BUSINESS TORTS & RICO NEWS

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1 Volume 8, Issue 4 Summer 2012 American Bar Association Section of Antitrust Law Business Torts & Civil RICO Committee BUSINESS TORTS & RICO NEWS Inside this issue: One-on-one with Judge Facciola: His thoughts on the attorney/client privilege in the 21st Century? By Danielle S. Fitzpatrick Outsourcing E- Discovery: Into the Woods (and Back Again) By Jennifer L. Sullivan From the Chairs Legal Privilege At Home and Abroad: Just How Full and Frank should a Client be with its Counsel? By Suzanne Rab and Nilufar Anwar Civil RICO Issue Index and Grid On Wednesday, June 13, 2012, I had the pleasure of speaking with the Honorable John M. Facciola about his thoughts on the attorney-client privilege in the 21 st Century. Judge Facciola has been a Magistrate Judge in the District of Columbia since being appointed in Prior to being appointed to the bench, he served as an Assistant District Attorney in Manhattan from , and was in private practice in the District of Columbia from Judge Facciola joined the U.S. Attorney s Office in 1982 and served as Chief of the Special Proceedings section from One-on-one with Judge Facciola: His thoughts on the attorney/client privilege in the 21 st Century By Danielle S. Fitzpatrick 1 of King & Spalding Outsourcing E-Discovery: Into the Woods (and Back Again) By Jennifer L. Sullivan of Faegre Baker Daniels LLP 1 When confronted with a case involving large amounts of electronic discovery, attorneys might remember another of Thoreau s Walden contemplations: The mass of men lead lives of quiet desperation until his appointment as Magistrate Judge. Judge Facciola is a frequent lecturer and speaker on the topic of electronic discovery. He is a member of the Sedona Conference Advisory Board, the Georgetown Advanced E- Discovery Institute Advisory Board and is also the former Editor in Chief of The Federal Courts Law Review, the electronic law journal of the Federal Magistrate Judges Association. He has recently been appointed to the Board of Directors of the Federal Judicial Center. Judge Facciola has co-authored a (Continued on page 3) [S]ee what is before you, and walk on into futurity. Henry David Thoreau 2 Yet we can t just go into the woods and hide from the complexities of electronically stored information ( ESI ). In an age when more than 90% of all corporate information is electronic; North American businesses exchange over 2.5 trillion s per year;... less than 1% of all communication will ever appear in paper form; and, on average, a person corporation will generate nearly 2 million s annually, 3 we lawyers (Continued on page 6) 2011 American Bar Association, Section of Antitrust Law

2 (Continued from page 1) can t be Luddites. But if, as the old joke goes, many of us went to law school because we hate math, that goes double for computer software engineering. We don t want to think in terms of terabytes, and we comfort ourselves with the notion that we can hire outside vendors to handle complex e-discovery. Yet Rule 26(g) imposes on counsel signing discovery pleadings a duty to make a reasonable inquiry about their accuracy, motivation, and proportionality before signing. The standard for what constitutes a reasonable inquiry is evolving, but in at least one case, Qualcomm Inc. v. Broadcom Corp., 4 lawyers were sanctioned under this rule for failing to adequately monitor their client s electronic discovery activities. As Magistrate Judge Major, who issued the sanctions in Qualcomm explained: For the current good faith discovery system to function in the electronic age, attorneys and clients must work together to ensure that both understand how and where electronic documents, records and s are maintained and to determine how best to locate, review, and produce responsive documents. Id. at 9. Although Judge Major reversed her ruling and declined to award the sanctions on remand, 5 her original observation offers a guidepost to the extent of attorneys obligations with respect to ESI. In order for counsel to have the requisite understanding of how best to locate, review and produce responsive ESI, they must take an active role in working with outside data forensic and e- discovery service providers. Given the amount of ESI that must be collected, reviewed, culled for privilege, and produced in complex litigation, firms must form teams, often comprised of e-discovery vendors, consultants, contract attorneys, and a firm s own reviewing attorneys. But many attorneys are unsure of how to manage these teams, because while it s understood that lawyers need to supervise vendors, the standards for that supervision remain imprecise. 