May's Notable Cases and Events in E-Discovery

1. In In re Fluor Intercontinental, Inc., 2020 WL 1487700, (4th Cir. March 25, 2020), the U.S. Court of Appeals for the Fourth Circuit held that third-party disclosure of information covering the same topic as an internal investigation and made pursuant to the advice of counsel did not mean that a party waived the attorney-client privilege over the underlying communications with counsel.

In this employment dispute litigation, plaintiff sued his former employer claiming, among other things, wrongful termination, defamation and negligence. According to an internal investigation by defendant, plaintiff had inappropriately engaged in conduct exposing defendant to liability under the False Claims Act, which was the reason for his dismissal. Id. at *1.

During discovery, plaintiff sought copies of defendant’s files from the internal investigation. Defendant refused to produce those files, claiming that they were protected by the attorney-client privilege. After a series of motions, recommendations by the magistrate judge and orders, the district court found that defendant had waived its attorney-client privilege and ordered defendant to produce the internal investigation files. Id. at *2. The district court held that defendant had voluntarily disclosed the results of its internal investigation in sending a summary of its internal investigation to the government pursuant to the Code of Federal Regulations. The summary included statements about plaintiff’s alleged misconduct and how those actions implicated the False Claims Act. The district court observed that the summary “revealed ‘legal conclusions which characterize [plaintiff’s] conduct in a way that reveals attorney-client communications.’” Id. (citation omitted).

Defendant sought a writ of mandamus from the Fourth Circuit for relief from the district court’s order to produce its internal investigation files.

The panel first determined that mandamus was appropriate because the defendant had no other adequate means to attain the relief sought. Plaintiff argued that defendant had three alternative options: “(1) disobey the district court’s order, be found in contempt, and appeal the contempt order; (2) seek certification of an interlocutory appeal under 28 U.S.C. § 1292(b); and (3) appeal after final judgment.” Id at *2. The panel held that appealing from a contempt order was not an adequate remedy as a civil contempt order is not immediately appealable and the decision to impose a civil versus a criminal contempt order is up to the district court judge. Similarly, seeking an interlocutory appeal under § 1292(b) would be futile because the district court had already considered factors similar to those for the § 1292(b) analysis and had made an adverse determination.

In rejecting the possibility of appealing after a final order, the panel concluded that this was an extraordinary circumstance working a manifest injustice. The panel recognized that ordinarily, post-judgment appeals are an “adequate means of relief from disclosure orders adverse to attorney-client privilege.” Id. at *3. Where, however, there are “‘extraordinary circumstances,’ such as ‘when a disclosure order ... works a manifest injustice,’ a party may still ‘petition the court of appeals for a writ of mandamus.’” Id. (quoting Mohawk Indus., Inc. v. Carpenter, 558 U.S. 100, 111 (2009)). Here, the panel concluded that the district court’s order worked a manifest injustice because it was clearly incorrect, it implicated important principles underlying the attorney-client privilege and defendant made its disclosure pursuant to a regulatory scheme.

According to the panel, simply because a disclosure is made “pursuant to the advice of counsel doesn’t mean that privileged communications themselves were disclosed.” Wavier of the attorney-client privilege requires disclosure of the communication or information covered by the privilege. But the court “will not infer a waiver merely because a party’s disclosure covers ‘the same topic’ as that on which it had sought legal advice.” In determining whether there has been a disclosure, courts must make distinctions between “disclosures based on the advice of an attorney, on the one hand, and the underlying attorney-client communication itself, on the other.” Id. at *4. A summary of privileged material can waive the privilege on the summarized communication. But there is no waiver where a summary merely describes general conclusions about an investigation and does not quote or summarize the substance of the privileged communications. Id. at *5.

