Update on Inadvertent Disclosure and FRE Rule 502

Over the past couple of months there have been some interesting amendments to the Federal Rules of Evidence (FRE)  that affect how we will have to handle inadvertently disclosed  Electronically Stored Information (ESI) evidence.

Federal Rules of Evidence (FRE) Rule 502
First of all, due in part to the skyrocketing cost of producing electronically stored information in litigation on February 27, 2008, the Senate approved by unanimous consent without amendment S. 2450, a bill adding new Evidence Rule 502 to the Federal Rules of Evidence. See Sen. Rept. No. 110-264.  If, as expected, the bill is approved by the House of Representatives, the long-anticipated new Federal Rule of Evidence 502 should take effect on December 1, 2008. 

Under the proposed rule, the disclosure of the attorney client or work product protected material does not operate as a waiver if the disclosure was made inadvertently and the holder of the privilege took reasonable steps to prevent the disclosure including following the provisions of FRCP 26(b)(5)(B). Rule 502 would apply to all cases in federal court, and protects against waiver in both state and federal court, including cases in which state law provides the rule of decision, notwithstanding Rules of Evidence 501, 101 and 1101. The rule rejects the notion that inadvertent disclosure of documents during discovery automatically constitutes subject matter waiver. As for confidentiality agreements, agreements between the parties are valid as to the parties, and court orders are also valid as to third parties in both state and federal proceedings.

Background
According to a September 2, 2008 article titled "New Rule 502 to Protect Against Privilege Waiver", by Alvin F. Lindsay, a partner in the Miami office of Washington-based Hogan & Hartson, in 2006, House Judiciary Committee Chairman James Sensenbrenner, R-Wis. -- concerned about rising costs associated with ESI -- suggested that the Judicial Conference of the United States consider proposing to Congress a rule dealing with waiver of attorney-client privilege and work-product. Unlike rules of civil procedure, rules governing evidentiary privilege must be approved by an act of Congress pursuant to the Rules Enabling Act, 28 U.S.C. 2074(b).

The Advisory Committee on Evidence Rules accordingly prepared drafts that were revised after testimony from a select group of judges, lawyers and academics, and again revised after two days of public testimony and the consideration of more than 70 written submissions from groups including defense and plaintiffs' lawyers, corporate counsel, the American Bar Association and even prisoners. In late 2007, the Advisory Committee provided its final draft, concluding that the current law on waiver of privilege and work-product is largely responsible for the rising costs of discovery, especially discovery of ESI. The Standing Committee on Rules of Practice and Procedure and the Judicial Conference itself approved the text, which then was introduced as a bill by senators Arlen Specter, R-Pa., and Patrick Leahy, D-Vt.

In complex litigation, lawyers spend significant time in efforts to preserve work-product and the attorney-client privilege because they know that, under existing law in some jurisdictions, if one protected document is produced -- even inadvertently -- there is a risk that a court may find a subject-matter waiver. Subject-matter waiver means that attorney-client privileged communications and work-product are considered waived not only as to the disclosure at issue but as to all related material -- and not only in that instant case, but in all other cases.

Electronically Stored Information (ESI) Disclosure is the Chief  Problem
Lawyers producing paper or electronic data worry about subject-matter waivers. Case law is rife with examples of inadvertent disclosures of otherwise privileged material due to clerical, vendor or attorney error. But the real problem is ESI. Our still-adolescent paradigm of electronic data retention, versus the former paper regime, mushrooms the potential for inadvertent production.

Problems include the fact that normal viewing of native-format computer documents, for example, will not reveal hidden metadata about who wrote, edited or last opened some PowerPoint presentation. Embedded data also don't always just show up on the screens of reviewing attorneys. The now-ubiquitous word searches performed using certain native applications, like Outlook, will not identify responsive and potentially privileged attachments. Then there is the multiple-replication problem, endemic to ESI, that provides numerous opportunities for one iteration of a privileged document to slip through a privilege review. These problems are, of course, amplified by the sheer magnitude of sometimes gigabytes or terabytes of data that are increasingly necessary to assess in the wake of the now-famous Zubulake opinions and the subsequent 2006 civil procedure rule revisions governing the production of ESI.

As a result of ESI and the fear of waiving privilege, there are reports of increasingly expensive privilege reviews. Representatives from Verizon testified during an advisory committee public hearing that the company had spent $13.5 million on one privilege review relating to a U.S. Department of Justice antitrust merger investigation. "Think about that the next time you pay your phone bill," one quipped. See Testimony of Ann Kershaw, Jan. 29, 2007, Hearing of the Advisory Committee on Evidence Rules, at 89.

Rule 502 would try to address this cost-of-review issue in several ways. First, it would provide that, in cases of actual waiver, the waiver would not automatically be deemed a subject-matter waiver. Information other than that specifically waived would be produced only if it "ought in fairness" be considered together. The committee note explains that the "fairness" determination required for a broader waiver determination should be limited to situations in which a party intentionally puts information into litigation in a selective, misleading and unfair manner. Obviously, like many of the rule's provisions, this will be litigated extensively, but any cost savings here would seem to flow from damage control to limit the effect of disclosures determined to be actual waivers, rather than from any savings during the privilege review itself.

