THE FINNLEY GROUP AS RECEIVER FOR INDUSTRIAL PIPING, INC., Plaintiff, v. TAO ZHANG and DAYI LIU, Defendants Case No. 4:15-CV-00450-EJL-CWD United States District Court, D. Idaho Filed June 14, 2018 Counsel Daniel J. Weber, Pro Hac Vice, Daniel J. Weber, P.C., Atlanta, GA, Phillip S. Oberrecht, Elam & Burke, P.A., Jason R. Mau, Parsons Behle & Latimer, Boise, ID, for Plaintiff. Jack S. Gjording, Julianne Slayton Hall, Stephen Lee Adams, Gjording Fouser PLLC, Boise, ID, for Defendants. Dale, Candy W., United States Magistrate Judge ORDER DENYING DEFENDANTS' MOTION TO COMPEL (DKT 72) INTRODUCTION *1 Pending before the Court is Defendants' Motion to Compel. (Dkt. 72.) All non-dispositive matters have been referred to this Court for resolution. (Dkt. 56.) Defendants filed the present motion to compel on March 23, 2018. Therein, Defendants assert that although the questions they wish to compel responses to may call for responses subject to attorney client privilege, that Plaintiff impliedly waived such privilege by putting the communications at issue. Defendants assert also that they have fully complied with the meet and confer requirements of District of Idaho Local Rule of Civil Procedure, 37.1. Plaintiff asserts it has not put the communications in question at issue and the information sought in the continued depositions is privileged attorney client communications. Additionally, Plaintiff disagrees that Defendants complied with the meet and confer requirement and ask the Court to dismiss Defendants' motion on that ground. Having fully reviewed record, the Court finds that the facts and legal arguments are adequately presented in the briefs and record. Accordingly, the Court will decide this matter on the record. D. Idaho Loc. R. 7.1. For the reasons that follow, the Court will deny Defendants' motion. BACKGROUND The complaint in this matter was filed on September 25, 2015 by Plaintiff Industrial Piping, Inc. (IPI). (Dkt. 1.) Now in its second amended version, the complaint alleges Defendants Tao (Mike) Zhang and Dayi (Sean) Liu committed unfair and deceptive trade practices in business dealings with IPI under the North Carolina Unfair or Deceptive Trade Practices Act (UDTPA).[1] (Dkt. 85.) IPI is a closely-held corporation with its principle place of operation in Pineville, North Carolina. IPI was hired by a corporation named Hoku Materials, Inc. (Hoku) to perform metal fabrication and component installation for a polysilicon plant being built by Hoku in Pocatello, Idaho. Defendant Zhang served as a director and President of Hoku, and Defendant Liu served as Hoku's Vice President. In addition, Zhang and Liu were also high-ranking managers at a company called Tianwei New Energy Holdings Co., Ltd. (Dkt. 40-1 at 7.) During the time period relevant to IPI's complaint, Tianwei held a 60 percent controlling interest in Hoku. Ultimately, Hoku became insolvent and was unable to pay its substantial debts—including outstanding invoices owed to contractors like IPI. Hoku filed for bankruptcy in late 2013 in the United States Bankruptcy Court for the District of Idaho. In the course of the business relationship, IPI and Hoku entered into three contracts: (1) a $13 million “Tank Farm” Contract” executed April 7, 2011; (2) a $9 million “Steel Supply Agreement” executed July 1, 2011; and (3) a “Master Construction Services Agreement” (MCSA) executed on or around October 6, 2011. (Dkt. 40-1 at 79-84.) Defendants' motion to compel is focused on internal discussions at IPI regarding the MCSA during negotiation of the contract. *2 The MCSA was drafted by Hoku and delivered to IPI's Senior Vice President of the Piping Division, Hans Ransom, on August 26, 2011. (Dkt. 72-3 at 8; 13.) As manager of the Hoku polysilicon project, Ransom was responsible for negotiating and executing the MCSA and associated task orders. Id. at 13; 72-4 at 39. IPI's second cause of action attributes representations and warranties made in the MCSA regarding its ability to pay IPI to Zhang, who was facilitating the contract negotiation for Hoku. (Dkt. 76 at 7-8.) IPI asserts the language in the MCSA, along with discussions Ransom had with Zhang, where Zhang assured him Hoku had no funding issues, were relied upon by IPI in its decision to execute the MCSA and begin work. Id. More specifically, IPI asserts the representations and warranties in Section 3.9 of the contract were made by Zhang to induce IPI to execute the MCSA and to being work—even though Zhang knew at the time that Hoku did not have the necessary capital to pay IPI. (Dkt. 49 at 26.) Section 3.9 reads as follows: 3.9 Representations and Warranties of Owner Owner [Hoku Materials] makes the following express representations and warranties to Contractor, which shall be continuing during the term of this Agreement: .... 3.9.4 Owner has thoroughly and carefully examined and fully understands the terms of this Agreement and is fully able to perform all of Owner's duties and obligations hereunder; .... 