The panel concluded that defendant had not waived the attorney-client privilege. As an initial point, the panel noted that whether statements involve legal conclusions only a lawyer could make is “not the test for whether waiver of attorney-client privilege has occurred.” Id. at *4. The panel explained that defendant had not quoted or summarized privileged material in the summary it submitted. Id. at *5. “Rather, the statements do no more than describe [defendant’s] general conclusions about the propriety of [plaintiff’s] conduct.” The panel announced that it was “unwilling to infer a waiver of privilege on these facts.”

The panel also noted that defendant made its disclosure pursuant to federal regulation. Where disclosure is prescribed by regulation, the court indicated its aversion to holding that the disclosure would, as a matter of course, sacrifice the attorney-client privilege. Finding waiver in these circumstances would be “patently at odds with the policy objectives of the regulatory disclosure regime.”

2. In KCI USA, Inc. v. Healthcare Essentials, Inc., 2020 WL 260429 (6th Cir. Jan. 16, 2020), the U.S. Court of Appeals for the Sixth Circuit reversed and remanded a sanctions award levied against a law firm and three of its attorneys because the law firm’s liability was largely based on the conduct of the individual attorneys, all of whom were denied due process.

In 2014, plaintiff filed a complaint against a group of defendants, including Healthcare Essentials, Inc., alleging deceptive trade practices, conversion, unfair competition and tortious interference with prospective business relationships. Id. at *1. Plaintiff claimed that defendants “engaged in a pattern of theft and fraud with respect to [plaintiff’s] VAC wound therapy systems.” At various stages of this “hotly contested” litigation, the district court found numerous discovery abuses, including “egregious acts such as throwing [plaintiff’s] property into a dumpster, lying to the court, failing to turn over thousands of responsive emails, fabricating requested spreadsheets, creating fake invoices, and deleting information on electronic devices, among other discovery violations.” Id. (internal quotation marks omitted). The focus of the appeal, however, centered on the involvement of one law firm (the Firm) and three of its attorneys.

The Firm represented Healthcare Essentials and was involved “from the filing of the answer in 2014 until April 2016, when it withdrew as counsel.” Litigation was “contentious,” and the district court twice had to intervene during discovery, issuing two orders to Healthcare Essentials to produce plaintiff’s requested discovery. When Healthcare Essentials failed to comply with the orders, plaintiff twice moved for sanctions against Healthcare Essentials and the Firm.

Two years into the litigation, the Firm stated that it became aware of defendants’ fraud and theft. Emails showed a connection between Healthcare Essentials’ owner (the owner) and a former plaintiff employee who was purportedly stealing VAC devices for the owner. The owner thereafter sent the Firm a letter firing it, “explicitly invoking the Fifth Amendment right against self-incrimination” and prohibiting the Firm from disclosing the emails. The Firm then sought to withdraw as counsel on the grounds of an “irreconcilable conflict with its client.” But the Firm “did not attach the emails to the brief or disclose the ongoing crime, believing it couldn’t” because of the owner’s invocation of the Fifth Amendment.

In April 2016, the district court allowed the Firm to withdraw, but stated that the Firm “may be called upon to clarify, explain, or justify its prior actions as counsel in this case.”

Plaintiff filed a motion to show cause after Health Essentials, now represented by new counsel, failed to comply with a preliminary injunction. The district court held a status conference with counsel only, but the Firm, no longer counsel of record, did not attend. During the conference, the new counsel placed blame on the Firm for discovery misconduct. The district court thus, instructed that the Firm should appear at the next status conference.

At the second conference, with the Firm’s counsel present, the court asked one of the Firm’s counsel about its handling of the discovery issues and the fraudulent discovery production. After the second conference, plaintiff sought discovery from the Firm regarding the discovery violations, and the Firm then filed a second ex parte brief, attaching the troubling emails. At a telephone status conference that addressed Healthcare Essentials’ continuing violation of the injunction and other discovery abuses, a Firm attorney testified regarding the Firm’s involvement in a falsified spreadsheet Healthcare Essentials had produced.

