November 5, 2001

Exxon blames Ala. judge for verdict
Document key in appeal of $3.5 billion case

Exxon Mobil Corp. has asked the Alabama Supreme Court to overturn a $3.5 billion jury verdict, arguing that a state trial judge ran roughshod over the attorney-client privilege.

By letting the state of Alabama introduce a memorandum prepared by an Exxon in-house attorney, the judge "ended any prospect of a fair trial for Exxon", the company claimed in its appellate brief, filed on Sept. 24.

Circuit Judge Tracy S. McCooey presided over the trial in question in December 2000, in which the jury concluded that Exxon had fraudulently under-paid oil and gas royalties to the state of Alabama. The award of $3.42 billion in punitive damages was by far the largest ever in the state and one of the biggest ever nationally.

The memorandum was written by Exxon in-house attorney Charles Broome in 1993 and addressed to Exxon's Mobile Bay project manager. According to Exxon's brief, Broome assessed "the strengths and weaknesses of various interpretations of the royalty clause" in a lease allowing the company to extract oil and gas from state-owned offshore areas and proposed that Exxon adopt an interpretation favorable to the company, though he added candidly that the likelihood of prevailing in court on this interpretation [was] less than 50%.

The American Corporate Counsel Association (ACCA) has filed an amicus brief. McCooey's ruling betrays "an underlying skepticism about whether in-house lawyers truly function as lawyers and whether their communications are entitled to the attorney-client privilege." ACCA warns in its brief filed on Sept. 24.

Privilege waived?
Alabama's outside counsel, Robert Cunningham Jr. of Mobile's Cunningham, Bounds, Yance, Crowder & Brown, says that his client has no quarrel with the well-settled proposition that companies may invoke the privilege for communications from in-house attorneys. But he argues that McCooey's ruling rests on equally well-settled exceptions such as waiver. Alabama also claims that the jury learned of facts in the disputed memo through other documents that Exxon never claimed were privileged.

Exxon argues that a jury could not be expected to understand that Broome's balancing of risks is a typical example of what attorneys do. Cunningham counters that the jury properly saw in the memorandum evidence of Exxon's intent to commit fraud, supporting their award of $87.7 million in compensatory damages and $3.42 billion in punitive damages.

Both Exxon and ACCA claim that the memorandum was clearly privileged because it originated with in-house counsel, consisted of legal advice and, by its content, implied that it was meant to be kept within the company.

Cunningham makes three responses. First, Exxon had the burden of proving that the memorandum was confidential, but submitted no affidavit or other evidence to support its claim, even though Broome was still on the company's staff. Second, Cunningham maintains, Exxon waived its privilege by distributing the memorandum to Exxon personnel who were not involved in making policy with respect to royalties. He points to a distribution list stamped on the memo. Trial testimony established that the memorandum was sent to everyone whose initials appeared on the stamp and that some of those Exxon employees, such as a construction manager, had no "need to know" about the legal issues addressed in the memorandum, he says. Finally, he asserts, the memorandum falls within the crime-fraud exception to the privilege.

American University College of Law Professor Paul R. Rice, who has written on the attorney-client privilege, says that Alabama's arguments are grounded in good law. Exxon, which is claiming the privilege, must prove confidentiality, something that "is usually done through supporting affidavits by people with personal knowledge," he said. The privilege may be waived "by inappropriate distribution within the corporate structure" even if the document never left a company's walls. Finally, he added, the courts will "not presume that communications from the lawyer are confidential and that that confidentiality is subsequently maintained."

Exxon says in its brief that McCooey ruled against the crime-fraud exception, but it does not address Cunningham's waiver and burden-of-proof allegations, except to say that the nature of the memorandum itself proves its confidentiality. ACCA's brief asserts, "Nothing in the record (or alleged by [Alabama]) evidences any disclosure inconsistent with confidentiality." Union Bank of California General Counsel John H. McGuckin, however, who contributed to the brief while serving as chairman of ACCA's Advocacy Committee, admitted that ACCA did not investigate whether the memorandum was distributed strictly on a need-to-know basis, adding, "You should ask Exxon about that."

Exxon's appellate counsel, David R. Boyd of Montgomery's Balch & Bingham, said he is confident the Alabama Supreme Court will find the memorandum went only to Exxon personnel to whom the privilege applied.

The state Supreme Court has not yet set a date for arguments.