Selling Computers to 3rd Party Equals Waiver of Attorney-Client Privilege

In a decision that makes you think “well, of course,” the U.S. District Court for the Eastern District of Tennessee held that selling business computers to a third party constitutes a waiver of any privileged material that may be housed on those computers.

In Stooksbury v. Ross, 2012 WL 3779113 (E.D. Tenn. Aug. 31, 2012), the Court was forced to manage post judgment discovery.   At some point during the case, the defendant sold its business computers to a third party.  The plaintiff wanted to image these computers, but the defendant argued that they contained information protected by the attorney-client privilege. Noting the well-established rule that the attorney-client privilege “is generally considered waived if a client voluntarily reveals otherwise protected communications to third parties, the Court ruled that the defendant’s “decision to sell a vessel containing privileged communications with counsel to a third party must certainly be interpreted as voluntarily revealing those communications to the third party.”  And finding the privilege “unequivocally waived,” the Court ordered full imaging of the defendant’s computers.

PoP Analysis. Duh! Of course this conduct constitutes waiver.  Apparently the defendant here believed that it retained some type of confidentiality interest in the privileged information housed on computers that it voluntarily sold.  The more appropriate action would have been to image the computer before selling–so to avoid any spoliation arguments–and wipe the outgoing computers clean of all information.  The defendant then could have used the image to identify and protect any information that it deemed privileged.  The Court’s decision in Stooksbury, while obvious, serves as reminder that businesses oftentimes take the attorney-client privilege for granted.  In reality, it takes disciplined diligence to establish and avoid waiver of the privilege.

Must Read IADC Article–Subject Matter Waiver and the Attorney-Client Privilege 3

The subject matter waiver doctrine associated with evidentiary privileges, most notably the attorney-client privilege, is relatively underdeveloped yet has frightening consequences.  And while some courts have considered the subject matter waiver doctrine in the context of disclosures during civil litigation, even fewer have addressed waiver where disclosures occurred outside the litigation context.  For example, it is common for clients and lawyers to disclose some privileged information during negotiations in business transactions; and if

Illinois Supreme Court

subsequent litigation ensues over the transaction the question becomes whether those limited pre-litigation disclosures result in waiver of the privilege with respect to all documents concerning the same subject matter.

In their article, The Perils of Oversharing: Can the Attorney-Client Privilege be Broadly Waived by Partially Disclosing Attorney Communications During Negotiations?, 79 Def. Counsel J. 265 (July 2012), lawyers Andrew Kopon, Jr. of Kopon Airdo, LLC in Chicago, and Mary-Christine Sungaila of Snell & Wilmer in Orange County, provide a comprehensive analysis of the scope of the subject matter waiver doctrine.  The article discusses how courts have handled subject matter waiver in settings outside the litigation context, such as settlement negotiations, public or media disclosures, grand jury investigations, patent disputes, SEC filings, and general business transactions. And, using the pending Illinois Supreme Court case of Center Partners, Ltd. v. Growth Head GP, LLC, (the intermediate appellate court’s decision published at 957 N.E.2d 496 (Ill. App. Ct. 2011)), the article highlights how the Court’s upcoming decision may shape the subject matter waiver discussion in this underdeveloped yet important area.

The article may be found here.  My thanks to Mr. Kopon and Ms. Sungaila, and the well-respected International Association of Defense Counsel (IADC), for permitting access to the article through this post.

Inadvertent Disclosure of 347 In-House Counsel Emails Waives Attorney-Client Privilege

Another federal court reminds companies and their in-house counsel that (1) the fact that in-house lawyers send or receive internal emails does not automatically render the emails privileged; and (2) the failure to take steps to prevent inadvertent disclosure will result in privilege waiver.

The federal court for the Southern District of Ohio, in Inhalation Plastics, Inc. v. Medex-Cardio-Pulmonary, Inc., 2012 WL 3731483 (S.D. Ohio Aug. 28, 2012), ruled that the attorney-client privilege covering 347 emails involving 3 in-house lawyers was waived through an inadvertent disclosure.  Medex Cardio-Pulmonary, Inc. produced 7500 documents that contained 347 emails either sent or received by in-house counsel.  When the plaintiff attempted to depose two of these lawyers based on the production, Medex asserted the attorney-client privilege and claimed the emails were inadvertently produced.

The court first questioned whether Medex met its burden of proving the emails were privileged, noting that “[t]he mere fact that [the in-house lawyer] was the sender or recipient of the documents at issue does not render them privileged.” The Court found that the burden was not met because Medex did not identify which of the 347 emails were privileged, did not provide a privilege log, and offered little factual evidence that the communications pertained to legal advice.

But the Court’s in camera review revealed that some emails were, in fact, privileged and evaluated whether the inadvertent disclosure of these documents constituted waiver. The Court considered the following 5 factors in its analysis: (1) the reasonableness of the precautions taken in view of the extent of document production; (2) the number of inadvertent disclosures; (3) the magnitude of the disclosure; (4) any measures taken to mitigate the damage of the disclosures; and (5) the overriding interests of justice.

The Court ruled that reasonable precautions were not proven because Medex did not specify who reviewed the documents pre-production or the steps taken to review for privilege, and did not provide a privilege log. The disclosure of 347 of 7500 privileged emails was significant and, although Medex acted promptly upon learning of the disclosure, it failed to comply with Fed. R. Civ. P. 26(b)(5)(B) to identify the privileged documents with specificity and explain why they are protected from disclosure.  And for these reasons, the Court found that the attorney-client privilege had been waived.

PoP Analysis.  The Inhalation Plastics decision reminds corporate and outside counsel that producing a significant number of documents requires diligent efforts on the front-end and back-end of the production.  In-house and outside counsel must not only conduct a pre-production privilege review, but must be able to specify the measures taken to prevent inadvertent disclosure. And while inadvertent disclosures may nevertheless occur in large productions, counsel must act swiftly to notify the other party and be disciplined in providing a detailed privilege log and detailing, in writing, the basis for the privilege claim.