United States of America et al v. Kmart Corporation

Filing 430

ORDER DENYING 387 Motion to Compel Production Of Attorney-Client Communications filed by Relator James Garbe. Signed by Judge Nancy J. Rosenstengel on 7/17/2017. (mlp)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ILLINOIS
UNITED STATES OF AMERICA, et al.
ex rel. JAMES GARBE,
Plaintiffs,
vs.
KMART CORPORATION,
Defendant.

)
)
)
)
)
)
)
)
)
)

Case No. 12-CV-881-NJR-RJD

MEMORANDUM AND ORDER
ROSENSTENGEL, District Judge:
On June 19, 2017, less than two months before the start of trial in this False Claims
Act case, Relator James Garbe filed a motion to compel the production of Defendant
Kmart Corporation’s privileged attorney-client communications (Doc. 387). Relator
contends that Kmart, despite previously disavowing a good faith reliance on advice
counsel defense, waived the attorney-client privilege in responding to Relator’s motion
for summary judgment on the issue of scienter. Specifically, Relator refers to the
following statements made by Kmart in its response:
“the Kmart pharmacy team testified that they understood that the
enrollment-based nature of Kmart’s discount programs distinguished
its discounted generic program prices from Kmart’s U&C prices for
those drugs”;
“Kmart believed its discount prices would be separate from, or kept at
‘arms-length’ from, Kmart’s U&C prices”;
Kmart’s “pharmacy team” attempted to “create a program that did not
impact its U&C price … [and] intended to do so within the bounds of
applicable regulations with no intent to mislead”;

Page 1 of 8

“not a single member of the Kmart pharmacy team testified that he
intended to violate the law”;
“each one testified that he believed Kmart’s discount program was
structured in a way that did not implicate U&C price, and therefore
Kmart was not required to submit the discount price as U&C”;
the “pharmacy team’s” testimony means “Kmart did not ‘knowingly’
misrepresent its U&C price to Government payers”; and
“Put another way, the scienter issue turns on whether Kmart
employees believed Kmart’s discounted prices were different than
U&C.”
Relator asserts that these statements, indicating Kmart employees acted on the “good
faith” belief their conduct was within the bounds of applicable regulations, implicitly
waives the attorney-client privilege because the truthful resolution of these statements
requires the examination of confidential communications.
In response, Kmart avers it did not place its own attorney-client communications
“at issue” in this case merely by denying scienter has been proven (Doc. 393). Kmart
contends that, under Relator’s interpretation of the law, any generic assertion of good
faith to contest allegations of intent to violate the law automatically waives the
attorney-client privilege, which cannot be the case. Kmart maintains it has merely
denied it possessed the “knowledge” required for Relator to succeed on his FCA claim.
Kmart also notes that Magistrate Judge Frazier already rejected Relator’s
argument at a discovery dispute conference in May 2014 (Docs. 15, 161). Magistrate
Judge Frazier addressed the question of whether Kmart had waived its attorney-client
privilege because of “reliance on advice of counsel” or “good faith” and concluded no
such defense had been raised and no waiver had occurred. Kmart insists nothing has

Page 2 of 8

changed since that time, and it will not rely on any “advice of counsel” or “good faith”
defense at trial.
The attorney-client privilege protects communications made to an attorney for the
purpose of seeking legal advice, encouraging open conversations between an attorney
and his or her client. Lorenz v. Valley Forge Ins. Co., 815 F.2d 1095, 1097–98 (7th Cir. 1987).
“The privilege, however, can be waived by the client, either explicitly or by implication.”
Id. at 1098. “Implicit disclosure can occur when a holder partially discloses a confidential
communication or when a holder relies on a legal claim or defense, the truthful
resolution of which will require examining confidential communications.” Id. (internal
citation omitted). To waive the privilege, “a defendant must do more than merely deny a
plaintiff’s allegations. The holder [of the privilege] must inject a new factual or legal
issue into the case. Most often, this occurs through the use of an affirmative defense.” Id.
(citations omitted). “It is the nature of an affirmative defense to raise a matter outside the
scope of plaintiff’s prima facie case.” Id. (citations omitted).
The Seventh Circuit has stated that the attorney-client privilege is waived when
the client asserts defenses “that put his attorney’s advice at issue in the litigation.” Garcia
v. Zenith Elecs. Corp., 58 F.3d 1171, 1175 (7th Cir. 1995). A party cannot use the
attorney-client privilege as both a shield and a sword. DR Distributors, LLC v. 21 Century
Smoking, Inc., No. 12 CV 50324, 2015 WL 5123652, at *4 (N.D. Ill. Sept. 1, 2015). In other
words, “a party cannot assert reliance on advice of counsel, but then assert the
attorney-client privilege to shield the disclosure of that advice.” Id. (citing Rhone–Poulenc
Rorer, Inc. v. Home Indemnity Co., 32 F.3d 851, 863 (3d Cir. 1994) (“advice of counsel is

