Gross v. Scottsdale Insurance Company

Background

This insurance-coverage case concerns Scottsdale’s alleged refusal to defend and indemnify two former directors of Flora Biosciences, Inc. in connection with a state-court lawsuit. Terry Gross asserts claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and bad faith.

In 2019, Scottsdale retained attorney Joseph Breen of Gordon & Rees to investigate a demand letter sent to Flora’s board. Breen prepared a report for Scottsdale and Flora’s board. Gross later became a Flora director, resigned, and eventually received the report from another former board member. During Breen’s February 13, 2025 deposition, Gross’s attorney attempted to use the report and question Breen about his work leading up to it. Scottsdale asserted attorney-client privilege and attorney work-product protection.

Attorney-client privilege

Because the case is based on diversity jurisdiction, the court applied California law to attorney-client privilege. The court found that Scottsdale established that Breen was retained to investigate the allegations and provide legal advice to Flora’s board. It also found that Scottsdale, Flora, and Breen had the insurance-related three-party relationship recognized under California law, so the report qualified as a privileged communication unless the privilege had been waived.

The court found waiver under Federal Rule of Evidence 502(b). The parties did not dispute that the report had been disclosed to former Flora shareholders, including Gross, by mid-2019. Scottsdale did not identify any steps that it or Flora took to retrieve the report. The court also found that Scottsdale should have known no later than December 15, 2023, when Gross’s complaint referred to the report and publicly disclosed portions of its contents. Scottsdale later filed that complaint in federal court as part of its removal papers. Because Scottsdale and Flora did not promptly act to protect the report after learning of the disclosure, the court ruled that the report was not protected by attorney-client privilege due to waiver.

The court did not decide the parties’ arguments about whether Delaware law applied or whether Gross was entitled to receive the report under Delaware law. It also rejected Gross’s argument that the report was only a factual investigation and not legal advice.

Work-product protection

The attorney work-product doctrine is a federal protection for materials prepared by or for a party or its representative in anticipation of litigation. It can protect legal strategies and an attorney’s mental impressions, but generally does not protect facts unless revealing them would disclose those strategies or impressions.

The court did not decide whether work-product protection applied to Breen’s testimony about his work leading up to the report or whether that protection had been waived. It found that neither party had adequately addressed those questions. The parties were ordered to confer, and any further discovery-dispute letter on that limited issue had to be filed by April 3, 2025.

Motion to seal and disposition

Gross filed an administrative motion concerning whether the report should remain under seal. Scottsdale did not file the required supporting statement or declaration within seven days. The court also found no good cause to maintain the report under seal because material portions had already been publicly disclosed in Gross’s complaint. The court denied the administrative motion to seal.

The order therefore ruled that the Breen report was not protected by attorney-client privilege because of waiver, left work-product protection for further proceedings, directed the parties to address that remaining issue through the specified discovery process, and denied the administrative motion to seal.