I. INTRODUCTION

*1 Plaintiff, Vitamin Energy, LLC (“Vitamin Energy” or “VE”), initiated this action against Defendant, Evanston Insurance Company (“Evanston”). The Court previously granted Evanston's Motion for Judgment on the Pleadings. The Court of Appeals reversed, and this case proceeded to discovery.

Now before the Special Master is Vitamin Energy's Motion to Compel (Doc. 136), Evanston's Motion for Protective Order (Doc. 140), and Evanston's Motion to Seal (Doc. 173). Vitamin Energy argues that Evanston withheld and/or redacted, various discoverable, non-privileged documents.[1] Evanston responds that the documents are protected by the attorney-client privilege and/or work-product doctrine and seeks a protective order precluding discovery of its communications with in-house counsel, William Quackenboss. Evanston also seeks to claw-back portions of an e-mail, inadvertently disclosed with privileged material unredacted.

After reviewing all relevant filings, for the reasons set forth below, the Special Master recommends that the Court:

II. FACTS AND PROCEDURAL HISTORY

On July 23, 2018, VE and Evanston entered into a General Liability Insurance Policy Agreement (“the Policy”). (Doc. 137, Ex. A). The Policy afforded VE coverage from July 23, 2018, through July 23, 2019. Id. Under “Coverage B” of the Policy, Evanston is required to defend and indemnify Vitamin Energy for “[d]amages as a result of Claims first made against [VE] ... for Personal Injury or Advertising Injury...”. Id. “Advertising Injury is defined in the Policy as:

The Policy also lists a number of exclusions that bar coverage. Id.

On June 10, 2019, VE was sued in the United States District Court for the Eastern District of Michigan by International IP Holdings, LLC and Innovation Ventures, LLC (“5-hour Energy”), the owners of trademarks for 5-hour Energy liquid energy shots. (Doc. 137, Ex. B). In that lawsuit (“the Michigan Lawsuit”), 5-hour Energy asserts claims against VE under the Lanham Act for trademark infringement, false designation of origin, false advertising, and trademark dilution. Id. 5-hour Energy also makes claims under Michigan law for trademark infringement, indirect trademark infringement, and unfair competition. Id. Among the wrongs 5-hour Energy alleges VE has committed is “false and misleading comparative advertising” about the benefits of VE's products relative to competing products—including 5-hour Energy's. Id.

*2 On June 13, 2019, VE notified Evanston of the Michigan Lawsuit and requested coverage under the Policy (“the VE Claim”). (Doc. 136-1 at 3). Markel Services, Inc. (“MSI”), provides Evanston with claims, underwriting, and in-house legal services.[2] (Doc. 136-6, Ex. 18 at 7:4-8); (Doc. 140-1 at 4). On June 17, 2019, MSI Claims Manager Maria Lavin assigned MSI Senior Claims Examiner Sharon Dombrowski the VE Claim. (Doc. 136-7, Ex. 19 at 15:18-23). On June 20, 2019, Ms. Dombrowski provided Ms. Lavin with a summary of the VE Claim via e-mail. (Doc. 136-2). Within the e-mail, Ms. Dombrowski requested permission to consult MSI in-house counsel; Ms. Lavin agreed. Id.; (Doc. 136-3, Ex. 3 at 6).

On July 9, 2019, after a series of e-mails with MSI Associate General Counsel William Quackenboss (“AGC Quackenboss”), Ms. Dombrowski provided Ms. Lavin with a draft coverage disclaimer. (Doc. 136-3, Ex. 9 at 40). Ms. Lavin gave her approval and Ms. Dombrowski issued the disclaimer to VE on July 10, 2019. Id.; (Doc. 137-4).

The coverage disclaimer asserted that the complaint in the Michigan Lawsuit does not allege an Advertising Injury, or any other injury covered by the Policy, and that, even if it did, various coverage exclusions would excuse coverage. Id. It disclaimed both Evanston's duty to indemnify and defend. Id. After a series of communications with Ms. Dombrowski, on July 17, 2019, counsel for VE informed her that VE intended to pursue a coverage action in the event Evanston continued to refuse to defend. (Doc. 136-2, Ex. 3 at 14). On July 19, 2019, after consulting with Ms. Lavin and MSI Senior Claims Director Melissa Hoffman-Schartel, Ms. Dombrowski issued a supplemental coverage disclaimer reaffirming Evanston's coverage position. (Doc. 137-5).

