Prescient Partners, LP v. Fieldcrest Cannon, Inc.
Prescient Partners, LP v. Fieldcrest Cannon, Inc.
1997 WL 736726 (S.D.N.Y. 1997)
November 26, 1997

Francis, James C.,  United States Magistrate Judge

Clawback
Attorney-Client Privilege
Sanctions
Waiver
Attorney Work-Product
Protective Order
Cost Recovery
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Summary
The court found that PRescient had not waived its attorney-client privilege through inadvertent disclosure and ordered the defendants to return the privileged documents, destroy all notes or other work product reflecting the contents of such material, and delete any information in any computer database reflecting the contents of these documents. The court also denied PRescient's application for sanctions.
PRESCIENT PARTNERS, L.P., Plaintiff,
v.
FIELDCREST CANNON, INC., Fieldcrest Cannon Sure Fit, Inc., UTC Holdings, Inc., and Bert Shlensky, Defendants/Third–Party Plaintiffs,
v.
Paula RILEY, Third–Party Defendant
No. 96CIV.7590(DAB)(JCF)
United States District Court, S.D. New York
November 26, 1997

Counsel

Ned W. Branthover, Esq., Kathryn Diaz, Esq., Morgan & Finnegan, LLP, New York, New York.
Albert P. Allen, Esq., Michael D. McCoy, Esq., Alston & Bird LLP, Charlotte, NC.
Eugene Farabaugh, Esq., David Gelfand, Esq., Milbank, Tweed, Hadley & McCloy, New York, New York.
Francis, James C., United States Magistrate Judge

MEMORANDUM AND ORDER

*1 The plaintiff PRescient Partners (“PRescient”) and Third Party Defendant Paula Riley move for a protective order: (1) directing the defendants, Fieldcrest Cannon, Inc., Fieldcrest Cannon Sure Fit, Inc ., UTC Holdings, Inc., and Bert Shlensky (collectively, the “defendants”) to return certain privileged documents PRescient claims it inadvertently produced to the defendants; (2) barring the defendants from using this material in discovery or at trial; (3) requiring the destruction of work product generated by these documents; and (4) awarding plaintiff's costs and attorneys' fees for making this motion. In response, the defendants maintain that PRescient waived its privilege by producing the documents and failing to take the reasonable steps necessary to maintain the documents' confidentiality. For the reasons that follow, PRescient's motion is granted in part and denied in part.
PRescient owns a patent for a device that stabilizes covers and cushions on upholstered furniture. On October 7, 1996, PRescient commenced this action against the defendants alleging infringement of the patent, breach of a confidential disclosure agreement, misappropriation of trade secrets, false patent marking, and false advertising, among other claims.
On October 29, 1996, the defendants filed their answer, along with counterclaims and a Third–Party Complaint against Paula Riley, PRescient's principal. Subsequently, the parties negotiated an agreement to preserve the confidentiality of documents produced in the course of this litigation (“Confidentiality Agreement”), which this Court entered as a protective order on January 21, 1997. See Stipulated Protective Order, attached as Exh. A, Subexh. 5[1] and Exh. C to Declaration of Kathryn E. Diaz in Support of Plaintiff's Motion for a Protective Order Directing Defendants to Comply with the 1/21/97 Protective Order and Return Privileged Documents, and Barring Defendants from Utilizing Such Material in Discovery or at Trial (“Diaz Decl.”). Paragraph 16 of the Confidentiality Agreement states that when a party claims that privileged documents were inadvertently produced, the receiving party must “promptly return” the material but may move thereafter for an Order compelling production.
On November 5, 1996, the defendants served their first document request. PRescient served its initial response to the defendants' request on May 15, 1997. Diaz Decl. ¶ 16. To comply with its ongoing duty of document production, PRescient also produced documents to the defendants on May 23, June 9, August 15, and September 3, 1997. Diaz Decl. ¶ 21. The May 23 and June 9 document productions included privileged communications with counsel. Diaz Decl. ¶ 21 (identifying the documents produced on each date); Letter from Ned Branthover to Michael McCoy dated Sept. 9, 1997, attached as Exh. A, Subexh. 3 to Diaz Decl. (list of documents claimed to be inadvertently produced); Letter from Albert Allan to Ned Branthover dated Aug. 11, 1997, attached as Exh. E to Diaz Decl. (stating that the plaintiff's document production contained attorney-client communications).
