PER CURIAM.
This case involves an adverse judgment against Exxon Corporation regarding royalty payments it owes the Alabama Department of Conservation and Natural Resources ("DCNR") for gas Exxon extracted from Mobile Bay. The jury awarded the State $87.7 million in compensatory damages and $3.42 billion in punitive damages on breach-of-contract and fraud claims. We reverse and remand.
I. Factual Background
Mobile Oil Company discovered oil in Mobile Bay in 1979. In 1981, DCNR began a major sale of oil leases in Mobile Bay. In preparation for the sale of the leases, DCNR performed a comprehensive review of its standard lease agreement, and its chief legal counsel, Robert Macrory, drafted a new standard oil-and-gas form lease agreement for DCNR. DCNR awarded seven leases to Exxon in 1981. In 1984, using the same standard lease forms, DCNR awarded Exxon 15 more leases. Exxon paid the State an initial price of approximately $585 million for all of its leases in Mobile Bay.
In mid-1993, when Exxon was completing construction of its infrastructure at the drilling sites in Mobile Bay and preparing to shift responsibility of the Mobile Bay project to its operations division, R.J. Mertz, Exxon's accounting manager on the Mobile Bay project, asked Exxon's in-house counsel Charles Broome to perform a legal analysis of the royalty provisions of the lease agreement "to ensure that royalties were paid in accordance with the terms of the mineral lease" and to evaluate potential areas of cost recovery for Exxon in the production and treatment process. Broome offered three different interpretations of the lease language concerning the payment of royalties, along with the likelihood of success of each interpretation in litigation. Using his analysis, R.J. Kartzke, the Mobile Bay project manager and Broome's chief supervisor; Mertz; and other Exxon executives adopted an interpretation of the lease and began paying DCNR royalties based upon that interpretation after production began that year.
In 1996 DCNR hired outside auditors to audit Exxon's royalty payments. When the audit was completed, DCNR made a demand for reimbursement, plus interest, of what it alleged were millions of dollars in royalties that, it said, according to the royalty provisions in the lease agreement should have been paid but were not. Exxon refused to pay, and DCNR officials informed Exxon that the State was planning to sue to recover the royalty payments. Soon after, on July 28, 1999, Exxon filed a declaratory-judgment action to determine the rights of the parties under the lease agreement. The next day, the State filed a separate action against Exxon, alleging breach of contract and fraud; it later dismissed that complaint and brought the same claims as compulsory counterclaims in Exxon's declaratory-judgment action. The trial court granted the State's motion to realign the parties, and the State became the plaintiff and Exxon the defendant.
The State presented its evidence of the purported breach of contract and fraud, while Exxon maintained throughout trial that the entire case simply involved a disagreement over the interpretation of ambiguous provisions in the lease agreement. The jury returned a verdict in favor of the State, finding Exxon liable for breach of contract and fraudulent underpayment of royalties, awarding both compensatory and punitive damages. Exxon filed a motion for a hearing on the excessiveness of the punitive-damages award based on § 6-11-23, Ala. Code 1975, and in accordance with Hammond v. City of Gadsden, 493 So.2d 1374 (Ala. 1986). The trial court concluded that the jury's award was not excessive based upon the potential harm Exxon's behavior could have cost the State and the need to impose a stiff punishment that would serve as an effective deterrent to underpaying in the future by a large corporation such as Exxon.
Exxon appeals, challenging the sufficiency of the evidence on the issue of fraud, the availability of a fraud claim in light of the statute of limitations, the propriety of the State's receiving a punitive-damages award, several rulings by the trial court at trial, and the punitive-damages award, based upon standards set forth by the United States Supreme Court, Alabama statutes, and this Court.
II. Analysis
Exxon first argues that the two-year statute of limitations for a fraud action (Ala. Code §§ 6-2-3 and 6-2-38(1)) bars the State's fraud counterclaim. Exxon contends that the statutory limitations period on the State's fraud counterclaim had run when Exxon's declaratory-judgment action was filed in July 1999. The State responds by stating that its counterclaim is compulsory and, therefore, as this Court held in Romar Development Co. v. Gulf View Management Corp., 644 So.2d 462, 470-73 (1994), a compulsory counterclaim is not subject to the defense of limitations. Exxon answers this argument by citing Ala. Code 1975, § 6-8-84, which provides:
"When the defendant pleads a counterclaim to the plaintiff's demand, to which the plaintiff replies the statute of limitations, the defendant is nevertheless entitled to his counterclaim, where it was a legal subsisting claim at the time the right of the action accrued to the plaintiff on the claim in the action."
