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Rhone-Poulenc Rorer Inc. v. Home Indemnity Co.

August 17, 1994

RHONE-POULENC RORER INC. AND ARMOUR PHARMACEUTICAL COMPANY, PETITIONERS,
v.
THE HOME INDEMNITY COMPANY, A NEW HAMPSHIRE CORPORATION,
v.
AETNA CASUALTY & SURETY INSURANCE; AIU INSURANCE COMPANY; AMERICAN CENTENNIAL INSURANCE COMPANY; BIRMINGHAM FIRE INSURANCE COMPANY; FIRST STATE INSURANCE COMPANY; GRANITE STATE INSURANCE COMPANY; HARTFORD INSURANCE COMPANY; INSCO LIMITED; INSURANCE COMPANY OF PENNSYLVANIA; LEXINGTON INSURANCE COMPANY; MANHATTAN FIRE & MARINE INSURANCE COMPANY; MOTOR VEHICLE CASUALTY COMPANY; OLD REPUBLIC INSURANCE COMPANY; PANTRY PRIDE INC; PROMETHEAN INSURANCE LTD.; PRUDENTIAL REINSURANCE COMPANY; PURITAN INSURANCE COMPANY; REVLON INC; TWIN CITY INSURANCE COMPANY; LONDON MARKET CO.; JOHN BARRINGTON HUME, AS REPRESENTATIVE OF UNDERWRITERS AT LLOYDS; INSURANCE COMPANY OF NORTH AMERICA; NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PENNSYLVANIA; ALL CITY INSURANCE COMPANY; EMPLOYER'S MUTUAL CASUALTY; GIBRALAR CASUALTY COMPANY; LANDMARK INSURANCE COMPANY; NEW ENGLAND INSURANCE COMPANY; ROYAL INSURANCE COMPANY; REPUBLIC INSURANCE COMPANY; INTERNATIONAL INSURANCE COMPANY; PACIFIC INSURANCE COMPANY LTD; ATLANTA INTERNATIONAL INSURANCE COMPANY; CENTURY INDEMNITY COMPANY; LIBERTY MUTUAL INSURANCE COMPANY; TRANSPORT INSURANCE COMPANY; MIDLAND INSURANCE COMPANY; INTEGRITY INSURANCE COMPANY; UNION INDEMNITY INSURANCE; TRANSIT CASUALTY COMPANY; CITY INSURANCE COMPANY; DRAKE INSURANCE COMPANY; EXCESS INSURANCE COMPANY; HOME INSURANCE COMPANY; PACIFIC EMPLOYER'S INSURANCE COMPANY; ROYAL INDEMNITY COMPANY; ZURICH INTERNATIONAL INSURANCE COMPANY; HENRIJEAN; ILLINOIS NATIONAL INSURANCE COMPANY; NORTH STAR REINSURANCE COMPANY; AND NATIONAL CASUALTY INSURANCE COMPANY, RESPONDENTS, AND THE HONORABLE JAMES MCGIRR KELLY, UNITED STATES DISTRICT JUDGE FOR THE EASTERN DISTRICT OF PENNSYLVANIA, NOMINAL RESPONDENT MORGAN, LEWIS & BOCKIUS; REED SMITH SHAW & MCCLAY; SHANLEY & FISHER, P.C.; HUGHES HUBBARD & REED; MONTGOMERY MCCRACKEN WALKER & RHOADS; SKADDEN ARPS SLATE MEAGHER & FLOM; AND COOPERS & LYBRAND, INTERVENORS IN SUPPORT OF PETITIONERS. RHONE-POULENC RORER INC. AND ARMOUR PHARMACEUTICAL COMPANY, APPELLANTS,
v.
THE HOME INDEMNITY COMPANY, A NEW HAMPSHIRE CORPORATION,
