Claw-Back Agreements: Are They Always Effective?

Kevin Cox, Associate Member, University of Cincinnati Law Review

In today’s digital age, most things are kept in electronic form (“ESI”)[1] rather than paper documents and nothing causes litigators more anxiety than the potential for inadvertent waiver of attorney-client or work-product privilege.  The labor and cost of caring for these documents can be exorbitant, and companies can have hundreds of thousands of electronic documents that they may be required to produce in the event of litigation.  Given the short amount of time to produce documents requested during discovery, parties may be apprehensive about the chances that they will inadvertently produce attorney-client privileged documents, waiving the privilege of those documents.

Federal Rule of Evidence 502(e) permits parties to enter into claw-back agreements whereby the parties can limit the scope of what kinds of disclosures could potentially result in a waiver of privilege.  District courts across the country, however, are split as to whether claw-back agreements always trump the requirements of Rule 502 or if there must be more in the agreement to govern.   Regardless of the split, courts have indicated that parties can draft effective agreements if they follow a few simple steps to establish robust, and enforceable claw-back agreements.  First, the parties should adhere to basic contracting principles and verify that all terms are clear, unambiguous and agreed upon by both parties.[2]  Second, the agreement must account for all types of potential disclosures, reckless, negligent, or intentional, and lay out steps to resolve potential disputes.[3]  Finally, pursuant to Rule 502(d), parties may ask for a court order incorporating their 502(e) agreement to encompass both intentional, as well as inadvertent, disclosures to prevent waiver.[4]

Federal Rule of Evidence 502, entitled “Attorney-Client Privilege and Work Product; Limitations on Waiver,” was enacted in 2008 to serve two major purposes, (1) to resolve discovery disputes about the effect of certain disclosures of protected information, and (2) to attempt to mitigate the rising litigation costs necessary to protect against waiver of attorney-client or work-product privilege.[5]  Prior to Rule 502’s enactment[6], “a study found that from 2006 to 2008, the average surveyed company spent between $ 621,880 and $ 2,993,567 per case on electronic discovery.” [7]  With increasing volumes of electronic documents, privilege review becomes correspondingly more expensive and time-consuming, so it follows that inadvertent production is increasingly likely to occur.[8]

The Rules

Rule 502 has seven subsections however, this paper focuses primarily on three: Rules 502(a), (b) and (e).  Rule 502(a) articulates the scope of intentional disclosures made in federal proceedings and 502(b) governs the scope of inadvertent disclosures.  Rule 502(b) states in part that a disclosure does not operate as a waiver if: (1) it was inadvertent, (2) reasonable steps were taken by the disclosing party to prevent the disclosure; and (3) the disclosing party acted promptly and reasonably to rectify the error (requested an immediate claw-back).  Rule 502(e) allows parties to enter into agreements regarding the effect of a disclosure (whether inadvertent or intentional) of privileged material.[9]  Rule 502(e) also goes hand-in-hand with Federal Rule of Civil Procedure 26(b)(5)(B), which requires a receiving party to promptly return, destroy, or sequester documents if the producing party discovers and notifies them of the privilege.[10]

While Rule 502(e) permits parties to enter into claw-back agreements, the district courts have not yet reached a consensus as to what force these agreements have when discovery disputes inevitably arise.  As a result of the ambiguity in the Rules, the district courts have developed three approaches: (1) if a claw-back is in place, it always trumps Rule 502(b);[11] (2) a claw-back agreement trumps Rule 502(b) unless the document production itself was completely reckless;[12] and (3) a claw-back agreement trumps Rule 502(b) only if the agreement provides concrete directives regarding each prong of 502(b).[13]

Irth Sols., LLC v. Windstream Communs. LLC[14]

In 2017, the district court for the Southern District of Ohio was faced with this exact question in Irth Sols., LLC v. Windstream Communs. LLC.[15]  In this case, the parties entered into a claw-back agreement prior to discovery which specified that if a party discovers that it inadvertently produced privileged ESI (1) the producing party will promptly notify the receiving party of the inadvertent production; (2) the receiving party will promptly destroy or return all copies of the inadvertently-produced documents; and (3) the inadvertent production does not waive that privilege.[16]  However, when the defendant produced 2200 pages (only 1400 of which were in a searchable form) of documents and realized, albeit twelve days later, that 140 pages were privileged, the plaintiff refused to return them. [17]  The plaintiff did sequester the documents while the court ruled on the dispute.  While the matter was before the court, the defendant again produced the same 2200 pages of documents (this time in a text-searchable format) including the privileged documents.[18]

