This Sidley Update addresses the following recent developments and court decisions involving e-discovery issues:
- A European Court of Justice (ECJ) decision declaring to be invalid the U.S.-EU Safe Harbor Program that has governed many U.S.-EU cross-border data transfers;
- An Eastern District of Pennsylvania opinion denying, on Fifth Amendment grounds, the Securities and Exchange Commission’s (SEC) motion to compel the disclosure of defendants’ personally selected passcodes for smartphones issued by their former employer;
- A Southern District of Florida ruling that the designation of 95 percent of a production as “highly confidential” and therefore subject solely to opposing counsel’s review was presumptively unreasonable and ordering production without any restrictions, subject only to a good-faith re-review over a 10-day period; and
- A Washington State Court of Appeals ruling reversing and remanding a trial court’s decision to disqualify counsel for accessing and reviewing an opponent’s privileged communications, finding that the trial court had failed to address various factors relevant to resolution of the disqualification issue.
1. In Schrems v. Data Protection Commissioner, E.C.J., No. C-362/14 (Oct. 6, 2015), the ECJ declared the European Commission’s decision on the U.S.-EU Safe Harbor Program invalid. The decision jeopardizes the ability of companies to transfer data from the EU to the U.S. by means of the U.S.-EU Safe Harbor Framework, a means of international data transfer used by more than 4,000 companies.
Max Schrems, an Austrian law student and Facebook user, requested that the Irish data protection commissioner investigate the transfer of his personal Facebook data to the U.S. soon after Edward Snowden revealed the scope of the U.S. surveillance program. The Irish data protection commissioner abstained from examining the complaint because Facebook transferred personal data in accordance with the U.S.-EU Safe Harbor Program. Schrems challenged this determination, and Ireland’s High Court referred the matter to the ECJ.
The Safe Harbor program allowed U.S. companies to self-certify that they abided by data protection standards in conformity with EU law. The European Commission signed the U.S.-EU Safe Harbor Framework in 2000 and found that companies participating in the Safe Harbor program were operating under an “adequate” data protection regime and could transfer personal information from the EU to the U.S.
In Schrems, however, the ECJ found the Safe Harbor agreement to be invalid. It ruled that data protection authorities “must be able to examine, with complete independence, whether the transfer of a person’s data to a third country complies with the requirements laid down” in the European Commission’s Data Protection Directive, which guarantees a baseline of protections for personal information wherever it is stored, transmitted or processed. The ECJ found the Safe Harbor Framework invalid, in part, because companies could disregard the Safe Harbor principles where these principles conflicted with national security, public interest and law-enforcement requirements, and there was little the U.S. did in terms of enforcement. Further, the ECJ faulted the inability of EU citizens to pursue legal remedies to gain access to personal data or to modify or delete such data when transferred to the U.S.
Soon after the release of the decision, the European Commission confirmed that its objectives were (i) to guarantee the protection of EU citizens’ personal data when transferred to the U.S., (ii) to proceed with talks with U.S. authorities regarding transatlantic data flows, particularly with a view to finalizing a revised Safe Harbor arrangement and (iii) to issue guidance to national data protection authorities to ensure a coordinated response to alternative ways to transfer data.
The court offered no grace period for firms to establish their new arrangements before Safe Harbor ceases to be valid. Ultimately, businesses relying on the U.S.-EU Safe Harbor, whether for intragroup data transfers or for transfers to third parties, will need to reassess their choice of international data transfer solutions and decide whether to adopt alternative mechanisms, such as Binding Corporate Rules or EU standard contractual clauses. The court also declined to give extra time to the European Commission, which is renegotiating new terms with the U.S. In a press release, the U.S. Secretary of Commerce expressed deep disappointment in the court’s decision, claiming it “creates significant uncertainty for both U.S. and EU companies and consumers, and puts at risk the thriving transatlantic digital economy.”
2. In the insider-trading case SEC v. Huang, 2015 WL 5611644 (E.D. Pa. Sept. 23, 2015), U.S. District Judge Mark A. Kearney denied on Fifth Amendment grounds the SEC’s motion to compel the disclosure of defendants’ individual passcodes for smartphones issued by their former employer.
Under the employer’s policy, the employer owned the smartphones and any corporate documents on them, but it allowed its employees to create their own passcodes to access the smartphones and asked employees, for security reasons, not to create or maintain records of such passcodes. When the SEC requested defendants’ passcodes in discovery, defendants invoked their Fifth Amendment privilege against self-incrimination. The SEC moved to compel, arguing that defendants were custodians of the corporate records and thus, under the “collective entity” doctrine, could not invoke the Fifth Amendment to avoid producing corporate records. Id. at *1-2.
District Judge Kearney rejected the SEC’s view, finding that the SEC was actually seeking production of defendants’ thought processes in selecting passcodes for their smartphones, rather than production of the corporate records contained therein. Id. at *2. Judge Kearney emphasized that production of the passcodes would “require intrusion into the knowledge of Defendants and no one else” because there was no evidence that the employer had assigned or tracked defendants’ passcodes. Id. Accordingly, Judge Kearney held that defendants’ production of their passcodes was a testimonial act and that defendants therefore could properly invoke their Fifth Amendment privilege. Id. As he ruled that the passcodes were not corporate records, Judge Kearney did not address whether defendants were custodians. Id. at *3 n.4.
