Mt. Hawley Postscript: Bad Facts Don’t Help on Appeal

On July 23, 2010, the U.S. District Court for the Southern District of West Virginia issued a decision affirming Magistrate Judge Mary E. Stanley’s decision in Mt. Hawley Insurance Company v. Felman Production Inc., 2010 WL 1990555 (S.D.W.Va., May 18, 2010). In doing so, the court shed some light on the key takeaways from the magistrate’s decision. If I were an advocate facing argument based on Mt. Hawley, I would be reading this shorter District Court decision as well.

[For background, see my prior posts on this case, Bad Facts Make Bad Law: ‘Mt. Hawley’ A Step Backward for Rule 502(b) and Mt. Hawley Revisited: Bad Apples Make for Bad Law.]

Appeal from the Magistrate

For those who are not lawyers, the appeals process and, in particular, the hierarchy of opinions can be confusing. Not all cases have the same weight when used for precedent. Not all decisions are binding on other courts. So, it is worth taking a second to under the procedural posture, as we used to say in law school.

Magistrate Judge Stanley is not what we call an Article III judge. That means she was not appointed by virtue of Article III of the Constitution, which created the judicial branch of our government. Rather, magistrates are appointed by the district courts pursuant to power granted by Congress. They serve for eight-year terms and are tasked with assisting district judges in the performance of their duties.

In Mt. Hawley, Judge Robert C. Chambers, the district judge in charge of the case, assigned it to Magistrate Judge Stanley to handle many of the pretrial proceedings, a common move in federal courts. Among other things, Magistrate Judge Stanley was asked to handle discovery issues and disputes, also a common assignment. She issued her opinion by virtue of that authority.

Not surprisingly, Felman didn’t like Magistrate Judge Stanley’s decision, so the lawyers appealed to District Judge Chambers. He issued his opinion affirming Magistrate Judge Stanley both on the facts and as a matter of law.

Just the Facts

The Felman team appealed Magistrate Judge Stanley’s factual conclusion that Felman waived the attorney-client privilege by not taking reasonable steps to screen for privilege before making the production. As Judge Chambers explained, the question before him was not whether he agreed with those findings but whether they were clearly “erroneous.” Specifically, the test is whether, after viewing the record, the judge was left with “the definite and firm conviction that a mistake has been committed.”

This is the standard that appellate courts commonly use in reviewing an appeal from a trial. The logic is that the trial court or jury heard the witnesses live, had a chance to review their demeanor and thus were in a better position to make a fact finding. It also stems from a policy decision that we don’t want appeals courts to re-try a case. If the judge had to review the facts, hear testimony and sit through the arguments again, there would be no point in delegating the task to the magistrate.

Judge Chambers properly deferred to Magistrate Judge Stanley’s fact findings on review and found no “clear error.” He recognized and accepted that the disclosure was inadvertent but still agreed that the screening procedures were not reasonable. The “ridiculously” high number of irrelevant materials and privileged communications that were produced showed lack of reasonableness, he concluded. As he explained:

Here, the number of inadvertently disclosed documents was enormous (approximately 30% of more than one million pages) and the number and extent of the attorney-client privileged communications disclosed was also very large (thousands of attorney-client protected communications were produced).

These facts alone, the judge concluded, weighed heavily in favor of finding the precautions taken to avoid inadvertent disclosure were unreasonable.

Hmmm. That seems questionable to me. As the judge admitted, one of the key problems was that an index on one of the Concordance databases failed and thus rendered search inoperable. What that means is that search for that segment of documents would not have found the key privilege terms counsel sought in trying to screen for privileged documents. How was counsel to know of this error if the software didn’t sound an alarm?

Basing the decision on numbers alone misses the underlying point. If we are relying on technology to help find documents, we run the risk that the technology will fail or that we will use it improperly. When that happens, the miss is not for one or two documents (as it might be with a lazy human screener). Rather, the miss could be thousands or tens of thousands of documents. The important point is that the number of documents is not a measure of counsel’s efforts. It is the steps taken that should be judged–or the choice to use Concordance for this purpose in the first place.

Accepting the high standard of review required on appeal, I think the judge still should have come to grips with the difficult factual issues involved here. Counsel took a lot of steps to protect against inadvertent disclosure. Were they reasonable or unreasonable? That is the question that needs to be answered and that is a factual determination. If the judge concluded that this was a close question, the appeal should have been affirmed. But that is where the decision should have been focused rather than on the numeric outcome.

To be fair, in a later section of the opinion, Judge Chambers endorses Magistrate Judge Stanley’s conclusion that Felman’s counsel’s “failure to test the reliability of keyword searches by appropriate sampling [was] imprudent.” He links this to the number of inadvertent disclosures to bolster the conclusion about a lack of care taken in the review process. If nothing else, Mt. Hawley and its appeal underscore the need for sampling during critical steps in the search and production process.

Ultimately, as Judge Chambers acknowledged, the emails were damning to Felman’s position. As the judge noted:

In the email, Felman allegedly (1) admits that it did not have sales contracts in place that would require the use of three furnaces, and (2) seeks advice from counsel on whether to request that customers backdate contracts in order to produce this evidence for the purposes of its insurance claim.