The plaintiff urged the court to find that these disclosures were more than just inadvertent but reckless and a waiver of privilege.  However, when the court looked to Rule 502’s definition of conduct amounting to waiver, it found only a “binary choice” for classifying disclosures: intentional or inadvertent.[19]  Since there was no evidence that the defendant intentionally disclosed the privileged documents, the court classified the disclosures as inadvertent.[20]

Next, the court analyzed the relationship of Rule 502 and claw-back agreements.  Noting that the Sixth Circuit has never addressed how claw-back agreements and Rule 502(b) “interlace,” the court recognized three approaches taken by other courts.[21]  The first approach, adopted by the Federal District Court for Kansas, holds that a claw-back agreement always defeats the operation of Rule 502(b).[22] The second approach, adopted largely by courts in the Second Circuit, holds that a claw-back agreement governs unless the document production process itself is “completely reckless.”[23]  The third approach holds that a claw-back agreement only governs if the parties provide concrete directives regarding the three prongs of Rule 502(b).[24]  That is, a claw-back agreement must define (1) what conduct constitutes inadvertence, (2) what precautionary measures are required to prevent disclosure, and (3) what the producing party’s post-production responsibilities are to prevent a waiver.[25]

The court quickly rejected the first approach and reasoned that an agreement must be drafted with care to effectuate the dual purposes of Rule 502(b)— “providing a predictable, uniform set of standards under which parties can determine the consequences of a disclosure, while simultaneously reducing discovery costs.”[26]  To achieve predictability parties, wishing to forego pre-production privilege review, must draft agreements that are explicit in rejecting Rule 502(b)(2)’s reasonable preventative measures prong.[27]  In this case, the parties’ agreement was silent regarding what pre-production measure must be taken, and the court found that due to the duplicate disclosures it was difficult to believe that any review had even taken place.[28]

The court then expressed approval of both the second and third approaches holding that waiver occurred under either.[29]  The court reasoned that it need not choose between either because “taking into account the careless privilege review, coupled with the brief and perfunctory claw-back agreement, following either approach leads to the same result: Defendant has waived the privilege.”[30]  Under the second approach, the court viewed the defendants’ repeat disclosures to be reckless and a waiver of privilege.  Furthermore, the court viewed the second and third approaches as a means “to revert back to Rule 502(b)’s requirements if an agreement is so perfunctory that that its intentions are not clear.”[31]  Thus, since the court found the claw-back agreement’s silence on the parties’ pre-production review to be ambiguous, it applied the third approach and deferred to Rule 502(b)’s requirement of reasonable preventative measures to find waiver.[32]

Discussion

Although the district court found that the defendant’s conduct had waived their claim of privilege, the Sixth Circuit Court of Appeals has agreed to hear this question on interlocutory appeal.[33]  Looking to the reasoning in the district court’s decision, it is difficult to believe that the Sixth Circuit will reach a contrary conclusion on the matter.  The advisory notes make it very clear that the primary purpose of the language in Rule 502 is to make resolution of discovery disputes predictable.[34]  Furthermore, in rejecting the first approach, the court recognized that claw-back agreements, like any other agreements, are contracts and thus, should adhere to basic contracting principles.[35]  The court viewed the parties’ agreement as a means to contract around the requirements of Rule 502; however, without explicit terms rejecting Rules 502(b)(2) and (3), interpreting it as such “would effectively rewrite the parties’ agreement into something it was not.”[36]  The court’s decision does not foreclose nor weaken the applicability of claw-back agreements.  It does recognize the sophisticated nature of attorneys, holding that if the parties intended to eliminate the requirement of pre-production review, they would have explicitly done so in the agreement.[37]

The second and third approaches recognize the power of claw-back agreements, but also recognize the duty of lawyers to protect the attorney-client privilege.[38]  “To find otherwise would undermine the lawyer’s responsibility to protect the sanctity of the attorney-client privilege.”[39]  The court reasoned that if the parties did not expressly reject, in their agreement, the requirement of reasonable measures to prevent disclosure, then the court could grant no greater protection to the those asserting privilege than the parties’ own precautions warrant.[40]

