Waste Administrative Services, Inc. v. The Krystal Company

09/27/2018
IN THE COURT OF APPEALS OF TENNESSEE
AT KNOXVILLE
July 19, 2018 Session
WASTE ADMINISTRATIVE SERVICES, INC. v. THE KRYSTAL
COMPANY, ET AL.
Appeal from the Circuit Court for Knox County
No. 2-259-15 William T. Ailor, Judge
No. E2017-01094-COA-R9-CV
We granted the Rule 9 application for an interlocutory appeal filed by The Krystal
Company (“Krystal”) to consider whether certain communications between Krystal’s
chief legal officer and David Jungling (“Jungling”), an employee of Krystal vendor
Denali Sourcing Services, Inc. (“Denali”), are protected by attorney-client privilege.
Waste Administrative Services, Inc. (“WASI”), which provided refuse service for
Krystal, sued Krystal, Denali, and Jungling in the Circuit Court for Knox County (“the
Trial Court”) alleging that Krystal breached their contract by unilaterally terminating it
and that Denali and Jungling induced the breach. The Trial Court held that
communications between Jungling and Krystal’s chief legal officer after June 9, 2014—
at which time Krystal and Denali executed a master agreement—are protected by
attorney-client privilege while prior communications are not. We hold that Jungling was
the functional equivalent of a Krystal employee as of October 31, 2013 when he was told
by Krystal’s President to “take lead” on Krystal’s dealings with WASI, and that his
subsequent communications with Krystal’s chief legal officer qualify for attorney-client
privilege belonging to Krystal. We, therefore, modify the judgment of the Trial Court
and remand this case for further proceedings consistent with this Opinion.
Tenn. R. App. P. 9 Interlocutory Appeal; Judgment of the Circuit Court Modified;
Case Remanded
D. MICHAEL SWINEY, C.J., delivered the opinion of the court, in which JOHN W.
MCCLARTY and THOMAS R. FRIERSON, II, JJ., joined.
Harry J. Winograd and Jessica J. Wood, Atlanta, Georgia, and Jeffrey R. Thompson,
Knoxville, Tennessee, for the appellant, The Krystal Company.
W. Morris Kizer, Knoxville, Tennessee, for the appellee, Waste Administrative Services,
Inc.
E. Michael Brezina, III and Lyndsey L. Lee, Knoxville, Tennessee, for the appellees,
Denali Sourcing Services, Inc. and David Jungling.
OPINION
Background
WASI provided waste management services for Krystal, a fast food company, for
a number of years dating back to 2008 under a contract between WASI and Krystal. By
2012, Krystal began dealings with Denali, a company that assists corporations in finding
ways to save money. Krystal was interested in pursuing what other waste management
options might be available. Krystal turned to Denali for help.
On September 12, 2012, Krystal and Denali entered into a Statement of Work.
Pursuant to the 2012 Statement of Work, Denali was to provide “ad-hoc Procurement
services to support Purchaser . . .” and Denali’s program manager would serve as the
“day to day liaison.” The 2012 Statement of Work covered four identified sourcing
projects: 1) Bags, Boxes, Trays; 2) Bowls, Cups, Plates; 3) Cheese; and 4) Coffee/Tea. It
also contained this provision: “Any Procurement projects not covered in the scope of this
agreement may be submitted to Seller via email.”
On July 18, 2013, Krystal and Denali executed an amendment to Exhibit C. This
amendment expanded the areas of involvement for Denali to: 1) Potatoes; 2) Beef; 3)
Logistics; 4) Restaurant MRO (maintenance, repair and office supplies); and 5)
Bacon/Sausage. The 2013 amendment included the following language, as well:
“Purchaser and Seller are contractors independent of one another. Nothing in these
Terms is intended to or will constitute either party as an agent, legal representative, or
partner of the other for any purpose;” and, “[t]hese Terms shall not be amended without
the written agreement of both parties.”
Jungling became Denali’s point man for Krystal. Jungling’s emails contained this
signature bloc: “David Jungling, Program Management Denali Sourcing Services on
behalf of The Krystal Company.” Although Jungling was a Denali rather than a Krystal
employee, he took an increasingly central role in Krystal’s policy with respect to WASI.
