Court Opinion

ID: 4309403
Source: CourtListenerOpinion
Date Created: 2018-09-01 07:17:03.413316+00
Date Added: 2024-06-11T14:42:49.665794
License: Public Domain

Opinion issued August 30, 2018

                                       In The

                                Court of Appeals
                                      For The

                           First District of Texas
                              ————————————
                               NO. 01-18-00049-CV
                             ———————————
            IN RE MICROVAST, INC., AND YANG WU, Relators

            Original Proceeding on Petition for Writ of Mandamus

                           MEMORANDUM OPINION

      Microvast, Inc. and Yang Wu petition for a writ of mandamus, challenging

the trial court’s order denying their motion to compel the production of privileged

documents. Microvast and Wu are defendants in the underlying trial court case.

Together, they assert that the plaintiff, Jeff Xu, waived his attorney-client privilege
by voluntarily disclosing legal advice that he received and by “offensive use” of the

privilege.1 We deny the petition.

                                    Background

      Jeff Xu sued Microvast and Wu, Microvast’s chief executive officer, claiming

that they fraudulently induced Xu to execute a promissory note secured by shares of

Microvast stock. Xu further alleges that Microvast and Wu defrauded him in

connection with their demand that he return his shares of Microvast stock following

his resignation from Microvast. Xu asserts that Microvast represented that the

promissory note served “tax purposes” and that Microvast would not enforce it.

      Microvast’s Formation

      According to the pleadings, Xu was a professor of chemistry at Xiamen

University in China. Xu is an expert in fuel energy storage technology. Wu recruited

Xu to start a fuel energy storage business. Xu resigned from his professorship and

began working full time for what eventually became Microvast. Microvast formally

incorporated in Texas in October 2006.

      In December 2006, to support Xu’s immigration status, Microvast provided

Xu with an employment offer letter. The letter stated that Xu would be Microvast’s

chief technology officer. His compensation would include salary, benefits, and a

1
      The underlying case is Jeff G. Xu v. Microvast, Inc. and Yang Wu, cause
      number 2015-48629, pending in the 295th District Court of Harris County,
      Texas, the Honorable Caroline Baker presiding.
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“stock option” covering “7% of company’s outstanding shares and the terms will be

discussed later.” Xu asserts that he asked Wu for stock instead of stock options. After

additional discussions, Wu and Xu agreed that Xu would own 7% of the company.

      In February 2007, Wu emailed Xu a promissory note. Wu told Xu he had to

sign it before Microvast could issue his stock representing 7% ownership in the

company. Xu claims that Wu assured and promised that neither he nor Microvast

would ever collect on the note. Xu signed the promissory note, which purported to

loan Xu $770,000 secured by 15,400 shares of Microvast stock.

      Xu claims that he received no loan proceeds, and that he received the stock in

exchange for joining Microvast.

      The note required Xu to pay $770,000 to Microvast on demand, or if no

demand were made, then at the earlier of (1) 30 days after the termination of his

employment or (2) December 31, 2013. The note also required Xu to pay interest on

the outstanding amount. It gave Microvast a security interest in Xu’s shares of

Microvast stock.

      The first two sentences of the pledge provision transposed the terms “Payee”

and “Maker.” Section 2 of the note reads:

             Security. As security for this, Payee [defined as Microvast]
             grants Maker [defined as Xu] a first lien security interest in and
             to that certain stock of Maker evidenced by that certain stock
             certificate(s) described on the attached Exhibit A (collectively,
             the “Certificate.”).

                                          3
This provision, which Microvast later called a “scrivener’s error,” purports to grant

Xu a security interest in the stock, rather than Microvast.

      Microvast issued Xu 15,400 common shares, which was 7% of the company’s

outstanding shares.

      The Relationship Ends

      In February 2011, about four years after Xu signed the promissory note,

Microvast asked Xu to amend the note to correct the security provision. Xu declined

to execute a modification of the note. When asked, Xu stated (among other

justifications) that he had consulted with an attorney, who told him that there was no

need to amend the note because the note did not provide him any protection.

Microvast also asked that Xu return the stock certificate representing the 15,400

shares to Microvast to hold while the note was outstanding. Xu recorded the

conversations he had with Microvast. Xu did not return the certificate. Six months

later, Xu resigned.

      Microvast demanded payment on the note. When Xu did not pay, Microvast

sent him a notice of default, informing Xu that he could cure his default either by

paying the note or by returning the shares that Microvast had issued to him. Three

days after Microvast’s counsel emailed the notice of default, Xu mailed his stock

certificate back to Microvast, but Xu did not sign the transfer endorsement on the

back of the certificate.

                                          4
      Microvast eventually needed its shareholders’ consent to issue additional

shares to two institutional investors. Because Xu owned 100 shares purchased under

a stock option granted to him in 2011, his consent was necessary. In connection with

requesting his consent, Microvast sent Xu a capitalization table dated May 1, 2015.

