e-discovery 2.0

With the recent implementation of Federal Rules of Evidence (FRE) 502 litigants have been waiting to see what kind of impact this rule will have in practice - particularly with the anticipated reduction of attorney review costs during electronic discovery.  In Rhoads Indus., Inc. v. Bldg. Materials Corp. of Am., 2008 WL 4916026 (E.D. Pa. Nov. 14, 2008) we see an early indication that things aren’t quite as clear as people had hoped.

In this breach of contract and negligent misrepresentation action plaintiff Rhoads admittedly (yet inadvertently) produced over eight hundred privileged, electronic documents during eDiscovery.  After returning the documents, Defendants filed a motion claiming that Rhoads waived privilege because:

• its production was careless,
• its response in seeking the return of the documents was delayed, and
• it failed to produce complete and accurate privilege logs.

The court began its analysis by focusing on FRE 502 which recently created a national standard (versus the previous split in jurisdictions) and now states a “middle ground” for the determining of inadvertent disclosure during eDiscovery.  The key provision being (b)(2) which provides protection if “the holder of the privilege or protection took reasonable steps to prevent disclosure.”

As the court began its legal analysis it quickly noted the similarity to Victor Stanley, Inc. v. Creative Pipe, Inc., which had “analogous facts” despite being decided pre-FRE 502.  Both Rhoads and Victor Stanley leveraged similarly the five-factor test stated in Fidelity which were:

1. the reasonableness of the precautions taken to prevent inadvertent disclosure in view of the extent of the document production,
2. the number of inadvertent disclosures,
3. the extent of the disclosure,
4. any delay in measures taken to rectify the disclosure, and
5. whether the overriding interests of justice would be served by relieving the party of its errors.

The Rhoads court indicated its belief that “the most appropriate approach is to first determine whether the producing party has at least minimally complied with the three factors stated in Rule 502, i.e., that the waiver was inadvertent, the party took reasonable steps to prevent disclosure, and attempted to rectify the error.”  Acknowledging that the reasonableness of Rhoads’ review was the crux of the dispute, the court then concluded, “that once the producing party has shown at least minimal compliance with the three factors in Rule 502, but ‘reasonableness’ is in dispute, the court should proceed to the traditional five factor test.”

Factor 1 (the reasonableness of the precautions)

Despite the unfortunate results, Rhoads actually started out on the right foot.  First, they recognized that with extensive electronic discovery on the horizon they needed an IT consultant to research software for the in-house processing and searching effort.  The consultant tested and then purchased a tool to perform the necessary electronic data searches, although it wasn’t clear how they selected that product or whether they reviewed any other similar solutions.

“The fact that Rhoads retained a consultant who recommended and used a fairly sophisticated screening device shows that Rhoads substantially complied with the following Explanatory Note to Rule 502: ‘A party that uses advanced analytical software applications and linguistic tools in screening for privilege and work product may be found to have taken “reasonable steps” to prevent inadvertent disclosure. The implementation of an efficient system of records management before litigation may also be relevant.’”

After picking out the software tool, the IT consultant identified a large volume of potentially responsive documents after consulting Rhoads’ attorneys to identify keyword searches intended to filter the privileged material and removed those documents from the group.  The search was run a second time to verify its accuracy.  Given the large volume of documents remaining even after removing materials hit by the privilege search, Rhoads’ counsel modified the original search terms and reduced the volume of potentially responsive documents to 78,000.   Rhoads’ counsel then manually reviewed a separate group of emails from specific accounts to identify and remove privileged documents, which were then added to separate privilege logs.

On the other side of the ledger, there were a number of things the court found lacking in Rhoads’ methodology, citing Victor Stanley, including a failure in crafting a viable search strategy: “Plaintiff produced documents that its limited search should have caught. Therefore Plaintiff not only failed to craft the right searches, but the searches it ran failed. Plaintiff has no explanation for this.  … Here there was no testing [read: no sampling] of the reliability or comprehensiveness of the keyword search. Plaintiff’s only testing of its search was to run the same search again.”

Factor 2 (The Number of Inadvertent Disclosures)

While 800 inadvertently produced documents was only 1-2% of the data set it still was a large number standing alone, especially compared to Victor Stanley, which had 165 at issue.  So, the court found that this issue favored the Defendants.

Factor 3 (The Extent of the Disclosure)

Read on.

Factor 4 (Any Delay in Measures Taken to Rectify the Disclosure)

The court skipped factor 3 and went instead to factor four, finding that this too favored Defendants.  Significantly the court found fault with the resources Plaintiff brought to bear on the issue and also noted that “Defendants had to bring Plaintiff’s error to its attention instead of Plaintiff catching its own mistake” (as in Victor Stanley).

Factor 5 (Fairness)

Now here’s where things get interesting.  Despite finding for the Defendants on the previous 4 (really 3) factors - meaning that they weren’t on balance “reasonable” - the court puts an unbalanced weighting on this final fairness factor:

“Although Rhoads took steps to prevent disclosure and to rectify the error, its efforts were, to some extent, not reasonable…. The most significant factor, …, is that Rhoads failed to prepare for the segregation and review of privileged documents sufficiently far in advance of the inevitable production of a large volume of documents.”