On July 22, 2019, VE filed suit against Evanston in the Philadelphia County Court of Common Pleas, seeking a declaratory judgment to compel Evanston to provide a defense in the Michigan Lawsuit and adding claims for breach of contract and bad faith in violation of 42 Pa.C.S. § 8371. (Doc. 136-4, Ex. 15). On August 14, 2019, Evanston removed the case to the Eastern District of Pennsylvania. (Doc. 1).

After the parties cross-moved for judgment of the pleadings, this Court granted Evanston's motion and held that the complaint in the Michigan Lawsuit did not allege an Advertising Injury, as defined by the policy, and that, accordingly, Evanston had neither a duty to indemnify nor defend Vitamin Energy in the Michigan Lawsuit. (Doc. 46). VE timely appealed. (Doc. 51). On January 5, 2022, the Third Circuit reversed, holding that Evanston did have a duty to defend the Michigan Lawsuit, and remanded the case to this Court. (Doc. 136, Ex. M).

On November 7, 2022, VE filed the instant Motion to Compel, seeking the production of various documents withheld or redacted by Evanston. (Doc. 136). Specifically, VE seeks production of:

On November 21, 2022, Evanston responded to VE's Motion to Compel and cross-moved for a Protective Order precluding the discovery of privileged communications and the deposition of AGC Quackenboss. (Doc. 140-1). On December 22, 2022, VE filed a Motion to Seal, seeking to redact confidential portions of deposition transcripts and claw-back what Evanston claims is an inadvertently produced privileged sentence contained in Ms. Dombrowski's July 19, 2019 e-mail to Ms. Hoffman-Schartel (EIC005382). (Doc. 173-1). Evanston produced the unredacted e-mail on July 18, 2022. (Doc. 186 at 2). Evanston had produced the same e-mail three other times, on each occasion with the sentence redacted. (Doc. 173-1 at 3); (Doc. 140-4 at 7). On September 27, 2022, VE introduced the unredacted e-mail as an exhibit at Ms. Dombrowski's deposition. (Doc. 136-7, at 106:13-15). On November 7, 2022, VE attached the unredacted e-mail as an exhibit it its Motion to Compel. (Doc. 136-4, Ex. 13). On November 28, 2022, VE quoted the sentence at issue in its Reply in Support of its Motion to Compel. (Doc. 145 at 2). On December 6, 2022, Evanston's counsel e-mailed VE's counsel, seeking to claw-back the sentence; VE's counsel refused. (Doc. 186 at 2-3).

*3 On December 22, 2022, the Court appointed the Special Master to resolve various discovery disputes, including those described above. (Doc. 170).[3]

III. STANDARD OF REVIEW

Pursuant to Federal Rule of Civil Procedure 26(b)(1), the scope of discovery is “any nonprivileged matter that is relevant to any party's claim or defense and proportional to the needs of the case.” Relevancy is “construed broadly to encompass any matter that bears on, or that reasonably could lead to other matters that could bear on, any issue that is or may be in the case.” Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351 (1978) (citing Hickman v. Taylor, 329 U.S. 495, 501 (1947)).

A party may seek an order to compel discovery when an opposing party fails to respond to discovery requests or provides evasive or incomplete responses. See Federal Rule of Civil Procedure 37(a). When a party moves to compel discovery pursuant to Federal Rule of Civil Procedure 37, the moving party bears the initial burden of proving the relevance of the material requested. See Morrison v. Phila. Housing Auth., 203 F.R.D. 195, 196 (E.D. Pa. 2001). Once relevancy has been established, the party objecting to the discovery request bears the burden of showing why the request is improper. See Northern v. City of Philadelphia, 2000 WL 355526, *2 (E.D. Pa. Apr.4, 2000); Momah v. Albert Einstein Med. Ctr., 164 F.R.D. 412, 417 (E.D. Pa.1996).