Exxon claims that the State conceded at the trial level that Exxon could have gone to court to obtain a declaration of its contractual royalty obligations as early as 1988 or 1989. Exxon also asserts that the earliest point at which the State could have asserted a fraud claim was December 1993, when Exxon made its first royalty payment. Exxon concludes that because the fraud claim accrued after Exxon's claim for declaratory judgment accrued, the fraud claim was not a "legally subsisting claim" within the meaning of § 6-8-84 at the time Exxon's claim accrued; therefore, it argues, the statute of limitations bars the State's fraud claim.
In support of this argument Exxon cites Sharp Electronics Corp. v. Shaw, 524 So.2d 586 (Ala. 1987), in which this Court held that when a counterclaim accrues after the date of the accrual of the plaintiff's action, but becomes time-barred before the plaintiff's action is filed, the counterclaim cannot be used offensively, i.e., it cannot exceed the amount of the plaintiff's recovery, if any. Sharp, 524 So.2d at 591.
However, this reading of § 6-8-84 and the Sharp rule are in contravention to the holding in Romar, which expressly overruled Sharp. In Romar, this Court ruled that all compulsory counterclaims, whether offensive or defensive, are not subject to the statute-of-limitations defense. The trial court denied the statute-of-limitations defense on the basis of Romar, and the State insists that we should as well. Exxon asks us to overrule Romar. The State contends that Exxon waived this argument by failing to preserve it in the trial court.
Yet, even if we elected, as Exxon urges, to overrule Romar and follow the Sharp rule, whether Exxon's limitations argument would entitle it to a summary judgment or a judgment as a matter of law is problematic. If we were to apply Sharp, as Exxon insists, we would have to agree with Exxon that the statutory period of limitations on the State's claim for fraud had run, as a matter of law, as of July 1999 when Exxon filed its declaratory-judgment action. The State contends that the fraud was ongoing until shortly before the trial.
Even if we were satisfied that the issue had not been waived, Exxon faces the formidable hurdle of stare decisis in its effort to obtain what might, even under Sharp, be at best a jury determination on the limitations defense. We note at the outset that we are not here dealing with a constitutional issue where the doctrine of stare decisis is often given diminished deference. See, e.g., Marsh v. Green, 782 So.2d 223, 232 (Ala. 2000). As Justice Somerville observed in his dissent in Bolden v. Sloss-Sheffield Steel Iron Co., 215 Ala. 334, 340, 110 So. 574, 580 (1925), "The doctrine of stare decisis, though not without its limitations, is the only thing that gives form, and consistency, and stability to the body of the law. Its structural foundations, at least, ought not to be changed except for the weightiest reasons." In Lindsay v. United States Savings Loan Ass'n, 120 Ala. 156, 167, 24 So. 171, 174 (1898), this Court commented:
"The observations of Chancellor Kent are instructive, and have been often quoted by courts and text writers: `
If a decision has been made upon solemn and mature consideration, the presumption is in favor of its correctness, and the community have a right to regard it as a just declaration or exposition of the law, and to regulate their actions by it.'"
(Emphasis added.) Recently we stated, "Judges adhering to the rule ofstare decisis defer to prior precedent to obtain the beneficial effect of predictability in the law even when enticed to embrace what appears to be a more logically sound rule." Keck v. Dryvit Sys., Inc., 830 So.2d 1, 7-8 (Ala. 2002). The State had the right to regard Romar as "a just declaration or exposition of the law, and to regulate [its] actions by it." Lindsay v. United States Savings Loan Co., 120 Ala. at 167, 24 So. at 174. We therefore reject Exxon's invitation to overrule a principle of law exempting the State from the defense of the statute of limitations on its fraud counterclaim.
Exxon's first substantive argument regarding the fraud claim is that the State failed to present sufficient evidence of fraud to warrant submitting that issue to the jury; it maintains that all of the allegations made by the State equate to at most a breach of contract, not fraud. Exxon concludes that the trial court therefore erred in submitting the fraud question to the jury. Another of Exxon's arguments, regarding the admissibility of a letter written by Charles Broome to R.J. Kartzke in April 1993, directly affects whether the State presented sufficient evidence of fraud; therefore, we first address Exxon's argument as to the admission into evidence of that letter.