Yikes. That is not the kind of thing you want to inadvertently produce. It went to the heart of Felman’s $39 million claim and showed it to be fraudulent. As both magistrate and judge put it, the email “resonates throughout this case—a bell which cannot be unrung.”

The Legal Decision

When a legal conclusion–as opposed to a factual one–is appealed, a different standard of review applies. Particularly when the case starts with a magistrate, the district judge is required to review legal conclusions from scratch, “de novo” as we legal types call it. Why? For two reasons. First, the district judge is the one empowered under the the Constitution to interpret the law. Magistrates are primarily there to assist with fact findings and judicial administration. Second, legal questions usually don’t turn on witness demeanor or factual testimony. Generally, the reviewing judge is just as well positioned to review a legal question as the trier of fact (magistrate in this case).

The trick is distinguishing between a legal and factual question. That isn’t always easy. “I know one when I see one” is probably as good a standard as we will get for e-discovery questions like these.

One legal question raised on appeal had puzzled me when I first looked at the case. Why weren’t the defendants required to honor the “clawback” agreement they signed earlier in the proceeding? As you may know, a clawback agreement is designed to protect both sides in a discovery dispute. It implicitly recognizes that privileged documents might slip through the net in either direction. Rather than force both parties to risk an inadvertent disclosure battle, it says that the receiving party has to give back the privileged document when asked.

In this case, the parties did more than just agree to a clawback. Early in the case, they also entered into a “Stipulation Regarding the Discovery of Electronically Stored Information.” Both the clawback and the stipulation were “intended to protect the confidentiality of and privilege attached to the documents produced, meanwhile facilitating the discovery process,” as the court noted. Why weren’t these controlling?

The judge doesn’t clearly answer that question, at least to my satisfaction. What he seems to say is this: Even with a clawback agreement in place, the court still must run through the tests in FRE 502(b) (and those set out in Victor Stanley v. Creative Pipe Inc., a seminal decision on inadvertent disclosure that predated the recent amendments to the Federal Rules of Evidence) to determine if the producing party can get the documents back. Ironically, in Victor Stanley, U.S. Magistrate Judge Paul W. Grimm pointed out that the parties had failed to enter into a clawback agreement—suggesting strongly that the inadvertent waiver issue would have been moot had they done so.

Rule 502(b) governs inadvertent disclosure in federal proceedings and requires that the disclosing party show three elements in order to recover privileged documents:

  1. the disclosure is inadvertent;
  2. the holder of the privilege or protection took reasonable steps to prevent disclosure; and
  3. the holder promptly took reasonable steps to rectify the error, including (if applicable) following Federal Rule of Civil Procedure 26(b)(5)(B).

In this case, the judge properly pointed out that the three provisions are connected with an “and” rather than an “or.” Thus, the fact that Felman took prompt steps to get the privileged documents back (rectify the error) was not dispositive. Rather, the judge, following Magistrate Judge Stanley, focused on whether Felman’s counsel took “reasonable steps” to prevent disclosure, something that feels more like a factual inquiry than a legal one.

What the judge didn’t do (as Magistrate Judge Stanley also did not) is explain how the clawback agreement factored into the equation. I have not seen the agreement itself, but you can assume that it said something like this: “If either side accidentally produces documents later determined to be privileged, then the other side agrees to give them back upon request.” What else could it say? The purpose of a clawback agreement is to eliminate an inadvertent waiver of privilege. Clawbacks were specifically sanctioned under FRE 502 (e) and made binding on the parties.

Both magistrate and judge seemed to accept that the production was inadvertent and that Felman’s counsel promptly requested the return of the harmful documents. So what happened to the agreement? I don’t know and neither opinion clarifies the point. Perhaps the agreement itself was deficient or was somehow waived.

Lacking an answer to this question, litigants are left to wonder whether their clawback agreements are safe or whether they will still have to satisfy the now somewhat stringent requirements of FRE 502(b) in order to recover inadvertently produced documents. In my book, that’s the legacy of Mt. Hawley. Bad facts and bad apples once again help make bad law.

mm

About John Tredennick

A nationally known trial lawyer and longtime litigation partner at Holland & Hart, John founded Catalyst in 2000. Over the past four decades he has written or edited eight books and countless articles on legal technology topics, including two American Bar Association best sellers on using computers in litigation technology, a book (supplemented annually) on deposition techniques and several other widely-read books on legal analytics and technology. He served as Chair of the ABA’s Law Practice Section and edited its flagship magazine for six years. John’s legal and technology acumen has earned him numerous awards including being named by the American Lawyer as one of the top six “E-Discovery Trailblazers,” named to the FastCase 50 as a legal visionary and named him one of the “Top 100 Global Technology Leaders” by London Citytech magazine. He has also been named the Ernst & Young Entrepreneur of the Year for Technology in the Rocky Mountain Region, and Top Technology Entrepreneur by the Colorado Software and Internet Association. John regularly speaks on legal technology to audiences across the globe. In his spare time, you will find him competing on the national equestrian show jumping circuit or playing drums and singing in a classic rock jam band.