And yet, “I find that the fifth factor, the interest of justice, strongly favors Rhoads. Loss of the attorney-client privilege in a high-stakes, hard-fought litigation is a severe sanction and can lead to serious prejudice. … [D]enying these documents to Defendants is not prejudicial to Defendants because, in the first place, they have no right or expectation to any of Rhoads’ privileged communications.”

The judge went on to further shore up his over reliance on the “fairness” prong by taking a crack at Judge Grimm’s analysis in Victor Stanley: “I believe that Judge Grimm’s analysis reflects, to a more significant degree than I believe appropriate, application of hindsight, which should not carry much weight, if any, because no matter what methods an attorney employed, an after-the-fact critique can always conclude that a better job could have been done.”

Interesting….  It seems that Rhoads stands for a fairness weighted approach that effectively eviscerates the entire reasonableness analysis mandated by FRE 502 as applied in Victor Stanley and Fidelity.  It seems to me that waiver of privilege is always going to be a “severe sanction” leading to “serious prejudice.”  That’s why inadvertent disclosure is called the third rail of e-discovery.  But, if you want the newly articulated reasonableness standard to mean anything, the “fairness” prong can’t trump the rest of the analysis.

I’m sure this will play out in the near future, but it’s my guess that “reasonable” minds will prevail…

There’s a lot of excitement (and corresponding uncertainty) about the recent passing of Federal Rule of Evidence 502 (FRE 502), which was signed into law on Sept 19th.  The main reason that the legal community is excited about FRE 502 is because of the potential for cost savings by reducing the amount of money associated with the e-discovery review process, which is routinely viewed as the most expensive area in the entire e-discovery process.

In combination with the codification of a national standard to determine when a privilege has been waived, FRE 502 is primarily designed to make the use of claw-back agreements a truly viable prospect when doing e-discovery privilege review.  It should provide some panacea (ideally) for rapidly escalating e-discovery costs.  Or, at least that was the impetus behind the rule’s creation - according to the Comments:

“The proposed new rule facilitates discovery and reduces privilege-review costs by limiting the circumstances under which the privilege or protection is forfeited, which may happen if the privileged or protected information or material is produced in discovery. The burden and cost of steps to preserve the privileged status of attorney-client information and trial preparation materials can be enormous. Under present practices, lawyers and firms must thoroughly review everything in a client’s possession before responding to discovery requests. Otherwise they risk waiving the privileged status not only of the individual item disclosed but of all other items dealing with the same subject matter. This burden is particularly onerous when the discovery consists of massive amounts of electronically stored information.”

In short, FRE 502 is designed to establish uniform, nationwide standards for waiver of attorney-client privilege and work product protection, with the main goal being to protect producing parties against the inadvertent disclosure of privileged materials or work product in either federal or state proceedings.  The salient section is subsection (b) which states that when a disclosure of privileged information is made in a federal proceeding or to a federal agency, the disclosure does not constitute a waiver if:

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).

The end game here is presumably to increasingly leverage automated review methodologies to save costs.  But, in order to facilitate this type of review methodology without taking on unhealthy levels of risk means that claw-back provisions must be as airtight at possible to prevent inadvertent electronically stored information (ESI) productions.  And yet, exactly how FRE 502 will work in practice is up to debate since there isn’t any case law interpreting it yet.

One area that’s top of mind is how this new Rule will impact the recent decisions on e-discovery search, including the Victor Stanley case authored by Chief Magistrate Judge Grimm.  Since FRE 502 contains a core “reasonableness” prong in section (b) it’s likely that Grimm’s proclamation about e-discovery search will still be controlling.  Grimm fundamentally had to evaluate whether the producing party’s search protocols and procedures were in fact reasonable.

“Defendants, who bear the burden of proving that their conduct was reasonable for purposes of assessing whether they waived attorney-client privilege by producing the 165 documents to the Plaintiff, have failed to provide the court with information regarding: the keywords used; the rationale for their selection; the qualifications of M. Pappas and his attorneys to design an effective and reliable search and information retrieval method; whether the search was a simple keyword search, or a more sophisticated one, such as one employing Boolean proximity operators; or whether they analyzed the results of the search to assess its reliability, appropriateness for the task, and the quality of its implementation.” (footnotes omitted).

In Victor Stanley, the producing party wasn’t able to demonstrate reasonableness because they didn’t strategically craft out their strategy nor conduct any sampling to make sure that the e-discovery search worked as designed.  This type of analysis would still seem to come into play under FRE 502 and so, as Grimm states, the use of either a best practices or collaborative approach to e-discovery would seem to be as important as ever.

Given that backdrop it’s just as important as ever that parties “show their work” when it comes to e-discovery search.   Whether FRE 502 will really make parties feel safe enough to use automated review processes (thereby reducing costs) will remain to be seen.  But, this first step which unifies standards and expectations is at least a very positive step.