A few months later, plaintiff finally received “the mirrored hard drive of [the owner’s] computer,” which revealed the extent of the fraud and theft. Plaintiff then filed a second motion to show cause, which primarily concerned “deletion of information stored on various electronic devices, failure to turn in electronic devices, and submission of false spreadsheets,” but did not mention the Firm, its attorneys or any of the Firm’s conduct.

A year later, after a delay caused in part by a criminal trial against the officer, the court held a hearing on plaintiff’s second-filed motion to show cause. Hours before the hearing, plaintiff filed a bench brief attacking the Firm’s attorneys and their conduct, but did not seek sanctions from the individual attorneys or name them in the brief. In response, the Firm filed a short brief and supporting affidavit stating that it was ready to defend itself. None of the Firm’s attorneys appeared at the hearing, but plaintiff repeatedly raised the Firm’s conduct during the course of the hearing.

Following the hearing, plaintiff sought monetary sanctions against the Firm — but not against the individual attorneys — attacking much of the same behavior discussed at the hearing. The Firm filed an opposition to plaintiff’s motion for sanctions, requesting an evidentiary hearing. In its reply brief, plaintiff, for the first time and in a footnote, mentioned that it was seeking sanctions against not only the Firm, but the individual attorneys as well.

The district court issued a sanctions order without holding another hearing, finding the Firm and the individual attorneys responsible for the discovery violations referenced in plaintiff’s motion. Ultimately, the district court, relying on its inherent powers, determined based on a damages hearing that plaintiff was entitled to $365,200.67 in attorneys’ fees and costs against the Firm and two of the attorneys and $290,488.30 against the third, all on a joint and several basis. After the district court denied their motion for reconsideration, the Firm and the individual attorneys lodged separate appeals.

On appeal, the individual attorneys’ primary argument was denial of due process. Id. at *3. At the outset of its analysis, the Sixth Circuit explained that while attorneys can be sanctioned under Fed, R. Civ. Pro. 26(g)(3) and 37(b)(2)(C), 28 U.S.C. § 1927, and the district court’s inherent powers, due process concerns mandate that they receive notice and an opportunity to be heard.

With respect to notice, “[w]hile formal notice detailing the penalties is not required, [plaintiff] or the court had to provide notice that sanctions were being sought against the individual attorneys and not just the firm.” Id. (internal quotation marks omitted). In the Sixth Circuit’s view, plaintiff’s mention of the individual attorneys in a footnote in its reply brief, where previous filings and allegations had been directed at the Firm, was “not sufficient notice.” Nor were previous admonitions from the district court or plaintiff’s prior allegations because they were directed only to Healthcare Essentials or the Firm. As the Sixth Circuit put it, “[i]t is one thing to believe your firm is going to be sanctioned and required to pay attorney’s fees and costs. It is quite another to be informed that you — individually — could be on the hook for the sanctions.”

On the question of whether the individual attorneys had had an opportunity to be heard, the Sixth Circuit explained that “[d]ue process does not mandate a full evidentiary hearing before the imposition of sanctions,” but “a party or attorney facing sanctions must still have a meaningful opportunity to respond to the allegations against them.” Id. at *4. Had the attorneys been afforded an opportunity to file individual briefs in response to plaintiff’s sanctions motion, that “could have provided the procedural safeguards necessary here.” But because the individual attorneys were not implicated until plaintiff mentioned them in a footnote in its reply brief, they were afforded no such opportunity.

Ultimately, the Sixth Circuit concluded that because the individual attorneys were not afforded notice or an opportunity to be heard and because due process rights afforded to the Firm could not be imputed to the individual attorneys, “the imposition of sanctions in this manner deprived the individual attorneys of due process.” With respect to the sanctions levied against the Firm, the Sixth Circuit determined that “[b]ecause we are remanding to the district court to allow the individual attorneys to file, at the very least, responsive briefing, we necessarily have to remand the [Firm’s] appeal, since the [F]irm’s liability turns, in large part, on the individual attorneys’ conduct.”