Exxon argues that the letter written by in-house counsel Charles Broome is protected by the attorney-client privilege pursuant to Rule 502, Ala. R. Evid., and that, therefore, it should not have been admitted into evidence at trial. "Whether a communication is privileged is a question of fact to be determined by the trial court from the evidence presented. . . ." Ex parte DCH Reg'l Med. Ctr., 683 So.2d 409, 412 (Ala. 1996). In order for the trial court's ruling on such an issue to be overturned, it must be shown that the trial court abused its discretion. Rule 502, Ala. R. Evid., states the requirements for an item of evidence to be considered privileged as a confidential communication between an attorney and the attorney's client. Rule 502(b) states, in pertinent part:
A copy of the letter is attached as an appendix to this opinion.
"A client has a privilege to refuse to disclose and to prevent any other person from disclosing a confidential communication made for the purpose of facilitating the rendition of professional legal services to the client, (1) between the client or a representative of the client and the client's attorney or a representative of an attorney. . . ."
In 1993 Charles Broome was employed as an in-house attorney for Exxon; thus, Broome's "client" was Exxon. Corporations are entitled to the benefit of the attorney-client privilege because corporations are included in the definition of "client" in Rule 502(a). See, e.g., Upjohn Co. v. United States, 449 U.S. 383 (1981). That the letter was written "for the purpose of facilitating the rendition of professional legal services" to Exxon is plain from the testimony at trial. Exxon's accounting manager for the Mobile Bay project, R.J. Mertz, testified that he "requested a legal opinion pursuant to the mineral leases" from Broome. Broome testified that in the letter he "provided advice on [his] interpretation of [sections] 5(a) and 5(b) in the lease[-agreement] form and the other provisions in the lease." See, e.g., Ex parte Great American Surplus Lines Ins. Co., 540 So.2d 1357 (Ala. 1989).
The content of the letter confirms Mertz's description of the letter as a "legal opinion." Broome first summarized what he believed to be the State's position as to the royalty provisions in the lease agreement and also the position of Shell Corporation with regard to these provisions. Those summaries were followed by Broome's attempts to "harmonize" sections 5(a) and 5(b) of the lease-agreement form because of what Broome perceived to be contradictions between the two sections. He offered two possible interpretations to achieve harmonization, followed by an assessment of the legal consequences of underpaying royalties to the State. Broome concluded by giving specific advice as to how royalties should be paid on certain items produced in the oil-extraction process, given the language in the lease agreement. The letter clearly represents a communication of legal advice pertaining to the interpretation of a contract.
At the time Broome wrote the letter, the State was auditing Shell Corporation concerning its payment of oil royalties under the same form lease agreement. Thus, Shell Corporation had formulated its own ideas as to the meaning of the royalty provisions of the form lease agreement.
The major question in this case is whether the letter was a "confidential communication" between Broome and his client. Indeed, it appears that the trial court declared the letter admissible mainly on the basis of a waiver of confidentiality. The trial court stated in part: "I don't think there's anything confidential about this. This is an information letter that is going out to people. To be honest with you, this probably went out to other companies as well." Thus, it is incumbent upon this Court to decide whether the trial court abused its discretion in declaring that the letter was not a "confidential" communication between the attorney and his client.
Rule 502(a)(5) states: "A communication is `confidential' if not intended to be disclosed to third persons other than those to whom disclosure is made in furtherance of the rendition of professional services to the client or those to whom disclosure is reasonably necessary for the transmission of the communication." The evidence must show that the letter was intended to be confidential in order to be protected by the privilege. Whether a party intended the communication to be confidential is dependent on who was privy to the legal advice. InUpjohn, the United States Supreme Court abandoned the "control-group" test for determining confidentiality in the corporate setting. The control-group test protected only those communications that were made to employees who had control or who were able to participate in the decision to which the legal advice pertained. 449 U.S. at 390. The United States Supreme Court rejected this test, stating:
"The control group test . . . thus frustrates the very purpose of the privilege by discouraging the communication of relevant information by employees of the client to attorneys seeking to render legal advice to the client corporation. The attorney's advice will also frequently be more significant to noncontrol group members than to those who officially sanction the advice, and the control group test makes it more difficult to convey full and frank legal advice to the employees who will put into effect the client corporation's policy."
