Protecting Privilege — New Rule 502 mitigates the risk of inadvertent e-discovery disclosures

By Michael Kozubek

Published in the 2/1/2009 Issue of Inside Counsel.

Privilege review has been a major culprit in the skyrocketing cost of e-discovery. With hundreds of thousands of documents subject to discovery in numerous cases, attorney-client communications and work-product information frequently end up in the hands of the opposing party. Because the production of privileged documents during discovery waives the privilege, discovery teams scour through documents trying to ensure nothing slips through that could damage their case. Still, with the volume of electronically stored information, inadvertent disclosure is almost inevitable, with potentially devastating results.

“Cases have been lost in part because of inadvertent disclosures,” says Bobby Balachandran, CEO of Exterro, a legal hold and workflow software provider.

But that risk diminished when Rule 502 of the Federal Rules of Evidence (FRE 502), originally drafted by the Judicial Conference Committee on Rules of Practice and Procedure, recently became law. The new rule is designed to mitigate the expense of privilege review while protecting companies from potentially large liabilities arising from inadvertent disclosures of privileged communication.

The rule provides that privilege is not waived when privileged communications are inadvertently disclosed, provided the holder of the privilege took “reasonable steps” to prevent disclosure and to rectify the error.

Litigators celebrated the enactment of FRE 502 while warning that it is not a panacea and does not remove the need for sound e-discovery management practices.

“The new rule is welcome news for litigants,” says David Lender, a partner at Weil, Gotshal and Manges. “An inadvertent production will not result in the waiver of the privilege as long as reasonable steps are taken to preserve the privilege before production.”

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A Mark to Market Rule for Lawsuits?

The Financial Accounting Standards Board (FASB) has proposed a new standard for public disclosure of pending lawsuits. This raises interesting legal technology and management questions for general counsels.

Reporting Rights in the January 2009 issue of InsideCounsel reports on FASB Statements No. 5 and 141[R]. These now-delayed rules would lower

“the threshold for reporting the potential loss from a lawsuit from the current ‘probable’ to anything short of ‘remote.’ …. Currently, because many loss contingencies are reasonably possible rather than probable, companies usually deal with significant litigation by describing it and stating that an estimate of loss cannot be made. That’s a far cry from the detailed liturgy FASB’s original proposal mandated, a liturgy that critics say will not only fail to work as intended, but will prejudice companies in a variety of ways.”

It strikes me that you could view the proposed FASB standard as the moral equivalent of financial mark to market rules. Failure to mark financial assets to market contributed to the current economic crisis. If corporations now have to report more financial assets at market (rather than book) values, why not also the moral equivalent for lawsuits? I wish the article had analyzed whether the mark to market debate will affect the FASB rule-making.

For more see prismlegal.com.

E-Discovery Trends in 2009 — New developments in e-discovery will affect enterprise general counsel and compliance officers, law firms serving corporate clients, and IT departments

By Christine Taylor, January 9, 2008, 12:10 PM

A few years ago, the Taneja Group coined the term “Information Classification and Management” (ICM) to describe the technology of locating and classifying data throughout the enterprise. ICM covered sub-technology sectors such as e-discovery, compliance, data security control, and data management. However, we saw the term “e-discovery” trump the more comprehensive name as rabid attention turned from ICM to the specifics of civil litigation software tools. We are now seeing the e-discovery term itself take on a fuller usage, more akin to ICM. People do use the term when talking about civil litigation, but are also expanding it to encompass compliance, corporate governance, data classification, and even knowledge management.

In this broad sense we have looked at the trends of the e-discovery market as they impact its largest stakeholders: the enterprise general counsel and compliance officers, law firms serving corporate clients, and IT.

The crux of the matter is that e-discovery and its related areas will be extremely hot for litigation and compliance, especially those related to the financial meltdown. The market increasingly understands the necessity of e-discovery software tools and systems, and will move toward proactive e-discovery adoption. A more reactive approach will remain alive and well as many companies will still avoid implementation until driven to it by a lawsuit or federal investigation. But companies will increasingly understand that the e-discovery solution phenomenon is much more than a litigation aid. It also has major effects on federal compliance and internal governance, and potentially on data management throughout the enterprise.

For more see byteandswitch.com.

