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Clawback Orders Do Not Trump Proportionality: Parties Need To Review Documents and Courts Must Not Ignore the Costs

Thursday, May 23, 2013
By David J. Kessler, Keith Angle, and Ted Bosquez, Fulbright & Jaworski LLP

One point can be an anomaly. Two points is a line and if those two points are In re Coventry Healthcare, Inc. ERISA Litig., 2013 BL 76546 (D. Md., March 21, 2013) and Adair v. EQT Prod. Co., 2012 BL 135030 (W.D. Va., May 31, 2012), that line may be foreshadowing a dangerous trend.

In both of these cases, the district courts found that the cost of review should not be factored into their analysis of whether the discovery requests were reasonable or proportional, because the availability of clawback orders and, presumably, Federal Rule of Evidence 502 (FRE 502) mitigated the risks of privilege waiver.

This conclusion, however, is flawed for numerous reasons. Not only does privilege protection shield documents from discoverability, not just use as evidence, but clawback orders and FRE 502 have no bearing on many of the other reasons for review, including withholding data privacy information, culling irrelevant data, and learning about the documents at issue.

 

While these mechanisms provide predictable protection to responding parties, courts must not oversimplify the legitimate concerns of these parties and view these mechanisms as magic bullets to resolve discovery disputes.

Responding parties have a right to produce only non-privileged, relevant, and responsive documents in discovery, and it is reasonable and appropriate for responding parties to manually review the documents to cull irrelevant, non-responsive, and privileged material.

If courts fail to account for these legitimate discovery goals, then they cannot accurately and appropriately weigh the costs and benefits of discovery; their non-action undermines the legitimate goals of proportionality.

Clawback orders and FRE 502 protection are valuable to address issues that will arise in discovery, but cannot be viewed as the only tools needed in a court's toolbox.

What Happened in
In re Coventry and Adair?
In re Coventry.

In In re Coventry, the plaintiffs filed a class action lawsuit against Coventry Health Care Inc. and certain fiduciaries of the Coventry Retirement Savings Plan, alleging violations of the Employee Retirement Income Security Act of 1974 (ERISA).

In discovery, the plaintiffs sought information regarding a program administered by the defendants for the period of February 2007 to October 2008. Defendants sought to limit the discovery time period to January 2008 to June 2008, arguing the production of electronically stored information (ESI) from the requested time frame would impose an undue burden on the defendants. The parties met to discuss the discovery dispute but failed to agree on the scope of the discovery time period.

In resolving the plaintiffs' motion to compel, the court held the burden of producing the ESI did not outweigh the potential benefit to the plaintiffs.

In particular, citing the Adair case, the district court found the defendants could reduce the cost to review the requested ESI by using a clawback order to protect themselves against claims of waiver. If the defendants used a clawback order, then the defendants “no longer bear the cost of reviewing the ESI for responsiveness and privilege,” the court reasoned.

Adair.

In the Adair case, defendants sought a protective order to avoid producing certain ESI or otherwise shift the costs of reviewing and producing this ESI to the plaintiffs. The defendants estimated the cost of responding to the plaintiffs' discovery requests at: (a) $19,000 to process the data and (b) up to $759,000 to review the documents for responsiveness and privilege.

The district court upheld the decision of a magistrate judge compelling the defendants to produce the ESI. The district court concluded that the use of a clawback order effectively eliminated the need for a document-by-document review, thereby reducing the burdens imposed upon the defendants. The clawback order could protect the defendants against claims of waiver caused by the production of confidential and privileged material, the court said.

This ruling, and the decision in In re Coventry, ultimately failed to acknowledge the myriad of reasons beyond privilege waiver for a party to review its documents prior to production to an opposing party.

What are Clawback Orders and FRE 502(d)?

As they should be, clawback agreements are becoming very common in litigation. They are agreements between parties that an inadvertent production of privileged documents in discovery will not, by itself, act as waiver of the applicable attorney-client privilege or work product doctrine.

What is less common, but likely should be as common, are court orders under FRE 502(d) that can eliminate the risk of waiver of attorney-client privilege or attorney work product protection, regardless of circumstances. See FRE 502; see e.g., Brookfield Asset Management, Inc. v. AIG Financial Products, Corp., 2013 BL 129985(S.D.N.Y., Jan. 7, 2013).

FRE 502(d) orders also bind third parties and apply to proceedings before federal agencies as well as federal and state court proceedings. See FRE 502(d).

Obligation to Limit Discovery Using Proportionality

Absent good cause, Federal Rule of Civil Procedure (FRCP) 26(b)(1) limits discovery to “regarding any non-privileged matter that is relevant to any party's claim or defense.”

Moreover, “[a]ll discovery is subject to the limitations imposed by FRCP 26(b)(2)(C),” which is often called the proportionality rule. It mandates that courts “must limit the frequency or extent of discovery otherwise allowed by these rules” where “the burden or expense of the proposed discovery outweighs its likely benefit, considering the needs of the case, the amount in controversy, the parties' resources, the importance of the issues at stake in the action, and the importance of the discovery in resolving the issues.”See FRCP 26(b)(2)(C).

As Judge Paul W. Grimm emphasized in his seminal opinion in Mancia v. Mayflower Textile Servs. Co., 253 F.R.D. 354, 364 (D. Md. 2008), courts have an obligation to limit discovery to that which is proportional. Thus, a court cannot compel discovery where the cost of the discovery to the responding party outweighs its expected benefit under the totality of the circumstances.