449 U.S. at 392. Reflecting the fact that the scope of the privilege has been broadened beyond the control group, the Advisory Committee's Notes to Rule 502 state that "the communication may be made only between representatives of the client who are within the `control group'
or whose duties are closely related to the matter about which the communication is made. . . ." (Emphasis added.)
Broome's letter was addressed to R.J. Kartzke, Exxon's Mobile Bay project manager. The face of the letter shows that copies were sent to Mertz, Exxon's accounting manager for the Mobile Bay project and the man who requested the legal opinion, and to R.G. Bremer, another accountant for Exxon on the Mobile Bay project. In an affidavit, D.C. Capobianco, the business operations support manager for the Southeastern Production Division, which includes Mobile Bay, affirmed that "at all times, Mr. Broome's legal advice was treated as confidential." Because Broome's advice dealt with the amount Exxon should pay the State in royalties according to the lease agreement, the accountants for the Mobile Bay project had duties "closely related to the matter about which the communication is made," and Kartzke was part of the decision-making group. Thus, the evidence in the record indicates that only those directly involved in the royalty-payment decision and the process of payment were privy to Broome's letter.
While Capobianco's affidavit is not evidence indicating that Broome's letter was treated as confidential by all who received it, it does provide some evidence of an intent not to disclose the communication to third parties other than those necessary to carry out Exxon's royalty-payment responsibilities. Moreover, Mertz testified in his deposition that legal opinions typically were "shared with senior management who makes the final decisions." Again, while this statement does not prove that this particular legal opinion was shared only with senior management who had decision-making authority and with those persons closely related to the topic addressed in the letter, it does provide evidence of the manner in which Exxon commonly treated legal opinions.
The above evidence, taken together, constitutes a prima facie showing that Broome's letter was intended to remain confidential. Contrary to the statement by the trial court, there is no evidence in the record indicating that the letter was seen by numerous people at Exxon, let alone by people at other companies. This prima facie showing of confidentiality by Exxon shifted the burden to the State to prove that the letter was not a confidential communication.
The only evidence presented by the State to show that the letter was not confidential is a stamp in the top-right corner of the letter; the stamp contains a date and the initials of several Exxon personnel, with boxes beside the initials. The State refers to the stamp as a "distribution list" detailing who received the letter, while Exxon refers to it as a "received" stamp, merely showing that Kartzke received the letter. If Exxon's interpretation of the stamp is accepted, then the stamp is proof only that Kartzke received the letter, because the boxes next to the initials are unmarked. If the State's interpretation of the stamp is accepted, i.e., that it is a distribution stamp, then because Exxon had already met its burden demonstrating the confidentiality of the letter, it was incumbent upon the State to demonstrate that Exxon had waived confidentiality by showing that the letter was received by the individuals whose initials are included on the stamp and that at least some of those individuals were not "client representatives" whose jobs were "closely related to" the issues discussed in the letter.
The State's only proof that the letter was given to the people listed on the stamp consisted of what it called "inferences" from the deposition testimony of Charles Broome. In that deposition, the State asked Broome a series of questions related to the initials appearing on the stamp that was imprinted on Broome's letter. The questions were similar for each set of initials on the stamp:
"Q. [State's attorney]: Who is DEB?
"A. [Broome]: That would have been Doug Baining who was the construction manager for the [Mobile Bay] project.
"Q. [State's attorney]: All right. Why is he getting the letter?
"A. [Broome]: Well, he is one of Kartzke's managers under Kartzke's supervision."
This line of questioning persisted in nearly identical fashion for each set of initials included on the stamp. The State's "inference" that Broome admitted through this testimony that each person whose initials were on the stamp received the letter represents an assumption on the part of the State, rather than proof that each person received the letter.
However, Exxon failed to object to the form of the questions at the time the deposition was taken; thus, it waived any objection for failure to prove the assumption underlying the questions. See Rule 32(d)(3)(B), Ala.R.Civ.P. Moreover, Broome failed to plead lack of knowledge as to whether those individuals had received the letter. Thus, we must accept Broome's deposition testimony as evidence indicating that each individual whose initials he was able to identify received the letter.