6 The standards for supervision may yet be foggy, but the biggest risk of data mismanagement the inadvertent production of privileged information is familiar. The sheer volume of data has all but assured the inadvertent production of privileged communications and work product material. Federal Rule of Evidence 502 was enacted in 2008 in response to the rising costs of e-discovery, partially attributable to the increased time parties now must spend to minimize the risk of inadvertent disclosures. Rule 502 provides that a disclosure of privileged or work-product material does not operate as a waiver if: the disclosure is inadvertent; the holder of the privilege or protection took reasonable steps to prevent disclosure; and the holder promptly took reasonable steps to rectify the error, including (if applicable) following the Federal Rule of Civil Procedure 26 (b)(5)(b). Fed. R. Evid Disputes arise under Rule 502 mainly as to what constitutes reasonable steps to prevent the disclosure under Subsection (b) of the Rule. The Explanatory Note to Rule 502 provides that under some circumstances, use of advanced analytical software applications and linguistic tools in screening for privilege and work product may constitute reasonable steps to prevent inadvertent disclosure. Of course, use of such applications and tools tends to require engagement of outside vendors. But even then, inadvertent disclosures occur. In order to have a sense of how long a leash attorneys can and should give to outside discovery vendors, while still remaining engaged enough to satisfy their discovery obligations, it s important to know just how much rope it takes to (attempt to) hang an Am Law 100 firm. McDermott Will & Emery A Leash Too Long? Last year, the venerable firm McDermott Will & Emery ( McDermott ) earned the unfortunate headline McDermott Will & Emery Wins E-discovery Blunder of the Week 7 when it was sued for malpractice for failing to properly supervise an outside electronic discovery vendor in the case J-M Manufacturing Company, Inc. v. McDermott Will & Emery and Does 1 through 100, filed June 2, 2011 in the Superior Court of the State of California, County of Los Angeles. 8 J-M Manufacturing Company, Inc. ( J-M ) hired McDermott to represent it in connection with an investigation by federal and state governments relating to qui tam litigation pending in the United States District Court for the Central District of California (the Qui Tam Litigation ). Pursuant to the governmental entities investigation, subpoenas directed to J-M required it to review mass amounts of electronic data from 160 custodians. This was too large a job for a team of attorneys, so McDermott hired outside discovery vendors to aid it with collecting and reviewing electronic data and identifying responsive, non-privileged documents. 9 (Continued on page 7) 6

3 (Continued from page 6) One of the vendors, Navigant Consulting, collected approximately 1.3 million ESI files from various J-M locations, including local and network hard drives, back-up media, archives, and individual employee Blackberry devices Those ESI files were then loaded into a database maintained by Stratify, an outside discovery vendor that was retained to provide a specialized electronic data repository, software review tool, and production services. 11 Stratify, using a keyword list developed jointly by McDermott and the U.S. Attorney working on the matter, 12 identified potentially responsive documents. 13 According to the Amended Complaint Stratify was then supposed to apply to the documents privilege filters consisting of over 1,000 keywords and phrases. 14 J-M alleges that after McDermott produced the keyword documents (consisting of approximately 435,000 ESI files) 15 to the federal government, the government informed McDermott that the initial production contained a significant number of privileged documents. Apparently, this inadvertent production occurred because Stratify did not apply all of the privilege filters to approximately 180,000 of the ESI files produced to the government. 16 The government asked McDermott to re-submit a new production set. 17 According to the original Complaint, McDermott filtered responsive documents through a second keyword list to determine whether they were privileged. 18 McDermott engaged another outside vendor to provide contract attorneys at the rate of $61.00 per hour to review the documents identified as potentially privileged. 19 The Amended Complaint alleges that while McDermott attorneys performed limited spotchecking of the contract attorneys privilege determinations, they failed to thoroughly review the documents that [the contract attorneys] reviewed to determine whether any or a large number of privileged documents were being disclosed. 20 Unfortunately for everyone involved, after 250,000 electronic documents 21 were produced to the governmental entities (who turned them over to counsel for the plaintiff in the Qui Tam Litigation (the Plaintiff )), it was discovered that approximately 3,900 privileged documents had been produced. 22 Plaintiff s counsel, however, refused to return the privileged documents, and argued that J-M had waived the attorney-client privilege with respect to the subject matter of the documents. 23 Sheppard Mullin, the firm that substituted for McDermott, filed a Motion for the Return or Destruction of Privileged Documents and for Other Appropriate Relief (the Clawback Motion ) in the Qui Tam Litigation. If any firm should be sensitive to the dangers of overproduction through an outside vendor, it should be Sheppard Mullin. However, after substituting its appearance for that of McDermott, Sheppard Mullin made yet another inadvertent disclosure of privileged material to the Qui Tam Plaintiff. According to Sheppard Mullin, this inadvertent disclosure can again be traced to vendor Stratify s failure to follow protocol. Consequently, an additional copy of approximately 1,200 ESI files that appeared to contain privileged material that had been previously produced by [McDermott] to the government were sent to Plaintiff s counsel. 