3.9.7 Owner is financially solvent, able to pay its debts as they mature and has sufficient working capital to complete its obligations under this Agreement. (Dkt. 49 at 24.) On December 13, 2017, Jack Gjording, counsel for Defendants, deposed Ransom. Mr. Gjording asked Ransom a series of questions regarding the MCSA negotiation, including what issues he had with the contract during negotiations. Ransom responded there were a few issues and that he sent the draft MCSA to IPI's general counsel, Daniel Weber, to get his thoughts. (Dkt. 72-1 at 4.) Mr. Gjording asked: “Did you discuss it with Dan?” Ransom responded: “I sent it to him. There's a string of emails that go back and forth. Dan's—I didn't verbally discuss it with him, but Dan sent me his thoughts on it.” Id. Mr. Gjording next asked: “Based on what you learned from the emails, what were Dan's thoughts?” Id. At this point, Mr. Weber, who is also the attorney representing IPI in this matter, objected based on attorney client privilege and instructed Ransom not to answer. Id. At the close of Ransom's deposition, Mr. Gjording notified Mr. Weber that he was going to look into whether there were grounds for discovery into Mr. Weber's conversations with Ransom and others, especially during the MCSA negotiation. Id. On January 16, 2018, Mr. Gjording took the deposition of Michael Jones, former president of IPI. (Dkt. 72-1 at 5.) Although he did not ask Mr. Jones any questions related to discussions with Mr. Weber during the MCSA negotiations, Mr. Gjording alerted Mr. Weber that he was also going to investigate whether conversations between Jones and Mr. Weber would be subject to attorney client privilege. Id. In the present motion, Defendants assert that, because IPI has alleged it relied on the representations made in Section 3.9 of the MCSA, they are entitled to discover the basis of that reliance, and “such basis would include any discussions that Mr. Ransom and Mr. Jones had with their counsel who assisted with negotiation of the MCSA.” (Dkt. 72-1 at 7.) Defendants reason further that IPI “waived the right to claim attorney client-privilege as a basis for withholding answers about such reliance” by asserting reliance on Section 3.9. Id. Defendants contend IPI waived its attorney client privilege to internal attorney-client communications by putting reliance on the terms of the MCSA at issue.[2] *3 As set forth above, in discovery, IPI disclosed that Mr. Ransom sought input from IPI's general counsel, Mr. Weber, during the course of the contract negotiation with Hoku. (Dkt. 72-1 at 1.) IPI affirmatively asserted such communications are privileged. Id. However, Defendants assert that, if they knew the content of Mr. Ransom's –and Mr. Jones's– discussions with Mr. Weber, they “could show there was no justifiable reliance on what are ostensibly boiler-plate terms of a construction contract.” Id. In turn, IPI argues it has not injected the negotiations or internal discussions that directly involved Mr. Weber at issue for the reliance element of its second cause of action. (Dkt. 76 at 9.) IPI asserts further that it has not used and does not require any of the content of such communications to support its causes of action. Id. For these reasons, IPI contends that it has not placed the attorney client communications at issue, and that they are not necessary for Defendants to mount a defense. STANDARDS OF REVIEW 1. Motions to Compel Discovery Discovery is permitted “regarding any nonprivileged matter that is relevant to any party's claim or defense.” Fed. R. Civ. P. 26(b)(1). Relevant information “need not be admissible in evidence to be discoverable.” Id. A party may move for an order compelling a discovery response pursuant to Federal Rule of Civil Procedure 37(a)(3)(B). A party may also complete a deposition or adjourn the examination of the deponent prior to moving for an order to compel a discovery response. Fed. R. Civ. P. 37(a)(3)(c). However, such motion may not be made unless the movant has in good faith conferred, or attempted to confer, with the party allegedly failing to answer, disclose or respond. Id. at 37(a)(1); Idaho Local Civ. R. 37.1. If the motion is granted, the Court must, after opportunity for hearing, order the party whose conduct resulted in the motion, or attorney advising the conduct, or both, to pay the reasonable attorney's fees of the movant. Id. at 37(a)(5)(A). However, the court must not make such order for fees if the moving party filed the motion before making a good faith effort to obtain disclosure without court intervention, the nondisclosure was substantially justified, or, other circumstances would make the award of fees unjust. Id. at 37(a)(5)(A)(i-ii). If the motion is denied, the court may issue a protective order, and must, after providing an opportunity for hearing, order the moving party, or attorney, or both, to pay the opposing party reasonable expenses including in opposing the motion. Id. at 37(a)(5)(B). The Court must not order such payment if the motion to compel was substantially justified, or any other circumstances make the award of fees unjust. Id. 2. Implied Waiver of Attorney Client Privilege “In a civil case, state law governs privilege regarding a claim or defense for which state law supplies the rule of decision.” Fed. R. Evid. 501. In a prior order, District Judge Edward J. Lodge ruled that North Carolina law, and not Idaho law, should apply in this case.