Even so, Broome's answers for each individual he was able to identify provided sufficient justification to satisfy those individuals' need to know the contents of the letter. Doug Baining was the construction manager for the Mobile Bay project; Robert Heinz was the financial manager for the Mobile Bay project; Harland Johnson was another project manager; Fred Terrell was the utilization manager for the Mobile Bay project; and Roger Koerner was the manager of the Southeastern Production Division and Kartzke's boss. All of these employees were directly connected to the Mobile Bay project, the subject of the letter, and represented part of the management of the project; they easily fit within the meaning of "client representatives."
As for the four sets of initials Broome could not identify, Broome did not provide testimony as to whether those individuals received the letter, and his lack of knowledge about the individuals, if anything, shows that those individuals did not receive the letter. In any event, it cannot be assumed that the individuals whose initials Broome could not identify received the letter, given Exxon's proof of confidentiality and the State's failure to provide any evidence proof — other than the stamp itself — that those individuals received the letter. The stamp itself cannot serve as evidence proof of receipt for anyone other than Kartzke, given the lack of any markings next to initials to indicate receipt. Thus, the State failed to disprove Exxon's showing that the letter was intended to be, and indeed was, confidential. Moreover, the State failed to present any evidence indicating that the individuals whose initials were on the stamp, if they did receive the letter, were not "client representatives."
The State also argues that, even if the letter is considered confidential, Exxon waived the attorney-client privilege in three two ways. First, it argues that the list of initials on the stamp constitutes a waiver of the privilege because, it says, it shows that the letter was distributed to people other than client representatives. For the reasons already discussed, this argument does not demonstrate that Exxon waived the privilege. Second, the State argues that certain documents, known as the "Condray documents," which Exxon does not claim to be privileged, contained the same information as the Broome letter, thereby rendering the Broome letter admissible.
The "Condray documents" consist of papers used in a 1993 presentation to Exxon's senior vice president, Ansel Condray, by Exxon employees, on royalty payments for the Mobile Bay Project.
However, although some of the information contained in the Broome letter is also contained in the Condray documents, and although Exxon personnel testified that the Broome letter was used in preparing the Condray documents for a presentation to Exxon executives, the Condray documents and the Broome letter do not contain the same information. Most obviously, the Condray documents do not contain Broome's opinion as to which interpretation harmonizing sections 5(a) and 5(b) of the lease agreement was the approach Exxon should take and why it should accept that approach. The Condray documents do not contain, as the Broome letter does, an assessment of the likelihood of success in court of each approach. Moreover, R.G. Bremer testified in deposition that the accountants' understanding of the Broome letter would have been included in the Condray documents, but that the Condray documents "would have been more item-specific." Again, this shows that the Condray documents and the Broome letter were sufficiently dissimilar so that the introduction into evidence of the Condray documents did not represent a waiver of the attorney-client privilege as to the Broome letter.
Moreover Finally, while some of the information found in the Broome letter can also be found in the Condray documents, the admission of the Broome letter provided more than information alone to the jury. This point goes directly to whether the admission of the letter prejudiced Exxon. The admission of the Broome letter permitted the State to argue, as it did several times before the jury, that Exxon's own lawyer believed that its interpretation of the lease agreement concerning royalty payments "has little chance of being upheld." The State would not have been able to make this claim, which the State admitted in its posttrial brief "obviously resonated loudly with the jurors," had the Broome letter not been admitted.
Third, the State cursorily argues that any confidentiality was waived through the crime-fraud exception to the attorney-client privilege. The trial court summarily rejected this argument, because it did not believe that the letter itself evidenced fraud. The State argues nonetheless that the Broome letter qualifies for the crime-fraud exception to the attorney-client privilege because "it was instrumental in informing, guiding, and thereby furthering Exxon's fraud." State's Brief, p. 208 n. 160.