3. In Advanced Physicians, S.C. v. Connecticut Gen. Life Ins. Co., 2020 WL 58698 (N.D. Tex. Jan. 3, 2020), U.S. District Judge Joe Fish, reversing a magistrate judge’s decision, held that the assignee of life insurance beneficiaries could use the fiduciary exception to the attorney-client privilege to force the plan administrator to produce privileged documents regarding the administration of the plan because the administrator was not the “real client” and thus was not entitled to invoke the privilege.

This discovery dispute arose in an Employee Retirement Income Security Act (ERISA) suit in which Advanced Physicians, S.C. (AP), provider of chiropractic and medical diagnostic services to certain beneficiaries of the NFL Player Insurance Plan (the Plan), filed suit as assignee of Plan beneficiaries, alleging that the Plan and Cigna Health and Life Insurance Company (Cigna) had wrongfully denied Plan beneficiaries’ claims. Id. at *1.

During discovery, AP sought certain documents from Cigna, which Cigna argued included confidential communications concerning Plan administration protected by the attorney client privilege. AP invoked the fiduciary exception to the attorney-client privilege to seek these confidential communications. The magistrate judge denied AP’s motion, finding that when the Plan beneficiaries assigned their rights as participants or beneficiaries to AP, they did not assign their rights to assert attorney-client privilege or to sue for breach of fiduciary duty. The fiduciary exception was thus, inapplicable to the case, a ruling that AP appealed to the district court. Id. at *1 – *2.

In his de novo review of the magistrate judge’s order, Judge Fish reversed and held that AP could assert the fiduciary exception in this case. The fiduciary exception to the attorney client privilege exists because “when a trustee obtains legal advice relating to the exercise of fiduciary duties ...[,] the trustee cannot withhold attorney-client communications from the beneficiary of the trust.” Id. at *3 (quoting United States v. Jicarilla Apache Nation, 564 U.S. 162, 165 (2011)). In reviewing the case law, Judge Fish found that courts had previously dealt with cases involving ERISA plan participants or the federal government bringing actions against ERISA plan fiduciaries. In these cases, courts in the Fifth Circuit had relied on the duty rationale (trustee’s disclosure duty to plan participants), the client rationale (plan participant, not trustee, is real client) or a combination of the two to hold that ERISA fiduciaries are precluded from asserting the attorney-client privilege under the fiduciary exception. But he noted that no court had addressed whether an assignee of the right to receive payments under an ERISA plan could invoke the fiduciary exception against a plan fiduciary. Id. at *3 – *4.

Whereas the magistrate judge had based her reasoning on the duty rationale, Judge Fish focused on the client rationale: “Under the client rationale, the focus of the fiduciary exception analysis is on the role of the ERISA fiduciary, who acts in a representative rather than a personal capacity with respect to plan administration.” Id. at *5 (citation omitted). Thus, plan administrators cannot claim attorney-client privilege over communications related to administration of a plan and thus, cannot assert the privilege in those circumstances.

Applying this rationale, Cigna could not assert attorney-client privilege against AP regarding communications made between Cigna and its attorneys where those communications related to administration of the Plan. Cigna was not the “real client” when it engaged in such communications with its attorneys. Id. at *6. Attorney-client privilege promotes “full and frank communication between attorneys and their clients” and thus, had no role in this context. Id. (citations omitted). Furthermore, “there is no attorney-client privilege between a plan trustee and an attorney who advises the trustee regarding the administration of the plan.” Id. (citation omitted).

Judge Fish found support for this determination in cases in which courts had held that the federal government could assert the exception against ERISA fiduciaries, regardless of the fact that the plan fiduciaries did not owe the government the fiduciary duties they owed to plan beneficiaries. Allowing the federal government to assert the exception in these cases “serve[d] the interests that ERISA is designed to protect.” Id. (citations omitted).