[3] (Dkt. 84; infra note 1.) Thus, North Carolina law governs substantive questions, including the questions of waiver of attorney client privilege raised in the present motion. HBC Ventures, LLC v. Holt MD Consulting, Inc., No. 5:06-CV-190-F, 2009 WL 10688888, at *2 (E.D.N.C. Feb. 9, 2009). *4 North Carolina employs a five-part test to determine whether attorney client privilege applies to communications: (1) the relation of attorney and client existed at the time the communication was made, (2) the communication was made in confidence, (3) the communication relates to a matter about which the attorney is being professionally consulted, (4) the communication was made in the course of giving or seeking legal advice for a proper purpose although litigation need not be contemplated and (5) the client has not waived the privilege. In re Miller, 357 N.C. 316, 335, 584 S.E.2d 772, 786 (2003). To find implied waiver, the following must be satisfied: (1) the party asserts that privilege as a result of an affirmative act, such as filing suit; (2) through this affirmative act, the asserting party puts the privileged information at issue; and (3) allowing the assertion of privilege would deprive the opposing party of information vital to its defense. HBC Ventures, 2009 WL 10688888, at *3 (citing Hearn v. Rhay, 68 F.R.D. 574, 581 (E.D. Wash. 1975)). In HBC Ventures, defendants asserted that plaintiffs impliedly waived attorney client privilege by alleging active concealment and reliance in their complaint—putting what plaintiffs knew or should have known at issue, and also what plaintiff's attorney learned or should have learned on plaintiff's behalf. Id. The court was not persuaded. It held defendants already had the opportunity to discover what plaintiffs knew, and that the attorney's knowledge was not vital for a defense against the claim. Id. DISCUSSION IPI did not put conversations regarding the MCSA terms at issue, and thus has not waived attorney client privilege to such conversations when they occurred between executive employees of IPI, including Ransom and Jones, and IPI's counsel, Mr. Weber. As set forth above, to find an implied waiver in this case, the Court must find (1) IPI's assertion of privilege comes from the affirmative act of asserting its second cause of action—reliance on the terms of Section 3.9 of the MCSA; (2) that through making the reliance-based claim, IPI has put communications regarding MCSA's terms with its counsel, Mr. Weber, at issue; and (3) that by allowing IPI to assert privilege to the communications, Defendants would be deprived of information vital to their defense. Even assuming IPI's assertion of privilege comes from its act of asserting its reliance-based claim, the Court does not conclude IPI put such internal communications regarding MCSA negotiations at issue, nor is the information vital to Defendants' defense. Although IPI asserts it relied on the representations made in the MCSA in its decision to execute it and to move forward with work, and it is also true that Ransom communicated with Mr. Weber regarding the MCSA's terms prior to execution, it does not necessarily or even logically follow that IPI put its internal decision-making process –including advice from its legal counsel–at issue through its assertion that it relied on the terms of a jointly-negotiated and jointly-executed contract.[4] Further, as the court found in HBC Ventures, it is IPI's knowledge that is at issue as it relates to reliance on the representations made in the MCSA—not the knowledge of IPI's attorney. *5 Furthermore, Defendants have had a full and fair opportunity to discover information related to IPI's knowledge of Hoku's actual financial situation. What Ransom, Jones, or any other employee discussed with Mr. Weber in the course of the MCSA negotiations is not information vital to Defendants' defense. For the foregoing reasons, the Court will deny Defendants' motion to compel. Meet and Confer Requirements On October 24, 2017, the Court entered a Case Management Order. (Dkt. 56.) Therein, the Court instructed that “the parties will strictly comply with the meet and confer requirement of Local Rule 37.1 prior to filing any discovery motions.” Id. at 3. And that “counsel must certify, not only that they have complied with Local Rule 37.1, but that they have complied with the Judge's procedures.” Id. Local Rule 37.1 provides as follows: To confer means to speak directly with opposing counsel ... in person or by telephone, to identify and discuss disputed issues and to make a reasonable effort to resolve the disputed issues. The sending of an electronic or voice-mail communication does not satisfy with the requirement to “confer.” IPI asserts that, although Defendants' counsel did use written communications in an attempt to resolve the privilege question related to the Ransom and Jones depositions, Defendants' counsel did not “speak directly” with Plaintiff's counsel prior to filing the motion to compel. Defendants' counsel argues, in turn, that the requirements of Rule 37.1 were met through multiple communications on the subject. Defendants' counsel