24 J-M is now working with its third law firm in the Qui Tam Litigation. Surprisingly, as of February of this year, Stratify was still serving as an outside discovery vendor. 25 In the court s Tentative Ruling on J- M s Clawback Motion (a hearing is schedule July 8, 2012), the court found that the procedure J-M designed and used in its initial production was reasonable. 26 Although it is too soon to tell, Judge Wu s Tentative Ruling indicates that he will find waiver, if at all, only because J-M continued to use the same vendor and made the same inadvertent production numerous times. Id. Venable: We re all Vulnerable. Magistrate Judge Mary E. Stanley of the Southern District of West Virginia struck a less forgiving tone in the 2010 decision Mt. Hawley Ins. Co. v. Felman, et al., 271 F.R.D. 125 (S.D. W. Va. 2010). Mt. Hawley involved the inadvertent production of an attorney-client by Felman, an intervening Plaintiff. 27 Plaintiffs claimed that the inadvertently produced was evidence of fraud, and refused to return it. 28 Felman and its counsel Venable contended that the inadvertent production was an inevitable result of large-scale document production, and specifically the result of an error in an outside discovery vendor s software. 29 Felman sought return of the from Plaintiffs under FRCP 26(b)(5)(B), FRE 502(b), and the parties clawback agreement (the Clawback Stipulation ), which was not made an order of the court. 30 The court found that although Plaintiffs had violated the Clawback Stipulation, which required them upon request to return all copies of the document and confirm in writing that all copies have been destroyed, Felman had nevertheless waived the privilege. 31 The Hawley court determined that Felman and Venable had not taken reasonable steps to prevent disclosure of the under FRE 502(b) (2). Ralph C. Losey, a well-known expert on e-discovery has described this conclusion as terrifying, given the first class law firm s extensive and sophisticated efforts to prevent disclosure. 32 The court detailed those efforts, which included, among others, (1) negotiating the Clawback Stipulation; (2) hiring an ESI collection vendor; (3) identifying potential (Continued on page 8) 7

4 (Continued from page 7) sources of relevant ESI with Felman personnel; (4) hiring a new vendor to process certain databases; (5) identifying search terms; (6) testing those terms and adding new ones; (7) identifying and applying privilege search terms; (8) testing those terms; and (9) conducting eyes-on review of documents identified as privileged. Id. at While those efforts do sound sophisticated and extensive, the court found them unreasonable because, among other things, Felman s methods resulted in an over-production (deemed by Plaintiffs a classic document dump 33 ) by more than 30%, the inadvertent production was not solely attributable to the problem with the vendor s database file, some documents on Felman s privilege log were produced and not clawed-back, Felman and Venable failed to perform critical quality control sampling to determine whether their production was appropriate, and failed to perform simple keyword searches. Id. The court concluded that Felman and Venable waived the privilege attached to the subject , and noted that unless materially different facts from those surrounding production of the subject pertained, its order would extend to Felman s production of 377 other allegedly privileged documents. Id. at 139. McGuire Woods: a Safer Path. If an inadvertent disclosure can be made by counsel on behalf of a client currently suing its former lawyers for the same mistake, it s fair to say anyone can make one. And if the efforts undertaken by Venable to prevent production of an inadvertent disclosure are unreasonable, then perhaps no firm may rest assured of the reasonableness of its efforts. So what s a Luddite or even a tech-savvy lawyer to do? A 2010 decision by Judge David Waxse of the District of Kansas offers a way for lawyers engaged in large-scale ESI discovery to sleep at night. In Rajala v. McGuire Woods, Civil Action No CM DJW, 2010 WL , (D. Kan. July 22, 2010), Plaintiff Eric C. Rajala, bankruptcy trustee for Ethanex Energy, Inc. ( Ethanex ), sued the law firm of McGuire Woods for various statutory violations and common law claims. Plaintiff claimed that a McGuire Woods attorney used his position as a partner with McGuire Woods and as an attorney representing Ethanex to perpetrate a fraudulent scheme involving the sale of unrestricted securities of Ethanex. 34 The parties could not agree on a stipulated protective order because McGuire Woods wanted the order to contain a clawback provision. Unlike the Clawback Stipulation described in Mt. Hawley, McGuire Woods sought a clawback provision that would allow the parties to claw back inadvertently produced privileged documents, without regard to whether the party made reasonable efforts to avoid the production in the first place. 35 McGuire Woods argued that such a provision would benefit both parties and was necessary because of the massive volume of potentially relevant and privileged ESI, including a minimum of 15,000 and 18,400 messages from McGuire Woods alone. 