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On Friday, June 29, 2012, the Texas Supreme Court denied a petition for mandamus relief in In re XL Specialty Insurance Company and Cambridge Integrated Services, Group, Inc., No. 10-0960 (Tex. June 29, 2012), clarifying the scope of the joint defense and common interest privilege doctrines under Texas law.  (The opinion is available here.) In a bad faith action brought by an injured employee against a workers’ compensation insurer, the Court held that a joint defense or common interest privilege under Texas evidentiary rules did not apply to prevent production of communications that had occurred between the insurer’s lawyer and the employer during an underlying administrative proceeding.

Background

XL Specialty Insurance Company (“XL”) is Cintas Corporation’s workers’ compensation insurer. The plaintiff, a Cintas employee, sought workers’ compensation for a work-related injury. A claims adjuster with XL’s third-party administrator denied the plaintiff employee’s claim. During the course of the workers’ compensation administrative proceeding, XL’s counsel sent communications about the status and evaluation of the proceedings to the employer and the claims administrator.

After the workers’ compensation dispute was resolved, the plaintiff employee sued XL and the claims administrator for breach of the common law duty of good faith and fair dealing and violations of the Texas Insurance Code and Texas Deceptive Trade Practices Act. During discovery, the plaintiff employee sought communications made between XL’s lawyer and the insured/employer (Cintas) during the administrative proceeding. XL argued that the attorney-client privilege protected the communications. After an in camera inspection, the trial court held that the privilege did not apply. XL unsuccessfully sought mandamus relief from the Dallas court of appeals, which held that the privilege did not apply, and then from the Texas Supreme Court, which reached the same conclusion.

Texas Evidentiary Rules

Texas Rule of Evidence 503 specifically defines communications, which are protected by privilege. Rule 503(b) protects not only communications between the lawyer and client, but also communications among representatives. The Court’s opinion focused on Rule 503(b)(1)(C) which protects communications “by the client or a representative of the client, or the client’s lawyer or a representative of the lawyer, to a lawyer or a representative of a lawyer representing another party in a pending action and concerning a matter of common interest therein.” The Court noted that this privilege has been variously described as the “joint client,” “joint defense” or “common interest” privilege. Although recognizing that courts sometimes use these terms interchangeably, the Court commented that they involve distinct doctrines that serve different purposes, and significantly, none of them accurately described the privilege at issue in this case.

The Court observed that Rule 503(b)(1)(C) generally has been applied to joint defense situations where multiple defendants, represented by separate counsel, work together in a common defense. The Court recognized that “[n]otably, and in contrast to the proposed federal rule, Texas requires that the communications be made in the context of a pending action.” The Court also pointed out the significant distinction that “in jurisdictions like Texas, which have a pending action requirement, no commonality of interest exists absent actual litigation.” Accordingly, the Court concluded that the Texas privilege is not a “common interest” privilege that extends beyond litigation. The Court also stated that the privilege could not be described as a “joint defense” privilege, as it applies not just to defendants but to any parties to a pending action. Therefore, the Court found that “Rule 503(b)(1)(C)’s privilege is more appropriately termed an ‘allied litigant’ privilege.”

In this case, XL was the client and the communications at issue were between XL’s lawyer and a third party, Cintas, who was not represented by XL’s lawyer (or any other lawyer) and was not a party to the litigation or any other related pending action. The Court recognized that “Cintas [the insured/employer], having contracted for a substantial deductible, may have shared a joint interest with XL during the administrative proceedings in the outcome of the claim.” However, the Court held that the communications were not privileged under Rule 503(b)(1)(C) because “no matter how common XL’s and Cintas’s interests might have been, our rule requires that the communication be made to a lawyer or her representative representing another party in a pending action.”

The Court also found that the “joint client” rule of privilege was not applicable because there were no arguments or evidence presented that XL’s lawyers also represented Cintas. The Court did not rule out the possibility that the same lawyer could represent both the insured and insurer in some circumstances. The Court also noted that there may be situations where an insurer can be a representative for an insured under Rule 503 but that argument was not pleaded or proved in this case. Finally, the Court also concluded that the other provisions in Rule 503(b)(1)(A),(B),(D) and (E) were inapplicable to protect the communications at issue.

Implications of Decision

Not only will this decision apply to privilege disputes in Texas state court litigation, the ruling also could potentially apply to federal civil cases that are governed by Texas substantive law. This decision also may have consequences beyond the workers’ compensation insurance area. For example, because the Court clarified that the Texas evidentiary rule limits application of a “common interest” type privilege to communications relating to a pending litigation, lawyers representing different parties with joint or common interests in business matters will not be able to invoke a “common interest” privilege under Texas law to protect sensitive communications between their counsel outside of the litigation context. Moreover, a “common interest” privilege may not protect communications among counsel for different parties concerning an investigation that is not related to a “pending action.” In addition, this decision raises privilege concerns for communications made by counsel for an insured to the insurer in other insurance-related situations where the insurer is not a party to a pending litigation.

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