Rule 502 of the Federal Rules of Evidence (FRE), which became law in 2008, addresses whether a party’s disclosure of materials protected by the attorney-client privilege or the work-product rule effects a waiver and if so, whether that waiver should be considered a subject-matter waiver. Although parts of the rule restate prior law, FRE 502(d) provides specific authorization for a federal court to enter a new kind of order, decreeing that disclosure of a privileged document during litigation does not effect a waiver. Recently, in In re Specialty Products Holding Corp., the court rejected a proposed novel use of FRE 502(d) that would have authorized the debtors to purposefully disclose privileged documents to other estate fiduciaries during plan negotiations, while maintaining privilege against other parties.
FRE 502 was enacted in response to the recent dramatic rise in discovery costs caused by the advent of electronic discovery, which exponentially increased the number of documents litigants must review, at significant expense, to protect privileged material.[1] Litigants were expending “prohibitive” amounts to review large volumes of electronically stored information to ensure that no privileged or protected information was inadvertently produced, lest the adverse party claim that privilege had been waived, either as to a single inadvertently produced document or all documents addressing the same subject matter.[2] Moreover, parties often felt that “issues regarding the application of the privilege had to be litigated to the hilt in order to avoid inadvertent waivers of the privilege.”[3]
Certain portions of FRE 502 merely restate prior law.[4] For example, FRE 502(a) provides that an intentional disclosure of a privileged or protected document extends to “an undisclosed communication or information” only if the disclosed and undisclosed information concern the same subject matter and all the communications in fairness ought to be considered together. Rule 502(b) provides that an “inadvertent disclosure” of privileged or protected material does not operate as a waiver, even as to the disclosed document, if the holder of the privilege “took reasonable steps to prevent disclosure” and “to rectify the error,” including (if applicable) following Federal Rule of Civil Procedure 26(b)(5)(B). FRE 502(c) concerns the effect of disclosures made in a state proceeding.
However, FRE 502(d) changed the law to provide “predictable protection from a court order—predictability that is needed to allow the party to plan in advance to limit the prohibitive costs of privilege and work product review and retention” by making a confidentiality order entered in connection with the parties’ discovery enforceable outside of the particular litigation in which the order is entered.[5] In particular, Rule 502(d) is designed to permit orders entered at the start of discovery enforcing “‘claw-back’ and ‘quick peek’ arrangements as a way to avoid the excessive costs of pre-production review for privilege and work product.”[6] It states:
(d) Controlling effect of a court order.—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.
An order entered in Jicarilla Apache Nation v. United States illustrates this intended use of FRE 502(d). The order provided that the government’s expedited production of certain document collections “shall not result in the waiver of the attorney-client privilege or work-product protection as to those documents and data…in any other federal or state proceeding.”[7] If either side determined that a produced document was potentially privileged, plaintiffs could not use it in the litigation unless the government consented or the court held that the document was not privileged. This intended use of FRE 502(d) to make “claw-back” or “quick peek” arrangements enforceable, not only in the case in which the production occurs but in other federal or state cases, may be helpful in any bankruptcy litigation involving large document productions, particularly those done quickly or by cash-strapped debtors.
Recently, in In re Specialty Products Holding Corp., the debtors proposed a novel use of FRE 502(d). An issue arose during plan discussions regarding whether the debtors’ parent company, which was created in a 2004 transaction, should be considered their alter-ego or successor-in-interest for purposes of asbestos liability. The debtors wanted to provide the official committee of asbestos claimants and future claims representative (FCR) with privileged or work-product documents relating to the 2004 transaction, presumably because debtors believed that the documents would persuade the committee and FCR that the parent company could have no such liability and should not be required to contribute to the plan. The debtors filed a motion under FRE 502(d) asking the bankruptcy court to order that their proposed disclosure would not waive privilege.
Several of the debtors’ insurers objected, arguing that FRE 502(d) did not authorize the court to shield the proposed voluntary disclosure of privileged documents from claims of waiver. The insurers argued that FRE 502(d) was not applicable because the debtors were not seeking an order that would reduce the burden of initial privilege screening by enforcing “claw-back” or “quick peek” arrangements. The insurers noted that the debtors had already completed their privilege review—they had just decided, for tactical purposes, that they wanted to disclose privileged documents to their negotiation adversaries. The insurers further argued that FRE 502(d) did not allow the court to shield the debtors from the usual effects of a purposeful selective disclosure of privileged documents.[8]
The debtors argued that although FRE 502(d) may have been enacted to address massive productions of electronically stored information, nothing in the text of the rule limited its application to that context. The debtors argued that the rule’s language “imposes no restrictions or no limitations on the Court’s ability to enter an order” protecting disclosures of privileged materials against waiver arguments.[9]
Judge Judith Fitzgerald denied the debtors’ motion.[10] First, she noted that there was no “litigation pending before the court,” as the rule requires. The committee and FCR were investigating whether any alter-ego or successor liability claims were viable, but they had not yet filed any lawsuit. She rejected the argument that the chapter 11 case itself comprised the necessary litigation.[11] Second, Judge Fitzgerald noted that the debtors had not negated claims by the insurers that they might be harmed, either in their efforts to defend underlying asbestos litigation or establish coverage defenses, by the debtors’ proposed disclosure of privileged documents to representatives of the asbestos claimants.[12]
Judge Fitzgerald’s decision is consistent with both the text of FRE 502(d) and its underlying purpose. Because the decision appears to be the first one to address a debtor’s request to extend the application of FRE 502(d) to provide privileged information to other estate fiduciaries during plan negotiations, it may not be the last word.