Page 3 of 8

placed in issue where the client asserts a claim or defense, and attempts to prove that
claim or defense by disclosing or describing an attorney-client communication.”)). In
Rhone-Poulenc, the Third Circuit summarized the rationale for waiving the privilege
when an affirmative advice of counsel defense is asserted:
Finding a waiver of the attorney client privilege when the client puts the
attorney’s advice in issue is consistent with the essential elements of the
privilege. That is, in leaving to the client the decision whether or not to
waive the privilege by putting the attorney’s advice in issue, . . . provide[s]
certainty that the client’s confidential communications will not be
disclosed unless the client takes an affirmative step to waive the privilege,
and . . . provide[s] predictability for the client concerning the
circumstances by which the client will waive that privilege. This certainty
and predictability as to the circumstances of a waiver encourage clients to
consult with counsel free from the apprehension that the communications
will be disclosed without their consent.
Rhone-Poulenc, 32 F.3d at 863-64.
Here, the Court concludes that Kmart has not waived the attorney-client
privilege. As an initial matter, more than three years ago, Magistrate Judge Frazier found
no waiver of the attorney-client privilege (Docs. 157, 161). Magistrate Judge Frazier
stated that the privilege would not be waived unless Kmart affirmatively adduced
evidence at trial indicating a Kmart employee relied on legal advice (Doc. 161, 10-14).
Magistrate Judge Frazier also noted that if Kmart did not intend to raise such a defense,
then no witness would be allowed, under anyone’s questioning, to say they “ran it by
counsel.” (Id., p. 14). Since that day, Kmart has continued to affirmatively disavow a
reliance on counsel defense. In its response to Relator’s motion for summary judgment
on scienter, Kmart did not raise any matter outside the scope of Relator’s prima facie case,
and it did not attempt to prove any defense by referring to attorney-client

Page 4 of 8

communications. Kmart merely denied Relator’s allegations that it had the requisite
knowledge to establish the scienter element of Relator’s case.
Furthermore, the cases cited by Relator are distinguishable, as they all involve
cases where the defendant affirmatively sought to use the attorney-client privilege as
both a sword and a shield. In United States v. Bilzerian, a criminal case, the defendant
relied on the advice of counsel to interpret complex securities law before taking certain
actions. United States v. Bilzerian, 926 F.2d 1285, 1291 (2d Cir. 1991). He then sought to use
counsel’s advice as a shield at trial, but filed a motion in limine to exclude evidence of
those communications with counsel. Id. The Second Circuit found that the defendant put
his attorney’s advice at issue by relying on it as a defense. Id. at 1292. As a result, the
attorney-client privilege was waived.
The district court cases cited by Relator are similarly unpersuasive. In Scott v.
Chipotle Mexican Grill, Inc., a Fair Labor Standards Act case, Chipotle invoked affirmative
defenses requiring a showing of good faith. In finding Chipotle waived its
attorney-client privilege, the court pointed to Chipotle’s corporate representative’s
testimony that decisions regarding its employment classifications were made “in the
context of communications and discussions with our lawyers.” Scott v. Chipotle Mexican
Grill, Inc., 67 F. Supp. 3d 607, 615 (S.D.N.Y. 2014). Because Chipotle’s affirmative defense
was based on its good faith reliance on counsel, the court found the plaintiffs were
entitled to discovery of Chipotle’s attorney-client communications. Id.
In Hamilton v. Yavapai Community College, the court found the attorney-client
privilege waived where the defendants asserted an affirmative defense of “good faith”

Page 5 of 8

belief in the legality of their actions in their Answer, but then refused to disclose relevant
attorney-client

communications.