*2 Attorney Kathryn Diaz managed PRescient's document production. See Diaz Decl. ¶¶ 13–14, 18–20. Paralegals numbered approximately 16,000 documents retrieved from PRescient Partners' storage facility, and made three copies: the “pristine set,” the “attorney set,” and the “paralegal set.” Diaz Decl. ¶¶ 14, 18. Ms. Diaz personally reviewed the “attorney set” and marked the privileged documents with a yellow sticker. Diaz Decl. ¶ 19. She then gave the color-coded “attorney set” to paralegal Joseph Ramirez, who was to remove the specified documents from his “paralegal set” before shipping them to the defendants. Diaz Decl. ¶ 20. Mr. Ramirez delegated this task to another paralegal, who shipped the documents without removing all the privileged material. Diaz Decl. ¶ 24. Ms. Diaz's later investigation revealed that this second paralegal erred due to a “chronic and serious health problem which caused her to be unable to perform her job duties,” a problem unknown to Ms. Diaz at the time of the document production. Diaz Decl. ¶ 32. Apparently, the paralegal experienced a stress-related emotional breakdown in which she “froze up” and was unable to follow the directions.
PRescient learned that privileged documents had been sent to the defendants on August 11, 1997, when it received a letter from defendants' counsel. The letter stated that PRescient had “waived its privileges through voluntary disclosure of ... communications between PRescient ... and its counsel” and cited four disclosed documents. Diaz Decl. ¶¶ 22–23. The next day, Mr. Ramirez sent a letter to one of defendants' paralegals citing paragraph 16 of the Confidentiality Agreement and requesting the return of the privileged documents. Letter from Joseph Ramirez to Marcia Siuda dated Aug. 12, 1997, attached as Exh. A, Subexh. 1 to Diaz Decl. Defendants' counsel responded ten days later with a letter stating that they were conducting an investigation to determine whether they agreed that the documents were “inadvertently produced.” Letter from Albert Allan to Ned Branthover dated Aug. 22, 1997, attached as Exh. A, Subexh. 2 to Diaz Decl.
PRescient's counsel then conducted a comprehensive review of the more than 12,000 pages that had been produced in order to determine if other privileged material had been disclosed. Diaz Decl. ¶¶ 26, 28. On September 9, 1997, they sent defendants' counsel a letter requesting the return of 117 pages of privileged material that had been included in the document production. Letter from Ned Branthover to Michael McCoy dated Sept. 9, 1997, attached as Exh. A, Subexh. 3 to Diaz Decl. Responding the next day, defendants' counsel refused to return the documents, claiming that the documents were not “inadvertently produced” and that PRescient had waived its privilege by producing them. Letter from Albert Allan to Ned Branthover dated Sept. 10, 1997, attached as Exh. A, Subexh. 4 to Diaz. Decl. PRescient then filed the instant motion.
*3 Rule 26(c) of the Federal Rules of Civil Procedure provides that
[u]pon motion ... accompanied by a certification that the movant has in good faith conferred or attempted to confer with other affected parties in an effort to resolve the dispute without court action, and for good cause shown, the court ... may make any order which justice requires to protect a party or person from annoyance, embarrassment, oppression or undue burden or expense, including ...
(1) that the disclosure or discovery not be had;
(2) that the disclosure or discovery may be had only on specified terms and conditions ....