A. Attorney-Client Privilege

“[S]tate law governs privilege regarding a claim or defense for which state law supplies the rule of decision.” Federal Rule of Evidence 501. Accordingly, in “a diversity action that raises a state bad faith claim, [state] law governs the applicability of the attorney-client privilege.” Hydrojet Servs., Inc. v. Sentry Ins. Co., 2022 WL 2168438 (E.D. Pa. June 16, 2022).

In Pennsylvania, attorney-client privilege is governed by 42 Pa.C.S. § 5928, which states “[i]n a civil matter, counsel shall not be competent or permitted to testify to confidential communications made by him to his client, nor shall the client be compelled to disclose the same, unless in either case this privilege is waived upon the trial by the client.” The Pennsylvania Supreme Court has rejected narrow interpretations of the statute and held that the privilege affords derivative protection to “confidential client-to-attorney [and] attorney-to-client communications made for the purpose of obtaining or providing professional legal advice.” Gillard v. AIG Ins. Co., 15 A.3d 44, 59 (Pa. 2011). A corporation may claim the privilege for communications between its counsel and its employees who have authority to act on its behalf. See Maleski v. Corporate Life Ins. Co., 641 A.2d 1, 3 (Pa. Cmwlth. Ct. 1994).

*4 “Pennsylvania law imposes a shifting burden of proof in disputes over disclosure of communications allegedly protected by attorney-client privilege.” Newsuan v. Republic Services Inc., 213 A.3d 279, 284 (Pa. Super. 2019). “The party invoking a privilege must initially set forth facts showing that the privilege has been properly invoked; then the burden shifts to the party seeking disclosure to set forth facts showing that disclosure will not violate the attorney-client privilege, e.g., because the privilege has been waived or because some exception applies.” Id. (quoting Nationwide Mut. Ins. Co. v. Fleming, 924 A.2d 1259 (Pa. Super. 2007), aff'd 992 A.2d 65 (Pa. 2010).

To successfully invoke the protections of attorney-client privilege, a litigant must show:

Ford-Bey v. Pro. Anesthesia Servs. of N. Am., LLC, 229 A.3d 984, 990-91 (2020).

“[D]ocuments subject to the [attorney-client] privilege may be transmitted between non-attorneys so that the corporation may be properly informed of legal advice and act appropriately.” SmithKline Beecham Corp. v. Apotex Corp., 232 F.R.D. 467, 477 (E.D. Pa. 2005); see also, Roberts Technology Group, Inc. v. Curwood, Inc., 2015 WL 4503547 at *2 (E.D. Pa. 2015) (applying Pennsylvania law) (holding that communications are privileged when they evidence the advice of in-house counsel or “otherwise reflect counsel's involvement in decisions relating to legal matters, even if the communication is between two members of [the client corporation's] management.”).

B. Work Product Doctrine

Unlike the attorney-client privilege, the work-product doctrine is governed, even in diversity cases, by a “uniform federal standard embodied in Federal Rule of Civil Procedure 26(b)(3).” United Coal Cos. v. Posell Construction Co, 839 F.2d 958, 966 (3rd Cir. 1988). Rule 26(b)(3) provides that “[o]rdinarily, a party may not discover documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative (including the other party's attorney, consultant, surety, indemnitor, insurer, or agent).”

However, such materials may be discovered if (a) “they are relevant to any party's claim or defense and proportional to the needs of the case” and (b) the party seeking discovery “shows that it has substantial need for the materials to prepare its case and cannot, without undue hardship, obtain their substantial equivalent by other means”. Id. The work-product doctrine seeks to promote the adversary system “by protecting the confidentiality of papers prepared by or on behalf of attorneys in anticipation of litigation.” Westinghouse Elec. Corp. v. Republic of the Philippines, 951 F.2d 1414, 1428 (3d Cir. 1991).

“A document is prepared in anticipation of litigation if ‘the nature of the document and factual situation in the particular case establishes the document can fairly be said to have been prepared or obtained because of the prospect of litigation’.” Fox v. Lackawanna Cnty., 2018 WL 4095854, *3 (M.D. Pa. Aug. 27, 2018) (quoting United States v. Rockwell Int'l., 897 F.2d 1255, 1265 (3d Cir. 1990). The preparer's anticipation of litigation must be objectively reasonable. See Martin v. Bally's Park Place Hotel & Casino, 983 F.2d 1252, 1260 (3d Cir. 1993). “The fact that the documents sought for discovery do not include legal advice is, ‘as a matter of law, irrelevant provided ... they were prepared in anticipation of litigation.’ ” Montgomery Cnty. v. MicroVote Corp., 175 F.3d 296, 305 (3d. Cir. 1999) (quoting In re Ford Motor Co., 110 F.3d 954, 968 (3d Cir. 1997) (abrogated on other grounds)).