It can be, and indeed has been, argued that courts that reject the first approach and adopt either the second or third approaches are disregarding Congress’s intended purposes of Rule 502: to give predictability in evidence disputes, and to mitigate the increasing costs of discovery.[41]  Under this logic, if parties have chosen to contract around Rule 502, courts should be more inclined to apply the agreed upon terms to any disputes that may arise.  This approach would allow parties to limit the costs of pre-production privilege review and require immediate return of inadvertently disclosed materials.  However, if a dispute does occur, a court should not summarily enforce a claw-back agreement without considering fairness to both parties.  Indeed, in Windstream, the plaintiff believed it was unlikely that such a large percentage[42] of the defendant’s partial production was unintentional, and that the defendant likely decided that the documents should be privileged after the fact.[43]  To construe the parties’ cursory agreement as to allow this claw-back would go against Rule 502’s purpose of giving litigation predictability.

When reviewing the district court’s decision in Windstream, the Sixth Circuit should keep in mind that Rule 502 was intended to decrease the cost burden of ESI production, as well as giving predictability in the resolution of discovery disputes.  With that in mind, the appellate court should review each of the three approaches in turn and determine if it furthers those goals.  While the district court’s opinion was persuasive in rejecting of the first approach, its reliance on the second approach was misplaced.  By adding the recklessness standard, the district court has injected a standard that was not contemplated by the drafters of Rule 502.[44]  The Sixth Circuit should disregard the second approach and adopt the third approach.  The court should look to the body of Rule 502 as a framework from which the parties may contract around, and if the terms of Rule 502 are not expressly rejected in an agreement apply them.  In this case, since the parties omitted the preventative measures of Rule 502(b)(2), but did not explain why, the court should be hesitant to give full force to a now questioned term of the agreement.  The parties to this case are represented by sophisticated counsel; if they intended to reject the requirements of Rule 502(b), the agreement should have so provided.  Therefore, if the agreement lacks the requisite terms of Rule 502, the court should adopt the third approach and fill in the cracks with Rule 502(b).

Conclusion

While the Sixth Circuit will soon pass down its decision in the Windstream dispute, there are still several key takeaways from the district court’s decision.  First, under all three approaches, parties should adhere to basic contracting principles when drafting a Rule 502(e) claw-back agreement.  That is, both parties should treat each provision with the utmost care to avoid any ambiguities.  While there is no way to draft agreements with every potential dispute in mind, the parties should articulate a general framework of how to resolve any that may arise.  If parties choose to forego pre-production review, the parties should expressly state it in their agreement and consider including an explanation of why they chose to do so.[45]  Furthermore, the agreement should include definitions of what types of disclosures will or will not result in a waiver of privilege.  If the agreement is intended to protect against waiver due to “reckless” disclosure in the same way it protects against “inadvertent” disclosure, parties should carefully craft agreements to not fall prey to the second approach.

[1] ESI or electronically stored information, refers to all information stored in digital form, and requires a computer or other device for access.  Can include, among other sources, emails, texts, video or audio files, and website activity and history.

[2] Irth Sols., LLC v. Windstream Communs. LLC, 2017 U.S. Dist. LEXIS 121241, *36 (S.D. Ohio, Aug. 2, 2017).

[3] See Paul W. Grimm et al., Federal Rule of Evidence 502: Has it Lived Up to Its Potential? 17 RICH. J.L. & TECH. 8, 64 (2011).

[4] See Grimm et al., supra note 3 at 59 (citing Rajala v. McGuire Woods, LLP, 2013 U.S. Dist. LEXIS 1761, *4 (D. Kan. Jan. 3, 2013) (A court order may also be effective against third-party disclosures as well).

[5] See Fed. R. Evid, 502 advisory committee’s note.

[6] Prior to Rule 502’s enactment, there were “three distinct positions” as to whether inadvertent production waived privilege: (1) strict accountability, i.e., confidentiality can never be restored; (2) the lenient approach of “to err is human,” which required intentional disclosure; and (3) a balancing test which required case-by-case determination.  See Grimm et al., supra note 3 at 8.

[7] Jonh H. Beisner, Discovering a Better Way: The Need For Effective Civil Litigation Reform, 60 Duke L.J. 547, 567-8 (citing Lawyers for Civil Justice, Civil Justice Reform Grp. & U.S. Chamber Inst. for Legal Reform, Litigation Cost Survey of Major Companies 3 (2010), available at http://civilconference.uscourts.gov (follow “Empirical Research, Pt. 2” hyperlink; then follow “Litigation Cost Survey of Major Companies” hyperlink)).