asserts the parties spoke directly regarding further discovery and depositions during the March 6, 2018 mediation the parties held on the matter. According to the record before the Court, the following communications were made regarding discovery: (1) February 20, 2018: A letter from Mr. Gjording to Mr. Weber detailing his request to resume depositions of Ransom and Jones regarding communications with Mr. Weber during MCSA negotiations. The letter provided notice that Mr. Gjording intended to file a motion with the Court to compel the depositions if Mr. Weber refused to allow them to proceed. (Dkt. 72-6 at 1-3.) (2) February 26, 2018: An email from Mr. Weber to Mr. Gjording acknowledging receipt of February 20 letter. Mr. Weber asked Mr. Gjording to explain the reasons the asserted attorney-client privilege did not apply. (Dkt. 72.6 at 1.) (3) March 6, 2018 Mediation: Defendants and IPI discussed further discovery and depositions. (Dkt. 72-2 at 5.) (4) March 7, 2018: Mr. Gjording sent Mr. Weber an email requesting continued depositions of Ransom and Jones. Therein he asserted that he thought he was entitled to discover the communications because they were related to IPI's reliance on Section 3.9 of the MCSA. (Dkt. 72-8 at 1.) (5) March 8, 2018: Mr. Weber responded to the March 7 email and refused to allow the continued depositions, and explained that Mr. Gjording had already had full opportunity to discover the basis of Ransom's and Jones's reliance on the representations in the MCSA. (Dkt. 72-9 at 1-2.) (6) March 22, 2018: The meet and Confer phone conference regarding discovery responses. In its response to the motion, IPI asserts Defendants did not raise the issue re: attorney client communications at this meet and confer. (Dkt. 76-1 at 2.) Defendants contend that, once it was clear IPI would continue to refuse to allow the continued depositions, there was no further point in attempting to comply with the meet and confer requirements. (Dkt. 78 at 4.) Nevertheless, if it is true that the subject was not raised and discussed during the March 22, 2018 meet and confer, it was likely inappropriate under Rule 37.1 for Defendants to file the instant motion before discussing the issue over the phone or in person. Further, Defendants failed to follow the Court's requirements regarding discovery disputes as directed in the Case Management Order.[5] (Dkt. 56 at 3.) *6 As set forth above, when a motion to compel is denied, Federal Rule of Civil Procedure 37(a)(5)(b) requires that the Court, after an opportunity to be heard, require the moving party to pay the opposing party reasonable expenses incurred in opposing the motion – including attorney's fees. However, the Court must not order the payment if the motion was substantially justified or other circumstances make an award unjust. The Court does not find that Defendants were substantially justified in making the present motion. However, because Defendants ardently argued the privilege was waived, and in turn, Plaintiff strongly asserted the privilege and denied implied waiver, it is likely the parties would not have resolved the dispute without Court intervention. Due to this circumstance, although it is a close call, the Court will not require Defendant to pay Plaintiff's expenses associated with the motion. CONCLUSION IPI did not impliedly waive attorney client privilege to communications made between its counsel and employees during the negotiation of the MCSA. Therefore, the Court will not order continued depositions of Mr. Ransom or Mr. Jones on the subject. ORDER NOW THEREFORE IT IS HEREBY ORDERED: 1) Defendants' Motion to Compel (Dkt. 72) is DENIED. Footnotes [1] District Judge Edward J. Lodge held application of UDTPA does not raise a conflict of law issue. (Dkt. 84 at 12.) “Under the UDTPA, a party to an arms-length negotiation who chooses to speak or make assurances regarding the financial condition of a company must provide all the information necessary to ensure his statements are accurate.” Id. at 8; See Ragsdale v. Kennedy, 209 S.E.2d 494, 500 (1974). [2] Defendants do not contend that IPI failed to assert the privilege, that the communications are not privileged, or that IPI expressly waived the privilege. [3] Neither of the parties prepared their memoranda with an eye toward North Carolina's law on the issue of attorney client privilege and implied waiver. Yet, in general, courts approach the issue of implied waiver the same. Therefore, the Court would not be aided in making its decision on the motion even if the parties had addressed the question under North Carolina law. Additional briefing is not required. [4] The Court has difficulty comprehending how the content of advice IPI received from its counsel, Mr. Weber, during MCSA negotiations is relevant or discoverable in the context of IPI's UDTPA reliance-based claim. What Mr. Weber had to say about the contract—even if he gave specific advice regarding Section 3.9—is not relevant to any claim or necessary for any applicable defense. [5] Discovery Disputes – Motions to Compel, U.S. DISTRICT COURT, DISTRICT OF IDAHO http://www.id.uscourts.gov/ district/judges/dale/Discovery_Disputes.cfm.