36 Plaintiff opposed the inclusion of such a clawback provision, arguing that in the event of a claimed inadvertent production, Plaintiff would be essentially deprived of arguing the facts showing that care was not taken by the producing party when the document at issue was produced. 37 The court rejected Plaintiff s argument, noting that [t]he goal [of Rule 502]is not to encourage disputes regarding waiver and inadvertent production, but to prevent such disputes from arising in the first place. 38 The court further noted that Rule 502 also validates certain clawback provisions or agreements. 39 The Rule is silent, however, on a court s authority to issue a clawback agreement without the consent of both parties. Judge Waxse relied instead on the authority granted a court to issue protective orders under Rule 26(c)(1) for good cause, issue an order to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense. 40 CONCLUSION The cases discussed herein illustrate the uncertainty introduced by Rule 502(b) s reasonable efforts requirement, particularly when working with outside data forensics and e-discovery vendors. Preferably, parties will be able to stipulate to a clawback agreement whereby they agree to waive the reasonableness requirement of Rule 502(b), or outline the efforts they intend to use to avoid inadvertent disclosures, and stipulate to their reasonableness or both. 41 Post-Rajala, however, a new option is available to parties looking to minimize the risk of waiver. If they cannot agree to a clawback agreement with opposing counsel, they may apply for a protective order containing such a clause under FRCP 26(c). While the exponential growth of data makes privilege review ever more arduous, attorneys can safeguard their clients and meet their obligations through the use of appropriatelydrafted clawback provisions and sophisticated data collection and review teams. 1 Jennifer L. Sullivan is Special Counsel in the Business Litigation group of Faegre Baker Daniels LLP and practices in the firm s Boulder office. 2 Henry David Thoreau, Walden, at 79 (Signet Classic 1960). 3 William P. Barnette, Ghost in the Machine: Zubulake Revisited and Other Emerging E-Discovery Issues Under the Amended Federal Rules, (Continued on page 9) 8

5 (Continued from page 8) 18 Rich. J.L. & Tech. 11 at 1 (2012) (internal footnotes omitted). 4 Qualcomm Inc. v. Broadcom Corp., Case No. 05cv1958-RMB (BLM), 2008 WL (S.D. Cal. Jan. 7, 2008), vacated in part, 2008 WL (S.D. Cal. March 5, 2008). 5 See Qualcomm v. Broadcom, Case No. 05cv1958-B (BLM), 2010 WL (S.D. Ca. April 2, 2010). 6 Nate Raymond, E-Discovery Nightmare: Client Cites McDermott s Use of Contract Lawyers in Malpractice Suit, the Litigation Daily, Corporate Counsel, P u b A r t i c l e C C. j s p? id= (June 6, 2011). 7 See Christopher Danzig, McDermott Will & Emery Wins E- discovery Blunder of the Week, Above the Law, abovethelaw.com/2011/07/ mcdermott-will-emery-wins-ediscovery-blunder-of-the-week (July 1, 2011). 8 Case No. BC , Superior Court of the State of California, County of Los Angeles (filed June 2, 2011). 9 Id. at Declaration of Anthony Navid Moshirnia and Exhibits A through J in Support of JM Manufacturing Company, Inc. s Reply in Support of Motion for the Return or Destruction of Privileged Documents and for Other Appropriate Relief, United States of America, et al. v. J-M Manufacturing Company, Inc., Case No. ED CV GW, United States District Court, Central District of California, Document (Feb. 13, 2012), at Id. 12 See Original Complaint, J-M Manufacturing Company, Inc. v. McDermott Will & Emery and DOES 1-100, at See Declaration of A. Moshirnia, supra note 10 at 6; see also Amended Complaint, J-M Manufacturing Company, Inc. v. McDermott Will & Emery and DOES 1-100, at See Declaration of A. Moshirnia, supra note 10 at Id. at Id. at Amended Complaint, J-M Manufacturing Company, Inc. v. McDermott Will & Emery and DOES 1-100, at Original Complaint, supra note 12, at Amended Complaint, supra note 17, at Id. 21 As one journalist colorfully noted, [t]hat s a quarter-million documents, after culling through zillions of irrelevant files. If that doesn t encapsulate the crappiness that is e-discovery, I don t know what does. Danzig, supra note Amended Complaint, supra note 17, at 13. According to J-M s new counsel in the underlying Qui Tam Litigation, the number of ESI files produced to the government and subsequently overturned to the Qui Tam Plaintiff is closer to 3,400. See Declaration of A. Moshirnia, supra note 10 at Id. at Id. 25 Minute Order, Tentative Ruling on Defendant J-M Manufacturing s Motion for the Return or Destruction of Privileged and Confidential Information, United States of America v. J-M Manufacturing (Feb. 27, 2012). 26 Tentative Order, supra note 25, at Although the referenced is described by the court as only the proverbial tip of the iceberg in terms of inadvertently produced privileged communications, it is the focus of the parties dispute and the court s opinion. 28 Mt. Hawley, 271 F.R.D. at Id. at 131, Id. at Id. at Ralph C. Losey, Adventures in Electronic Discovery, p. 46, West (2011 ed.). 33 Mt. Hawley, 271 F.R.D. at Rajala, 2010 WL , at *1. 35 Id. at *7. 36 Id. at *2. 37 Id. at *3 (quoting Pl. s Resp. to Def. s Mot. for Entry of Clawback Provision). 38 Id. at *7. 39 Id. at *5. 40 Id. 41 See Losey, supra note 32 at