This was so even though the written agreements specified no such role for Denali or
Jungling. A series of emails illustrates how closely Jungling worked with Krystal
leadership concerning WASI.
On October 31, 2013, Jungling sent an email to Doug Pendergast (“Pendergast”),
President and CEO of Krystal, and Brian Blosser (“Blosser”), Vice-President for
Development & Construction, stating:
-2-
If we want to leverage the incumbent (WASI), it may be helpful to review a
list of pricing per site from WASI. I could get a comparison from other
bids we’ve done recently and get a picture of what is possible. I think then
Brian and I could have a discussion with the vendor with the request to
lower the pricing to perhaps a more desired market pricing. Can we get a
list of pricing per location?
Pendergast, in an email to Jungling and Blosser, stated: “David — can you and
Brian take lead on this?” The next day, Jungling was included on an internal use only
email. Jungling proceeded to interact with WASI on Krystal’s behalf. On November 21,
2013, Blosser emailed Jungling to say: “I would like to move away from these folks
[WASI] asap (if we are not obligated). They are clearly out for themselves and in no way
want to provide us an experience.” Jungling emailed Blosser: “No. I read the contract
and don’t see any language that limits Krystal other than a 90 day out clause. We would
issue that clause as soon as the new vendor is selected as it may take up to 3 months to
transfer the vendor.” On November 25, 2013, emails at the root of this appeal were
exchanged between Jungling and Krystal’s chief legal officer. These emails are redacted
in the record. In a January 23, 2014 email, Pendergast thanked Jungling for “staying on
top of this process.” Finally, on April 30, 2014, Jungling notified WASI by email that
Krystal would be transitioning its refuse business to another provider.
In May 2014, Krystal and Denali signed a master services agreement expanding
those areas in which Denali was authorized to act for Krystal. A new, more open-ended
provision stated Denali was to “provide ad-hoc sourcing services to support [Krystal] . . .
to all [Krystal] functions as directed by [Krystal].” On July 25, 2014, Krystal and Denali
executed an amendment to the May 2014 agreement establishing the latter’s effective
date as June 9, 2014.
In May 2015, WASI sued Krystal for improper unilateral termination of their
contract. WASI also sued Denali and Jungling for inducement to breach, seeking treble
damages pursuant to Tenn. Code Ann. § 47-50-109. After some additional procedural
history, the Trial Court considered whether certain email communications between
Jungling/Denali and Krystal’s chief legal officer were discoverable. Krystal asserted that
Jungling was the functional equivalent of one of their employees and that he and Denali
should be prevented from revealing the communications on account of attorney-client
privilege. On May 22, 2017, the Trial Court entered an order holding that attorney-client
privilege would attach only to those qualifying communications that occurred after June
9, 2014, the effective date of Krystal’s and Denali’s master agreement. The Trial Court
stated:
-3-
This cause came on for hearing on the 18th day of April, 2016, upon
the Krystal Company’s Motion to Reconsider the Court’s March 2, 2017
Order. After considering the Motion, reviewing the file and hearing the
arguments of counsel for all parties, the Court rendered its opinion from the
bench. From all of which, the Court finds as follows:
1. On April 14, 2016, the Court GRANTED Krystal Company’s
Renewed Motion for Protective Order, holding that “Mr. Jungling was the
functional equivalent of an employee of Krystal, and therefore those
communications [between Krystal’s Chief Legal Officer and
Denali/Jungling] would be privileged.” (Apr. 14, 2016 Transcript, p. 20,
attached hereto as Exhibit A.)
