Opinion
Civil Action No. 1:06-CV-850-MHS.
October 10, 2006
ORDER
This action is before the Court on plaintiffs' motion to compel. For the following reasons, the Court denies the motion.
Background
Defendant SmartVideo Technologies, Inc. (SmartVideo), is a Delaware corporation with its principal place of business in Duluth, Georgia. SmartVideo provides live TV and on-demand programming to customers' cell phones and computers. Plaintiffs are thirteen investors in SmartVideo who purchased shares of stock, as well as warrants to purchase additional shares of stock, on or before December 31, 2004. In connection with their investments, SmartVideo entered into subscription agreements and registration rights agreements with each plaintiff.
SmartVideo sold more shares and warrants throughout January, February, and March 2005. According to plaintiffs, these early 2005 investors were permitted a one-year period immediately following. March 2005 within which the exercise price for their warrants would be reset, or "ratcheted down," if the price for any shares offered to other investors during that one-year period was set below the exercise price ($3.50) set by SmartVideo in March 2005. In fact, on November 21, 2005, within the one-year period, plaintiffs allege that SmartVideo sold convertible preferred common shares at 75¢ per share, and that SmartVideo offered the early 2005 investors — but not plaintiffs — the benefit of the ratcheted down exercise price.
In addition, plaintiffs contend that on June 30, 2005, SmartVideo registered plaintiffs' shares by filing a Form SB-2 registration statement with the Securities and Exchange Commission (SEC). In connection with the registration, SmartVideo's outside counsel, Leslie J. Croland, an attorney with the law firm of Edwards Angell Palmer Dodge, LLP, submitted an opinion dated July 7, 2005. Subsequently, Mr. Croland determined that there was material information missing from the SB-2 registration statement. Therefore, in a letter dated November 18, 2005 (the Croland letter), he instructed SmartVideo's transfer agent that it could no longer rely on his July 7 opinion in connection with any public sale of securities covered by the registration statement. SmartVideo placed restrictions on plaintiffs' ability to transfer their shares or exercise their warrants until the registration statement was amended. These restrictions remained in place from late October 2005 through the third week of January 2006.
On April 10, 2006, plaintiffs filed this action against SmartVideo asserting two causes of action. In Count I of their complaint, plaintiffs allege that SmartVideo breached the subscription agreements by not providing plaintiffs the same "ratcheted down" exercise price for their warrants as was provided to subsequent investors. (Campl. ¶¶ 38, 58, 60.) In Count II, plaintiffs allege that SmartVideo breached the registration rights agreements by restricting plaintiffs' ability to sell their shares or exercise their warrants from late October 2005 through the third week in January 2006. (Compl. ¶¶ 46-47.) Plaintiffs seek to recover damages of approximately $1.8 million for the alleged breach of the subscription agreements, and $8.2 million for the alleged breach of the registration rights agreements.
During the course of discovery, plaintiffs took the depositions of Ron Warren, SmartVideo's Vice President of Investor Relations and its designated corporate representative; and Richard Bennett, SmartVideds CEO and President of its Board of Directors. Both Mr. Warren and Mr. Bennett testified that during the period from October 2005 through January 2006 they relied exclusively on the advice of Mr. Croland with respect to the withdrawal of the opinion letter and what filings needed to be made with the SEC. (Warren Dep. at 76, 81-82; Bennett Dip. at 17.) Plaintiffs' counsel then asked a series of questions seeking to elicit the specific advice that Mr. Croland had given SmartVideo on these as well as other issues. Upon instruction of SmartVideo's counsel, the witnesses refused to answer these questions on the grounds that the information sought was protected by the attorney client privilege. (Warren Dep. at 87-90.)
Plaintiffs then filed the instant motion to compel disclosure of the attorney-client privileged information on the grounds that SmartVideo had implicitly waived the privilege.
Discussion
Plaintiffs contend that SmartVideo implicitly waived the attorney-client privilege as to all communications regarding the suspension of trading of plaintiffs' stock by asserting, through the testimony of Mr. Warren and Mr. Bennett, that it had relied on the advice of counsel in connection with the matter. Plaintiffs rely on cases holding that the privilege "may not be used both as a shield and a sword," but may be implicitly waived "[w]here a party raises a claim which in fairness requires disclosure of the protected communication." Chevron Corp. v. Pennzoil Co., 974 F.2d 1156, 1162 (9th Cir. 1992); see also Tackett v. State Farm Fire Cas. Ins. Co., 653 A.2d 254, 259 (Del. 1995); Garfinkle v. Arcata Nat'l Corp., 64 F.R.D. 688, 689-90 (S.D.N.Y. 1974).
