PRCM Advisers LLC v. Two Harbors Investment Corp.

Background

PRCM Advisers LLC, Pine River Capital Management L.P., and Pine River Domestic Management L.P. were the external manager of Two Harbors Investment Corp. under a Management Agreement from October 28, 2009, until Two Harbors terminated the agreement on August 14, 2020. The agreement’s Second Amendment, approved by Two Harbors’s board in 2014, stated that intellectual property created or developed by Pine River in connection with the agreement or otherwise would be Pine River’s exclusive property, while Two Harbors would receive a nonexclusive, royalty-free license during the agreement’s term.

Pine River alleged that Two Harbors breached the Management Agreement by terminating it without cause and later used Pine River’s intellectual property without authorization. Two Harbors asserted counterclaims alleging, among other things, that Pine River misled Two Harbors’s independent directors about the purpose and scope of the Second Amendment. Two Harbors alleged that the directors believed the amendment was limited to intellectual property needed for a commercial real-estate initiative, and sought damages, a declaration that the amendment was void, and other relief.

Discovery and privilege dispute

Pine River sought access to 17 documents concerning the Second Amendment and related intellectual-property negotiations. Two Harbors had withheld, redacted, or clawed back those documents based on attorney-client privilege. The documents included communications involving Two Harbors’s general counsel, Rebecca Sandberg, outside counsel, and Two Harbors officers. Two Harbors had also disclosed other communications involving Sandberg and used some of them while questioning witnesses.

Pine River argued that Two Harbors waived attorney-client privilege in two ways. First, Pine River argued that Two Harbors’s counterclaims placed its directors’ knowledge, access to legal advice, and reliance on Pine River’s statements at issue. Second, Pine River argued that Two Harbors selectively disclosed and affirmatively used favorable attorney-client communications while withholding related communications.

Two Harbors argued that the disputed documents concerned hypothetical intellectual-property arrangements for the commercial-real-estate initiative rather than the scope of the Second Amendment. It also argued that it had not waived privilege because it had not submitted the disclosed communications to the court or used them in connection with a merits motion. Two Harbors opposed reopening Kasnet’s deposition, arguing that he was not a recipient of the disputed documents and had already answered some questions about the amendment.

Court’s analysis

The court found an at-issue waiver. An at-issue waiver occurs when a party makes factual claims that cannot fairly be evaluated without examining otherwise privileged communications. The court concluded that several of Two Harbors’s allegations concerned the independent directors’ state of mind—what they knew about the amendment, what they were told, and what they believed when they approved it. Those issues could not be fairly assessed without examining Sandberg’s communications and advice.

The court also found a waiver based on selective disclosure. It reasoned that Two Harbors had made an affirmative use of privileged material by questioning witnesses about disclosed communications concerning the amendment, even though it had not yet submitted the resulting testimony to the court or used it in a merits motion. Fairness therefore required disclosure of related communications on the same subject.

The court rejected Two Harbors’s effort to separate the disputed documents from the Second Amendment. It relied in part on Two Harbors’s privilege log, which described nearly all the documents as concerning the negotiation of the Management Agreement and amendment. The court also noted that the documents themselves linked the proposed intellectual-property arrangement to the Second Amendment.

The court did not order production of the document identified as TWOHARBORS_PRIV004682, described as Sandberg’s handwritten notes concerning assessments of Pine River’s management of Two Harbors. The record was insufficient to determine whether that document concerned the same subject matter as the other documents. The parties were ordered to meet and confer about it and, if they could not agree, contact the court to arrange an in-camera review, meaning a private judicial examination of the document.

Ruling

The court’s conclusion states that the plaintiffs’ letter-motion was GRANTED to the extent that Two Harbors had to promptly produce the disputed documents other than TWOHARBORS_PRIV004682. The parties had to meet and confer about that document, with possible court review if they could not resolve the issue.

The court also ordered Two Harbors to produce Stephen Kasnet for no more than one-half day, or three and one-half hours, of additional deposition testimony. The testimony was limited to communications that had previously been the subject of Two Harbors’s privilege claim.