The Secret’s out – if you want to lower your ediscovery and litigation costs – seek F.R.E. 502 non-waiver orders

March 30th, 2009 | By Steve Puiszis

Heriot v. Byrne, 2009 WL 742769 (N.D. Ill. March 20, 2009)

Heriot addresses the inadvertent production of privileged materials by an ediscovery vendor. Because the law firm that retained the vendor had taken reasonable steps to review the documents prior to their production, and took prompt steps to rectify the inadvertant disclosure once they learned of it, the court ruled the disclosure was inadvertent and did not result in a waiver attorney-client privilege under Fed. R. Evid. 502(b). The decision also serves as a stark reminder of the care which must be taken in selecting an ediscovery vendor, and the American Bar Association Ethics Opinion addressing a lawyer’s obligations when outsourcing legal and nonlegal services.

However, after reading the court’s analysis of the parties’ Rule 502(b) arguments, I was struck by how unnecessary it all was. I tried to imagine the number of hours the district court spent reviewing the documents which had been submitted for an in camera inspection, reviewing the parties’ briefs, and then drafting its opinion resolving the Rule 502(b) issues that were presented. I thought of the hours, and literally the thousands of dollars that were wasted litigating the inadvertent waiver issue. Much of that time, money and effort could have been avoided had the parties simply entered into a non-waiver order under Fed. R. Evid. 502(d).

So, before stepping off the soap box and getting back to Heriot, let us provide a practical suggestion to lower your ediscovery and litigation costs – enter into non-waiver orders under Fed. R. Evid. 502(d). The Note to Rule 502(d) explains that once a non-waiver order is entered in a federal proceeding, “its terms are enforceable against non-parties in any federal or state proceeding.” That Note further explains the agreement of the parties is not a condition to the entry of, or the enforceability of a non-waiver order. As indicated in one of our prior posts, Rule 502 non-waiver orders are the gold standard to follow when seeking protection against the inadvertent waiver of privilege.

The Heriot lawsuit involves competing claims over the ownership of the copyright to a television documentary called “The Secret.” A web site for The Secret found at http://www.thesecret.tv claims that it reveals:

[T]he most powerful law in the universe. The knowledge of this law has run like a golden thread through the lives and the teachings of all the prophets, seers, sages and saviors in the world’s history, and through the lives of all truly great men and women.”

The web site further claims: “By knowledge of this law, you can change every aspect of your life.” It will unlock “the secret to prosperity, health, relationships and happiness.” I know what you are thinking … if I had only learned the secret before I played last week’s Lotto.

The plaintiffs were Drew Heriot, an Australian director of The Secret, and Drew Pictures, an Australian production company, which employed him to direct the documentary. The defendants were various individuals who were involved in The Secret’s development, who counterclaimed seeking a declaratory judgment that they were the sole owners of the copyright.

The plaintiffs retained an ediscovery vendor to provide electronic scanning, the addition of optical character recognition (OCR) to their documents, and other discovery related services. The vendor created a database of the documents provided by the plaintiffs. Plaintiffs employed paralegals and other non-lawyers to conduct a preliminary review of documents, and assign them general pretrial discovery codes, including one code addressing Mr. Heriot’s immigration status. Additionally, documents would be marked either “Confidential” or “Highly Confidential” pursuant to a stipulated protective order. After the documents were reviewed and coded, they were copied and loaded by the vendor into a “production database.”

Defendants sought in discovery all documents relating to Mr. Heriot’s visa applications. Unfortunately, a number of the documents produced by the vendor to the defendants were obtained from Mr. Heriot’s immigration lawyer. Less than one month after their production, plaintiffs’ counsel learned of their inadvertent disclosure. Counsel immediately sent a letter to the defendants explaining that privileged documents had been inadvertently produced, and requested their destruction. Defendants directed their ediscovery vendor to seal off all access to the documents identified in that letter, and destroyed all but one set of the documents which they submitted to the court for an in camera inspection, arguing that plaintiffs’ production had waived any claim of privilege.

Application of Rule 502(b)

The court initially concluded that FRE 502 was applicable, even though the lawsuit was filed before its effective date. The court noted that in Judson Atkinson Candies, Inc. v. Latini-Hohberger Dhimantec, 529 F.3d 371, 388 (7th Cir. 2008), the Seventh Circuit adopted a balancing approach to claims involving the inadvertent waiver of privilege which among other things considers: “(1) the reasonableness of the precautions taken to prevent disclosure; (2) the time taken to rectify the error; (3) the scope of the discovery; (4) the extent of the disclosure; and (5) the overriding issue of fairness.” These same factors are mentioned in the Explanatory Note to Rule 502(b). The court in Heriot concluded that the factors outlined in Judson “have been folded into the entire FRE 502(b) inquiry.” The court also observed the Note to Rule 502(b) explains that while the rule is flexible enough to accommodate these factors, it did not explicitly codify them because they are considered “a set of non-determinative guidelines that vary from case to case.”