Other Delaware bankruptcy courts have also issued orders referencing FRE 502(d), albeit in different circumstances. In American Home Mortgage Holdings Inc., Judge Christopher Sontchi approved a stipulated order under FRE 502(d) providing that all privileges and protections applicable to the debtors’ information and documents “shall not be waived” by disclosure of such documents and information to the creditors’ committee, which was assuming responsibility for pursuing certain avoidance actions on behalf of the estate.[13] When the order was entered, the debtors’ plan—which was already confirmed but not yet effective—provided that the proceeds of any avoidance actions would be paid to the committee’s constituency. The order was entered in a pending avoidance action, so it complied with the rule’s “litigation” requirement. In Washington Mutual Inc., Judge Mary Walrath entered agreed orders providing that the debtors would not waive privilege by voluntarily producing documents to an examiner and that the examiner’s citation to, release, publication, discussion, or other dissemination of the debtors’ documents and information “shall not constitute a waiver of the Debtors’ privileges or protections.”[14]
In sum, FRE 502(d) potentially has many uses in bankruptcy cases, but it is not without limits.
1.A Bill to Amend The Federal Rules of Evidence to Address the Waiver of Attorney-Client Privilege and the Work Product Doctrine, S. Rep. No. 110-264, at 2 (Feb. 1, 2008).
2.Id. (rule “responds to the widespread complaint that litigation costs necessary to protect against waiver of attorney-client privilege or work product have become prohibitive due to the concern that any disclosure (however innocent or minimal) will operate as a subject matter waiver of all protected communications or information”).
3.Jicarilla Apache Nation v. United States, 93 Fed. Cl. 219, 219 n. 1 (2010), citing Fed. R. Evid. 502 Advisory Committee Note, rev. Nov. 28, 2007.
4.154 Cong. Rec. H7817-H7820 (Sept. 8, 2008) (Congress enacted the rule to “reaffirm…and reinforce…the attorney-client privilege and work product protection by clarifying how they are affected by, and withstand, inadvertent disclosure in discovery”).
5.Judicial Conference Advisory Committee on Evidence Rules, Explanatory Note on Evidence Rule 502 (Nov. 28, 2007).
6.Id.
7.Jicarilla Apache Nation v. United States, 93 Fed. Cl. 219, 220 (2010).
8.See Statement of Congressional Intent Regarding Rule 502 of the Federal Rules of Evidence, Addendum to Judicial Conference Advisory Committee on Evidence Rules, Explanatory Note on Evidence Rule 502 (FRE 502(d) “does not provide a basis for a court to enable parties to agree to a selective waiver of the privilege…while preserving the privilege as against other parties seeking the information”).
9.Transcript of July 6, 2011 Hearing at 14, (July 6 Transcript), In re Specialty Products Holding Corp., No. 10-11780 (Bankr. D. Del.).
10.Order Denying Motion of the Debtors for an Order (A) Authorizing Disclosure of Attorney-Client Privileged and/or Work Product-Protected Documents and (B) Determining That The Applicable Privileges or Protections Will Not Be Waived By Disclosure, Dkt. No. 1465, In re Specialty Products Holding Corp., No. 10-11780 (Bankr. D. Del. July 19, 2011).
11.July 6 Transcript at 15-17, 38-39.
12.Id. at 25.
13.Stipulated Order Between the Debtors and the Official Committee of Unsecured Creditors of American Home Mortgage Holdings Inc., et al., Pursuant to Federal Rule of Evidence 502(d), Dkt. No. 13, American Home Mortgage Corp. v. JPMorgan Chase Bank NA (In re American Home Mortgage Holdings Inc.), Adv. Proc. No. 09-51702 (Bankr. D. Del. Oct. 27, 2009).
14.Order Pursuant to Federal Rule of Evidence 502(d), Dkt. No. 5744, In re Washington Mutual Inc., No. 08-12229 (Bankr. D. Del. Nov. 2, 2010).