The table included the 100 shares, but it did not include the 15,400 shares evidenced

by the stock certificate that Xu had returned to Microvast in 2011. Xu alleges that

this was the first time he had reason to know that Microvast denied Xu’s ownership

in the 15,400 shares. Microvast formally extinguished Xu’s ownership in June 2015.

      Proceedings in the Trial Court

      Xu sued in August 2015, alleging fraudulent inducement and negligent

misrepresentation in connection with his return of the stock certificate in October

2011. Microvast has pleaded limitations as an affirmative defense to Xu’s claims. In

response, Xu alleges discovery-rule tolling.

      During discovery, Xu produced his recorded phone calls with Microvast.

Microvast asserts that these conversations reveal that, more than four years before

Xu filed his suit, he had conversations with his lawyer regarding the note.

      Microvast requested that Xu produce his communications with this lawyer

relating to the note. When Xu claimed he had no documents, Microvast subpoenaed

Xu’s lawyer. Xu objected, and he asserted the attorney-client privilege. Xu’s lawyer

refused to produce the documents in his possession. Microvast moved to compel

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production of the documents. Following a hearing, the trial court denied Microvast’s

motion. This petition for writ of mandamus followed.

                                     Discussion

      Microvast challenges the trial court’s order, contending that Xu has waived

the attorney-client privilege by voluntarily disclosing a conversation with his lawyer

about the promissory note, and by offensive use. Microvast contends that Xu is

affirmatively relying on his lawyer’s advice in 2011 in connection with his claims

against Microvast. Microvast further contends that it lacks an adequate remedy by

appeal because the denied discovery “goes to the heart of [its] defense.”

      Waiver Through Disclosure

      Entitled “Waiver by Voluntary Disclosure,” Texas Rule of Evidence 511

establishes a general rule that “[a] person upon whom these rules confer a privilege

against disclosure waives the privilege if . . . the person . . . voluntarily discloses

. . . any significant part of the privileged matter unless such disclosure itself is

privileged.” TEX. R. EVID. 511(a)(1). Microvast asserts that Xu waived the attorney-

client privilege because he “affirmatively disclosed not only that he had contacted a

lawyer, but also (i) the subject matter of his discussion with the lawyer (the Note),

(ii) his lawyer’s mental impressions of the Note (that it was enforceable

notwithstanding the scrivener’s error and had strong on-demand language favoring

Microvast), and (iii) details of his lawyer’s advice (Xu should try to re-negotiate the

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Note and get an employment agreement, presumably to protect him from having to

pay the Note on demand).”

      In refusing to amend the note, Xu told Microvast that he had talked to a lawyer

who said the note appeared enforceable, that it did not offer Xu any protection, and

that there was no need to amend the note to correct the scrivener’s error. The trial

court acted within its discretion to conclude that these disclosures (for which the

privilege might be waived) did not open the door to the remainder of Xu’s privileged

communications with his lawyer or to the production of documents held by Xu’s

lawyer.

      The disclosures essentially amount to three statements:

      • The lawyer read the note and said that it did not provide Xu any
        protections, so he should try to renegotiate for more protection;

      • Xu told the lawyer he did not have a written employment agreement and
        the lawyer said he should ask for one; and

      • The note contained an error that did not “affect” the agreement and Xu did
        not “need” to amend the note.

Microvast does not cite any authorities suggesting that disclosures like these result

in wholesale subject-matter waiver of the attorney-client privilege. Rather, the cases

that Microvast advances evaluate whether the disclosure of particular documents

resulted in a waiver of privilege for those documents alone. See, e.g., Axelson, Inc.

v. Mcllhany, 798 S.W.2d 550, 553–54 (Tex. 1990) (disclosure of documents from

internal investigation to FBI, IRS, and Wall Street Journal waived privilege for those

                                          7
documents); In re ExxonMobil Corp., 97 S.W.3d 353, 362–63 (Tex. App.—Houston

[14th Dist.] 2003, orig. proceeding) (holding privilege waived as to specific

documents). We conclude that Xu did not waive the attorney-client privilege beyond

the statements themselves.

      Waiver Through Offensive Use

      Microvast further contends that the lawyer’s documents are independently

discoverable under the offensive use doctrine. The Texas Supreme Court has warned

that “an offensive use waiver of a privilege should not lightly be found.” Republic

Ins. Co. v. Davis, 856 S.W.2d 158, 163 (Tex. 1993). In Republic Insurance, the Court

concluded that “[i]n an instance in which the privilege is being used as a sword rather

than a shield, the privilege may be waived.” Id. The Court then described the limited

circumstances where there may be waiver by offensive use, when the information

sought would be outcome determinative of the cause of action asserted:

             First, before a waiver may be found the party asserting the
             privilege must seek affirmative relief. Second, the privileged
             information sought must be such that, if believed by the fact
             finder, in all probability it would be outcome determinative of
             the cause of action asserted. Mere relevance is insufficient. A
             contradiction in position without more is insufficient. The
             confidential communication must go to the very heart of the
             affirmative relief sought. Third, disclosure of the confidential
             communication must be the only means by which the aggrieved
             party may obtain the evidence. If any one of these requirements
             is lacking, the trial court must uphold the privilege.
Id.