Fed.R.Civ.P. 26(c). The burden rests on the movant, In re Agent Orange Product Liability Litigation, 821 F.2d 139, 145–46 (2d Cir.1987), who must establish good cause by a “particular and specific demonstration of fact [[[.]” In re Akron Beacon Journal, No. 94 Civ. 1402, 1995 WL 234710, at *10 (S.D.N.Y. April 20, 1995) (citations omitted). PRescient has certified that it conferred in good faith with the defendants in an effort to resolve the issues raised in the motion without court action. See Diaz Decl. ¶ 4. The plaintiff argues that good cause exists for issuing a protective order because the defendants breached paragraph 16 of the Confidentiality Agreement and because PRescient did not waive any privileges through disclosure of the documents. In response, the defendants argue that paragraph 16 does not govern this situation because the documents were not “inadvertently produced” as the term is defined by caselaw.
Paragraph 16 of the Confidentiality Agreement is entitled “Inadvertent Production of Privileged Information, Confidential Information or Restricted Information,” and provides in relevant part:
16. If information subject to a claim of ... privilege ... is inadvertently produced, such production shall not ... constitute a waiver of ... any claim of privilege .... If ... a claim of inadvertent production is made ... [the party in receipt of the documents] ... shall promptly return to the claiming party or person the material (and all copies thereof) as to which the claim of inadvertent production has been made. All notes or other work product reflecting the contents of such material shall be destroyed and any information in any computer database shall be deleted.
Stipulated Protective Order, attached as Exh. A, Subexh. 5 and Exh. C to Diaz Decl.
The defendants argue that because this provision uses the language “inadvertently produced,” it incorporates caselaw on waiver of privilege through inadvertent production of privileged documents. Defendants' Memorandum in Opposition to Plaintiff's Motion for Protective Order at 4–13 (“Defendants' Memo.”). Under the defendants' interpretation, paragraph 16 applies only where the privilege was not waived under governing caselaw because the producing party took reasonable steps to maintain the confidentiality of the disclosed documents. Defendants' Memo. at 4–13. See generally Liz Claiborne, Inc. v. Mademoiselle Knitwear, Inc., No. 96 Civ.2064, 1996 WL 668862, at *3 (S.D.N.Y. Nov. 19, 1996) (“[C]ourts in this district ... have found waiver of the privilege [as a result of inadvertent production] only if the disclosing party failed to take reasonable steps to maintain the confidentiality of the assertedly privileged documents ....”) (quotations and citations omitted). The defendants argue that the protective order does not govern these circumstances because PRescient failed to take such reasonable steps.
*4 In contrast, PRescient maintains that paragraph 16 controls the instant situation regardless of whether the documents would be deemed inadvertently produced under governing caselaw. Taking the plain meaning of the provision's language, PRescient argues that it applies to any documents about which a claim of inadvertent production is made. Memorandum of Law in Support of Plaintiff's Motion for a Protective Order under Fed.R.Civ.P. 26(c) at 3 (“Plaintiff's Memo.”).
Magistrate Judge Bernikow construed a similar provision in Union Carbide Corp. v. Montell N.V., No. 95 Civ. 0134 (S.D.N.Y. Aug. 15, 1997). He held that the provision did not merely incorporate the caselaw standards governing inadvertent waiver because, if it did, the provision would have no effect. Id. at 4. Furthermore, the provision “was designed to protect the parties, who face massive discovery obligations, from having to litigate the issue of inadvertence.” Id. Judge Bernikow noted however that “[p]erhaps a completely reckless production of privileged documents would result in waiver.” Id.
The same reasoning leads to the conclusion in this case that paragraph 16 does not incorporate the caselaw governing inadvertent waiver. The parties drafted this provision to provide for the out-of-court resolution of inadvertent production issues and to avoid litigating these issues. If the provision applied only to documents deemed inadvertently produced under governing caselaw, then the parties would have to brief that law for the court to determine even whether the provision applied to a particular situation. This would contravene the provision's purpose of protecting the parties from having to litigate inadvertent production issues. See Union Carbide, slip. op. at 4.
Thus, unless the production was “completely reckless,” id., paragraph 16 governs any document as to which “a claim of inadvertent production is made.” For a production to be “completely reckless,” the producing party must have shown no regard for preserving the confidentiality of the privileged documents. Here, PRescient certainly attempted to preserve the documents' confidentiality. Attorney Diaz personally reviewed thousands of documents and color-coded the privileged documents to be pulled before shipment to the defendants. The error occurred when a paralegal experienced an emotional breakdown and failed to follow instructions. Because the production was not reckless, paragraph 16 governs the present situation.