[8] See Hopson v. Mayor of Balt., 232 F.R.D. 228, 232 (D. Md. 2005) (quoting COMM. ON RULES OF PRACTICE AND PROCEDURE, SUMMARY OF THE REPORT OF THE JUDICIAL CONFERENCE 27 (Sept. 2005)).

[9] Fed. R. Evid. 502(e).

[10] Fed. R. Civ. P. 26(b)(5)(B).

[11] See Rajala v. McGuire Woods, LLP, 2013 U.S. Dist. LEXIS 1761, *14 (D. Kan. Jan. 3, 2013) (holding that producing party need not show it had taken “reasonable steps” in pre-production privilege review because parties had entered into claw-back agreement that “defeat[ed] operation of Rule 502(b)”).

[12] Adopted largely by courts in the Second Circuit.  See, e.g., HSH Nordbank AG N.Y. Branch v. Swerdlow, 259 F.R.D. 64, *75 (N.Y.S.D. July 22, 2009) (“where parties execute such an order [claw-back], waiver is appropriate only if production of the privileged material was “completely reckless”) (internal quotations omitted); see also, Dover v. British Airways, PLC (UK), 2014 U.S. DIST. LEXIS 114121, *8 (N.Y.E.D. Aug. 15, 2014) (“Under the “completely reckless” standard, “inadvertent production will not waive the privilege unless the conduct of the producing party or its counsel evinced such extreme carelessness as to suggest that it was not concerned with the protection of asserted privilege.”) (internal quotations omitted).

[13] See Burd v. Ford Motor Co., 2015 U.S. Dist. LEXIS 48627, *34-35 (S.D. W. Va., April 14, 2015) (holding that if a claw-back agreement does not include “concrete terms explaining what precautions must be taken to meet the reasonableness standard in the second prong of Rule 502(b),” the court will rely on 502(b) to fill in the gaps.).

[14] 2017 U.S. Dist. LEXIS 121241, *35 (S.D. Ohio, Aug. 2, 2017).

[15] Id.

[16] Id. at *3 (The agreement also provided that the producing party will include a privilege log listing documents withheld).

[17] Id. at *6.

[18] Id. at *7. (

[19] Id. at *18.

[20] Id.

[21] Id. at *25.

[22] Id. (citing Northrop Grumman Sys. Corp. v. United States, 120 Fed. Cl. 436, 437 (2015)).

[23] Id. at *28.

[24] Id. at *30.

[25] Id. at *30

[26] Id. at *33.

[27] Id. at *34; see also Fed. R. Evid. 502(b)(2).

[28] Id. at *38.

[29] Id. at *35-36.

[30] Id.

[31] Id. at *41-42.

[32] Id.

[33] In re Windstream Communs., LLC, 2018 U.S. App. LEXIS 21997 (6th Cir. Aug. 7, 2018).

[34] Fed. R. Evid. 502 advisory committee’s note (“The majority rule has simply been distilled here into a standard designed to be predictable in its application.”).

[35] Irth Sols., LLC, 2017 U.S. Dist. LEXIS at *36.

[36] Id.

[37] Id; see also United States v. Sensient Colors, Inc., No. 07-1275 (JHR JS), 2009 WL 2905474, at *2 (D.N.J. Sept. 9, 2009) (“Plaintiff and Sensient are represented by sophisticated counsel.  If they intended to implement a ‘clawback’ provision this would have been specifically mentioned.”).

[38] Irth Sols., LLC, 2017 U.S. Dist. LEXIS at *40.

[39] Id. at *35.

[40] Id. see also In re Sealed Case, 877 F.2d 976, 980 (D.C. Cir. 1989).

[41] See Paul W. Grimm et al., supra note 3, at 73-74.

[42] More than 10% of the 2200 pages produced were claimed to be privileged.  Irth Sols., LLC, 2017 U.S. Dist. LEXIS at *40.

[43] Id. at *12.

[44] In fact, the Committee’s Note states the exact opposite with regard to Rule 502(d): “[T]he court order may provide for the return of documents without waiver irrespective of the care taken by the disclosing party.”  See Fed. R. Evid. 502(d) advisory committee’s note.

[45] See Grimm et al., supra note 3, at 76.

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