Clawback Agreements – Friend or Foe?

As construction attorneys, we are no strangers to voluminous productions of client documents and communications, both in electronic and hardcopy formats, during discovery. Even with proper safeguards in place during document review, there exists the possibility that some privileged material may accidentally slip over to an opposing party. Production of such material to a third party, especially an adversary, runs the risk of waiving attorney-client privilege or attorney work product privilege.

Rule 502(b) of the Federal Rules of Evidence creates somewhat of a safety net for inadvertent disclosures, but requires compliance with a number of steps. Fed. R. Evid. 502(b) ("disclosure does not operate as a waiver in a federal or state proceeding 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) [concerning inadvertent production of trial preparation materials].") Note also that the term "inadvertent" is not defined. Id. Whether those three requirements are met can be challenged by the opposing party.

Clawback agreements, pursuant to Federal Rules 502(d) & (e) and equivalent state rules, are aimed at avoiding waiver of privileges without having to resort to proof under Rule 502(b). See Fed. R. Evid. 502(d) ("A federal court may order that the privilege or protection is not waived by disclosure connected with the litigation pending before the court—in which event the disclosure is also not a waiver in any other federal or state proceeding."); Fed. R. Evid. 502(e) ("An agreement on the effect of disclosure in a federal proceeding is binding only on the parties to the agreement, unless it is incorporated into a court order."). Likewise, scheduling orders under Rule 16 of the Federal Rules of Civil Procedure contemplate the Court approving the parties' clawback agreement in this regard ahead of time. Fed. R. Civ. P. 16(b)(3)(iv) ("The scheduling order may...include any agreements the parties reach for asserting claims of privilege or of protection as trial-preparation material after information is produced, including agreements reached under Federal Rule of Evidence 502").

So, what are the potential concerns when using clawback agreements? In the event of a dispute between parties over a produced document, a court, depending on the circuit or state, may not be willing to enforce a generally stated agreement unless it explicitly speaks to the Rule 502(b) standard.

For example, in irth Solutions, LLC v. Windstream Communications, LLC, 2018 WL 575911 (S.D. Ohio Jan. 26, 2018), the district court confirmed the magistrate judge's decision that, per Federal Rule of Evidence 502(b), the defendant had waived its attorney-client privilege by twice producing 43 privileged documents to plaintiff’s counsel notwithstanding that the parties had a clawback agreement. Although the defendant's counsel did not dispute that the production of the 43 documents was "reckless," the defendant's counsel argued that the clawback agreement should trump the requirements of 502(b), which avoids waiver only upon an "inadvertent" disclosure. The district court disagreed, instead focusing on whether the parties' agreement even spoke to dispensing with Federal Rule of Evidence 502(b)(2)’s requirement to "take reasonable steps to prevent disclosure." The court noted that "the clawback agreement lacked any language to support a finding that the parties came to an understanding that there would be no pre-production review [and] [m]oreover, the email memorializing the parties' clawback agreement also contained a provision requiring the parties to provide privilege logs...[indicating to the Court] that the parties did in fact contemplate meaningful pre-production privilege review." Accordingly, the Court concluded that the defense had waived the privilege by producing the documents and that the clawback agreement did not preserve the privilege. The irth case was granted an interlocutory appeal by the Sixth Circuit to answer the question "what is the legal standard for determining whether a clawback agreement displaces the test under Rule 502(b) for evaluating if an inadvertent disclosure of privileged documents constitutes waiver of the attorney-client privilege? The defendant argued on appeal that a clawback agreement, no matter how cursory, always prevails, such that an inadvertent disclosure does not waive the privilege." irth Solutions, LLC v. Windstream Communications, LLC, 2018 WL 1870140, at *1 (S.D.Ohio, 2018) (granting defendant’s motion to certify and stay the case). However, the appeal of irth may not ever provide guidance on this issue -- the appeal is stayed due to pending bankruptcy proceedings of one of the parties.

A state court case, Vigor Works, LLC v. White Skanska, JV, 2019 WL 1027891 (Mass. Super. 2019) (applying a state rule almost identical to Rule 502) provides an example of a successful enforcement of clawback agreement - in a construction case. There, the plaintiff had inadvertently produced 2 documents with attorney communications providing legal advice on an early draft of the subcontract at issue. The production occurred, in part, because "the litigation support vendor engaged to assist in the document production failed to identify it as potentially privileged, although the name of the attorney author was a search term in the ESI review protocol" and also, in part, to the way a certain document had been scanned in with others (making it seem as though the attorney communication had already been sent in a packet to the opposing party). Fortunately, the parties' agreement defined "inadvertent" as "produced notwithstanding that the producing party 'performed a reasonable search for Privileged Documents' by looking in the places where such documents could reasonably be expected to be located." Id. It also defined the term "reasonable search" as the "implementation of review methods which consist of the following: the use of keyword searches to isolate electronic documents that include the names of attorneys; the review by counsel of all potentially Privileged Documents identified by said keyword searches.” Id. Upon these facts, the reasonable steps taken by counsel, and in light of the "modern trend" that an inadvertent disclosure shall not waive privilege, the Court enforced the clawback agreement and required the two documents to be returned or destroyed.

In sum, regardless of the circuit or state, drafting clawback agreements that identify and address each Rule 502(b) element is a very important rule of thumb to avoid the possible waiver of privileges.

Originally published in Under Construction Volume 20, Number 2, Fall 2018. ©2019 by the American Bar Association. Reproduced and modified with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.