v.
AETNA CASUALTY & SURETY INSURANCE; AIU INSURANCE COMPANY; AMERICAN CENTENNIAL INSURANCE COMPANY; BIRMINGHAM FIRE INSURANCE COMPANY; TRANSPORTATION INSURANCE COMPANY; FIRST STATE INSURANCE COMPANY; GRANITE STATE INSURANCE COMPANY; HARTFORD INSURANCE COMPANY; ILLINOIS NATIONAL INSURANCE CO.; INSCO, LTD; INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA; LEXINGTON INSURANCE COMPANY; MANHATTAN FIRE & MARINE INSURANCE COMPANY; MOTOR VEHICLE CASUALTY COMPANY; NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA; NEW ENGLAND REINSURANCE COMPANY; NEW HAMPSHIRE INSURANCE COMPANY; OLD REPUBLIC INSURANCE COMPANY; PACIFIC EMPLOYERS INSURANCE COMPANY; PANTRY PRIDE, INC.; PROMETHEAN INSURANCE, LTD.; PRUDENTIAL REINSURANCE COMPANY; PURITAN INSURANCE COMPANY; REVLON, INC; TWIN CITY INSURANCE COMPANY; THE LONDON MARKET COMPANIES; AND JOHN BARRINGTON HUME A REPRESENTATIVE OF UNDERWRITERS AT LLOYDS OF LONDON; AND REVLON, INC.;
v.
CITY INSURANCE COMPANY; DRAKE INSURANCE COMPANY; EXCESS INSURANCE COMPANY; HENRIJEAN; THE HOME INSURANCE COMPANY; PACIFIC EMPLOYER'S INSURANCE COMPANY; ROYAL INDEMNITY COMPANY; ZURICH INTERNATIONAL INSURANCE COMPANY; INSURANCE COMPANY OF NORTH AMERICA; NATIONAL UNION FIRE INSURANCE OF PITTSBURGH, PA; ALL CITY INSURANCE COMPANY; EMPLOYERS MUTUAL CASUALTY COMPANY; GIBRALTER CASUALTY COMPANY; LANDMARK INSURANCE COMPANY; NEW ENGLAND INSURANCE COMPANY; ROYAL INSURANCE COMPANY; REPUBLIC INSURANCE COMPANY; INTERNATIONAL INSURANCE COMPANY; PACIFIC INSURANCE COMPANY, LTD.; ATLANTA INTERNATIONAL INSURANCE CO.; CENTURY INDEMNITY COMPANY; LIBERTY MUTUAL INSURANCE COMPANY; TRANSPORTION INSURANCE COMPANY; MIDLAND INSURANCE COMPANY; PACIFIC INSURANCE COMPANY LTD.; ATLANTA INSURANCE COMPANY LTD.; CENTURY INDEMNITY COMPANY; LIBERTY MUTUAL INSURANCE; MIDLAND INSURANCE COMPANY; INTEGRITY INSURANCE COMPANY; UNION INDEMNITY INSURANCE COMPANY; TRANSIT CASUALTY COMPANY; ROYAL INSURANCE COMPANY; ROYAL INDEMNITY COMPANY; NEW ENGLAND INSURANCE COMPANY; INSURANCE COMPANY OF NORTH AMERICA; NORTH STAR REINSURANCE COMPANY; AND NATIONAL CASUALTY INSURANCE COMPANY, APPELLEES, MORGAN, LEWIS & BOCKIUS; REED SMITH SHAW & MCCLAY; SHANLEY & FISHER, P.C.; HUGHES HUBBARD & REED; MONTGOMERY MCCRACKEN WALKER & RHOADS; SKADDEN ARPS SLATE MEAGHER & FLOM; AND COOPERS & LYBRAND, INTERVENORS-APPELLANTS.



ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA. (D.C. Civ. No. 88-9752).

The opinion of the court was delivered by: McKELVIE, District Judge.

Argued March 10, 1994

Before: MANSMANN, LEWIS, Circuit Judges McKELVIE, District Judge *fn1

In this insurance coverage case, the district court has ordered the insureds, their attorneys and their accountants to produce documents that would normally be protected from disclosure by the attorney client privilege, by the accountant client privilege, or as attorney work product. The documents to be produced were created beforeáthe insureds purchased coverage, and contain evaluations of the insureds' potential liability to consumers of their products.

The district court found the information in the documents relevant to matters in issue in the action in that it may tend to show whether or not the insureds expected or intended the claims for which they seek coverage. The court held the insureds had waived any right to maintain confidentiality of these documents by filing this action for coverage and by putting in issue the matter of their knowledge of facts relating to the claims.

The insureds have appealed from that order. They have also filed a petition for a writ of mandamus directing the district court to vacate and reverse the order. The six law firms and the accounting firm that have been subpoenaed to produce documents have moved to intervene and join in the insureds' requests for relief.

For the reasons set out below, we will grant the petitioners' request for relief and issue a writ of mandamus to the district court and direct it to vacate its order that these documents be produced.

I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

A.

The Parties and the Nature of the Proceedings

Rhone-PoulencááRorer Inc. is the successor to the Rorer Group Inc. In the fall of 1985, soon after Pantry Pride, Inc. had acquired Revlon, Inc.á, Rorer entered into an agreement with Pantry Pride to purchase Revlon's ethical pharmaceutical businesses, including USV and Armour Pharmaceutical Company. One of Armour's products was Factorate, a blood clotting product processed by Armour and sold principally for use by hemophiliacs.

Rorer formally acquired Armour on January 7, 1986. On April 21, 1986, Armour was named in the first of a series of lawsuits filed by individuals who claimed Factorate had infected them with the Human Immunodeficiency Virus (HIV), which is thought to be the cause of Acquired Immunodeficiency Syndrome (AIDS). To date, Armour has been joined as a defendant in more than two hundred AIDS-related cases.

Rorer had purchased a general liability insurance policy from The Home Indemnity Company on December 31, 1985, and looked to it for coverage for the claims against Armour. In addition, it sought coverage under a blanket excess policy it purchased from Pacific Employers Insurance Company áon July 29, 1986. Home denied coverage for these AIDS-related claims.

In December of 1988, Roreráand Armour brought this suit in the United States District Court for the Eastern District of Pennsylvania. In the complaint, they allege they are insureds under a primary comprehensive general liability insurance policy provided by The Home Indemnity Company. They contend Home has failed and refused to honor its obligations to defend and indemnify them from liability for the AIDS-related claims. They contend the district court has subject matter jurisdiction based on diversity of citizenship of the parties under 28 U.S.C. § 1332. Rhone-Poulenc áand Armour seek, among other things, a declaration that Home accepted coverage for these claims.

Home answered the complaint by denying that Rhone-Poulenc áRorer and Armour are entitled to the relief sought. In addition, it has asserted a number of affirmative defenses and has filed a counterclaim for a declaration that it does not owe a duty to indemnify or defend the plaintiffs for the claims identified in the complaint. Home has also filed a third party complaint against Pantry Pride, Inc., Revlon, Inc.á and a number of insurance companies, including Pacific Employers Insurance Company. áCertain of theáthird-party defendant insurers have filed fourth-party complaints against other insurers.

One of Home and Pacific Employers' affirmative defenses is that the claims identified in the complaint are excluded from coverage because they do not result from "occurrences." The insurers agreed to indemnify and defend against claims relating to bodily injury that is caused by an occurrence. An occurrence is defined in the Home policy as "an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insureds." The insurers argue that the alleged transmission of HIV from Factorate was known when the insurance policies were purchased, that the resulting injuries were not "neither expected nor intended," and that the resulting claims are not insured.

A second affirmative defense asserted by the insurers is that Rorer and Armour wrongfully obtained the coverage by intentionally failing to disclose their knowledge of the potential for these claims. A third defense is that Armour sold the products knowing that they would create an unreasonable risk of harm to others and that the resultingáá claims are, therefore, uninsurable.

B.

The Discovery Sought by Home and Pacific Employers

In connection with these defenses, Home and Pacific Employers have sought discovery from the plaintiffs on what information they may have had prior to purchasing the policies that would have suggested that Armour's products might transmit the HIV virus and that Armour would be subject to claims for injuries suffered as a result of transmitting that virus.

During a September, 1992 deposition, Robert E. Cawthorn, Rhone-Poulenc áRorer's chairman and chief executive officer, testified to the investigation and analysis undertaken by Rorer in connection with its decision to purchase Armour. Cawthorn testified that at the time Rorer was negotiating to purchase Armour he and others at Rorer were aware of reports in the press that blood products might have transmitted the AIDS virus and had sought and obtained advice from counsel with regard to liabilities for claims alleging damages for transmitting the virus. He testified:

We had got the advice of outside counsel on the potential legal liabilities in this area and had learned that blood products are not considered in most states as products, per se, and are not subject to the same liability laws as regular pharmaceutical products. We had learned that there was some precedence [sic] in terms of transmission of the hepatitis virus which these plasma products had transmitted to hemophiliacs. And that, in fact, my recollection is we were told that there had been no successful cases against the fractionaters [sic] and hepatitis because of the particular legal situation. And the opinion was that that should hold, also, for the AIDS virus.

After the deposition, Home and Pacific Employers moved for an order extending the time for completion of discovery and compelling Rhone-Poulenc áand Armour to produce all evaluations of their potential liability for AIDS-related claims, including any documents confirming the advice described by Cawthorn. In response to the motion, Rhone-Poulenc áand Armour produced copies of four documents, subject to an agreement with the insurers that the production would not waive any privilege with respect to any other communication.