Thus, the court in Heriot fashioned the following test in applying FRE 502(b). First, a court should determine whether the disclosed material is privileged. If the material is not privileged for any reason, the inquiry ends. If a court finds that the material is privileged, it should then address Rule 502(b)’s requirements. If the court concludes that the disclosing party satisfied all of FRE 502(b)’s elements, privilege has not been waived. If, however, the disclosing party fails to satisfy any of Rule 502(b)’s three requirements, the privilege is deemed to have been waived. The court Heriot concluded that a court is free is to consider any or all of Judson’s five factors, provided they are relevant in evaluating whether any of Rule 502(b)’s elements have been satisfied.

Information Required to Determine Whether Documents are Privileged

Defendants initially challenged the plaintiff’s claim of privilege by arguing that plaintiffs had merely provided a conclusory assertion that the documents constituted privileged communications between Mr. Heriot, and his immigration lawyer. The court observed that while that may be true; asking for more specificity could force a party to disclose privileged information which is not required under the rules. Rule 26(b)(5)(A)(ii) expressly contemplates a description of the protected documents or communications “in a manner that, without revealing information itself privileged or protected, will enable the other parties to assess the claim.”

The Crime-Fraud Exception Conundrum

Defendants also raised the crime-fraud exception, which places communications made in furtherance of a crime or fraud outside the realm of the attorney-client privilege. The court in Heriot recognized that following United States v. Zolin, 491 U.S. 554, 573 (1989), an in camera inspection is only warranted when a party provides an adequate factual basis to support a good faith belief by a reasonable person that an in camera review of the materials may reveal evidence establishing the applicability of the crime-fraud exception.

The purpose of the Zolin rule is to prevent district courts from having to engage in lengthy document reviews. Heriot, however, noted a conundrum raised by Zolin’s framework. In most instances, a district court will have already conducted a document-by-document review to determine whether they are privileged, rendering the purpose of the rule illusory.

The court in Heriot found that none of the defendants’ arguments established a sufficient basis to support a good faith belief that an in camera review would reveal evidence establishing the applicability of the crime-fraud exception. Moreover, based upon its actual review of the documents for privilege, the court ruled that none of the communications between Mr. Heriot, and his lawyer demonstrated that he was attempting to perpetrate a fraud by soliciting fake deals to convince the government to issue him a visa for entry into the United States.

Inadvertence Under FRE 502(b)

The court initially addressed the defendants’ argument that the production of a significant number of privileged documents established the production was not inadvertent. Depending upon whether the number of pages or documents involved in the production was used as the benchmark, the amount of material that was inadvertently produced ranged between 5% and 13% of the entire production. The court in Heriot observed that under either calculation, the extent of the disclosure was broad, and could not be characterized as insignificant.

However, in the court’s view, the producing party’s actions after discovering the inadvertent disclosure carries more weight in determining whether its production was in fact inadvertent. The court noted that within 24 hours of learning about the inadvertent production, plaintiffs sent a letter to the defendants identifying the privileged documents, and requesting they be destroyed. Moreover, the fact that the plaintiffs used reasonable procedures to review the documents before they were sent to the ediscovery vendor also weighed in favor of a finding of inadvertence. The fact that “paralegals and other non-lawyers” were employed to screen the documents, rather than lawyers, was not a determinative factor because no problems had occurred in the initial document review. The error occurred after the documents were provided to the ediscovery vendor.

Prior to production, counsel for the defendants inquired if plaintiffs were intending to withhold any privileged documents, and plaintiffs’ counsel indicated they were not. Defendants argued that had a reasonable inquiry been made before responding, plaintiffs’ counsel would have discovered the inadvertent production. Rejecting the argument that counsel’s statement established plaintiffs knowingly disclosed privileged documents, the court in Heriot observed that Rule 502(b) “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.” Accordingly, plaintiffs had no duty to make a second review of their documents after they were provided to their ediscovery vendor. In the court’s view, requiring such a second review would chill the use of ediscovery vendors, and introduce a level of costs that the rule was intended to avoid.

Finally, the court noted that there were no obvious warning signs or indications which should have put plaintiffs’ counsel on notice that protected communications or information had been inadvertently produced.

Thus, in evaluating whether the production had been inadvertent, the fact that a significant number of privileged documents had been produced was outweighed by the other factors considered by the court. Therefore, the court concluded that the production had been inadvertent, and the first element of Rule 502(b) was met.

