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SIXTH DIVISION

December 20, 2002

JUSTICE GALLAGHER delivered the opinion of the court:

Defendant, UBS PaineWebber, Inc. (Paine Webber), appeals from an order of the circuitcourt holding it in contempt of court for refusing to produce certain documents demanded byplaintiff, Sterling Finance Management, L.P. (Sterling), during discovery. PaineWebber wasassessed a fine of $500 for its refusal to comply with the court's order. For the reasons thatfollow, we affirm the judgment of the trial court that the materials at issue are not protected bythe attorney-client privilege. We vacate the order of contempt.

JURISDICTION

This court has jurisdiction over this appeal, which was properly filed pursuant to IllinoisSupreme Court Rule 304(b)(5) (155 Ill. 2d R. 304(b)(5)). A contempt proceeding is anappropriate method for a party to test the correctness of an otherwise unreviewable pretrialdiscovery order. Lewis v. Family Planning Management, Inc., 306 Ill. App. 3d 918, 715 N.E.2d743 (1999).

BACKGROUND

Only a brief summary of the nature of the underlying case is necessary for backgroundpurposes. On August 9, 1999, Sterling sued PaineWebber⁽¹⁾ for alleged misrepresentations madein connection with Sterling's purchase of mortgage-backed securities from PaineWebber. Sterling's complaint included allegations of fraudulent concealment, intentionalmisrepresentation, negligent misrepresentation, breach of fiduciary duty, violations of the IllinoisSecurities Law of 1953 (815 ILCS 5/1 et seq. (West 1998)), violations of the Illinois ConsumerFraud and Deceptive Business Practices Act (815 ILCS 5/505 et seq. (West 1998)), breach of awritten contract, and breach of an oral agreement - all of which Sterling alleged resulted in itslosing more than $15 million.

The documents and communications at issue in this appeal involve reports prepared byPaineWebber's outside counsel, New York attorney Robert Mendelson (Mendelson reports), anda memorandum with supporting papers prepared by PaineWebber's employee Terry Ann Goulard(Goulard memorandum). On January 19, 1996, PaineWebber's employee Allen Meyer, capitalmarkets compliance counsel, retained Mr. Mendelson to conduct a review of PaineWebber'sCMO (collateralized mortgage obligations) residual business. Mendelson conducted a review ofthe residuals desk in order to perform his analysis of legal and compliance issues pertaining toresiduals. On September 30, 1996, Mendelson provided a report, entitled "Report RegardingPaineWebber Incorporated's CMO Residual Training and Sales Practices." As a result of furtherdiscussions with PaineWebber's in-house counsel, Mendelson issued a modified report onFebruary 17, 1997.

In the fourth quarter of 1997, after receiving the Mendelson reports, PaineWebber's legaldepartment asked PaineWebber's management audit and controls group, its internal auditfunction, to review the CMO residual trading and sales desk to evaluate the desk's procedures ascompared to the recommendations set forth in the Mendelson report. Terry Ann Goulard, groupmanager of the management audit and controls group, performed the review. On March 16,1998, Goulard furnished Gerard Citera, deputy general counsel of PaineWebber, with a draftmemorandum and accompanying work papers (Goulard memorandum) reflecting this review. The Goulard memorandum set forth Mr. Mendelson's legal advice regarding various aspects ofPaineWebber's residuals business and, in many instances, included verbatim quotations from theMendelson report. For each item of legal advice from Mendelson, the Goulard memorandumlisted observations of the desk's procedures relating to that advice.

During the discovery process, several disputes arose. PaineWebber repeatedly refused toturn over documents. One of the disputes, relevant to this appeal, occurred on October 17, 2001,during the deposition of one of PaineWebber's employees named Ramesh Singh - which the trialjudge took the extraordinary step of personally attending via video conference. Sterling's counselasked Singh what he knew about a 1996 investigation into the conduct of one of PaineWebber'straders in its mortgage-backed securities department. PaineWebber's counsel objected andrefused to allow the witness to answer on the ground that the questions called for informationprotected by the attorney-client privilege. PaineWebber's counsel requested an opportunity tobrief the privilege issue. Subsequently, however, despite insisting on briefing the propriety of itsprivilege objections, and despite Sterling's reminder to address them, PaineWebber failed to doso in its briefs submitted to the trial court. Instead, PaineWebber addressed only its refusal toproduce the Mendelson report and the Goulard document and ignored the deposition objections.

On January 14, 2002, after briefing, oral argument and an in camera inspection of thewithheld documents, the circuit court rejected PaineWebber's privilege argument and entered anorder denying PaineWebber's motion to affirm the attorney-client privilege. The court orderedPaineWebber to produce the withheld documents and further ordered that the witness reappearfor a deposition to answer those questions that had previously been objected to by PaineWebber. On January 22, 2002, the court entered an order holding PaineWebber in indirect civil contemptafter PaineWebber informed the court that, for the purpose of seeking review of this otherwiseunappealable discovery order, it would respectfully not comply. In this appeal, PaineWebberasserts that the trial court incorrectly determined that the documents and communications werenot protected by the attorney-client privilege. Specifically, PaineWebber claims that the courtshould have applied New York law when deciding whether the materials were privileged, andfurther contends that these materials are privileged under New York law.