2. After a further review of the record and the 2012 and 2013
Statements of Work which the Court did not have previously, this Court on
March 2, 2017 ruled that “any communications prior to May 15, 2014
between Jungling and Krystal would not be covered by the attorney-client
privilege and that he was not the functional equivalent of an employee
during those times and those communications are discoverable.” See
March 2, 2017 Order, p. 2-3
3. On April 18, 2017, the Court heard Krystal’s Motion to
Reconsider, all of the arguments of all counsel and reviewed the responses
of the other parties as well as a further review of the exhibits filed with the
Court including the 2012 and 2013 Statements of Work (SOW) entered into
between Krystal (Purchaser) and Denali (Seller). The Court notes that both
Statements of Work contain nothing about Denali/Jungling having the
authority to terminate contracts and they are by their own terms for the
limited purposes of finding information for Krystal about pricing limited to
certain specifically designated areas of service none of which includes
waste services. Additionally, the Court finds that the 2013 SOW states that
“Purchaser and Seller are contractors independent of one another. Nothing
in these Terms is intended to or will constitute either party as an agent,
legal representative, or partner of the other for any purpose”. (2013 SOW
p.44) Other terms of the SOW designate Denali/Jungling as “program
manager”. In a section titled, Seller Roles and Responsibilities-Program
Manager, the SOW states on p. 24 states, “The Program Manager will act
as the day to day liaison between Purchaser and Seller”. (Emphasis
Added) The Court ruled that to expand the terms of the agreement between
Krystal and Denali would be the equivalent of the Court rewriting the
contract between the parties and any ambiguity of the same should be
construed against the drawer of the agreement which in this case is Krystal.
4. As a result of everything the Court reviewed and consideration of
the arguments presented, this Court held that “Mr. Jungling was not the
-4-
functional equivalent of an employee until the June 9, 2014 agreement and
he did not have any authority to work on the refuse issue until that time.
Therefore, the Court rules that the June 9, 2014 date is the date designating
Mr. Jungling as a functional equivalent of an employee for Krystal.” (Apr.
18, 2017 Transcript, p. 40, attached hereto as Exhibit B) As a result,
KRYSTAL000046-50 and 56-59, dated prior to June 9, 2014 are not
protected by any attorney-client privilege. However, KRYSTAL 000053-
55 dated after June 9, 2014, are protected by attorney-client privilege. (see
Exhibit C consisting of redacted versions of documents filed with the
March 27, 2016 Notice of Filing Documents Under Seal).
IT IS THEREFORE ORDERED that Krystal’s Motion to
Reconsider is DENIED and any communications prior to June 9, 2014
between Jungling and Krystal are discoverable and shall be produced.
However, this issue is approved for interlocutory appeal, and no production
of the documents at issue shall occur until after all appeals are exhausted.
(Apr. 18, 2017 Transcript, p 55, attached hereto as Exhibit D)
The Trial Court granted permission for interlocutory appeal as did this Court.
Discussion
We granted this Rule 9 application to consider the sole issue of whether the Trial
Court erred in holding that communications between Jungling and Krystal’s chief legal
officer before June 9, 2014 could not qualify for attorney-client privilege.
“The law favors making all relevant evidence available to the trier of fact.” Boyd
v. Comdata Network, Inc., 88 S.W.3d 203, 212 (Tenn. Ct. App. 2002). However, certain
privileges may limit discovery where applicable. So as to foster open communications
between attorney and client, the law recognizes attorney-client privilege as one such
privilege. Attorney-client privilege is not absolute, and “[t]he communications must
involve the subject matter of the representation and must be made with the intention that
they will be kept confidential.” Id. at 213 (Footnotes omitted). Attorney-client privilege
belongs to the client and may be waived by the client. Smith County Educ. Ass’n v.
Anderson, 676 S.W.2d 328, 333 (Tenn. 1984). “When the third party in whose presence
such communications take place is an agent of the client, the confidentiality is not
destroyed.” Id. Appellate courts review a trial court’s decision regarding attorney-
privilege using the abuse of discretion standard. Boyd, 88 S.W.3d at 211. “An abuse of
discretion occurs when the trial court causes an injustice by applying an incorrect legal
standard, reaches an illogical result, resolves the case on a clearly erroneous assessment
of the evidence, or relies on reasoning that causes an injustice.” Gonsewski v. Gonsewski,
350 S.W.3d 99, 105 (Tenn. 2011).
-5-
In Upjohn Co. v. United States, 449 U.S. 383, 101 S. Ct. 677, 66 L. Ed. 2d 584
(1981), the United States Supreme Court considered attorney-client privilege in the
corporate context. In Upjohn, “[t]he communications at issue were made by Upjohn
employees to counsel for Upjohn acting as such, at the direction of corporate superiors in
order to secure legal advice from counsel.” Id. at 394, 101 S. Ct. 677 (Footnote omitted).