Court Enforces Clawback Agreement, Denies Motion to Compel

Bro-Tech Corp. v. Thermax, Inc., 2008 WL 5210346 (E.D. Pa. Dec. 11, 2008)

On the eve of trial in this case in which plaintiffs alleged trade secret theft, the court granted an extension “on urgent party request” so that additional discovery could be accomplished.  The discovery proved to be complex, and the court appointed a special master to manage the electronic discovery issues.  Thereafter, the parties negotiated a stipulation, approved by the court, which included a clawback procedure (“the Clawback Agreement”) to handle the return of privileged documents.  The Clawback Agreement provided that in the event of disclosure of a privileged document, the document was to be returned upon written demand.  If the recipient of the document wished to challenge the privilege claim, they were required to do so in writing, within five days of receipt of the demand for the document’s return.  The special master would then resolve the dispute following an in camera review.

For more see ediscoverylaw.com

When U.S. E-Discovery Meets EU Roadblocks

By Shannon Capone Kirk, Emily Cobb and Michael Robotti
The National Law Journal
December 22, 2008

One of the most challenging aspects of electronic discovery arises when U.S. litigation crosses borders into European Union countries with strong privacy laws. Ten years ago, these challenges seemed nonexistent; today, litigators face increasing roadblocks to e-discovery based on foreign privacy laws.

Are these roadblocks real or imaginary?

All European Union privacy laws derive from EU Directive 95/46/EC, adopted by the European Parliament in October 1995. The directive and the national laws implementing it shield “personal data” from disclosure in most instances. This protection is in stark contrast to Federal Rule of Civil Procedure 26, which mandates that parties disclose relevant information regarding any matter not privileged.

Because Rule 26 has been broadly interpreted, U.S. discovery generally is viewed as the most far-reaching among common law countries. This expansive scope directly conflicts with the protections afforded to personal data in the European Union. It is, therefore, not surprising that EU privacy laws restrict the “transfer” of personal data to the United States from the European Union. This article does not seek to define personal “data.”

EU privacy laws protect against the “processing” (reviewing) and “transfer” (which can include viewing, from the United States, data “hosted” on an EU Web site) of personal data — “any information relating to an identified or identifiable” individual, which is construed broadly to include information such as an e-mail address. See, e.g., The Sedona Conference Working Group on International Electronic Information Management, Discovery and Disclosure, Framework for Analysis of Cross-Border Discovery Conflicts 8-9 (August 2008) (hereinafter Sedona Report).

For more see law.com.

Judge Looks Past Inadvertent Disclosure Protection Rule

Shannon P. Duffy
The Legal Intelligencer
December 8, 2008

In one of the first decisions to interpret a new rule of evidence that governs “inadvertent disclosure” of privileged documents, a federal judge has held that if the “reasonableness” of the accidental disclosure remains in dispute, courts should continue to apply the traditional five-factor test to determine whether the privilege has been waived.

In his 21-page opinion in Rhoads Industries Inc. v. Building Materials Corp. of America, U.S. District Judge Michael M. Baylson was forced to resolve a dispute that arose when plaintiffs lawyers accidentally turned over more than 800 privileged e-mails when they provided the defense lawyers with copies of 78,000 e-mails.

The decision is one of the first to apply the newly enacted Rule 502 of the Federal Rules of Evidence, which protects against waiver of privilege if the disclosure is inadvertent and if the holder of the privilege took “reasonable steps” to prevent disclosure and to rectify the error.

But for lawyers, the ruling also serves as a reminder of another rule, Rule 26(b)(5)(B) of the Federal Rules of Civil Procedure, which mandates that lawyers create a privilege log for all documents withheld.

Although Baylson ultimately concluded that the privilege wasn’t waived for all 800 documents, he nonetheless found that the plaintiff’s failure to comply fully and timely with the mandatory requirements of Rule 26 meant that the privilege was waived for 120 documents.

“The obligation to log privileged documents is mandatory under the specific terms of Rule 26(b)(5). Despite Rhoads’s attempts to justify, explain and minimize its failure to log all of its inadvertently privileged documents by June 30, 2008, the court finds that the delay in doing so until Nov. 12, 2008 is too long and inexcusable,” Baylson wrote.

Defense lawyers urged Baylson to rule that the plaintiff had waived the privilege for all of the inadvertently disclosed documents because its process of screening the documents was “grossly insufficient.”

For more see law.com.

U.S. Federal Rule of Evidence 502

Ronald J. HedgesDecember 2nd, 2008

The Federal Rules of Evidence have now been amended to include a new Rule 502 [PDF], which should represent a sea change in the law of waiver in the United States. Rule 502 is intended to introduce uniformity in the law of waiver of attorney-client privilege and work production protection throughout the United States courts and, through operation of the Commerce Clause of the United States Constitution, among State courts.

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