STANDARD OF REVIEW

PaineWebber has not included the standard of review in its briefs. Generally, rulings ondiscovery matters are reviewed under an abuse of discretion standard. Maxwell v. Hobart Corp.,216 Ill. App. 3d 108, 110, 576 N.E.2d 268, 270 (1991). A trial court, however, lacks thediscretion to compel the disclosure of information that is privileged. In re Marriage of Daniels,240 Ill. App. 3d 314, 324, 607 N.E.2d 1255, 1261 (1992). Nonetheless, because privileges aredesigned to protect the interests that are outside the truth-seeking process, they are strictlyconstrued as an exception to the general duty to disclose. Daniels, 240 Ill. App. 3d at 324-25, 607N.E.2d at 1262. Generally, the applicability of a statutory evidentiary privilege, and anyexceptions thereto, is a matter of law subject to de novo review. Norskog v. Pfiel, 197 Ill. 2d 60,70-71, 755 N.E.2d 1, 9 (2001). Courts have applied a de novo standard of review in deciding theapplicability of the attorney-client privilege. Hayes v. Burlington Northern & Santa Fe Ry. Co.,323 Ill. App. 3d 474, 477, 752 N.E.2d 470, 473 (2001); Midwesco-Paschen Joint Venture for theViking Projects v. IMO Industries, Inc., 265 Ill. App. 3d 654, 660, 638 N.E.2d 322, 326 (1994). This court has also applied the de novo standard of review to the trial court's decision on achoice-of-law issue. Household International, Inc. v. Liberty Mutual Insurance Co., 321 Ill. App.3d 859, 749 N.E.2d 1, 9 (2001). Our review is de novo.

DOES A CONFLICT EXIST?

PaineWebber's primary issue raised on appeal is "whether Illinois choice-of-law rulesrequire that New York law be applied when determining whether the communications anddocuments at issue are protected by the attorney-client privilege." While the question implies thatthere is a conflict between Illinois law and New York law, PaineWebber has neglected toarticulate clearly whether there is a conflict.⁽²⁾ As Sterling correctly notes, it was PaineWebber'sresponsibility to explain why it mattered whether Illinois law rather than New York law wasapplied by explaining the germane features of New York law (with citation of authority) and howthat law conflicts with Illinois law. Before this court undertakes a choice-of-law analysis todetermine which state's law governs a claim, we must look to see whether a conflict exists. Thisis a threshold question because choice-of-law considerations are not implicated unless there is anactual conflict in the law of the two states. Household International, Inc. v. Liberty MutualInsurance Co., 321 Ill. App. 3d 859, 868, 749 N.E.2d 1, 8 (2001); Malatesta v. MitsubishiAircraft International, Inc., 275 Ill. App. 3d 370, 374, 655 N.E.2d 1093, 1096 (1995). A conflictexists when the application of one state's law over another will make a difference in the outcome. Malatesta v. Mitsubishi Aircraft International, Inc., 275 Ill. App. 3d at 374, 655 N.E.2d at 1096. If the law of the jurisdictions in question is essentially the same on the disputed issue, there is noneed to apply a choice-of-law analysis. Wreglesworth v. Arcto, Inc., 316 Ill. App. 3d 1023, 1028,738 N.E.2d 964, 969 (2000). Moreover, if there is no conflict, Illinois law applies as the law ofthe forum. Dearborn Insurance Co. v. International Surplus Lines Insurance Co., 308 Ill. App.3d 368, 373, 719 N.E.2d 1092, 1096 (1999). Thus, we must decide whether there is a conflict inthe laws of the two states regarding the attorney-client privilege.

In the typical choice-of-law case involving a privilege, the conflict is undeniable becauseone state has a privilege that is nonexistent in the other state. Here, it is undisputed that bothIllinois and New York recognize the attorney-client privilege generally, as well as specifically,for corporations. It is the potential difference in the scope of the corporate attorney-clientprivilege that arguably creates a conflict. Therefore, the comparison of the substantive law ofeach state is more involved than merely comparing the existence versus the nonexistence of aprivilege. Our analysis necessarily involves a consideration of how each jurisdiction has definedthe scope of the privilege and a determination of whether New York applies its corporateattorney-client privilege in the same way Illinois does. We must undertake this analysis in thecontext of the case before us in order to assess whether any difference in the scope of theprivilege would have an impact on the particular facts of this case, i.e., whether the differencewould be outcome determinative.