In support of this argument, the State cites In re Grand Jury Proceedings, 87 F.3d 377, 381 (9th Cir. 1996), in which the United States Court of Appeals for the Ninth Circuit stated: "To trigger the crime-fraud exception, the government must establish that `the client was engaged in or planning a criminal or fraudulent scheme when it sought the advice of counsel to further the scheme.' In re Sealed Case, 754 F.2d [395] at 399 [(D.C. Cir. 1985)] (citations omitted)." (Emphasis added.) The undisputed evidence before the trial court indicated that in the ordinary course of business R.J. Mertz asked for a legal opinion from Broome concerning the royalty provisions of the oil-and-gas lease agreements. The State presented no evidence indicating that the letter was requested in order to commit a fraud or to further a fraud upon the State. Even if we accepted the State's claim that the letter was subsequently used to "inform" or "guide" Exxon in committing fraud, it would not establish that Exxon "was engaged in fraud" at the time it requested the letter or that the letter was requested "to further the scheme" of the alleged fraud. See also, In re Grand Jury Investigation, 842 F.2d 1223, 1226 (11th Cir. 1987).
As the Ninth Circuit Court of Appeals emphasized:
"
[I]t isn't enough for the government merely to allege that it has a sneaking suspicion the client was engaging in or intending to engage in a crime or fraud when it consulted the attorney. A threshold that low could discourage many would-be clients from consulting an attorney about entirely legitimate legal dilemmas. Rather, the district court must find `reasonable cause to believe' that the attorney's services were `
utilized . . . in furtherance of the ongoing unlawful scheme.'
In re Grand Jury Proceedings, 867 F.2d [539] at 541 [(9th Cir. 1989)]."
In re Grand Jury Proceedings,
87 F.3d at 381 (emphasis added.) Because the State failed to present evidence indicating that Exxon, when it requested the letter, was using Broome's services to further an ongoing
fraudulent scheme, the Broome letter does not qualify for the crime-fraud exception, and the trial court correctly rejected that argument.
Finally, the State argues that if the admission of the letter was erroneous, the error was harmless. However, the State's emphasis on the letter throughout the trial belies any claim of harmless error. In its brief in support of its motion to compel production of the Broome letter and other documents, the State said: "To describe the `Broome letter' as a `smoking gun' is a monumental understatement. The Broome letter is the equivalent of a crystal clear video with sound of the assailant plunging a bloody knife into the victim's chest." The State highlighted the Broome letter in its opening statement to the jury; referred to the letter as "infamous" during the trial; used it in cross-examining several Exxon employees; and again referred to the letter in its closing statement. No other document played such a central role in the State's fraud case, and through the statements of its attorneys at trial the State essentially admits that the admission of the letter prejudiced Exxon.
The Court takes Justice Houston's point in his special writing to be that Exxon failed to challenge during the trial the State's evidence concerning the amount of compensatory damages, and therefore the admission of the Broome letter was harmless error with regard to the State's breach-of-contract claim. While it may be true that the amount of damages was not challenged, Exxon certainly contested the issue of liability on the breach-of-contract claim. The Broome letter directly discusses Exxon's liability for royalty payments due the State. Thus, its admission cannot be considered harmless error with regard to the jury's determination of liability on the breach-of-contract claim. This Court has previously held that the admission of information protected by the attorney-client privilege that speaks to the issue of the defendant's liability would be "highly prejudicial" and should not, therefore, be admitted. See Melco Sys. v. Receivers of Trans-American Ins. Co., 105 So.2d 43, 52 (Ala. 1958). We find the same to be true in this case.
In its closing, the State told the jury: "You've got the Broome . . . letter that says [Exxon's] got little chance of winning, but what have we got to lose other than giving the money back." In discussing awarding punitive damages, the State told the jury: "If you go back there and you don't award punitive damages, you're going to be patting Charles Broome on the back and saying you were right; all we made you do was give back the $87 million including interest, which is what he said you would do."
Because Exxon established that the Broome letter represented a confidential communication between an attorney and his client or client representatives and because the admission of the letter clearly prejudiced Exxon, the trial court committed reversible error in admitting the Broome letter into evidence. The letter was a legal opinion by an Exxon attorney prepared on behalf of Exxon pertaining to the very issues before the jury in this case. Consequently, the letter should not have been admitted.
We reverse the judgment of the trial court and remand the case for further proceedings consistent with this opinion.
REVERSED AND REMANDED.
SEE, LYONS, BROWN, HARWOOD, WOODALL, and STUART, JJ., concur.
HOUSTON, J., concurs in part and dissents in part.
MOORE, C.J., and JOHNSTONE, J., dissent.