By James E. Kurack Jr.
The Legal Intelligencer

September 30, 2008

The increasing volume of electronically stored information the average business maintains makes businesses vulnerable to the inadvertent disclosure of privileged communications. Unfortunately, the inadvertent disclosure of a single privileged document frequently results in expensive litigation over whether the privilege has been waived and the scope of the waiver. Some courts conclude that a party who inadvertently discloses a single document may potentially waive the privilege as to hundreds or thousands of other documents related to the same subject matter as the disclosed document in both pending and subsequent litigation. Fear over the consequences of subject-matter waiver has escalated the costs and delay of the discovery process for businesses that must vigilantly protect against the disclosure of privileged documents by spending significant amounts of time and effort to hire attorneys to engage in extensive privilege reviews.

In an effort to adapt the doctrines of inadvertent disclosure and subject matter waiver to the realities of electronic discovery and relieve the increasing costs associated with document production, Congress passed new legislation setting forth a new Federal Rule of Evidence. Proposed Rule 502 provides the following protections:

• Subsection (a) provides that in the event the court determines a party has disclosed information or communication that waives the attorney-client privilege, the waiver will only apply to the information disclosed unless the holder of the privilege intentionally produced the privileged information or communication in a misleading manner;

• Subsection (b) provides that the inadvertent disclosure of privileged information or communication in a federal proceeding will not result in a broader subject matter waiver if the holder of the privilege inadvertently disclosed the information or communication and took reasonable steps to prevent disclosure and rectify the error;

• Subsection (c) provides that disclosure of privileged information or communication in a state court proceeding will not operate as a broader subject matter waiver of the attorney-client privilege in a subsequent federal proceeding if the disclosure does not constitute a waiver under Rule 502 or is not a waiver under the law of the state where the disclosure occurred;

• Subsection (d) provides that if a federal court enters an order that the disclosure of documents containing privileged information or communication does not constitute a broader subject matter waiver, that order is enforceable against any party in subsequent federal or state court litigation;

• Subsection (e) allows parties to enter into confidentiality agreements protecting against subject matter waiver in the event of the inadvertent disclosure of privileged information or communication in a federal court proceeding.

Proposed Rule 502 attempts to address the costs associated with the production of electronically stored information in several respects. First, the rule eliminates automatic subject matter waiver in all but the most "unusual" circumstances. Subsection (a) eliminates automatic subject matter waiver when a party mistakenly produces a privileged document unless the disclosure was intentional and the document "ought in fairness" be considered with the privileged documents withheld from disclosure. The committee notes explain that the "fairness" consideration will result in a broader subject matter waiver only where "a party intentionally puts information into the litigation in a selective, misleading and unfair manner."

Second, the rule clarifies the consequences of inadvertent disclosure. Federal courts take three separate views as to whether an inadvertent disclosure results in a waiver. Some courts determine that the inadvertent disclosure of confidential information will only result in a waiver if the disclosure was intentional. Conversely, other courts conclude that any inadvertent disclosure of a privileged communication results in a waiver. Subsection (c) purports to resolve conflicting case law on inadvertent disclosure by adopting the view held by the majority of courts that consider multiple factors — including reasonableness of precautions taken to prevent disclosure, extent of disclosure, period of time to rectify the error — and in determining whether the inadvertent disclosure of a document will result in a subject matter waiver.

Third, the rule limits the consequences of the inadvertent disclosure of an otherwise privileged document in a prior state court action in two ways. The rule allows a party who inadvertently discloses a document in a state court proceeding to seek protection under Rule 502 in a subsequent federal court proceeding. Likewise, if the state in which the inadvertent disclosure occurred provides broader protections against subject matter waiver than Rule 502, subsection (c)(2) allows a party to utilize those protections.

Fourth, the rule allows parties to limit costs of pre-production privilege review by entering into confidentiality agreements which will protect against the consequences of inadvertent disclosure. While many parties utilize "claw back" or "quick peek" agreements which require the return of any inadvertently disclosed privileged documents, the risk of subject matter waiver remains because some courts have not approved the use of such agreements. More importantly, these agreements may not be enforceable against third parties. Subsections (d) and (e) address these problems. Subsection (e) provides authority for parties to rely on these agreements. Subsection (d) gives federal courts the authority to incorporate confidentiality agreements into court orders so these types of agreements can be enforced against third parties in subsequent federal and state court litigation.

Despite Congress' attempt to provide broader protections against subject-matter waiver, several uncertainties remain. The rule fails to define how courts should evaluate the factors in subsection (b) which determine whether the inadvertent disclosure of a document will result in a subject matter waiver. The committee notes suggest that the following factors should assist in making such a determination: reasonableness of precautions taken to prevent disclosure, the time taken to rectify the error, the scope of discovery, the extent of the disclosure and the "overriding issue of fairness." The committee notes, however, do not interpret these factors. The failure to define the circumstances that may determine whether the inadvertent disclosure of a document will result in a subject matter waiver cast doubt upon a rule designed to provide clarity. It is unknown how courts will determine whether or not counsel took reasonable steps to prevent disclosure.

The committee notes give some instruction as to what may constitute reasonable precautions to protect against the disclosure of electronically stored information. The committee notes explain that reasonable precautions include the use of "analytical software applications" and "linguistic tools" to screen for privilege and work product as well as the use of an "efficient system of records management."

Likewise, the committee notes fail to specify how much time a party should take to rectify the error. Significantly, the proposed rule does not require a party to engage in any post-production review to determine whether any protected communication or information has been inadvertently produced. In fact, the committee notes explicitly state that such action is not required. Instead, the Rule requires the producing party to follow up on any disclosure of obvious privileged information.

Furthermore, while Rule 502 limits the consequences of inadvertent disclosure in a federal court proceeding, parties to a state court action must continue to protect against inadvertent disclosure. Rule 502 provides no protection to a party who inadvertently discloses a document in state court. The rule only binds state courts when an inadvertent disclosure is made at the federal level and the disclosed communication or information is subsequently offered in a state proceeding.

Finally, no one can predict the ease in which federal courts will enter confidentiality orders under subsection (d). Notably, the drafters of the rule deleted language prohibiting court confidentiality orders without agreement of the parties from the rule. Thus, federal courts will presumably be able to enter such orders on disputed motions or sua sponte.

Proposed Federal Rule of Evidence 502 reduces the consequences of inadvertent disclosure and should relieve some of the financial costs associated with document production. The rule, however, does not eliminate the need for businesses to have an efficient document retention policy for electronic communication. Conversely, the rule makes it essential for businesses to have such a policy. The protections under the proposed rule will undoubtedly force businesses to enter into agreements to produce information pursuant to a confidentiality agreement which allows parties to retrieve inadvertently disclosed material. In certain situations, however, the harm of an inadvertent disclosure of a document will not be eliminated by the return of that document. The most efficient way to protect against inadvertent disclosure is through an efficient document retention policy that allows businesses to clearly identify attorney-client privileged and work-product protected documents before litigation. Such a policy allows businesses to eliminate the pitfalls of inadvertent disclosure and ensure its resources are not wasted with needless privilege review. •

James E. Kurack Jr. is a senior associate with Obermayer Rebmann Maxwell & Hippel. His practice areas include general commercial litigation and data security and privacy. He can be reached at 215-665-3169 or james.kurack@obermayer.com.

 This article is reprinted with permission from the September 30, 2008 issue of The Legal Intelligencer © 2008 NLP IP Company.

The information contained in this publication should not be construed as legal advice, is not a substitute for legal counsel, and should not be relied on as such. For legal advice or answers to specific questions, please contact one of our attorneys.