Inadvertent Waiver of the Attorney-Client Privilege in E-discovery Cases under North Carolina law—Does North Carolina Need a Rule 502?
“It’s a dangerous business, Frodo, going out of your door. You step into the Road, and if you don’t keep your feet, there is no knowing where you might be swept off to.”
Gandalf the Wizard speaking to Frodo Baggins
–J.R.R. Tolkien’s “The Fellowship of the Ring”
In Blythe v. Bell, 2012 NCBC 42 (N.C. Super. Ct. July 26, 2012), the North Carolina Business Court was faced with the issue of waiver of the attorney-client privilege in the context of large, electronic productions. The court’s ruling should place North Carolina within the majority of jurisdictions on the issue and should give some needed guidance to practitioners seeking to navigate the sometimes murky E-discovery waters. Unfortunately, for law students and practitioners alike, there is still little understanding of the state of E-discovery law in North Carolina. This is despite the passage of the E-discovery amendments to the North Carolina Rules of Civil Procedure effective October 1, 2011. Perhaps, this is because the number of E-discovery cases in North Carolina (or the number of cases that are popularly known) is relatively small. Lawyers and courts will often cite to Judge Tennille’s “twin” opinions in Bank of America [ref] 1. Bank of Am. Corp. v. SR Int’l Bus. Ins. Co., LTD, 2006 NCBC 15 (Nov. 1, 2006) (Tennille). [/ref] and Analog Devices [ref] 2. Analog Devices v. Michalski, 2006 NCBC 14 (Nov. 1, 2006) (Tennille). [/ref], dated November 1, 2006. Some may be aware of the High Voltage opinion out of the Western District dealing with proportionality. [ref] 3. High Voltage Bevs., LLC v. Coca-Cola Co., 2009 U.S. Dist. LEXIS 88259 (W.D. N.C. Sept. 7, 2009). [/ref] But, to even the seasoned practitioner, that might be as far as their knowledge goes. This recent Business Court case should be added to the North Carolina E-discovery Pantheon, or at least be read and applied by all North Carolina civil litigators going forward. It should also be evidence of the need for the North Carolina General Assembly to pass a state-court version of Federal Rule of Evidence 502.
The discovery dispute in Blythe brought into sharp focus the issues of attorney-client privilege and waiver, all in the context of E-discovery. As is customary in civil litigation, Plaintiffs served Defendants with requests for production. But, Defendants waited many months to respond. They eventually produced two hard drives in response to an order by the court compelling production. The court’s order to compel required Defendants to produce “[e]mail between and among HBI’s officers and employees, Drymax product sales representatives, Drymax product manufacturers, retailers and others that are responsive to document requests.” The parties did not enter into an agreement or request an order dealing with the possibility of inadvertent production of privileged materials.
To assist them in the identification, processing and conversion of electronic files, Defendants hired a third-party vendor.[ref]4. Some valid and troubling concerns were raised regarding the vendor’s qualifications to perform searches for protected information in the litigation context. Defendants later called the vendor “not very sophisticated.” Defendants identified 2.3 million duplicate records when they performed subsequent searches and reviews. See, e.g., N.C.R.P.C. 8.4 cmt. 4; ABA Model Rule 5.3. See also Thorncreek Apts. III, LLC v. Village of Park Forest, 2011 U.S. Dist. LEXIS 88281, at *25-26 (N.D. Ill. Aug. 9, 2011) (a lawyer must ensure that the third-party vendor he or she hires is competent). [/ref] Plaintiffs provided a list of search terms to be used to search Defendants’ computer files, which Defendants instructed the vendor to use without modification. The vendor located and searched over 286 gigabytes of information (547 PST files and 307,816,673 individual files or e-mails and attachments). The vendor then converted the files from native into readable PDF files for production. [ref] 5. Plaintiffs complained that e-mails were not connected to their attachments, that there was no way to search the e-mails and the documents were not marked so as to show which request they corresponded to. This raises an interesting question about whether a production of “readable” PDF files (and a production if in the condition described by Plaintiffs) either complied with the request by Plaintiffs or is a proper production under N.C. R. Civ. P. 34(b) (requiring production of documents as they are kept in the regular course of business). See also “The Sedona Conference Cooperation Guidance for Litigators and In-House Counsel,” Cooperation Point #7, at pp. 9-11 (March 2011). [/ref]
In response to Plaintiffs’ requests for production Defendants produced 2,000 pages of documents, over 10,000 pages of e-mails with attachments, and stored files equaling approximately three hundred boxes. [ref] 6. Plaintiffs complained that Defendants hid relevant documents in a large “dump” of irrelevant information. [/ref] The record demonstrated that Defendants had only performed a very limited review of the information prior to production. Inexplicably, Defendants did not keep a copy of the hard drive or the production sent to Plaintiffs.
