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It started as a run-of-the-mill discovery dispute. A group of employees at California Costco stores filed suit against the discount retailer, alleging it improperly classified them as exempt from overtime pay. In a deposition, a Costco manager explained that when it was deciding how to classify the employees years before, the company relied on an opinion from outside counsel.

Following the deposition, the plaintiffs’ counsel requested that opinion–which was contained in a 22-page memorandum prepared by the firm Sheppard, Mullin, Richter & Hampton. The company had hired Sheppard Mullin in 2000 to analyze whether certain employees could be classified as managers. Costco objected to producing the document, arguing the memo was attorney work product and subject to the attorney-client privilege.

The trial court ordered Costco to turn the memo over to a court-appointed discovery referee who would evaluate the privilege claim. The referee agreed with Costco that the vast majority of the memo was privileged, but found that a few pages containing purely factual information should be turned over.

What the court ordered Costco to turn over to the plaintiffs was not very juicy–it was essentially whittled down to the statements of witnesses describing various employees’ duties. But it turned out that a lot more was on the line. The discovery dispute ended up making it all the way to the California Supreme Court. On Nov. 30, 2009, the state high court found in Costco Wholesale Corp. v. The Superior Court of Los Angeles County that the entire memo was privileged.

“Several things turned this into a death match,” says H. Scott Leviant, a partner at Spiro Moss. “Costco didn’t want a bad precedent. And the plaintiffs’ counsel thought this would be very useful evidence in favor of class certification.”

Extraordinary Relief

Typically, a discovery dispute would not be ripe for appeal. But Costco thought the issue was important enough to warrant a writ of mandate–a procedure which allows for an interlocutory appeal under extraordinary circumstances.

“When a decision could have a prejudicial effect that couldn’t be remedied by an appeal at the end of the case, you can ask for immediate review,” says Julie Dunne, a shareholder at Littler Mendelson. “Attorney-client privilege is perfect for this–once something is disclosed, you can’t unring the bell.”

Still, it was a long shot for the case to get the attention of the Supreme Court. The court receives nearly 6,000 petitions for review each year and takes only about 115 cases.

The Costco case took a circuitous route through the courts. The appellate court summarily denied the writ of mandate. The California Supreme Court reversed and instructed the appellate court to look at the issue substantively. The appellate court reviewed the issue and then denied the writ, finding that Costco couldn’t make the required showing of “irreparable harm” if it was ordered to turn over the redacted document. A second appeal to the California Supreme Court finally yielded Costco, and defense counsel everywhere, the relief they sought. The court ruled that the order for Costco to disclose even part of the memo was an error.

“The attorney-client privilege attaches to a confidential communication between the attorney and the client, and bars discovery of the communication irrespective of whether it includes unprivileged material,” Judge Kathryn Werdegar wrote for the unanimous court. “It is the actual fact of the transmission [of documents,] which merits protection, since discovery of the transmission of specific public documents might very well reveal the transmitter’s intended strategy.”

Bitter Battle

By the time the Supreme Court rendered its decision, the parties had already settled the case. As for why both sides spent so much time and money on the dispute, Buddy Warner, a partner at Jeffer, Mangels, Butler & Marmaro, has an idea: “It seems to me like the memo said, ‘You’re screwing up.’”

Leviant suggests that the plaintiffs fought so hard for the information because it could be useful to show that the company didn’t conduct an individualized analysis of each employee’s job duties, which would support the plaintiffs’ argument that the case should proceed as a class action.

Even if the memo had contained damaging information, the plaintiffs never would have learned about it. The fight seemed to be more about principle.

“Prior to the trial court decision, any attorney would have felt confident that this memorandum would be privileged,” Dunne says. “The decision was shocking, and if Costco hadn’t challenged it, there would be a bad precedent that could lead to further erosion of the privilege.”

Even Leviant, a plaintiffs attorney, agrees that the result the Supreme Court reached is probably the best outcome.

“It’s better for everyone to have an absolute rule,” he says. “Usually when a plaintiff goes after this kind of material, the plaintiff loses and expends a lot of energy. This will prevent a lot of fruitless discovery disputes.”