Seyfarth Synopsis: California Court of Appeal holds that (1) an outside attorney’s investigation can be privileged even though the attorney simply investigated facts, and (2) the employer does not waive the privilege simply by asserting an “avoidable consequences” defense in litigation.

The recent decision in Waters v. City of Petaluma is a welcome development for employers who retain outside attorneys to perform personnel investigations, as it provides greater assurance that those investigations will be protected from disclosure in discovery.

The Facts

Andrea Waters was a firefighter for the City of Petaluma. She claims that she was subjected to sex harassment and discrimination during her employment, and that she was retaliated against when she complained about it. She resigned from the Petaluma Fire Department three days after filing a charge with the EEOC in 2014.

The City Attorney, in response to the EEOC charge, retained an outside attorney to investigate the charge and to help the City prepare to defend the anticipated lawsuit. The retention agreement required the attorney to “tell [the City] what we believe happened, and the basis for that conclusion,” and to arrive at “findings based on an impartial and professional evaluation of the evidence.” The agreement stated that it created “an attorney/client relationship” between the City and the attorney investigator, that the investigation would be subject to the attorney-client privilege, and that the attorney would use “employment law and investigation expertise to assist you in determining the issues to be investigated and conduct impartial fact-finding.” The agreement did not, however, ask the attorney to advise the City on what to do in response to Waters’s EEOC complaint, stating: “we will not render legal advice as to what action to take as a result of the findings of the investigation.”

The attorney provided a written investigation report to the City, and the City preserved the confidentiality of the report, as well as all the supporting work product. Each page of the report stated that it is confidential and attorney-client privileged.

When Waters sued the City—claiming sexual harassment, discrimination based upon sex, retaliation, and failure to prevent harassment, discrimination, and retaliation—the City asserted various affirmative defenses, including avoidable consequences. That defense asserted that the plaintiff had unreasonably failed to make use of the preventive and corrective measures regarding workplace harassment that the employer had provided, and that if the plaintiff had done so, she would have prevented the harm that she allegedly suffered.

Waters then sought to discover documents relating to the City’s investigation, including the investigator’s report. The City objected, raising the attorney-client privilege and the work product doctrine. Waters moved to compel production, arguing that the investigation was not privileged, and that any privilege was waived in any event when the City placed the investigation at issue by pleading the avoidable consequences defense.

The trial court granted the motion to compel, reasoning that the investigation and report were not attorney-client communications, because the investigator’s retention agreement specified that she would not render legal advice to the City. The trial court also concluded that any privilege had been waived because the City put the investigation at issue by pleading avoidable consequences.

The Appellate Court Decision

The Court of Appeal reversed the trial court’s ruling. First, the Court of Appeal recognized that an attorney-client relationship may exist when an attorney provides a legal service without also providing legal advice. The Evidence Code defines a “client” for purposes of the attorney-client privilege and the work product doctrine. A “client” is a person who retains a lawyer for securing “legal service or advice” in the attorney’s professional capacity.

The Court of Appeal noted that the City retained an outside attorney to provide a “legal service” because the investigator was hired to use her legal skills to assist the City in developing a response to an EEOC complaint and anticipated lawsuit. The retention agreement expressly created an attorney-client relationship and also directed the investigator to use her employment-law expertise to make findings based upon her “professional evaluation of the evidence.” She was not simply to gather facts and transmit them to the City. Rather, “she was expected to use her legal expertise to identify the pertinent facts, synthesize the evidence, and come to a conclusion as to what actually happened.” The purpose of her representation was to provide “legal service” to help the City Attorney advise the City on the appropriate course of action. The conclusion that the investigation constituted the provision of legal services to a client was reason to apply both the attorney-client privilege and the work product doctrine.

The Court of Appeal also determined that assertion of the avoidable consequences defense did not waive any privilege associated with an investigation that occurs after the employee has left employment. “[T]he assertion of an avoidable consequences defense does not put a post-employment investigation directly at issue in the litigation.” Rather, the avoidable consequences defense implicates only what the employer and employee did or did not do while the employee remained employed. The City was not relying on its post-employment investigation as part of its avoidable consequences defense. Therefore, the Court of Appeal held that the City’s assertion of the avoidable consequences defense did not waive any attorney-client or work product protection afforded to the outside attorney’s post-employment investigation.

What City of Petaluma Means for Employers

Plaintiffs regularly seek discovery regarding an employer’s prelitigation investigation, hoping to leverage the employer’s industry and efforts and to mine investigative findings to use against the employer in litigation. City of Petaluma provides greater assurance to employers that those investigations will be protected from disclosure in discovery, and also provides useful guidelines for employers to follow when retaining an outside attorney to conduct a personnel investigation. Employers should carefully review their retention agreement with outside counsel who conduct investigations to make sure that the agreement provides that the parties intend to create an attorney-client relationship and that the attorney investigator is providing a legal service to the employer, if not also providing legal advice.