Even if the defendants were correct and paragraph 16 applied only where the privilege was not waived under governing caselaw, I would reach the same result. This is because, under the applicable legal principles, the privilege was not waived through the disclosure.
The voluntary disclosure of a document protected by the attorney-client privilege generally waives any claim of privilege as to that document. Carter v. Rosenberg & Estis, P.C., No. 95 Civ. 10439, 1996 WL 695866, at *2 (S.D.N.Y. Dec.4, 1996) (citing In re von Bulow, 828 F.2d 94, 101 (2d Cir.1987)); Eigenheim Bank v. Halpern, 598 F.Supp. 988, 991 (S.D.N.Y.1984). However, if the disclosure is inadvertent, the privilege will not be waived unless the producing party's conduct was “so careless as to suggest that it was not concerned with the protection of the asserted privilege.” Aramony v. United Way of America, 969 F.Supp. 226, 235 (S.D.N.Y.1997) (citing Desai v. American International Underwriters, No. 91 Civ. 7735, 1992 WL 110731, at *1 (S.D.N.Y. May 12, 1992)).
*5 The standard test for waiver through inadvertent disclosure was developed in Lois Sportswear, U.S.A., Inc. v. Levi Strauss & Company, 104 F.R.D. 103, 105 (S.D.N.Y.1985). See Aramony, 969 F.Supp. at 235; Lloyds Bank PLC v. Republic of Equador, No. 96 Civ. 1789, 1997 WL 96591 at *3 (S.D.N.Y. Mar. 5, 1997); Liz Claiborne, 1996 WL 668862, at *3; Bank Brussels Lambert v. Credit Lyonnais (Suisse) S.A., 160 F.R.D. 437, 443 (S.D.N.Y.1995); Martin v. Valley National Bank of Arizona, No. 89 Civ. 8361, 1992 WL 196798, at *2 (S.D.N.Y. Aug.6, 1992) (all applying Lois Sportwear test). Under the Lois Sportswear analysis, a court considers four factors in determining whether the release of documents was a “knowing waiver” or “simply a mistake, immediately recognized and rectified.” Lois Sportswear, 104 F.R.D. at 105. These are: (1) the reasonableness of the precautions taken to prevent inadvertent disclosure, (2) the time taken to rectify the error, (3) the scope of the discovery and the extent of the disclosure, and (4) overarching issues of fairness. Id. at 105.
The fact of disclosure does not necessarily mean that the precautions were unreasonable. Bank Brussels Lambert, 160 F.R.D. at 443. Generally, precautions will be reasonable if “the procedure followed in maintaining the confidentiality of the document [is] not ... ‘so lax, careless, inadequate or indifferent to consequences as to constitute a waiver.” ’ Martin, 1992 WL 196798, at *2 (quotation and citation omitted).
Here, the precautions taken by PRescient's counsel to preserve privilege were reasonable. Attorney Diaz personally reviewed the documents in the “attorney set,” marked privileged documents, and instructed paralegal Ramirez to remove the designated documents before shipment to the defendants. Diaz Decl. ¶¶ 19–20. The other paralegal to whom Mr. Ramirez delegated this task had an emotional breakdown and failed to follow through. Diaz Decl. ¶¶ 24, 32.
PRescient's counsel explains that an attorney did not check the paralegals' duplication and sorting before shipment to the defendants because of the “press to produce documents.” Plaintiff's Memo. at 5. However, this step was not necessary in order for the production to pass the reasonable precautions test. Imposing a duty on attorneys to personally double check simple tasks performed by paralegals in a large document production would needlessly increase the costs of litigation.