The Court found that these “[c]ommunications concerned matters within the scope of the
employees’ corporate duties, and the employees themselves were sufficiently aware that
they were being questioned in order that the corporation could obtain legal advice.” Id.
The Court concluded that “[c]onsistent with the underlying purposes of the attorney-
client privilege, these communications must be protected against compelled disclosure.”
Id at 395, 101 S. Ct. 677.
In the present case, Jungling was not officially a Krystal employee. Nevertheless,
some jurisdictions have extended attorney-client privilege to include parties who are the
“functional equivalent of an employee.” Our research did not yield any on-point,
controlling Tennessee law on the subject. Therefore, we look to other jurisdictions for
persuasive authority. The court in Export-Import Bank of the United States v. Asia Pulp
& Paper Co., Ltd. articulated a test for functional equivalency as follows:
To determine whether a consultant should be considered the
functional equivalent of an employee, courts look to whether the consultant
had primary responsibility for a key corporate job, In re Bieter, 16 F.3d at
933-34; Ross, 2004 WL 67221, at *4, whether there was a continuous and
close working relationship between the consultant and the company’s
principals on matters critical to the company’s position in litigation, In re
Bieter, 16 F.3d at 938; In re Copper Market, 200 F.R.D. at 219; Ross, 2004
WL 67221, at *4, and whether the consultant is likely to possess
information possessed by no one else at the company, In re Bieter, 16 F.3d
at 938.
Export-Import Bank of the United States v. Asia Pulp & Paper Co., Ltd., 232 F.R.D. 103,
113 (S.D.N.Y. 2005).
On the other hand, some courts have balked at the functional equivalent doctrine.
The court in BSP Software, LLC v. Motio, Inc. declined to apply the test, stating “[w]e are
concerned that over time, the application of the functional equivalent test could expand
the scope of the privilege by eroding the circumstances in which it can be waived” and
that “even the most well-structured test may falter in the application.” BSP Software,
LLC v. Motio, Inc., 2013 WL 3456870, at *3 (N. D. Ill. 2013).
-6-
Another court discussed a scenario whereby a plaintiff sought communications
between a public relations firm and the corporation on whose behalf it was working:
RLM was, essentially, incorporated into Sumitomo’s staff to
perform a corporate function that was necessary in the context of the
government investigation, actual and anticipated private litigation, and
heavy press scrutiny obtaining at the time. Sumitomo retained RLM to deal
with public relations problems following the exposure of the copper trading
scandal. Sumitomo’s internal resources were insufficient to cover the task.
RLM’s public relations duties included preparing statements for public
release and internal documents designed to inform Sumitomo employees
about what could and could not be said about the scandal. RLM possessed
authority to make decisions on behalf of Sumitomo concerning its public
relations strategy. The legal ramifications and potential adverse use of such
communications were material factors in the development of the
communications. In formulating communications on Sumitomo’s behalf,
RLM sought advice from Sumitomo’s counsel and was privy to advice
concerning the scandal and attendant litigation.
In addition, RLM’s communications concerned matters within the
scope of RLM’s duties for Sumitomo, and RLM employees were aware that
the communications were for the purpose of obtaining legal advice from
Paul Weiss and/or Sumitomo’s in house attorneys. Under the principles set
out in Upjohn, RLM’s independent contractor status provides no basis for
excluding RLM’s communications with Sumitomo’s counsel from the
protection of the attorney-client privilege. Cf. McCaugherty v. Siffermann,
132 F.R.D. 234, 239 (N.D. Cal. 1990) (under Upjohn, there is no principled
basis for distinguishing consultant’s communications with attorneys and
corporate employee’s communications with attorneys when each acted in
the scope of their employment).
The Court therefore finds that, for purposes of the attorney-client
privilege, RLM can fairly be equated with the Sumitomo for purposes of
analyzing the availability of the attorney-client privilege to protect
communications to which RLM was a party concerning its scandal-related
duties. Accordingly, confidential communications between RLM and
Sumitomo’s counsel, or between RLM and Sumitomo, or among RLM,
Sumitomo’s in-house counsel and Paul Weiss that were made for the
purpose of facilitating the rendition of legal services to Sumitomo can be
protected from disclosure by the attorney-client privilege.