As to the genuinely menacing prospect of inadvertent disclosure, the proposed rule provides that if such disclosure is made at the federal level, no waiver will be found if the holder had taken reasonable steps to prevent the disclosure and employed reasonably prompt measures to retrieve the mistakenly disclosed information. This provision codifies a middle-ground standard that has been adopted by a plurality of courts requiring some form of balancing test. A minority of courts has applied either strict liability -- meaning that any inadvertent disclosure is a waiver, and perhaps a subject-matter waiver -- or intent-based standards that take hornbook knowing-and-intentional language to the opposite finding of no waiver for inadvertent disclosures.

Under proposed Rule 502, state courts in subsequent state proceedings will be required to honor Rule 502 determinations made at the federal level; if there is an earlier disclosure of privileged or protected information in a state proceeding, admissibility in a subsequent federal proceeding would be determined by the law that is most protective against waiver, even in situations in which potentially less-protective state law would otherwise provide a rule of decision. The exercise of federal pre-emption and supremacy over state law under these circumstances was evidently palatable to the group of state chief justices that commented on the proposed rule. These justices succeeded, however, in blocking other language that would have imposed a uniform middle-ground balancing standard on all inadvertent-disclosure cases, including those made in, and applicable solely to, state proceedings. The state judiciary evidently thought this congressional regulation of traditional state law would be anathema to principles of federalism, if not to the U.S. Constitution.

Importantly, under the proposed new rule, federal courts would be permitted to enter confidentiality orders providing that disclosure of privileged or protected material, for example, under quick-peek and clawback agreements, does not constitute a waiver as to other parties in other state or federal proceedings. In fact, early language prohibiting court confidentiality orders without agreement of the parties was deleted. Presumably, therefore, such orders will be entered on disputed motions or perhaps even courts' own accord.

Will the rule in its final version achieve its stated purpose of reducing the cost of privilege review? Even a middle-ground balancing as to inadvertent disclosure can provide seemingly harsh results. As recently as May 29, a District of Delaware court applied a common law balancing test, but found waiver for the inadvertent production of 165 privileged documents, out of tens of thousands reviewed, because the party failed to satisfy its burden to establish that its search-and-review methodology was "reasonable." Victor Stanley Inc. v. Creative Pipe Inc., 2008 WL 2221841, at *1-*7 (D. Md.).

Nor was the Victor Stanley court impressed with the producing party's "prompt measures to retrieve the mistakenly disclosed data," as it chided the party for the "delay" of a "one-week period between production by the Defendants and the time of the discovery by the Plaintiff of the disclosures -- a period during which the Defendants failed to discover the disclosure." Id. at *8.

One week would actually seem very prompt when, as noted by the American Bar Association in its Feb. 15, 2007, submission to the rules committee, it may be months -- even years -- before errors are discovered, and determining when an error "should have been" discovered is inherently subjective. Thus if such decisions were to continue under the Rule 502's proposed balancing test, the rule would do nothing to change current efforts to prevent inadvertent disclosure by extensive attorney review.

The committee note to proposed Rule 502 does acknowledge, however, that while the rule "does not require the producing party to engage in a post-production review to determine whether any protected communication or information has been produced by mistake," it does require follow-up on obvious indications of potential communication of protected material. Moreover, regarding whether "reasonable steps" were taken to prevent a disclosure, the committee note suggests that using advanced analytical software applications and linguistic tools in screening for privilege may suffice, i.e. with no page-by-page attorney review. Further, implementation of an efficient system of records management may also be relevant to a reasonableness determination.

Whether the rule succeeds in saving money, therefore, will depend on whether courts are willing, first, to conduct balancing tests for inadvertent waiver in a manner that understands the difficulties and costs of reviewing substantial ESI; and, second, to freely enter anti-waiver orders when asked, perhaps even sua sponte.

Notably, the most controversial potential provision of Rule 502, governing selective waiver, ultimately was discarded. "Selective waivers" between government agencies and parties being investigated are attempts to agree that the party under investigation will produce privileged material to the government, while still preserving no-waiver status as to nonparties. The effectiveness of selective waivers, however, has largely been rejected by the courts. See, e.g., In re Qwest Comm. Int'l, 450 F.3d 1179 (10th Cir. 2006).

Although the U.S. Securities and Exchange Commission clearly supported inclusion of a provision codifying the legality of selective waiver in the proposed rule, most others strongly opposed the provision. Several times during the public hearings, business representatives indicated that, although they might have supported the provision five years ago, in the current climate selective waiver would signal a tacit approval of regulatory-agency belief that waiver is the touchstone of the level of cooperation necessary to secure better treatment by the government.

Corporate counsel and business argued that selective waiver would further chill what might be an already cool reliance on the free dialogue between corporate counsel and corporate representatives as contemplated by Upjohn v. U.S., 449 U.S. 383 (1981). Executives don't want to worry that advice solicited regarding a potential compliance program will later become a blueprint of evidence about the company's insufficiencies if failures occur. As a representative from the Association of Corporate Counsel testified, selective waiver would put "an inherent endorsement upon the culture of waiver." See Testimony of Susan Hackett, Jan. 29, 2007, Hearing of the Advisory Committee on Evidence Rules, at 218. These arguments obviously succeeded.

Whether those parties that staunchly opposed the erosion of the attorney-client privilege through selective waivers, but otherwise hailed Rule 502, ultimately will allow even more of their privileged material to be viewed by outsiders under the protection of clawback and quick-peek agreements, however, remains an interesting question.

posted by Charles Skamser @ 9:51 AM