IV. THE SPECIAL MASTER'S ANALYSIS

*5 Evanston has withheld Ms. Dombrowski's e-mail communications with AGC Quackenboss on the basis of attorney-client privilege. (Doc. 136, Ex. 17 at 4-7). Similarly, it has also redacted portions of Ms. Dombrowski's claims notes and communications with her superiors that memorialized AGC Quackenboss's advice. (Doc. 136-2, Ex. 3); (Doc. 136-3, Ex. 9); (Doc. 136-6, Exs. 12-13). Evanston has succeeded in facially invoking the privilege. Evanston was the client of AGC Quackenboss, an attorney, and sought his advice regarding a legal matter—the scope of coverage under the policy.

VE does not dispute that the withheld documents and redactions contain AGC Quackenboss's opinion and advice regarding Evanston's coverage position. (Doc. 136-1, at 14) (noting that Ms. Dombrowski consulted AGC Quackenboss for a “second set of eyes” and issued the coverage disclaimer with his input). VE instead relies upon a single trial court decision, General Refractories Co. v. Firemen's Fund Ins. Co., to support its claims that “under Pennsylvania law, there is no privileged relationship between an insurance company and in-house counsel in their role as claims handlers”. (Doc. 136-1 at 18); 45 Pa. D. & C. 4th 159 (C.P. Phila. Cnty. 2000).

As a preliminary matter, the Special Master notes that Pennsylvania appellate courts have not adopted General Refractories' two decade-old holding. Even assuming that General Refractories is controlling, its scope is limited by its egregious facts.

In General Refractories, an insured sued its carrier, alleging breach of contract, breach of fiduciary duty, and bad faith, after the carrier disclaimed coverage in several asbestos-related suits. 45 Pa. D. & C. 4th at 162. The claims handler assigned to evaluate the insured's claim was also an attorney. Id. The carrier attempted to create a “privilege wall” around discoverable, non-privileged documents by burying them in the file of the attorney/claims-handler's file. Id. at 167. The court determined that the attorney/claims handler's activities and advice in the pre-litigation claims handling process constituted the basis of the insured's bad faith claim and were therefore discoverable. Id. The court also held that the carrier's “obdurate conduct, including actions demonstrating an intent to obstruct the discovery process, constitute[d] a waiver of any and all right to assert the attorney-client or work-product privileges as it relate[d] to the [attorney/claims handler]. Id. The General Refractories Court found the insurers' conduct so appalling that it imposed an over $120,000 sanction and removed the insurer's litigation counsel from the case. Id.

The dissimilarities between the facts of General Refractories and the case sub judice are striking.[4] First, AGC Quackenboss is not a claims adjuster, either in fact or theory. AGC Quackenboss was not licensed as a claims adjuster and there is no evidence that he drafted the coverage disclaimer, instructed Ms. Dombrowski to disclaim coverage, or was in any other way involved with the VE claim, apart from giving legal advice. (Doc. 140-6 at 2).

Evanston has not engaged in the sort of “obdurate conduct” present in General Refractories. Rather than attempting to conceal discoverable documents in AGC Quackenboss's file, Evanston identified and logged the privileged communications and produced redacted documents when feasible. Nor has Evanston erected a “privilege wall” around Evanston's coverage determination. VE has had the opportunity to depose both Ms. Dombrowski and Ms. Lavin regarding the decision to disclaim coverage. As such, AGC Quackenboss's communications, and the documents memorializing them, fall squarely within the scope of the privilege.

