Opinion
MEMORANDUM & ORDER Re: Attorney-Client Privilege
MARILYN PATEL, Chief District Judge.
The above-captioned actions arise from the litigation involving the alleged copyright infringement of Napster, Inc. and its customers. Now before the court is a discovery dispute among the parties to these actions arising from assertions of attorney-client privilege by defendants Bertelsmann AG, Bertelsmann, Inc., and BeMusic, Inc. (collectively "Bertelsmann") with respect to their communications with BMG, Inc., a wholly owned subsidiary of Bertelsmann AG. Having considered the parties' arguments and for the reasons set forth below, the court enters the following memorandum and order.
BACKGROUND
The instant motion relates to three actions now pending before this court as part of the In re Napster Copyright Litigation multidistrict litigation ("MDL") proceedings, C MDL-00-1369 MHP. The initial phase of the In re Napster litigation arose from claims that the Napster peer-to-peer Internet file-sharing network enabled the network's users to infringe copyrighted musical compositions and sound recordings owned by various musical publishers, composers, and record labels, thereby giving rising to claims of contributory and vicarious copyright infringement against Napster itself. These proceedings ultimately led this court to issue an order preliminarily enjoining Napster from operating its file-sharing network in a manner that enabled its users to engage in copyright infringement, the substance of which was affirmed by the Ninth Circuit on appeal. See A&M Records, Inc. v. Napster, Inc. ("Napster I") , 114 F.Supp.2d 896, 927 (N.D. Cal. 2000) (Patel, C.J.), aff'd in part and rev'd in part, 239 F.3d 1004 (9th Cir. 2001), on remand, No. C MDL-00-1369 MHP, 2001 WL 227083 (N.D. Cal. Mar. 5, 2001). After concluding that it was unable to continue doing business in a manner that would comply with the court's order, Napster ceased operations on July 1, 2001.
Napster subsequently sought bankruptcy protection and is no longer party to the consolidated MDL proceedings that bear its name. The proceedings continue, however, with various plaintiffs taking aim at still-solvent entities that invested in Napster prior to the shut-down of its file-sharing network. Among those former Napster investors is Bertelsmann, a media conglomerate with interests in the fields of television and radio, publishing, online media, and music distribution. Bertelsmann participated indirectly in the initial round of In re Napster litigation through its BMG subsidiary, which was one of the record label plaintiffs who had pursued copyright infringement claims against Napster. However, during the course of those proceedings, in approximately September 2000, Bertelsmann allegedly approached Napster and proposed to form a "strategic partnership" for the purpose of distributing musical compositions and sound recordings via the Internet. Bertelsmann subsequently invested a total of $85 million in Napster and, according to the plaintiffs in the above-captioned actions (collectively "plaintiffs"), participated actively in the management and day-to-day operations of the company. Plaintiffs now assert that Bertelsmann's investment in Napster and control of the Napster network facilitated acts of direct copyright infringement committed by Napster and its users, thus establishing Bertelsmann's liability for contributory and vicarious infringement of plaintiffs' copyrighted musical compositions and sound recordings.
Discovery related to plaintiffs' secondary copyright infringement claims and Bertelsmann's defenses to those claims is ongoing. In the course of that discovery, plaintiffs have propounded a number of requests seeking documents relating to Bertelsmann's decision to invest in Napster. In responding to those requests, Bertelsmann has asserted claims of privilege with respect to certain documents and has compiled a privilege log containing more than 20, 000 entries. Among the documents identified in the privilege log are communications between Bertelsmann's counsel and the employees of its BMG subsidiary, which Bertelsmann asserts are protected from disclosure during discovery by the attorney-client privilege. Plaintiffs take issue with these assertions of privilege, arguing that Bertelsmann must establish that it shared a "common interest" with BMG with respect to the subject matter of a particular inter-affiliate communication if that communication is to be brought within the scope of the attorney-client privilege. The court addresses these arguments in the following memorandum and order.