In response, SmartVideo argues that the attorney client privilege is waived only where the client attempts to prove a claim or defense by disclosing or describing an attorney-client communication, which is not the case here. SmartVideo points out that it has not asserted either in its answer to the complaint or in the testimony of its designated representative that the Croland letter or any advice provided by Mr. Croland is a defense to plaintiffs' claims in this action. Therefore, SmartVideo contends, there has been no waiver.
The Court concludes that plaintiffs have failed to establish that SmartVideo implicitly waived its attorney client privilege. Under Georgia law, which the parties agree is controlling in this diversity case, the attorney-client privilege is waived if a protected communication is disclosed by the party "in furthering its cause." Associated Grocers Co-op, Inc. v. Trust Co. of Columbus, 158 Ga. App. 115, 116 (1981); see also Young v. State, 65 Ga. 525 (1880) ("if the witness in his testimony shall disclose anything in such confidential communications material to his side of the cause, then the other party would have the right to all that was said in the same conversation, although it was said to the attorney"). There has been no such disclosure in this case; therefore, there has been no waiver.
In their depositions, Mr. Warren and Mr. Bennett merely testified in that SmartVideo generally relied on Mr. Croland's advice in connection with this and other matters involving the SEC. At no point did they disclose any portion of an attorney-client communication on which SmartVideo relies to support a defense against plaintiffs' claims. Thus, for example, neither Mr. Warren nor Mr. Bennett testified that Mr. Croland had advised SmartVideo to suspend trading in plaintiffs' stock or to delay amending the registration statement, nor does SmartVideo assert any defense based on its reasonable reliance on such advice. As for the Croland letter itself, it is neither a protected communication the disclosure of which might support a waiver, nor is it asserted by SmartVideo as a defense to plaintiffs' claims.
The Court's conclusion is consistent with the cases upon which plaintiffs principally rely. For example, in Chevron, 974 F.2d at 1162, the court held that the defendant waived the attorney-client privilege by relying on its attorney's tax advice to support its defense in the case. Likewise, in Tackett, 653 A.2d at 259-60, the court held that the defendant insurance company waived the attorney client privilege by relying upon its entire claim file, including attorney client communications, to defend against plaintiffs bad faith claim. And in Garfinkle, 64 F.R.D. at 689-90, because the defendant relied upon its attorney's opinion letter as a defense to the plaintiff's breach of contract claim, the court held that the plaintiff was entitled to discover attorney client communications related to the letter. The other cases cited by plaintiffs are to the same effect. See Glenmede Trust Co. v. Thompson, 56 F.3d 476, 486 (3d Cir. 1995); United States v. Bilzerian, 926 F.2d 1285, 1292 (2d Cir. 1991); Panter v. Marshall Field Co., 80 F.R.D. 718, 720-21 (N.D. Ill. 1978);Handgards, Inc. v. Johnson Johnson, 413 F. Supp. 926, 929 (N.D. Cal. 1976); State Farm Mut. Ins. Co. v. Superior Court, 228 Cal. App. 3d 721, 727 (1991).
Both parties have requested an award of their fees and expenses incurred in bringing or responding to plaintiffs' motion to compel. See Fed.R.Civ.P. 37(a)(4). The Court concludes that an award of fees and expenses would be unjust because plaintiffs' motion, although ultimately determined to be without merit, was not clearly unjustified. Therefore, both sides shall bear their own expenses. Conclusion
For the foregoing reasons, the Court GRANTS plaintiffs' motion to expedite a ruling on its motion to compel [#23] and DENIES plaintiffs' motion to compel [#20].
The Court notes that since SmartVideo has disclaimed any reliance on its attorney's advice as a defense to plaintiffs' claims, it is judicially estopped from raising such a defense hereafter, either at trial or in connection with any motion. In re Cox, 338 F.3d 1238, 1243 n. 3 (11th Cir. 2003) (equitable principles of judicial estoppel prevent party "from deliberately changing positions according to the exigencies of the moment") (quoting Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1285 (11th Cir. 2002)).
IT IS SO ORDERED.