-7-
In re Copper Market Antitrust Litigation, 200 F.R.D. 213, 219 (S.D.N.Y. 2001) (footnote
and record citations omitted).
The functional equivalent test takes into account a corporation’s legitimate interest
in relying upon frank exchanges between its legal counsel and non-employee individuals
or organizations who behave as the functional equivalent of an employee. This approach
acknowledges the reality of corporate activity and is in keeping with Upjohn. We,
therefore, apply the functional equivalent test to determine whether the communications
at issue may qualify for attorney-client privilege and whether in this instance the
privilege “belongs” to Krystal.
Krystal argues that Jungling was the functional equivalent of one of its employees
at least as of October 31, 2013, when Pendergast advised Jungling to “take lead” in the
WASI matter, and Jungling did so. Denali argues in response that the parties’ written
agreements explicitly disclaimed any kind of agency relationship and that, at the relevant
times, Jungling had no authority to act for Krystal on waste management issues. As a
result, Denali contends, Jungling could not be considered a Krystal employee for
purposes of attorney-client privilege and his communications with Krystal’s chief legal
officer are discoverable.
The documents before June 9, 2014 do establish a circumscribed role for Denali.
We do not believe that ends the matter, however. We also are interested in how the
parties actually conducted themselves. Emails in the record reflect that Jungling was a
central player in Krystal’s bid to make a change in its waste management business.
Jungling had the ear of Krystal’s President in these matters. Most decisively, Pendergast
asked Jungling in his October 31, 2013 email that Jungling “take lead” with respect to the
WASI matter. Jungling, thereafter, took a leading role indeed. The September 12, 2012
statement of work provides that “[a]ny procurement projects not covered in the scope of
this agreement may be submitted to seller [Denali] via email.” Krystal’s President’s
email of October 31, 2013 to Jungling did exactly that. Jungling’s activities following
Pendergast’s October 31, 2013 email could scarcely be distinguishable from those of a
Krystal employee. Jungling was, in fact, the functional equivalent of a Krystal employee
beyond that date. Despite the categorical provisions of the parties’ written agreements
disclaiming agency, we cannot ignore the parties’ actual course of conduct.
Our holding that Jungling was the functional equivalent of a Krystal employee
following October 31, 2013 extends to his employer, Denali, which possesses the
communications at issue. Denali may understandably be chagrined at being unable to
disclose its own records. However, a company acts through its employees. To hold that
Jungling was the functional equivalent of a Krystal employee for purposes of attorney-
client privilege but Denali was not would vitiate the protection afforded by the privilege
-8-
in the corporate context. Insofar as Jungling sought legal advice from Krystal’s chief
legal officer regarding the WASI contract after he was instructed to take lead on the
WASI matter, Krystal was the client for purposes of attorney-client privilege and the
privilege belongs to Krystal. Jungling, and by extension Denali, acted on behalf of
Krystal in a very intimate and direct way. Krystal could justifiably rely upon
confidentiality in consultations with its own lawyer.
In summary, we hold that Jungling was the functional equivalent of a Krystal
employee as of October 31, 2013 when he was told by Krystal’s President to “take lead”
on Krystal’s dealings with WASI, and that his subsequent communications with Krystal’s
chief legal officer may qualify for attorney-client privilege belonging to Krystal if these
communications also otherwise qualify as privileged attorney-client communications.
We make no determination on appeal as to the ultimate application of the privilege to
specific communications between Jungling/Denali and Krystal’s chief legal officer after
October 31, 2013. We hold only that those communications qualify for attorney-client
privilege under the functional equivalent test. We are not asked in this appeal to
determine whether all the other elements necessary to make the communications subject
to the attorney-client privilege are present. We, therefore, modify the judgment of the
Trial Court to show that the functional equivalent employee test is satisfied as to the
communications in question on appeal and remand this case for further proceedings
consistent with this Opinion.
Conclusion
The judgment of the Trial Court is modified, and this cause is remanded for
further proceedings consistent with this Opinion and for collection of the costs below.
The costs on appeal are assessed against the Appellees, Waste Administrative Services,
Inc., Denali Sourcing Services, Inc., and David Jungling.
____________________________________
D. MICHAEL SWINEY, CHIEF JUDGE
-9-