LEGAL STANDARD
Under Rule 501 of the Federal Rules of Evidence, federal common law governs the availability and scope of evidentiary privileges in actions where federal law supplies the rules of decision. Fed. R. Evid. 501. The attorney-client privilege "has been recognized as the oldest of the privileges for confidential communications known to the common law.'" Gomez v. Vernon , 255 F.3d 1118, 1131 (9th Cir.) (quoting Upjohn Co. v. United States , 449 U.S. 383, 389 (1981)), cert. denied, 534 U.S. 1066 (2001). The importance of the privilege lies in the need "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.'" Swidler & Berlin v. United States , 524 U.S. 399, 403 (1998) (quoting Upjohn , 449 U.S. at 389). Consequently, confidential communications between an attorney and his or her client made for the purpose of obtaining legal device are generally shielded from disclosure during discovery. See Gomez , 255 F.3d at 1131. Nonetheless, because evidentiary privileges "impede the full and fair discovery of truth, " the attorney-client privilege is "strictly construed, " and the party claiming the privilege bears the burden of establishing its claim. Weil v. Investment/Indicators, Research & Mgmt., Inc. , 647 F.2d 18, 24-25 (9th Cir. 1981)); see also United States v. Gann , 732 F.2d 714, 723 (9th Cir.), cert. denied, 469 U.S. 1034 (1984).
In Upjohn, the Supreme Court addressed the scope of the attorney-client privilege in the corporate setting. The Court refused to adopt a bright-line rule for applying the privilege to communications between an attorney representing a corporate entity and the corporation's employees, observing that "the recognition of a privilege based on a confidential relationship should be determined on a case-by-case basis." Upjohn , 449 U.S. at 396 (quoting S. Rep. No. 93-1277, at 13 (1974)) (original alteration omitted). Nonetheless, the Court made clear that confidential communications between a corporate employee and counsel for the corporation will generally be privileged if the communications (1) concern matters within the scope of the employee's duties to the corporation and (2) the employee is aware that the information is being furnished for the purpose of enabling the attorney to provide legal advice to the corporation. Id. at 394; see also Admiral Ins. Co. v. United States Dist. Court , 881 F.2d 1486, 1492 (9th Cir. 1989). Numerous courts have extended this protection to encompass communications between an attorney for a parent corporation and the employees of its subsidiary. See, e.g., Glidden Co. v. Jandernoa , 173 F.R.D. 459, 472-73 (W.D. Mich. 1997); Polycast Tech. Corp. v. Uniroyal, Inc. , 125 F.R.D. 47, 49 (S.D.N.Y. 1989); Medcom Holding Co. v. Baxter Travenol Labs., Inc. , 689 F.Supp. 841, 842-44 (N.D. Ill. 1988).
DISCUSSION
The question before the court is whether Bertelsmann is entitled to claim attorney-client privilege with respect to certain communications relating to its investment in Napster made between Bertelsmann's attorneys and the employees of its BMG subsidiary. There is no dispute that at the time that the purportedly privileged communications were made, BMG was pursuing copyright infringement claims against Napster, which on its face suggests that Bertelsmann and BMG did not share the same interest in the subject matter of those communications. Plaintiffs contend that this apparent conflict of interest forecloses any assertion of privilege with respect to the communications, arguing that Bertelsmann must establish that it shared a "common legal interest" with its subsidiary to bring the disputed communications with the scope of the attorney-client privilege.
If the two entities at issue here were not corporate affiliates, plaintiffs' "common interest" analysis would undoubtedly be correct. The attorney-client privilege is intended to maintain the confidentiality of a communication between an attorney and his or her or client. See, e.g., United States v. Palmer , 536 F.2d 1278, 1281 (9th Cir. 1976). Consequently, the interjection of a third party into an attorney-client relationship generally destroys any privilege that might attach to such communications. See United States v. Stepney , 246 F.Supp.2d 1069, 1074-75 (N.D. Cal. 2003) (Patel, C.J.) (citing Gann , 732 F.2d at 723 and Weil , 647 F.2d at 24). However, an exception to this general rule applies where the privilege holder and the third party to whom the confidential communication has been disclosed share a common legal interest with respect to the subject matter of that communication. See, e.g., United States v. Bergonzi , 216 F.R.D. 487, 495 (N.D. Cal. 2003) (Jenkins, J.). This court has found such a "common interest privilege" to apply where (1) the communication is made by separate parties in the course of a matter of common interest; (2) the communication is designed to further that effort; and (3) the privilege has not been waived. Id. (citing In re Mortgage Realty Trust , 212 B.R. 649, 653 (Bankr. C.D. Cal. 1997)) (discussing attorney work product doctrine).
