Fordham Law

In case underlying McDermott malpractice suit, judge on brink of etching big ‘clawback’ precedent

Daniel Capra in ACEDS, August 07, 2012

Media Source

When Congress approved Rule 502 of the Federal Rules of Evidence in September 2008 to protect sensitive materials caught up in the swell of electronic discovery, few envisioned that it would decide the contentious issue now playing out in a landmark Los Angeles federal case.

The case involves allegations that J-M Manufacturing Co., of Los Angeles, through its former lawyers at McDermott Will & Emery and e-discovery service providers, Navigant and Stratify, repeatedly disclosed nearly 4,000 privileged documents to adversaries and the US government in a federal False Claims Act lawsuit.
J-M sued McDermott in California Superior Court in June 2011 for malpractice, and added the two vendors as defendants a year later. It is the first lawsuit ever filed against attorneys on grounds of e-discovery malpractice.
Clawback rides on ‘reasonableness’ of protection of records
In September, J-M moved to “claw back,” or retrieve, the privileged records from the "relators" in the False Claims case after months of fruitless negotiations. J-M's motion argues that as the holder of the privileged records, it took reasonable precautions to prevent the disclosure and to secure their return. It says it took the “patently reasonable” step of entrusting its sensitive documents to the lawyers and vendors who purported to be experts in complex litigation and voluminous e-discovery.
The relators say J-M has waived its privilege, or rather, had its privilege waived, by the actions of McDermott, Navigant and Stratify, who it says were negligent. To bolster their argument, they cite the malpractice suit J-M filed against McDermott and the vendors.
Court cases on clawback limits are rare
According to US district Judge George Wu, in Los Angeles, who is hearing the case, decisions that have parsed the clawback rule under these peculiar circumstances are rare. Rule 502 says an inadvertent disclosure does not operate as a waiver if “the holder of the privilege… took reasonable steps to prevent disclosure.”
The key question is whether under Rule 502 a client is bound by the actions of the lawyer, or whether it can prevent waiver simply by hiring qualified professionals to handle its sensitive documents. 
In a preliminary ruling on July 30, Wu said, “The prevailing party on this motion will be determined by… (resolving) the meaning of… ‘holder’… in [Rule] 502(b)(2). [A] plain reading… would support the conclusion that only the reasonableness of J-M's conduct should therefore be at issue.”
“However,” he added, “as the Relator(s) point out…, at least historically, actions of a ‘holder's’ agent may affect a waiver of the privilege….”
‘Clarence Darrow’ of document review could not save J-M
If the relators are right about the meaning of “holder” in Rule 502, a client’s decision to hire lawyers and vendors who are experienced in large-scale document reviews “means nothing,” Wu said. A company could hire the “Clarence Darrow of document productions” and not satisfy the reasonableness standard if the attorney’s conduct is not “up to snuff,” he added.
One person who sides with the relators and echoes Wu’s “Clarence Darrow” analogy is the principal author of Rule 502.
“Hiring the best lawyer in the world doesn’t mean you took reasonable steps,” Daniel Capra, an attorney and professor at Fordham University School of Law, told ACEDS. “(The reasonable steps analysis is based) on the actions of the lawyers, and that was the case before Rule 502.”
Clawbacks hinge on a three-step process
Rule 502, which is titled “Attorney-Client Privilege and Work Product; Limitations on Waiver,” lays out a three-pronged standard to measure whether a disclosure relinquishes the privilege attached to the documents or the attorney-client privilege. They are not waived if:
•the disclosure is inadvertent,    
•the holder of the privilege took reasonable steps to prevent the disclosure, and
•the holder promptly took reasonable steps to rectify the error.
“Obviously, it would have been easy to add the language ‘or its attorneys or other agents’ [after ‘the holder’],” Wu noted.
Legal experts side with interpretation of the relators
Some legal experts say that to meet the reasonableness standard by simply hiring qualified lawyers, or getting a mulligan if the lawyers err, would defeat the purpose of Rule 502.
“Of course, the client never authorizes the agents to screw up,” attorney Michael Graham, a professor at the University of Miami School of Law and author of 16 books on evidence, told ACEDS. “If [the client was required to authorize waiver explicitly], there wouldn’t be a Rule 502(b) in the first place.”
“The remedy is a lawsuit for malpractice,” he adds.
Experts divided on scope of waiver
Capra, the Fordham law professor, says a client cannot simultaneously prevail in a clawback motion and successfully sue its lawyer for malpractice tied to the same disclosure.
Others say the issue is not so clear-cut. Conduct amounting to malpractice cannot be a waiver of privileges because it falls outside the scope of activities the client authorized the agent to perform, they say. J-M can, in a sense, have its cake (retrieve the documents) and eat it, too (bring a successful malpractice suit).
Attorney Victor Gold, a professor of Loyola Law School, in Los Angeles, and a former CBS News legal analyst, explains, “The question is whether the agents are acting outside the scope of their authority. It’s the client’s privilege to assert, and the lawyer’s job to follow instructions. If the client did not authorize the waiver -- if there’s negligence by the lawyer -- it should not be a waiver.”
He adds the caveat, “There are a spectrum of possibilities. It really comes down to what the client has authorized the lawyers to do. There are lots of fine lines.”   
Judge said McDermott, vendors did not take reasonable steps
Wu said it is “clear” that “one or more of J-M’s agents” did not take reasonable steps to prevent the repeated disclosure of thousands of sensitive documents. His words are sure to reverberate in the malpractice suit against McDermott and the vendors. There, J-M has accused them of “literally hand[ing]” critical records to its adversaries.
The outcome of the clawback motion may play a large role in determining the damages J-M will seek in the malpractice case. J-M says it has already incurred more than $350,000 in costs and fees to litigate the clawback motion.
Wu said developing a complex software or other system for reviewing documents in a complicated e-discovery project is, “in itself,” a reasonable step to take. He added that he expects mistakes to be made in the production of millions of electronic files, but that repeated mistakes concerning the same files “can illustrate only that there is something so flawed in the process and/or its application that whatever ‘steps’ are being taken are not ‘reasonable.’”
J-M has alleged as much in the malpractice suit. It has charged Navigant and Stratify with maintaining an ineffective privilege filter that “dumped unnoticed” sensitive documents into a pool of hundreds of thousands of others.
J-M says McDermott failed to supervise the vendors and other service providers, and “willfully hamper[ed]” efforts to retrieve the documents. J-M is said to have twice produced the same privileged materials to the government in 2007 and 2008, and later directly to the relators and to parties in other cases as recently as last December.
J-M will undoubtedly use these facts as ammunition in the malpractice case, but they could end up defeating its clawback effort. As Capra says, “The sins of the agent can be visited up on the principal.”