In rare decision, judge rules against plaintiff's firm in discovery dispute

SANTA ANA -- In a rare decision, a federal judge in a case against a plaintiffs' firm accused of fabricating class actions has ruled that some material covered by attorney-client work privilege is discoverable under the crime-fraud exception.

U.S. District Judge James V. Selna on Tuesday rejected an argument that attorneys don't have to represent a client for material to be protected, which could widen the scope of discovery that the judge said already supports claims of widespread fraud.

Selna wrote that the documents at issue reveal conduct "indicative of a vast scheme or conspiracy to commit fraud on the court ... which threatens to harm the integrity of the judicial process."

"While the judicial machinery may be designed to handle certain finite incidents of wrongdoing by parties or even officers of the court, it is not designed to protect the public from officers of the court who are operating a scheme to manufacture litigation based on contrived injuries that they set in motion in order to extort settlements," the judge wrote in his 30-page order.

A crime-fraud exception to attorney-client privilege and protected work product doctrines, particularly in a civil case, is "very, very extraordinary," said Neama Rahmani, president of West Coast Trial Lawyers and a former assistant U.S. attorney.

"Attorney-client privilege is by and far away the most sacred of all the different types of privileges under both common and statutory law," Rahmani said. "So courts are very hesitant to disturb that."

Selna's order affirms a ruling from special master Rosalyn M. Chapman, a retired U.S. magistrate judge now with JAMS, that most of the documents she reviewed from defendant Newport Trial Group should be released to plaintiffs' attorneys even though they encompass typically privileged work.

The documents are from eight past lawsuits filed by the firm, which the complaint against it alleges were part of an organized fraud ring that paid people to pose as injured parties in false advertising and wiretapping claims.

The plaintiff, Natural-Immunogenics Corp., was sued by the firm in 2012 for consumer fraud. U.S. District Judge Larry A. Burns in San Diego dismissed the case in 2015 after he determined the appointed class representative misrepresented himself as a California resident. Nilon v. Natural-Immunogenics Corp., 12-CV00930 (S.D. Cal., filed April 16, 2012).

The corporation's lawyer, Peter A. Arhangelsky of Emrod & Associates in Arizona, filed a complaint seven months later. It includes claims of malicious prosecution, unfair competition and conspiracy to violate the Racketeer Influenced and Corrupt Organizations Act, and six violations of RICO, including extortion, bribery, witness tampering and obstruction of justice. Natural-Immunogenics Corp. v. Newport Trial Group, 15-CV02034 (C.D. Cal., filed Dec. 7, 2015).

Callahan & Blaine APLC represents Newport Trial Group and its founders, Scott J. Ferrell and his brother, Ryan M. Ferrell, an attorney in Arizona. They also represent attorneys Victoria C. Knowles and David W. Reid, as well as investigator Andrew Baslow. Ford & Diulio PC represents six defendants who were plaintiffs in the underlying cases.

Selna's order said the Newport Trial Group defendants are close friends. While, the close relationship "is not explicit evidence of a crime or fraud, it suggests that they were aware of each others' involvement and NTG's pattern of filing manufactured litigation," the judge added.

Scott J. Ferrell, a California State Bar member since 1999, founded Newport Trial Group in 2010. It's now Pacific Trial Attorneys in Newport Beach, where Knowles is a partner and Reid is managing partner. Ferrell did not return a phone call seeking comment on Thursday.

At a hearing June 7, Stephanie A. Sperber, a senior trial attorney with Callahan & Blaine, said she knows opposing counsel finds it "reprehensible the idea that litigation would be staged."

"However, the U.S. Supreme Court has acknowledged that this is allowed in certain context," Sperber said, comparing the conduct to a disability rights attorney sending a person in a wheelchair into a restaurant knowing violations of the Americans with Disabilities Act may occur.

She also said her client's use of so-called testers in wiretapping lawsuits decreased the number of companies recording calls without permission, "and that is an important public interest that is being served in these cases."

"The businesses who are attacked by testers find this type of litigation conduct distasteful, but, again, that is a matter of perspective," Sperber said. "It is not a matter of crime fraud."

Selna's order affirms Chapman's application of the crime-fraud exception to a portion of the 248 reviewed documents, which she randomly selected from the 1,696 documents in dispute.

It also says her decision to review a random sample while considering the crime-fraud exception was proper, but it also orders her to review the remaining documents because "there is a high likelihood that at least some of these documents will be in furtherance of defendants' fraudulent scheme."

Additionally, Selna ordered Chapman to review 465 documents that were deemed privileged work product "to determine whether the work-product protection should even apply" because he said he agreed with plaintiffs that documents prepared while not working on behalf of a client shouldn't be covered.