Hamilton

v.

Yavapai

Cmty.

Coll.

Dist.,

No.

CV-12-08193-PCT-GMS, 2016 WL 8199695, at *2 (D. Ariz. June 29, 2016). Similarly, in
Carson v. Lake County, the defendant asserted an affirmative defense of acting in good
faith and in compliance with the law. Carson v. Lake Cty., No. 2:14-CV-117-PRC, 2016 WL
1567253, at *6 (N.D. Ind. Apr. 19, 2016). The defendant also testified that its attorney gave
legal advice regarding the termination of plaintiffs’ employment and age discrimination
laws, which was considered when deciding to terminate Plaintiff. Id. Thus, the court
found the plaintiff was entitled to discover what that advice was. Id. In McLaughlin v.
Lunde Truck Sales, Inc., 714 F. Supp. 916 (N.D. Ill. 1989), again, the defendants explicitly
asserted “good faith reliance” on the opinions of the Department of Labor as a defense,
then filed an affidavit by their attorney as evidence of their good faith. Id. at 917, 919. For
those reasons, the court found the privilege was waived. Id. at 920.
Finally, Relator’s reliance on Van Straaten v. Shell Oil Products Co., LLC, to support
his argument that it “remains to be seen” whether Kmart will introduce evidence of
consultation with an attorney as proof of its good faith efforts at legal compliance is
unavailing. In Van Straaten, the defendants insisted they were not asserting an advice of
counsel defense “as of right now.” Van Straaten v. Shell Oil Products Co., LLC, No.
09-C-1188, 2010 U.S. Dist. LEXIS 98604, *3 (N.D. Ill. June 8, 2010). Then, at summary
judgment, the defendants argued they reviewed the relevant statutes and consulted with
their in-house lawyers in an effort to comply with state law. Id. As a result, defendants
believed they were in compliance with all applicable laws. Id. at *3-4. Defendants

Page 6 of 8

maintained they had not waived the attorney client privilege because there is a
difference between an affirmative defense (reliance on counsel) and evidentiary facts
refuting scienter. Id. at *4.
In rejecting this argument, the court noted that to make a sufficient showing of
good faith, the defendants would need to show they consulted with an attorney, the
nature of the advice they received, and whether they followed counsel’s advice. Id. By
allowing the defendants to make the “naked assertion that they consulted with their
attorneys would leave the fact finder with the impression that they had satisfied the
aforementioned conditions even in situations where they had not.” Id. Permitting
defendants to do so while still maintaining the attorney-client privilege “would
effectively be abusing the privilege—using it both as a shield and a sword. This is not
allowed.” Id. at *4-5; see also Dorr-Oliver Inc. v. Fluid-Quip, Inc., 834 F. Supp. 1008, 1011
(N.D. Ill. 1993) (a defendant cannot claim it consulted with counsel to bolster a good
faith defense, but then claim privilege with regard to those communications); Claffey v.
River Oaks Hyundai, 486 F. Supp. 2d 776 (N.D. Ill. 2007) (defendant waived the privilege
by asserting that its “normal procedure” was to consult with counsel; even if defendant
did not plan to argue it actually consulted with counsel, the evidence would create the
impression that defendant had, indeed, relied on the advice of counsel while depriving
plaintiff of the opportunity to discovery the substance of the communications).
As previously discussed, Kmart is not wielding any swords in this case. Kmart
has assured the Court on multiple occasions that it will not assert a good faith reliance
on counsel defense at trial. It has not affirmatively placed its communications with

Page 7 of 8

counsel at issue in the case. Therefore, Kmart has not waived the attorney-client
privilege. Accordingly, Relator’s motion to compel is DENIED.
IT IS SO ORDERED.
DATED: July 17, 2017
____________________________
NANCY J. ROSENSTENGEL
United States District Judge

Page 8 of 8