Three months later, Defendants produced a second hard drive containing information copied from a computer Defendants had initially failed to search. Like the first hard drive, the second hard drive did not include an index, was not copied, and was not reviewed by Defendants’ counsel.
Upon review of Defendants’ production, Plaintiffs’ counsel found e-mails with the caption of the lawsuit in the title. Counsel identified these communications between Defendants and their attorneys as presumptively privileged and refrained from reviewing them. Plaintiffs’ counsel then took a 30(b)(6) deposition of Defendants to explore Defendants’ efforts to identify and protect attorney-client information in the production process. After the deposition, Plaintiffs’ counsel notified Defendants’ counsel that potentially privileged information had been produced.
Defendants filed a motion to compel Plaintiffs to return the privileged information that Defendants claim they inadvertently produced. Defendants also produced a privilege log with five hundred and eleven (511) items, many of which were communications between counsel and Defendants. The issue was then presented to Judge James L. Gale on the North Carolina Business Court.
Waiver of the attorney-client privilege: A Cautionary Tale for the Practitioner
Based on the factual record, Judge Gale found that Defendants had waived the attorney-client privilege on all of the e-mails between clients and counsel produced to Plaintiffs. In undertaking its analysis, the court looked to the 2011 Business Court opinion in Morris v. Scenera Research, LLC, 2011 NCBC 33 (N.C. Super. Ct. Aug. 26, 2011),[ref] 7. The Morris case was in the North Carolina Business Court after remand from the United States District Court for the Eastern District of North Carolina. [/ref] also by Judge Gale. In Morris, Judge Gale analyzed waiver of the attorney-client privilege through the lens of federal law and applied the test authored by Chief Magistrate Judge Paul W. Grimm in Victor Stanley, Inc. v. Creative Pipe, Inc., 250 F.R.D. 251 (D. Md. 2008) (“Victor Stanley I”). Judge Gale found the inadvertent production in that case did not constitute waiver of the attorney-client privilege.[ref] 8. Morris at ¶¶47-49. According to Judge Grimm, a court should look at the following elements when considering waiver: (1) the reasonableness of the precautions taken to prevent disclosure; (2) the number of inadvertent disclosures; (3) the extent of the disclosures; (4) any delay in attempts to rectify the disclosures; and (5) the interests of justice. Victor Stanley I, 250 F.R.D. at 259. See also Continental Cas. Co. v. Under Armour, Inc., 537 F. Supp. 2d 761, 772-73 (D. Md. 2008) (Grimm) (waiver of work product protection by disclosure of counsel’s files).[/ref] In Blythe, Judge Gale again used the Victor Stanley I balancing test and announced that the North Carolina Business Court has “adopted [the test] for North Carolina state courts.” But, in Blythe, Judge Gale found that Defendants’ failure to employ reasonable precautions to avoid disclosure was so egregious that it was unnecessary to go through each of the five elements of the balancing test.
The Blythe court reasoned that larger volumes of data to be produced require the employ of more stringent quality controls and protections to avoid inadvertent disclosure. The court recognized that a prudent manner for dealing with short deadlines on production or large, costly productions is to enter into “claw-back” or “quick-peek” agreements with opposing counsel. At the least, these methods allow some modicum of protection against inadvertent disclosure. Instead, the court found that Defendants’ counsel took only “limited” steps to protect its privileged information, which are inadequate to support the claim that the once-privileged information that was produced should be returned. Defendants argued that the remaining four factors weighed in favor of a return of the documents and against waiver, but the court was not persuaded.
Judge Gale concluded: “This court takes no pleasure in finding the waiver of attorney-client privilege. But, regrettably, the court cannot on this record conclude that reasonable efforts adequate to protect against a waiver were undertaken in advance of production to insulate against a subsequent waiver by applying the remaining factors of the five-factor balancing test.” (Emphasis added)
How does a litigator avoid being “swept off”?