The defendants argue that PRescient's counsel failed to take reasonable precautions because it did not “ensure that someone was available that was capable of performing the duties involved.” Defendants' Memo. at 8. However, Ms. Diaz did not know of the paralegal's health problem at the time of the production, Diaz Decl. ¶ 32, and the record contains nothing to indicate that she was negligent in failing to be aware of it. Thus, the precautions taken by PRescient were reasonable. See Aramony, 969 F.Supp. at 235–6 (precautions reasonable where four attorneys and three paralegals reviewed 630,000 pages of documents for privilege before shipment to defendants); Lloyds Bank PLC, 1997 WL 96591, at *4 (precautions reasonable where attorneys conducted document review); Martin, 1992 WL 196798, at *3 (same); see also Lois Sportswear, 104 F.R.D. at 105 (precautions “only just adequate[]” where attorney demonstrated to paralegals which types documents were privileged and then delegated the segregation of privileged documents to the paralegals).
*6 “Inordinate delay in claiming the privilege can prejudice the adversary and may be deemed a waiver.” Bank Brussels Lambert, 160 F.R.D. at 445 (citation omitted). The delay should be measured from the time the producing party learns of the disclosure, not from the time of the disclosure itself. Aramony, 969 F.Supp. at 237; Georgia–Pacific Corp. v. GAF Roofing Manufacturing Corp., No. 93 Civ. 5125, 1995 WL 117871, at *2 (S.D.N.Y. Mar.20, 1995).
No inordinate delay occurred in this case because PRescient's counsel wrote defendants' counsel the day after learning of the error to demand return of the documents. Diaz Decl. ¶ 25. See Aramony, 969 F.Supp. at 237 (no waiver where counsel sent letter demanding return of documents the day after learning that privileged documents had been produced); Georgia–Pacific, 1995 WL 117871, at *2 (no waiver where producing party acted within two business days after discovery of inadvertent disclosure). After receiving the defendants' final refusal to return the documents on August 22, 1997, PRescient's counsel began a comprehensive review to uncover other inadvertently produced privileged material, Diaz Decl. at ¶ 28, and sent the defendants what they believed was a comprehensive list of inadvertently produced documents eighteen days later, on September 9, 1997. See Diaz Decl., Exh. A, Subexh. 3.
The defendants argue that PRescient's attempt to rectify was not timely because it did not produce the list of inadvertently produced documents until September 9th, almost a month after it became aware of the disclosure. Defendants' Memo. at 8–9. In addition, recently conducted depositions have revealed six more pages of privileged attorney-client communications that were produced but were not listed in PRescient's September 9th letter. Defendants' Memo. at 4. While PRescient could have begun its comprehensive review as soon as it learned of the disclosure on August 11th, the fact that it did not begin that review until August 22nd—when counsel learned that the defendants would not immediately return the documents—does not constitute an inordinate delay. Cf. Baxter Travenol Laboratories, Inc. v. Abbott Laboratories, 117 F.R.D. 119, 121 (N.D.Ill.1987) (finding waiver where party waited over three months to assert privilege).
The third Lois Sportswear factor focuses on the number of privileged documents disclosed in relation to the overall size of the document production. Martin, 1992 WL 196798, at *3–4 (no waiver where five protected documents disclosed out of 50,000 pages produced). “Courts have routinely found that where a large number of documents are involved, there is more likely to be an inadvertent disclosure rather than a knowing waiver.” Baker's Aid v. Hussmann Foodservice Co., No. 87 Civ. 0937, 1988 WL 138254 at *5 (E.D.N.Y. Dec. 19, 1988) (no waiver where one document disclosed out of approximately 5,000 documents inspected); see also Lois Sportswear, 104 F.R.D. at 105 (no waiver where 22 documents disclosed out of approximately 16,000 pages inspected).
*7 PRescient produced 117 pages of privileged material. See Diaz Decl., Exh. A, Subexh. 3 (list of documents claimed to be inadvertently produced). However, this was less than one percent of the overall document production of 12,612 pages. Diaz Decl. ¶ 21. More importantly, the circumstances surrounding the disclosure do not indicate recklessness regarding the documents' confidentiality. Virtually the entire disclosure[2] was caused by a single unforeseen error, the paralegal's emotional breakdown, as opposed to numerous errors evidencing imprudence. Therefore, despite the large size of the disclosure, this factor does not weigh in favor of the defendants. See Lloyds Bank, 1997 WL 96591, at *2–4 (finding no waiver where producing counsel inadvertently disclosed 227 pages of privileged documents in production involving approximately 10,000 pages of material and where counsel “committed only one error which resulted in the production of all fifty allegedly privileged documents, not fifty distinct errors”).
