieb than in Milroy. The court further notes that in Kirby, the seminal case supporting the joint client exception line of cases, the court relied on absolutely no authority at all. Kirby v. Kirby, 1987 WL 14862 (Del.Ch.1987) (unreported).
In In re Tri-River Trading, LLC, 329 B.R. 252 (8th Cir. BAP 2005), an individual and a corporation formed an LLC and were the sole members. Id. at 257. The individual member and the LLC eventually sued the corporate member and the corporation's president and manager. Id. at 258. One attorney represented both the individual member and the LLC in that suit. Id. In a later bankruptcy action, the bankruptcy court prohibited the LLC's state court attorney from testifying as to communications he had with the LLC. Id. at 259. Instead, the attorney was permitted to testify only as to the advice he gave to the individual member during the state court action. Id. The Eighth Circuit bankruptcy appellate panel overturned. Id. Without explanation, the court assumed that the individual member and the LLC were joint clients. Id. at 268-69. The court concluded that there is no expectation of privacy between adverse joint clients for communications the clients receive during the time they had a common interest and held that the attorney should have been allowed to testify as to his communications with the LLC. Id.
Based on all of these considerations, the court concludes that the Milroy line of cases are more persuasive. It makes sense that the corporation is the sole client. While the corporation can only communicate with its attorneys through human representatives, those representatives are communicating on behalf of the corporation, not on behalf of themselves as corporate managers or directors. Moreover, the court finds very convincing the language in Weintraub, which states that the privilege belongs to the corporation, can be asserted or waived only by management, and that this power transfers when control of the corporation is transferred to new management.
Also important to the court's decision is the fact that Montgomery, like the former director in Milroy, is not suing on behalf of eTreppid or in his capacity as a former manager or officer. Rather, Montgomery is suing to benefit himself individually — a perfectly acceptable position, but not one which should entitle him to eTreppid's attorney-client privileged communications. Like the "dissident" director in Milroy, Montgomery is now adverse to eTreppid and may not obtain privileged documents over the objection of current management. Moreover, even though Montgomery would have had access to such documents during his time at eTreppid, he still would have been duty-bound to keep such information confidential.
The court concludes that eTreppid is the sole client; therefore, eTreppid holds the attorney-client privilege. Only current management may assert or waive such privilege. Although he is still a member of eTreppid, Montgomery is not part of eTreppid's current management (# s443-445). As such, Montgomery may not access eTreppid's attorney-client privileged communications.
The court concludes as follows:
Based on the foregoing and for good cause appearing:
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