While such a showing of common interest is routinely demanded where corporate litigants attempt to assert claims of attorney-client privilege for communications with unaffiliated parties, Bertelsmann points out that a different rule generally applies where, as here, the communications at issue are made between an attorney for a parent corporation and the employees of its wholly owned subsidiary. For example, the Ninth Circuit has observed in dicta that "communications between employees of a subsidiary corporation and counsel for the parent corporation, like communications between former employees and corporate counsel, would be privileged if the employee possesses information critical to the representation of the parent company and the communications concern matters within the scope of employment." Admiral Ins. , 881 F.2d at 1493 n.6. Moreover, the clear implication of this dictum-that a parent corporation and its wholly owned subsidiary should be treated as a single entity for purposes of applying the attorney-client privilege doctrine-has found support in a number of district court decisions applying federal common law privilege rules. See, e.g., Music Sales Corp. v. Morris, No. 98 CIV. 9002(SAS)(FM), 1999 WL 974025, at *7 (S.D.N.Y. Oct. 26, 1999); Glidden , 173 F.R.D. at 473; Duplan Corp. v. Deering Milliken, Inc. , 397 F.Supp. 1146, 1184-85 (D.S.C. 1974).
In light of the general principles governing the extension of attorney-client privilege to communications with third parties sharing a common interest with the client, the application of such a rule to communications among related corporate entities ordinarily makes sense. Indeed, the willingness of federal courts to draw such bright-line distinctions in this area of privilege law merely reflects the fact the interests of a corporate parent and its subsidiaries are in most cases so closely aligned that no particularized inquiry into the nature of the common interest asserted is necessary. It is thus hardly surprising that courts have assumed that such a common interest exists as a matter of law and that accordingly, they have extended the protection of the attorney-client privilege doctrine to encompass communications among legally separate but economically interdependent corporate entities.
However, at least on their face, the communications between Bertelsmann and BMG that are at issue here depart markedly from the more common situation where the legal as well as economic interests of a parent corporation and its subsidiary are closely aligned, or at least not mutually antagonistic. As noted above, there is no dispute that BMG was actively pursuing copyright infringement claims against Napster at the same time that Bertelsmann approached the same company seeking to invest in it. Furthermore, even after Bertelsmann consummated that investment and acquired a significant financial stake in the continued operation of Napster's file-sharing network, BMG persisted in pursuing its copyright infringement claims and continued to do so throughout the proceedings that ultimately led Napster to cease operations and to seek bankruptcy protection. In this respect, the situation that Bertelsmann and BMG found themselves in with respect to the initial round of Napster litigation appears more akin to that which arises when members of partnership who would otherwise share a common interest with respect to matters within the scope of the partnership become opposing parties in litigation. Under such circumstances, the partnership's attorney-client privilege is deemed waived on the theory that the policy of encouraging confidential communications between a lawyer and his or her clients would not be advanced by protecting those communications from disclosure after two or more of those clients have sued each over a matter falling within the scope of the attorney's representation. See John W. Strong, McCormick on Evidence § 91 (5th ed. 1999 & Supp. 2003).
Ultimately, such policy considerations must guide the court's application of the attorney-client privilege doctrine to the principal-subsidiary communications at issue here. As the Supreme Court made clear in Upjohn, the inquiry into the scope of a corporation's attorney-client privilege must be guided by the goal of encouraging frank communication between an attorney and his or her client rather than by reliance on formalistic rules. See 449 U.S. at 396; see also Admiral Ins. , 881 F.2d at 1492 (noting that Upjohn "held that each case must be evaluated to determine whether the application of the privilege would further its underlying purposes"). This goal would simply be not be advanced by protecting communications between two related corporate entities that found themselves taking legally and commercially adverse positions with respect to pending litigation at the time that those communications were made. Thus, while there is no doubt that the fact that BMG is a wholly-owned subsidiary of Bertelsmann must be taken into account in determining the scope of the attorney-client privilege for communications between the two entities, it would be absurd to extend the protection of the privilege to matters in which the two corporations' legal interests were directly adverse to each other.
