Avoiding Waiver of Privileged Materials Based On Inadvertent Disclosure and Clawback Order

Inadvertent disclosure of 184 documents out of over 63,000 documents produced in discovery in paper and electronic format did not result in waiver based on reasonable steps taken to remedy the error and the terms of a “clawback” order, in Board of Trustees, Sheet Metal Workers' National Pension Fund v. Palladium Equity Partners, LLC, 722 F.Supp.2d 845 (EDMI July 14, 2010) (No. 08-12586)

FRE 502(b) addresses the circumstances of inadvertent disclosure of materials covered by the attorney-client privilege. Under the rule, inadvertent disclosure does not result in waiver when the holder of the privilege "took reasonable steps to prevent disclosure" and "promptly took reasonable steps to rectify the error." The courts have considered when the circumstances demonstrate disclosure was inadvertent to invoke the protection of the rule. Further, FRE 502(d) permits a protective order (or “clawback” order) which may provide that disclosure of privileged communications does not result in waiver regardless of whether “reasonable steps” were taken under Rule 502(b). These issues were considered in a case in which two multi-employer pension plans sued three private equity investment partnerships and a financial advisor over a dispute concerning withdrawal liability of two companies under the Employee Retirement Income Security Act of 1974, as amended.

In the case, the defendants claimed they inadvertently disclosed 184 documents provided in discovery which included “more than 63,000 documents consisting of over 4.3 million pages in both paper and electronic format.” Palladium, 722 F.Supp.2d at 848. As the court described, the claimed privileged documents included (a) “attorney drafts of memoranda on attorney letterhead,” (b) “attorney memoranda marked as ‘Privileged and Confidential’," (c) “case printouts marked with what appear to be attorney handwritten notes,” (d) “draft agreements marked as attorney drafts,” (e) “hundreds of pages of emails that include between counsel,” “communications between counsel and Palladium personnel,” “communications between counsel, Palladium personnel, and Haden [company] personnel,” and (f) “several documents that appear to be privileged that were produced multiple times in multiple formats.” Palladium, 722 F.Supp.2d at 848. A stipulated protective order had been entered in the case which provided:

If a party has inadvertently produced to the other party information subject to [a] claim of privilege or immunity, the other party upon request shall promptly return the information for which a claim of inadvertent production is made. The party returning such information may then move the Court for an order compelling production of such information, but said party shall not assert that inadvertent disclosure constitutes a waiver.

Palladium, 722 F.Supp.2d at 849.

While the plaintiffs claimed the defendants delayed in asserting inadvertent disclosure and failed to comply with Fed. R. Civ. P. 26(b)(5)(B) requiring “a party notified of a privilege claim to return to the sender, sequester, or destroy the specified information and any copies of it and not use this information until the claim of privilege is resolved,” the Court ultimately agreed that the defendants met their burden to show inadvertent disclosure. Palladium, 722 F.Supp.2d at 849-50 (Fox v. Massey-Ferguson, Inc., 172 F.R.D. 653, 671 (E.D.Mich. 1995) ("When a producing party claims inadvertent disclosure, it has the burden of proving that the disclosure was truly inadvertent.") (citing Golden Valley Microwave Foods, Inc. v. Weaver Popcorn Co., 132 F.R.D. 204, 207 (N.D.Ind. 1990))). The Court noted that there was no binding precedent on the applicable factors to apply under FRE 502.

The court concluded the claimed materials were protected for two reasons. First, the court agreed that the stipulated protective order satisfied FRE 502(d). Second, reasonable steps were taken to prevent disclosure:

According to the defendants, their law firm reviewed 63,025 documents totaling an estimated 4.7 million pages; produced 56,846 documents totaling some 4.3 million pages; and prepared privilege logs for 1,306 documents. The defendants used a team of sixteen associates (who were supervised by two senior associates) to conduct review, and the team spent about 2,500 hours reviewing 8,700 hard copy documents and more than 59,000 electronic documents, including emails. They say review was complicated by the fact that the documents contained correspondences with at least eleven law firms representing defendants and their affiliates on a broad range of matters.

The Court also is satisfied that the defendants took prompt steps to recall the documents once they realized that they had been disclosed. In an affidavit, attorney Scott A. Gold avers that once the defendants discovered the disclosure of the May 13, 2005 email "late in the day on Friday, June 19, 2009," they notified the plaintiffs on Monday, June 22, 2009 of the inadvertent production [and provided specific steps that were taken]….

The Court finds that the defendants' disclosure of the subject documents was inadvertent, they took reasonable measures to ensure against unintended disclosure, and they promptly sought to rectify the disclosure when they learned about it. Therefore, the Court finds that the defendants did not waive the privilege.

Palladium, 722 F.Supp.2d at 8451-52.

The Palladium case highlights two avenues to avoid waiver of the attorney-client privilege. First, a party can meet its burden to satisfy the requirements of FRE 502(b). Second, the party may invoke the protection of a “clawback” order consistent with FRE 502(d). Both avenues were satisfied in the case.

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