                                          8
      Microvast observes that Xu is seeking affirmative relief, including money

damages. It fails to cite, however, any case in which a court has held that a party

waives the attorney-client privilege solely because the party seeks damages and the

possibility exists that attorney-client communications undermine the claim.

Microvast relies upon Ginsberg v. Fifth Court of Appeals, 686 S.W.2d 105 (Tex.

1985) to assert that:

             [Xu] cannot “invoke[] the jurisdiction of the courts in search of
             affirmative relief against [Microvast]; yet . . . attempt, on the
             basis of privilege, to deny [Microvast] the benefit of evidence
             which would materially weaken or defeat [his] claims against
             [it].”

See id. at 107. Although the Court in Ginsberg held that the trial court properly

exercised its discretion in deeming plaintiff to have waived the psychotherapist-

patient privilege through offensive use, it warned that its holding should not be

construed as endorsing litigants to engage in “fishing expeditions” into privileged

matters. Id. at 108. Since Ginsberg, the Court has made clear that offensive use

waiver is limited “to instances where a party attempts to protect outcome–

determinative information from any discovery.” In re M-I L.L.C., 505 S.W.3d 569,

579 (Tex. 2016) (citing Ginsberg, 686 S.W.2d at 107-08).

      The Court in Republic Insurance refined the standard applied in Ginsberg by

requiring that privileged information go to the heart of the affirmative relief sought

to demonstrate waiver through offensive use. See Republic Ins., 856 S.W.2d at 163;

                                          9
Denton v. Texas Dep’t of Pub. Safety Officers Ass’n, 862 S.W.2d 785, 789 (Tex.

App.—Austin 1993, writ granted), aff’d, 897 S.W.2d 757 (Tex. 1995). The Court

expressly held that an assertion of offensive use waiver cannot be premised on

relevance or the possibility that the material would reflect a position that conflicted

with the one advanced in the lawsuit. Republic Ins., 856 S.W.2d at 163.

      Xu discussed the note with his lawyer in February 2011. Microvast asserts

that these privileged communications would reveal Xu’s knowledge about his claims

more than four years before he sued Microvast. Xu responds that he filed suit within

three months after he discovered Microvast’s position that he had surrendered his

shares, and about two months after Microvast formally cancelled the shares. Xu

argues that the cancellation of his shares gave rise to his action.

      Microvast has not demonstrated that the communications Xu had with his

lawyer in 2011 are outcome-determinative on the question of whether Xu’s claims

are barred by statute of limitations. Rather, Microvast seeks to review the privileged

documents based on a possibility that they could reveal a position favorable to

Microvast. Nor has Microvast demonstrated a limiting principle to its offensive use

theory, which could open the door to the production of privileged communications

any time the statute of limitations and the discovery rule are contested. Thus, the

trial court acted within its discretion in denying Microvast’s motion to compel.

                                          10
      Microvast argues that the privileged communications are needed because the

potential absence of any discussion Xu had with his attorney regarding an agreement

not to enforce the note could be used to cast doubt on Xu’s claims with a jury.

Microvast speculates that, if Xu believed that the note would not be enforced, then

Xu “undoubtedly told his lawyer that when consulting him about the Note’s

enforceability in February 2011” and “[i]f Xu did not tell his lawyer these things

when consulting the lawyer about the Note’s enforceability, the jury will question

his assertion of those claims here.” We find this line of argument unpersuasive.

Allowing discovery of privileged communications in an attempt to prove the

absence of discussions with an attorney would open the door to every

communication with an attorney without discernable limitation.

      In sum, Microvast argues that the court must find offensive use waiver in this

case because Xu filed a claim for damages and the privileged communications might

reveal statements (or the absence of statements) that can be used to “undermine”

Xu’s claim that he has filed suit within the applicable statute of limitations. The

Texas Supreme Court has made clear in the offensive use context, however, that the

privileged information must go to “the very heart of the affirmative relief sought” in

the case. Republic Ins., 856 S.W.2d at 163. This means that the party asserting the

privilege must place the privileged information into issue.

                                         11
      Xu does not rely on the discussion with his attorney to support his claims. Xu

told Microvast that he had consulted with an attorney, but his statements do not

reveal whether Xu consulted with the attorney about the claims alleged in this suit.

Rather, Microvast seeks to inject Xu’s disclosure of the attorney’s advice into the

case because it could be helpful to Microvast’s limitations defense, and it poses that

further discovery into the conversations Xu had with his attorney may be even more

fruitful. In seeking this discovery, Microvast essentially asserts that no use of

privileged communications is required for a waiver by offensive use. We reject that

characterization of the rule.

                                    Conclusion

      For the foregoing reasons, we deny the petition for writ of mandamus.

                                              Jane Bland
                                              Justice

Panel consists of Justices Keyes, Bland, and Lloyd.

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