Law Firm DQ’d for Use of Inadvertently Disclosed Privileged Email

In a 2–1 decision, a California appellate court upheld a trial court’s disqualification of a law firm after one of its lawyers decided not to return an adversary’s privileged email and to use it offensively before obtaining a court order allowing him to do so.  The court issued the ruling even though the lawyer received the privileged email from his client—not opposing counsel—and it facially appeared that the opposing party had waived the privilege by forwarding to a third-party.  McDermott Will & Emery LLP v. Superior Court, 217 Cal. Rptr. 3d 47 (Ct. App. 2017).  You may read this lengthy—but instructive—opinion here.

Client Sends Privileged Email to Third-Party

The facts are a bit convoluted, so I’ll try to simplify.  Dick Hausman, the 80 year-old son-in-law of Allergan Pharmaceuticals’ founder, was the president of a holding company that managed the family’s investment portfolio.  The McDermott firm represented the holding company.  Mr. Hausman’s son, Rick Hausman, later became president and “a struggle for control” of the holding company ensued.  Dick Hausman retained lawyer Mark Blaskey to represent him in these disagreements. More…

18 Questions Doom Counsel’s Inadvertent Disclosure Argument and Waive Privilege

We all know that lawyers must “promptly take steps to rectify” an inadvertent disclosure of privileged information or risk privilege waiver.  FRE 502.  And while the term “promptly” may have different meanings in different contexts, a federal court has ruled that permitting a lawyer to ask 18 deposition questions about an inadvprivilege boxertently disclosed, privileged email before lodging an objection was not prompt enough.  Waste Connections of N.C., Inc. v. K.R. Drenth Trucking, Inc., 2015
WL 4647823 (W.D.N.C. Aug. 5, 2015).  You may read the opinion here.

Background

In this breach-of-contract case, the corporate plaintiff produced over 11,000 emails and documents, including emails between the company’s Division Vice President and two in-house lawyers.  One of these emails contained a statement indicating the vice president’s interpretation of a pertinent contract provision.

At the vice president’s deposition, defense counsel showed him one of these emails and asked 18 questions about it without objection from plaintiff’s counsel.  The parties took a 49-minute lunch break and, upon resumption of the deposition, plaintiff’s counsel informed defense counsel that it appeared his client inadvertently produced privileged documents.

Defense counsel then filed a motion asking the court to deem the privileged waived as to the email used at the deposition as well as all inadvertently disclosed privileged emails.

Consent Protective Order

The parties agreed that a Consent Protective Order, available for review here, governed the vice president’s deposition and related discovery.  While the Order provides guidance regarding the identification and return of inadvertently produced documents, it was silent regarding the precautionary measures that the parties must take to avoid inadvertently producing privileged information.  The court took note of the absence of any governing provisions.

Adequate Measures

In the absence of guidance from the Consent Protective Order, the court defaulted to FRE 502 to determine whether the corporate plaintiff took adequate precautionary measures to prevent inadvertent disclosures.  The plaintiff argued that objections to privileged materials do not have to be immediate, but the court determined that allowing 18 questions before asserting an objection was neither immediate nor prompt.

The Court is sympathetic with counsel, but does not believe that he should be afforded greater protection than an attorney at trial who does not object to evidence at the critical point when tendered.

The court found the privileged waived and ordered production.

PoP Analysis

Two lessons arise from the Waste Connections opinion.  First, if lawyers agree on a protective order that governs inadvertent disclosures, then they should consider including an agreement on precautionary measures that each party must take to avoid inadvertent production of privileged information.  Without identified and agreed-upon measures, courts will default to FRE 502 (or state equivalent) to determine the adequacy of procedures.  A word of caution: if a party agrees to certain pre-production measures, then he must adhere to them or risk indefensible waiver.

Second, while allowing your opponent lawyer 18 questions on a putatively privileged document may not seem overly permissive, particularly when the lawyer was unsure how defense counsel obtained the documents and felt secure in the Consent Protective Order, the court’s ruling instructs lawyers to object immediately, even with a protective order, and prevent further questioning until all of the facts are known.

Outside Counsel Forwards Privileged Email to Adversary—Court Finds No Waiver

The USDC SDNY issued an instructive roadmap in ruling that an outside lawyer’s forwarding a privileged email to adversary counsel did not constitute privilege waiver. Andmistake concepts, with oops message on keyboard. the ruling avoided a potentially larger disaster—disclosure of other privileged documents under the subject-matter waiver doctrine. Rank Group Ltd. v. Alcoa, Inc., 2014 WL 1883505 (SDNY May 9, 2014). You may read the opinion here.

Background

Rank Group purchased Alcoa’s Chilean-based consumer packaging business, and later sued Alcoa seeking indemnification for a $10M tax liability from the Chilean government. During the transaction process, one of Rank’s outside lawyers forwarded a privileged email to Alcoa’s outside lawyer regarding the Chilean tax authority’s treatment of a loan repayment.

In the post-transaction litigation, Alcoa claimed that, by voluntarily sending the email to Alcoa counsel, Rank’s lawyer waived the privilege, and it sought production of all communications between Rank and its lawyers regarding the loan repayment and associated tax consequences.

No Authority to Waive

Rank sprang to damage-control action, and argued that its outside lawyer had no authority to unilaterally waive the company’s privilege. In support, Rank submitted affidavits from the outside lawyer’s partner and the company’s regional financial controller. Both Rank representatives stated that Rank never authorized its outside counsel to share the privileged email with Alcoa and that it considered confidential all communications between Rank and its outside lawyer.

Ruling

The Court, applying New York law, stated that the party asserting the corporate attorney-client privilege has the burden of demonstrating the privilege’s application, including that the communication (1) was between client and its counsel, (2) was and remained confidential, and (3) was made for purposes of rendering legal advice.

The burden also requires the party to show a lack of privilege waiver. The non-waiver burden means that the party asserting the privilege

 must show that [its] disclosure was unauthorized and therefore did not result in waiver of the attorney-client privilege.

The Court held that Rank met its non-waiver burden. Both its outside counsel and internal controller verified that its lawyer’s forwarding the privilege email was “unauthorized and inadvertent.” The Court found that these self-serving affirmations “are enough to carry the burden of showing that the disclosure was unauthorized.” And because of this non-waiver finding, the Court did not invoke the subject-matter waiver doctrine.

PoP Analysis

Rank and its counsel avoided a potentially serious consequence arising from the subject-matter waiver doctrine. When a party voluntarily discloses a privileged communication, the subject-matter waiver doctrine extends this waiver to all other communications pertaining to the same subject matter. The doctrine’s purpose is to prevent a party from selectively disclosing favorable information while simultaneously withholding unfavorable information under the cloak of privilege.

The Court’s decision provides a roadmap that companies should follow when someone inadvertently discloses its privileged communications to third parties. The corporate attorney-client privilege belongs to the company, not its executives or its outside lawyers, and only those authorized to waive the privilege may do so. Here, Rank proved—through two affidavits—that its outside lawyer had no authority to waive the privilege. Lawyers faced with an inadvertent privilege disclosure should follow Rank’s lead.