The first of the four documents produced is the minutes of the November 26, 1985, meeting of the Board of Directors of Rorer Group Inc. During this meeting theáBoard considered the Armour acquisition. Those minutes show that John W. Eckman chaired the meeting, and that Cawthorn and Rorer's general counsel, Richard H. Lange, were present. Also present were representatives of the accounting firm of Coopers & Lybrand and the investment banking firm of First Boston Corporation, as were attorneys from the law firms of Hughes, Hubbard & Reed; Skadden, Arps, Slate, Meagher & Flom; and Montgomery, McCracken, Walker & Rhoads. The following summary is included in the minutes:

In response to a question by Mr. Eckman concerning Armour's product liability exposure, Mr. Lange said that Armour's products are not regarded as drug products, with associated strict liability, and that it has been necessary to prove negligence by the manufacturer as a basis for liability. In addition, many states have legislation limiting liability for blood products. There have been only about six to eight AIDS contamination suits to date in the industry, none of them against Armour. Revlon has carried an umbrella excess liability policy of $60 million, and the benefits of a substantial portion of this coverage will be available for USV/Armour product claims arising duringáthe pre-acquisition period.

The second document produced by the insureds is a copy of an April 10, 1986, letter from John S. Allee, an attorney with Hughes, Hubbard & Reed, to Richard Lange, forwarding to Lange a copy of the third document produced, a memorandum by Hughes Hubbard titled "Survey of Blood Immunity Statutes and Case Law." This survey provides a state-by-state analysis of the law applicable to entities engaged in the preparation, distribution and use of human blood and blood products.

The fourth document is a copy of an April 18, 1986, letter from Allee to Lange following up on the April 10 letter and suggesting steps Lange should consider as a part of his risk assessment and reduction efforts. In producing a copy of this seven page letter, Rhone-Poulenc áand Armour redacted approximately one half of the typed material on the fifth page and the entire sixth page, and reported to the insurers that the deleted material contained very general advice of a legal nature as well as Allee's mental impressions.

On receiving copies of these documents, Home and Pacific Employers continued to pursue their motion to compel, and asked the court to enter an order directingáthe plaintiffs to produce all documents in their possession, custody or control relating to the 1985 and early 1986 assessments of potential AIDS-related claims.

In the briefing in support of their motion, the insurers argued that these documents would disclose what information the insureds had about the AIDS-related claims at the time they obtained the coverage, the advice they received on whether those claims would be asserted, and their intent or expectation as to whether they would become obligated to pay damages as a result of those claims. Home and Pacific Employers argued that this information would be relevant to a number of issues in the litigation, including whether the AIDS-related claims fell within the definition of an "occurrence" under the policy, whether Rorer and Armour had sufficient knowledge of the probability of the AIDS-related claims so that in obtaining the coverage they had breached duties owed the insurers by failing to disclose facts relating to the risk that Armour's products transmitted the HIV virus, and whether or not the probability of the AIDS-related claims was sufficiently clear at the time the insureds obtained the coverage that they would not be insurable as fortuitous claims.

Home and Pacific Employers argued that by filing the suit and putting these matters in issue, Rhone-Poulenc áand Armour had waived any right to object to the disclosure of the requested documents on the grounds of privilege or work product. The insurers also argued Rhone-Poulenc áand Armour had waived any protection from disclosure by failing to file timely objections to the initial discovery requests seeking the disclosure of these documents and by failing to identify them on a list of documents being withheld as privileged or as work product. With regard to the redacted portion of the April 18 Hughes Hubbard letter, they argued Rorer had disclosed the letter to First Boston after the acquisition and thus had waived the privilege. They further argued that by producing a portion of the letter Rhone-Poulenc áand Armour had waived the privilege as to the balance of the contents, including the advice that had been redacted.

The insurers asked the district court to enter an order compelling Rhone-Poulenc áand Armour to produce all evaluations or assessments of their potential liability for AIDS-related claims arising from Armour's blood products, includingáthose in their possession and those in the possession of their present and former agents and attorneys. This request includes documents in the possession of the law firms that had advised Rorer in connection with the acquisition of Armour: Hughes, Hubbard & Reed; Skadden, Arps, Slate, Meagher & Flom; and Montgomery, McCracken, Walker & Rhoads, as well as the accounting firm Coopers & Lybrand, and three law firms that have represented Armour in connection with the AIDS-related claims: Morgan, Lewis & Bockius; Shanley & Fisher; and Reed Smith Shaw & McClay.

C.

The Magistrate Judge's Orders Providing for the ...


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