Regarding AP’s status as assignee, rather than original beneficiary, Judge Fish determined that when the Plan beneficiaries assigned their rights to receive insurance payments and to sue to collect unissued insurance payments to AP, this aligned the interests of the beneficiaries and AP. They both sought payment for the cost of services provided to the Plan beneficiaries, and the interests were sufficiently similar to allow AP to rely on the fiduciary exception. Id. at *6 – *7.

Therefore, the court modified and set aside the magistrate judge’s opinion and held that AP can assert the fiduciary exception against Cigna, “or, stated differently, Cigna ‘cannot assert the attorney-client privilege against [AP] about legal advice dealing with plan administration.’” Id. at *7 (citing Wildbur v. ARCO Chemical Co., 974 F.2d 631, 645 (5th Cir. 1992)). Judge Fish noted that Cigna could still assert the attorney-client privilege with respect to attorney communications not dealing with plan administration.

4. In DriveTime Car Sales Company, LLC v. Pettigrew, 2019 WL 1746730 (S.D. Ohio April 18, 2019), U.S. District Judge George Smith rejected plaintiff’s adverse inference sanction request but ordered that the jury should be allowed to hear evidence about a defendant’s text message spoliation and denied defendants’ summary judgment motion in part because the deleted text messages created an issue of disputed fact precluding summary judgment.

The case involved an alleged kickback scheme between defendant Pauley Motor Car Co., a car seller (Pauley Motor), and defendant Bryan Pettigrew, who purchased cars on behalf of plaintiff DriveTime Car Sales Co., LLC (DriveTime). Records cited by plaintiff showed that Pettigrew paid comparatively more for Pauley Motor’s cars and paid comparatively less for cars sold by other parties, while a similarly situated DriveTime buyer paid comparatively less for Pauley Motor cars. There were also hearsay claims that Pettigrew had been seen being paid off by Pauley Motor in a bathroom, as well as clams that Pettigrew kept Pauley Motor gift cards given to its auction vehicle purchasers, notwithstanding a DriveTime policy and contractual obligation that DriveTime receive all auction purchase incentives. Id. at *1 – *2.

The plaintiff sued the defendants for fraud and conversion and issued a litigation hold requiring the defendants to preserve all text messages exchanged between them. A Pauley Motor executive stated, however, that he had exchanged text messages with Pettigrew, but lost some of those messages when he purchased a new phone after the litigation hold was in place. Id. at *3.

The defendants moved for summary judgment on the grounds that the plaintiff lacked any evidence of a fraud, and DriveTime filed a cross motion for spoliation sanctions and adverse inference instructions based on the Pauley Motor’s failure to preserve the text messages.

Judge Smith denied DriveTime’s request for an adverse inference under Fed. R. Civ. P. 37(e)(2) because it found no evidence that Pauley Motor discarded the text messages with an intent to deprive DriveTime of relevant evidence. In doing so, Judge Smith noted that “Rule 37(e)(2)’s intent standard is stringent and does not parallel other discovery standards.” Id. at *4 (internal quotation marks and citations omitted).

Even though an adverse inference was not warranted, Judge Smith determined that lesser sanctions authorized by Rule 37(e) were warranted because the text messages were relevant to plaintiff’s claims and the loss of the text messages prejudiced DriveTime under Rule 37(e)(1). “If as DriveTime alleges, Pauley Motor and Pettigrew entered into a kickback scheme, text messages between the two might provide highly relevant information. On the other hand, they might not — and at this point, we will never know.” Id. at *5. Because the loss of the messages prejudiced DriveTime, Judge Smith decided to impose measures “no greater than necessary to cure the prejudice,” as authorized by Rule 37(e)(1). To do so, he held that DriveTime could introduce evidence to the jury about the messages’ existence and their subsequent destruction.

Judge Smith then considered the defendants’ motion for summary judgment. As to each of the outstanding claims, he held either that there was conflicting evidence or that the loss of the messages created a genuine dispute of material fact that could be presented to the jury according to the court’s curative measures, and therefore, the defendants were not entitled to summary judgment.