Bertelsmann argues that such a conclusion conflicts with the weight of authority, which it characterizes as establishing a per se rule under which a parent corporation and its subsidiaries are deemed to be a single entity for the purpose of determining whether inter-affiliate communications are afforded the protection of the attorney-client privilege. See, e.g., Music Sales, 1999 WL 974025, at *7; Glidden , 173 F.R.D. at 473; Duplan , 397 F.Supp. at 1184-85. However, these cases simply did not present a situation where, as here, a corporate subsidiary was actively pursuing a litigation strategy that was intended to (and in fact did) have the effect of wiping out the parent corporation's investment in the target of the subsidiary's lawsuit. In any event, such a categorical approach to assertions of privilege for inter-affiliate communication ignores Upjohn's warning to eschew bright-line rules in applying the attorney-client privilege doctrine in the corporate context. The court therefore holds that Bertelsmann must come forward with evidence that its interest in the Napster litigation was not directly adverse to that of its BMG subsidiary in order to meet its burden of establishing that communications between its attorneys and the employees of its subsidiary are protected by the attorney-client privilege.
As to whether Bertelsmann can meet this burden, that question simply cannot be answered based on the record as it now stands. For example, Bertelsmann may yet succeed in establishing that BMG's participation in the record labels' action against Napster was part of an organization-wide strategy to, as plaintiffs put it, "enjoy the best of both worlds." Pls.' Mem. P. & A. at 3. If so, and if the communications at issue otherwise meet the requirements for protection under the attorney-client privilege doctrine, then Bertelsmann would be entitled to claim the privilege with respect to such communications. On the other hand, if it can be established that BMG and Bertelsmann were in fact behaving as separate entities respectively pursuing the mutually incompatible goals of destroying Napster through litigation and saving it through the timely infusion of capital, the recognition of an attorney-client privilege for communications between Bertelsmann's counsel and BMG employees would be incompatible with the underlying purpose of the privilege and would not be entitled to its protection.
In particular, in noting that the Bertelsmann-BMG communications at issue must otherwise meet the requirements for establishing the attorney-client privilege, the court emphasizes that it is essential to distinguish between legal advice, which is privileged, and advice concerning matters of business strategy that happens to be provided by a lawyer, which is not. See, e.g., North Pacifica, LLC v. City of Pacifica , 274 F.Supp.2d 1118, 1127 (N.D. Cal. 2003) (Chen, Mag. J.) ("[L]egal advice must predominate for the communication to be protected.... [W]hen the legal advice is merely incidental to business advice, the privilege does not apply[.]") (citations, quotation marks, and original alterations omitted).
These examples are meant only to be illustrative of the nature of the interests that would or would not give rise to cognizable attorney-client privilege claims for communications between counsel for Bertelsmann and the employees of BMG. Nonetheless, they do call attention to the fact that Bertelsmann must make some showing of a common (or at a minimum, non-adverse) interest to meet its burden of establishing that such communications are privileged. It may also be appropriate for plaintiffs to take discovery, including deposition testimony, for the purpose of testing whether any assertions of common interest between Bertelsmann and BMG have evidentiary support. Thus, the court grants plaintiffs leave to take up to three depositions for that purpose if they elect to do so.
Finally, the court notes that in camera examination of certain purportedly privileged Bertelsmann-BMG communications may be necessary to determine whether the two entities' interests in the Napster litigation were sufficiently concordant to claim attorney-client privilege protection for those communications. Such an inquiry is properly undertaken by the Special Master whom the parties have retained for the purpose of resolving discovery disputes.
CONCLUSION
For the foregoing reasons, the court holds that Bertelsmann must come forward with evidence that its interest in the Napster litigation was not directly adverse to that of its BMG subsidiary in order to meet its burden of establishing that communications among its attorneys and BMG employees are protected by the attorney-client privilege. The court further orders that plaintiffs be permitted to take a total of no more than three (3) depositions for the purpose of inquiring into the propriety of such assertions of attorney-client privilege. Any disputes regarding particular assertions of privilege may be submitted to the Special Master to be resolved in accordance with this order.
IT IS SO ORDERED.