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Attorney-Client Privilege/Class Action Defense Cases–Costco v. Superior Court: California State Court Denies Writ Relief Of Court Order Requiring Defense To Produce In Labor Law Class Action Copy Of Redacted Letter Prepared By Outside Counsel

Class Action Discovery Order Requiring Defense to Produce Redacted Letter Prepared by Outside Counsel did not Warrant Extraordinary Writ Relief because Unredacted Portions were “Inconsequential” and Disclosure to Class Action Plaintiffs would not cause Costco “Irreparable Harm” California Court Holds

Plaintiffs filed a putative labor law class action against Costco alleging that it “misclassified certain managers as exempt employees.” Costco Wholesale Corp. v. Superior Court, ___ Cal.App.4th ___, 74 Cal.Rptr.3d 345, 347 (Cal.App. 2008). According to the class action complaint, each Costco warehouse store “has hundreds of employees and up to 20 managers”; a “general manager” (apparently the most senior person at the warehouse store), and “ancillary managers” (in charge of various departments, such as meat, bakery, pharmacy, optical, etc.). Id., at 348. The class action alleges that “[s]enior operations personnel at Costco determine how to classify employees for compensation purposes,” and in June 2000 Costco’s corporate counsel hired a law firm to “‘undertake [a] comprehensive factual investigation and legal analysis regarding the classification of managers within Costco Warehouses.’” Id. In response to that request, outside counsel conducted interviews, performed legal research and prepared a 22-page letter dated August 4, 2000, addressed to Costco’s corporate counsel. Id. Internal meetings followed, attended by in-house counsel, and in 2001 Costco reclassified ancillary managers as non-exempt employees. Id., at 348-49. The gravamen of the class action is that Costco “unlawfully failed to pay overtime to ancillary managers…because Costco categorically had misclassified these employees as exempt employees”; Costco’s answer to the class action complaint included the affirmative defense that “plaintiffs were exempt from the protection of the California overtime laws (the exemption defense).” Id., at 349. In discovery, plaintiffs sought inter alia production of the August 4 letter, which defense attorneys had listed on a privilege log; the trial court ordered production of a redacted copy of the letter. Costco sought a writ of mandate but the Court of Appeal denied the petition.

This discovery dispute centered on whether Costco had placed the contents of the August 4 letter at issue by virtue of its affirmative exemption defense and other discovery responses. Specifically, in response to interrogatories Costco stated that it “reasonably expected that employees who held the position of salaried Costco manager regularly and customarily exercised their independent judgment and discretion performing such exempt tasks…for more than 50% of their time.” Costco, at 349. The defense “person most knowledgeable about Costco’s exemption defense” testified that “Costco relied, in part, on input from counsel in classifying its employees as exempt or nonexempt.” Id., at 350. Defense attorneys stated that Costco was not relying on “advice of counsel” as a defense, and asserted the attorney-client privilege as to any discussion with counsel, id. Plaintiffs demanded discovery of legal advice provided by outside counsel on the grounds that the privilege had been waived; defense attorneys reiterated that Costco’s “‘reasonable expectation’ exemption defense was not dependent upon legal advice.” Id.

Plaintiffs filed a motion to compel, arguing that Costco had placed the contents of the communications at issue:

“Costco affirmatively placed the requested information directly at issue by basing its exemption defense on its ‘reasonable expectation’ that junior managers spent most of their time on managerial tasks. Plaintiffs have a right to show that Costco actually knew and expected the exact opposite, i.e., that Costco investigated the work of its junior managers and learned that they were spending most of their time doing hands-on work. Furthermore, Costco relied on counsel’s input to support its exemption defense. In essence, Costco testified that it reasonably expected junior managers to be primarily engaged in management tasks based on input from in-house counsel.”

Costco, at 350-51. Defense attorneys responded that the communications were protected by the attorney-client privilege and attorney work product doctrine. Id., at 351. The discovery referee ordered Costco to produce the August 4 letter for in camera review (over defense objection), and then ordered the letter produced in a form redacted by the referee; the redacted letter “left only those parts the referee considered to be not protected by attorney-client or work product privileges” and, in part, included the redaction of “all text on pages 2-9 and 17-21” of the 22-page letter. Id. Defense attorneys objected to the referee’s recommendation, and requested that the trial court rule on Costco’s objection without reviewing the letter, id., at 352. The trial court agreed, but adopted the referee’s recommendation and ordered that the letter, as redacted, be produced. Id. The Court of Appeal summarily denied Costco’s petition for writ of mandate, but the California Supreme Court granted review and transferred the matter back to the appellate court for consideration of the merits. Id., at 352-53.

After discussing at length the privileges and the “substantial evidence” standard of review, see Costco, at 353-57, the Court of Appeal denied writ relief. It noted that the referee believed that the unredacted portions of the letter reflected “factual information about various employees’ job responsibilities…based on non-privileged documents (Costco’s written job descriptions) and interviews with two Costco Managers” which were not protected from disclosure. Id., at 357 (citation omitted). In the appellate court’s view, not only were 13 of the 22 pages “redacted in their entirety,” but “[l]arge portions of the remaining pages [also] were eliminated by the referee.” Id., at 358. The court held that defense attorneys failed to satisfy their two-prong burden of establishing (1) that the material was privileged and (2) that extraordinary relief is warranted, id. Based on its review of the letter (which had been filed under seal), the Court of Appeal concluded that the portions of the letter that the referee left unredacted “are inconsequential and do not infringe on the attorney-client relationship.” Id. The appellate court denied the petition “because the unredacted portions of the [August 4] letter contain no information that can irreparably harm Costco.” Id., at 359.

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