Clawbacks and FRE 502 Do Not
Eliminate the Need for Review

In order to protect their rights and mount an adequate defense in their proceedings, responding parties must understand the content and nature of the documents being produced to their opposition. In navigating the discovery process, responding parties must evaluate a number of complex and varied considerations not capable of being resolved by a single set of solutions.

Waiver Is NOT the Only Privilege Concern

Privileged materials protected by the work product doctrine are not merely inadmissible or protected from use by an opponent, they are shielded from discovery in the first instance.

A responding party has a right to take any and all reasonable steps to prevent disclosure. If a responding party produces privileged materials, the opposing party cannot unlearn what is revealed through this disclosure, even if the material remains privileged. It is difficult, if not impossible, for this genie to put be put back into the bottle once it is set free.

Clawbacks and FRE 502 Do Not Limit
Exposure for Producing Privacy Data

Generally speaking, clawback orders only pertain to attorney-client privileged and work product documents and FRE 502 is explicitly limited to such. See FRE 502. However, many parties have a great deal of non-attorney or work product information that is protected from disclosure in discovery and, in theory, could lead to liability if disclosed.

Statutory Constraints

For example, some clients may have customer financial or medical information protected from disclosure by statute. See e.g. The Health Insurance Portability and Accountability Act of 1996 Pub.L. 104–191, 110 Stat. 1936 (1996); Financial Services Modernization Act, Pub.L. 106–102, 113 Stat. 1338 (1999); and Right to Financial Privacy Act of 1978 (12 U.S.C. §3401). Likewise, the government and certain government contractors may have sensitive data, the disclosure of which may endanger national security and therefore is statutorily prohibited from disclosure. See. e.g. 18 U.S.C. §793.

Personally Identifiable Information

Moreover, it may be prudent or required to prevent the disclosure of personally identifiable information for employees, third parties, and customers, including, for example, social security numbers.

Requirements of Foreign Courts

Finally, to the extent information is covered by the data protection regulations of foreign jurisdictions, like the data protection regulations of the European Union Member States, certain information may need to be redacted or withheld.

Clawback orders and FRE 502(d) protections do not assist parties regarding any of these obligations.

Right to Withhold Irrelevant Documents

Discovery is broad, but it is not unbounded. Fundamentally, it is an intrusion into the privacy of the parties responding. Discovery is limited to documents that are responsive to document requests, see FRCP 34(b), and at its broadest, cannot be used to reach anything beyond documents relevant to the claims or defenses, see FRCP 26(b)(1). In fact, courts cannot order inspections of a responding party's computers absent good cause, such as established discovery abuse. See In re Ford Motor Co., 345 F.3d 1315 (11th Cir. 2003); Bethea v. Comcast, 218 F.R.D. 328 (D.D.C. Dec. 3, 2003).

Responding parties have a right to prevent the production of irrelevant documents and anything that was not properly requested. Correspondingly, the requesting party is not entitled to that information.

The bell cannot be unrung and once data leaves the party it can be very hard (and expensive) to control it or know that it is not being misused.

It is reasonable for parties to prevent the disclosure of irrelevant trade secrets and confidential information, even in the face of protective orders, clawback orders, and FRE 502 protections.

Thus, for the reasons discussed above, even if a protective order, clawback order, or FRE 502(d) protections are in place, it is not appropriate to discount the need for document-by-document review and otherwise ignore the cost of this review in a proportionality analysis.

Conclusion

The mere presence of a clawback order or even FRE 502(d) protections does not mean that a responding party will not need to bear the cost of review for privilege or responsiveness. These are real costs of discovery and must be considered by federal courts in their proportionality analysis under FRCP 26(b)(2)(B).

It is reasonable in many circumstances, even with the availability of clawback orders and FRE 502(d) protections, for a party to conduct a document-by-document review.

As we have discussed, responding parties have a number of legitimate reasons to review their documents prior to production in order to ensure their rights are adequately protected and obligations met. The waiver of privilege is only one of these reasons, and the availability of these protective mechanisms does not even fully address privilege issues.

Responding parties are protected not only from the use of their privileged material in court proceedings, but from the very disclosure of this material. Clawback orders and FRE 502(d) protections are not fully comprehensive measures and must not be the sole basis to frame the proportionality analysis under FRCP 26(b)(2)(B).

If the cost of review to cull irrelevant documents, privileged material, or data privacy materials outweighs the expected benefit of discovery, then the courts must limit or prohibit the discovery. It is disingenuous for courts to presume the only reason parties review documents is to protect themselves from privilege waiver. This assumption unnecessarily undercuts the rights of responding parties and otherwise disregards the practical reality of discovery in modern litigation.

Courts should not pretend the review is not going to happen because a clawback order or FRE 502(d) protections are available. This should not be the basis on which courts find that the discovery is proportional and warranted.

David Kessler is a partner at Fulbright & Jaworski and co-chair of its E-Discovery and Information Governance Practice Group. David counsels the firm's clients regarding strategic and tactical solutions in all phases of eDiscovery and aspects of data management including data security, data privacy, and data remediation.

As a Senior Counsel in Fulbright & Jaworski L.L.P.'s Houston office, Keith Angle consults with clients and their IT personnel on eDiscovery and Information Governance matters regarding litigation readiness, information management, technology assisted review, and data disposition.

Ted Bosquez is a Senior Associate in the Environmental Department of Fulbright & Jaworski LLP. He advises clients on a wide range of environmental subjects and provides guidance on eDiscovery issues arising in civil and criminal enforcement, regulatory compliance, and transactional matters.

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