2. Ms. Dombrowski's Request to Consult In-House Counsel

*6 Evanston redacted, as privileged, a portion of Ms. Dombrowski's June 20, 2019 summary e-mail to Ms. Lavin containing Ms. Dombrowski's request for permission to consult in-house counsel. (Doc. 136-2, Ex. 4). VE argues the attorney-client privilege cannot apply to this request, as it was sent prior to AGC Quackenboss's involvement. (Doc. 136-1 at 15-16).[5] However, Pennsylvania law protects client to attorney communications made for the purpose of seeking legal advice. Gillard, 15 A.3d at 59 (Pa. 2011). While Ms. Dombrowski's request was not directed to an attorney, it was the necessary first step to receiving legal advice and is protected accordingly.

3. The Post-July 9 Redactions

Besides being privileged, the post-July 9, 2019 claims notes and e-mails are also protected by the work-product doctrine. The point at which an insurance company's activity is in “reasonable anticipation of litigation” turns on the facts of each case. Lyvan v. Harleysville Ins. Co., 1994 WL 533907, at *4 (E.D. Pa. Sep. 29, 1994). “Normally, only after [an] insurance company makes a decision with respect to [a] claim will it be possible for there to arise a reasonable threat of litigation so that information gathered thereafter might be said to be acquired in anticipation of litigation.” Id. Ms. Dombrowski's coverage disclaimer was approved by Ms. Lavin on July 9, 2019. (Doc. 136-6, Ex. 9). At this point, Evanston had decided to disclaim coverage and could reasonably anticipate litigation. Evanston's reasonableness is bolstered by the fact that VE representative Rich Gorman demanded Evanston begin defending the 5-hour Energy Claim on July 3 and July 5, 2019. (Doc. 136-2, Ex. 3). Indeed, VE's counsel would inform Evanston that VE intended to pursue a coverage action just one week after the disclaimer was issued. (Doc. 136-2, Ex. 3 at 14). Given the extensive discovery that has already taken place, VE has not demonstrated that it has a substantial need for the materials sufficient to overcome the doctrine's protections. As such, the post-July 9, 2019 redacted claims notes and e-mails are protected by the work-product doctrine, in addition to the attorney-client privilege.

4. Evanston's Motion to Seal

VE does not oppose Evanston's request to redact confidential portions of the deposition transcripts. (Doc. 186 at 1). As such, the Special Master will not address the issue and recommends that the transcripts be redacted as per the Motion to Seal. VE does oppose Evanston's request to claw-back and seal the inadvertently produced sentence contained in Ms. Dombrowski's July 19, 2019 e-mail. Id.

The sentence in question refers to and memorializes AGC Quackenboss's legal advice. Accordingly, for the reasons discussed above, it would normally be protected by the attorney-client privilege. However, VE argues that Evanston waived the privilege through its inadvertent disclosure and its failure to promptly rectify its error. Id. at 3.

When determining whether an inadvertent disclosure constitutes a waiver of the attorney-client privilege, Pennsylvania courts consider:

Carbis Walker, LLP v. Hill, Barth & King, LLC, 930 A.2d 573, 582 (Pa. Super. Ct. 2007).

Here, Evanston took reasonable precautions to prevent inadvertent disclosure in view of the extensive document production in this case. Evanston has produced the July 19, 2019 e-mail on four occasions—only once was the privileged sentence unredacted. (Doc. 173-1 at 3). The inadvertent disclosure appears to be Evanston's first to date and its extent is minimal. The interests of justice do not weigh strongly in favor of either result. While Evanston did not attempt to rectify its disclosure for several months, this factor is outweighed by Evanston's precautions and the limited extent of disclosure. See Fidelity Deposit Co. of Maryland v. McCulloch, 168 F.R.D. 516, 523 (E.D. Pa. 1996) (“While Plaintiff has not been especially vigilant in its efforts to rectify these disclosures... the interests of justice are best served by holding that a small number of insignificant disclosures do not constitute a waiver.”). As such, the Special Master recommends that the Court allow Evanston to claw-back the unredacted July 19, 2019 e-mail.

V. RECOMMENDATION

For the reasons set forth above, the Special Master recommends that the Court:

Respectfully submitted,

James J. Rohn, Esq., Special Master

AND NOW, this _____ day of _____, 2023, based upon the February 6, 2023 Report and Recommendation of the Special Master, it is hereby ORDERED that:

BY THE COURT

The Honorable Joel H. Slomsky