Absent any prejudice to the defendants caused by restoring immunity to the documents, “[i]t would be inappropriate for the client of producing counsel to suffer the waiver of privilege ... due to an isolated, inadvertent error.” Aramony, 969 F.Supp. at 237. Some of the disclosed documents involve attorney-client communications about case strategy in the instant case and could be damaging to PRescient. The defendants claim that preserving the documents' privileged status would prejudice them by depriving them of evidence to challenge PRescient's claims for damages and attorneys' fees. Defendants' Memo. at 11–13. However, “[t]he prejudice factor focuses only on whether the act of restoring immunity to an inadvertently disclosed document would be unfair, not whether the privilege itself deprives parties of pertinent information.” Bank Brussels Lambert, 160 F.R.D. at 446. The defendants have not shown that unfairness would result from restoration of the privilege. Therefore, the fourth factor also weighs in PRescient's favor. Based on the Lois Sportswear factors, then, there has been no waiver of the attorney-client privilege.
D. Relief
As discussed above, paragraph 16 of the Confidentiality Agreement governs this situation. Therefore, as provided in that paragraph, the defendants shall: (1) promptly return to PRescient the material (and all copies thereof) listed in Ned Branthover's September 9, 1997 letter to Michael McCoy, see Diaz Decl., Exh. A, Subexh. 3; (2) destroy all notes or other work product reflecting the contents of such material; and (3) delete any information in any computer database reflecting the contents of these documents. Furthermore, the defendants are prohibited from using these documents or references to these documents in discovery or at trial.
In addition, PRescient asks for an award of costs and attorneys' fees for making this motion. Plaintiff's Memo. at 7. This application is governed by Rule 37(a)(4)(A) of the Federal Rules of Civil Procedure, which authorizes a court to:
*8 require the party ... whose conduct necessitated the motion or the party or attorney advising such conduct or both of them to pay to the moving party the reasonable expenses incurred in making the motion, including attorney's fees, unless the court finds that ... the opposing party's ... response ... was substantially justified, or that other circumstances make an award of expenses unjust.
Fed.R.Civ.P. 37(a)(4)(A). Under this rule, then, attorneys' fees and expenses must be awarded unless the defendants' conduct was “substantially justified” or “other circumstances make an award of expenses unjust.” Sanstrom v. Rosa, No. 93 Civ. 7146, 1996 WL 469589, at *7 (S.D.N.Y. Aug.16, 1996).
In this case, the defendants refused to return the documents because they believed that paragraph 16 of the Confidentiality Agreement incorporated general principles governing inadvertent disclosure and that PRescient had waived its privilege under the applicable caselaw. That position was not unreasonable. Paragraph 16 is subject to alternative interpretations, including the one offered by the defendants. Furthermore, the defendants' argument that PRescient waived its privilege under the Lois Sportswear test was warranted considering both the large number of privileged documents produced and the fact that the defendants were unaware that the disclosure was attributable to the paralegal's emotional breakdown when they originally refused to return the documents. Therefore, although the defendants' position was not ultimately vindicated, it was “substantially justified,” and I decline to award costs or attorneys' fees.
For the reasons set forth above, the plaintiff's motion is granted except that the application for sanctions, including costs and attorneys' fees, is denied.
SO ORDERED.

Footnotes

Exh. A to the Diaz Declaration includes five separate exhibits, each of which will be referred to as a subexhibit in this Memorandum and Order.
All of the disputed documents except one were disclosed in a document production on May 23, 1997, when the paralegal apparently had her emotional breakdown. The other disputed document (PP 7430–33) was disclosed in a document production on June 9, 1997.