This case should leave the practitioner with mixed feelings. Fear because the case demonstrates how easily a production can get away from counsel unfamiliar with e-discovery issues. Comfort because the Business Court has articulated a reasonable and rational approach for dealing with inadvertent waiver in the context of voluminous electronic productions, in the absence of guidance in the North Carolina Rules of Evidence. The court could have, but did not, find waiver of all matters sharing the subject matter of the information produced. [ref] 9. This is considered the strict approach. However, typically, an inadvertent production will not lead to subject-matter waiver. See, e.g., Parkway Gallery Furniture, Inc. v. Kittinger/Pennsylvania House Group, Inc., 116 F.R.D. 46, 52 (M.D.N.C. 1987) (“In a proper case of inadvertent disclosure, the waiver should cover only the specific document in issue.”).[/ref] The court could have, but did not, excuse the actions of Defendants and preserve the privilege. [ref] 10. This considered the lenient approach.[/ref] Instead, the court found waiver of the privilege on only those items actually produced. [ref] 11. This is considered the intermediate approach to waiver, followed in a majority of U.S. jurisdictions. [/ref]
Federal Rule of Evidence 502, passed in September 2008, requires the application of a three-part balancing test when analyzing inadvertent waiver. Federal courts will find no waiver when (1) the disclosure was inadvertent; (2) reasonable steps were taken to protect the privileged information; and (3) prompt and reasonable steps were taken to rectify the error. Fed. R. Evid. 502(b). This rule provides some comfort to practitioners and litigants in federal court. But, North Carolina does not have a Rule 502 in state-court practice. North Carolina Rule 26(b)(7)(b), effective October 1, 2011, allows a party to claim privilege after the inadvertent production of privileged information. However, short of a court applying the Blythe balancing test, there is no uniform approach in North Carolina state court for dealing with this issue. Perhaps it is time for the General Assembly to consider adding a Rule 502 to the North Carolina Rules of Evidence to give attorneys clarity regarding inadvertent disclosure. Unfortunately, this issue is not going away, as the volume and use of electronically stored information grows daily. The risk for litigators and litigants alike is increasing at the same pace.
What are some practical steps a North Carolina practitioner can take to avoid waiver in a large electronic production? First, counsel should spend the time it takes with his or her client to gain an understanding of the client’s information universe—identify document custodians; understand what information is being requested; understand what information is available, responsive and relevant; understand where the responsive information resides (in-house or with third parties?); understand the methods necessary to identify and secure the responsive information (are legacy systems implicated? back up tapes?); understand what information is reasonable accessible and what, if any, is inaccessible; understand the methods and costs involved in identifying and securing the responsive information; understand the timing necessary in the process; understand the effect of preservation (is it disruptive? costly?) on the client’s ongoing operations. Counsel should team up with management and IT professionals in this effort. Second, counsel must understand the e-discovery rules and duties related to their client and the issues and law in the case. Third, counsel must seek assistance from IT professionals (internal or third-party) and/or e-discovery vendors who are able, knowledgeable, competent, and reputable to gain an understanding of costs, processes, procedures and timelines involved. In this way counsel can ensure that he or she meets their duties regarding the supervision of third parties. The process must be defensible before the court. Fourth, counsel must communicate and cooperate with opposing counsel on timing, scope and details of requests and production. If this is not possible, counsel should seek the court’s assistance early in the process. Fifth, immediately upon learning of any inadvertent production of potentially privileged information, counsel must notify opposing counsel and begin to work toward resolution. If counsel has developed a professional working relationship with opposing counsel, this process will go more smoothly. Finally, counsel should discuss the use of non-waiver arrangements, like “claw-back” and “sneak-peek” agreements, with opposing counsel during the Rule 26(f) conference early in the case. [ref] 12. The parties in the Morris case included “non-waiver” language in their Rule 26(f) report, which Judge Gale found controlling on the issue. Morris at ¶47. See also “The Sedona Conference Cooperation Guidance for Litigators and In-House Counsel,” Cooperation Point #12, at p. 15 (March 2011). [/ref]
Gandalf cautioned Frodo that the seemingly mundane act of walking out your door and entering the road (a presumably familiar place) can be “a dangerous business.” So, too, discovery and production of documents (a familiar and sometimes mundane task for litigators) can be a dangerous business, especially in the E-discovery context. A litigator needs to know where he or she might be swept off to. Be safe out there!
J.D. Hensarling, Esq.
Jon David Hensarling Law, P.C. www.HensarlingLaw.com