Reasonable Steps to Prevent the Inadvertent Disclosure

The second element of FRE 502(b) requires that reasonable steps be taken in an attempt to prevent an inadvertent disclosure from occurring. The court in Heriot noted that Laethem Equip. Co. v. Deere & Co., 2008 WL 4997932 (E.D. Mich. Nov. 21, 2008), held that an inspection procedure after a discovery vendor had copied documents, but before they were disclosed to opposing party, was a reasonable approach to prevent the inadvertent production of privileged documents. The court in Heriot concluded that whether the review procedure occurs before or after the documents are provided to an ediscovery vendor should not change the outcome. So long as the review procedures in place prior to turning documents over to a vendor are reasonable, the second element of Rule 502(b) was met.

The court also observed that the Note to Rule 502(b) explains that a party’s use of “advanced analytical software applications and linguistic tools in screening for privilege,” and the “implementation of an efficient system of records management before litigation” are relevant factors that can be considered in determining whether reasonable steps were taken to prevent an inadvertent disclosure. However, the plaintiffs in Heriot did not use any analytical software tools to screen for privilege, and no information was presented to the court concerning the records management system that was in place prior to the litigation, so the court had no occasion to address those factors in its opinion.

Steps Taken to Rectify the Inadvertent Disclosure

The court in Heriot had little difficulty in concluding that once plaintiffs’ counsel learned of the inadvertent disclosure, prompt steps were taken to rectify the situation. Defendants argued that it took the plaintiffs approximately a month to learn of its inadvertent disclosure which suggested that reasonably prompt steps were not taken. The court rejected that suggestion, and observed “how the disclosing party discovers and rectifies the disclosure is more important than when after the inadvertent disclosure the discovery occurs.” In Heriot, plaintiffs’ counsel learned of the inadvertent disclosure while preparing for a deposition, and immediately wrote to opposing counsel. Consequently, the third element of Rule 502(b) was met.

ABA Ethics Opinion 08-451

Last August, the American Bar Association promulgated a formal Ethics Opinion addressing a lawyer’s obligations when outsourcing legal and non-legal services. [Download PDF of that opinion.] It should be read by any lawyer who is involved in ediscovery. Please recognize that the ABA’s Ethics Opinion is based on the Model Rules of Professional Conduct, and not all states have updated their respective Rules of Professional Conduct to conform to the Model Rules. The Rules of Professional Conduct adopted in each individual state are controlling. However, the ABA’s Ethics Opinion provides a respected view of these issues which simply shouldn’t be ignored.

In that Ethics Opinion, the ABA readily concluded there was nothing unethical about a lawyer outsourcing legal or non-legal services, “provided the outsourcing lawyer renders legal services to the client with the ‘legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation,’ as required by Rule 1.1.” Rules 5.1 and 5.3(b) impose supervisory responsibilities on the outsourcing lawyer. Rule 5.3(b) specifically requires that when outsourcing services to a nonlawyer, “reasonable efforts” be made to ensure the nonlawyer’s conduct “is compatible with the professional obligations of the lawyer.” Accordingly, the challenge for an outsourcing lawyer is “to ensure that tasks are delegated to individuals who are competent to perform them, and to oversee the execution of the project adequately and appropriately.”

That Ethics Opinion goes on to note “[a]t a minimum, a lawyer outsourcing services . . . should consider conducting reference checks and investigating the background of the lawyer or nonlawyer providing the services as well as any nonlawyer intermediary involved.” The opinion further observes that when the relationship with “the individuals performing the services is attenuated, as in a typical outsourcing relationship, no information provided by Rule 1.6 may be revealed without the client’s consent.” The Opinion explains that the implied authorization of Rule 1.6 which permits the sharing of “confidential information within a firm does not extend to outside entities or to individuals over whom the firm lacks supervision and control.”

Particularly relevant to Heriot is one aspect of the Ethics Opinion which “requires the lawyer to recognize and minimize the risk that any outside service provider may inadvertently – or perhaps even advertently – reveal client confidential information to adverse parties or to others who are not entitled to access. Written confidentiality agreements are, therefore, strongly advisable in outsourcing relationships.” Additionally, the Ethics Opinion strongly suggests that the outsourcing lawyer should verify that its service provider “does not also do work for the adversaries of their clients on the same or substantially related matters,” in which case the lawyer should choose another vendor.

Many of these statements reflect common-sense practices. For example, it is always wise to discuss with a client the use and selection of an ediscovery vendor, even when privileged documents will not be handled or reviewed by the vendor. A good resource to consult when selecting an ediscovery vendor is The Sedona Conference’s Best Practices for the Selection of Electronic Discovery Vendors which you can download from Sedona’s website.

So The Secret’s out – Heriot teaches that we all should use non-waiver orders at every opportunity. They provide the best available protection for both the lawyer and the client against the inadvertent waiver of privilege in litigation.

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