JURISDICTIONAL APPLICATIONS OF THE CORPORATE ATTORNEY-CLIENTPRIVILEGE

As discussed by our supreme court in Consolidation Coal Co. v. Bucyrus-Erie Co., 89 Ill.2d 103, 432 N.E.2d 250 (1982), various tests have been used by jurisdictions in deciding thequestion of who speaks for a corporation on a privileged basis. The control group test "focuseson the status of the employee within the corporate hierarchy." Consolidation Coal, 89 Ill. 2d at114, 432 N.E.2d at 255. Broader tests, including the so-called "subject matter" test, "focus onwhy an attorney was consulted rather than with whom he communicated." Consolidation Coal,89 Ill. 2d at 115, 432 N.E.2d at 255. The United States Supreme Court has rejected the controlgroup test as the governing test in federal courts. Consolidation Coal, 89 Ill. 2d at 112-13, 432N.E.2d at 254, citing Upjohn Co. v. United States, 449 U.S. 383, 66 L. Ed. 2d 584, 101 S. Ct.677 (1981).

ILLINOIS APPLIES CONTROL GROUP TEST

Despite the Upjohn decision, Illinois reaffirmed the control group test in ConsolidationCoal Co. v. Bucyrus-Erie Co., 89 Ill. 2d 103, 432 N.E.2d 250 (1982). As our supreme court held,not every communication made to a corporation's attorney by an employee of the corporation isprivileged but, rather, the corporation attorney-client privilege applies only to those employeeswithin the control group. Consolidation Coal Co. v. Bucyrus-Erie co., 89 Ill. 2d 103, 432 N.E.2d250 (1982). In addition to top management, the Consolidation Coal court also included withinthe control group any employee "whose advisory role to top management in a particular area issuch that a decision would not normally be made without his advice or opinion, and whoseopinion in fact forms the basis of any final decision by those with actual authority." Consolidation Coal, 89 Ill. 2d at 120, 432 N.E.2d at 258. Thus, Illinois law is clear that thecontrol group test is used to determine whether the corporate attorney-client privilege applies to acommunication. Before we discuss New York law, we shall first complete our examination ofIllinois law by discussing what the outcome would be if Illinois law is applied here indetermining whether the communications and documents at issue are protected by the attorney-client privilege.COMMUNICATIONS HERE ARE NOT PRIVILEGED UNDER ILLINOIS'S CONTROLGROUP TEST

In the present case, the controlling factor in the trial court's decision that the Goulardmemorandum was not protected by the attorney-client privilege was its conclusion that, underIllinois law, Goulard is not a member of the control group.⁽³⁾ In a jurisdiction that does not follow the control group test, however, this factor might not be dispositive. Thus, it is this very factorthat creates, in the first instance, the potential conflict between Illinois and New York law thatwould be outcome determinative.

DOES NEW YORK FOLLOW CONTROL GROUP TEST?

The next step in our analysis is to determine whether a conflict exists between Illinois lawand New York law. If New York follows the control group test, no conflict would exist betweenits law and that of Illinois. On the other hand, if New York does not follow the control group testor uses an alternative approach under which the communications might be privileged, then a trueconflict would exist. Whereas Illinois law is clear and explicit on this issue, New York law isnot so clear.

In Niesig v. Team I, 76 N.Y.2d 363, 558 N.E.2d 1030, 559 N.Y.S.2d 493 (1990), theCourt of Appeals cited Upjohn and, in dictum, stated: "[a]s the Supreme Court recognized, acorporation's attorney-client privilege includes communications with low- and mid-levelemployees." (Emphasis added.) Niesig, 76 N.Y.2d at 371, 558 N.E.2d at 1033-34, 559 N.Y.S.2dat 496-97. The Niesig court, however, noted the distinction between the scope of the ex partecontact rule at issue and the attorney-client privilege. Although the Niesig court did reject thecontrol group test, it was in the context of determining whether opposing counsel could have exparte contact with a corporate party's employees as it related to the interpretation of the ethicalrules governing attorney conduct. Thus, PaineWebber's assertion that Niesig stands for theproposition that "New York has rejected application of the control group test to corporatecommunications" is not completely accurate. One commentator has noted as follows:

"Among the fifty states, there are a number of competing tests for determining theapplicability of the attorney-client privilege in the corporate context, and the issue,despite Upjohn, is far from settled. Most states have not adopted Upjohn explicitly,although some, such as Colorado, have. Other states, such as Illinois, have rejectedUpjohn altogether and adopted the control group test to determine which employees'communications to corporate counsel are protected by the privilege. The majority ofstates, like New York, have yet to decide which standard, if either, will apply." (Emphasisadded.) B. Hamilton, Conflict, Disparity, and Indecision: The Unsettled CorporateAttorney-Client Privilege, 1997 Ann. Surv. Am. L. 629, 630 (1997).

The attorney-client privilege has been codified in section 4503 of New York's CivilPractice Law and Rules (N.Y.C.P.L.R.