The SEC also sought production on the basis of the “foregone conclusion” doctrine, which states that a production is not testimonial “if the proponent of production can show with reasonable particularity, at the time it sought to compel the act of production, it already knew of the materials, thereby making any testimonial aspect a foregone conclusion.” Id. at *3 (internal quotation marks omitted). In this case, the SEC claimed that “any incriminating testimonial aspect to Defendants’ production of . . . their personal passcodes already is a foregone conclusion because [the SEC] can show Defendants were the sole users and possessors of their respective work-issued phones.” Id. Judge Kearney rejected this argument, stating that “the SEC has no evidence any documents it seeks are actually located on the work-issued smartphones, or that they exist at all.” Id. at *4.
3. In Procaps S.A. v. Patheon Inc., 2015 WL 4430955 (S.D. Fla. Jul. 20, 2015), Magistrate Judge Jonathan Goodman held that the designation of 95 percent of a production as “highly confidential” (and limited strictly to opposing counsel’s review) was presumptively unreasonable. The magistrate judge ordered production without any restrictions, subject only to a good-faith re-review over a 10-day period.
In this ongoing antitrust lawsuit that has produced a series of discovery-related decisions, see Procaps S.A. v. Patheon, Inc., 2014 WL 800468 (S.D. Fla. February 28, 2014); Procaps S.A. v. Patheon, Inc., 2014 WL 1047748 (S.D. Fla. March 18, 2014); Procaps S.A. v. Patheon Inc., 2015 WL 1880346 (S.D. Fla. Apr. 24, 2015), the latest dispute related to an admitted over-classification of produced documents as “highly confidential.” The parties had earlier entered into a confidentiality agreement that permitted “confidential information” to be shared only with the opposing party and its counsel and “highly confidential information” to be shared only with opposing party’s counsel. In producing documents to Patheon, Procaps designated 95 percent of its documents “highly confidential information.”
Patheon cried foul and asked the court to permit it to use all of Procaps’ documents without restriction despite the highly confidential designation subject only to Procaps’ ability to in good faith re-designate the documents within five days. Procaps did not deny that it had over-designated the documents as highly confidential and stated that it had to do so given the tight discovery deadlines. To remedy Patheon’s concerns, Procaps suggested that Patheon should designate those documents it would like re-reviewed and either Procaps or the special master assigned to the case would review those documents.
Magistrate Judge Goodman found in Patheon’s favor. He began by noting that the “highly confidential” designation was one of the most restrictive designations permitted under a protective order. Accordingly, courts regularly impose a duty of good faith on the party making such designations. The magistrate judge noted that over-designation can be a “significant handicap” on the opposing party and impede discovery, trial preparation and trial and, further, may make settlement difficult if not impossible. Id. at *6. The magistrate judge found the designation of 95 percent to be “presumptively improper” if not “absurd.” Id. at *7. Procaps attempted to blame its vendor and the tight deadline for the over-designation, but in part because the tight deadline was due to Procaps’ failure to meet prior deadlines and because Procaps was responsible for staffing the discovery review appropriately, the magistrate judge found Procaps responsible.
To remedy the situation, the magistrate judge was careful not to assign the discovery burden associated with any re-review to Patheon or any innocent bystanders. Magistrate Judge Goodman noted that Procaps’ proposed solutions would simply shift the production burden to Patheon or the special master. Instead, the magistrate judge found Patheon’s request appropriate. “There is ample legal authority to support the remedy of allowing Patheon to use all the documents designated from the forensic production as highly confidential, subject to Procaps’ good faith re-designation, on a specific, document by document basis [within 10 days].” Id. at *9 (citations omitted). Further, the magistrate judge granted Patheon’s request for $25,000 in attorneys’ fees and imposed the order against Procaps’ attorneys, pointing out that it would be unfair to impose the award on Procaps itself.
4. In Foss Maritime Co. v. Brandewiede, 2015 WL 5330483 (Wash. Ct. App. Sept. 14, 2015), the Washington State Court of Appeals reversed and remanded a trial court’s decision to disqualify counsel for accessing and reviewing an opponent’s privileged communications, ordering that the trial court on remand analyze various factors that it failed to address in its prior ruling, including prejudice, counsel’s fault, counsel’s knowledge of claim of privilege and possible lesser sanctions.
Foss Maritime Co. (Foss) subcontracted with Core Logistic Services (Core) to renovate a vessel. Id. at *1. Brandewiede Construction, Inc. (Brandewiede) also performed work on the vessel on behalf of Core.Id. A dispute arose regarding the work performed under the renovation contract, and Foss sued Core and Brandewiede for breach of contract, unjust enrichment and fraud. Id.
During discovery, Brandewiede’s counsel met with Van Vorwerk, a former Foss employee terminated two months before the onset of litigation and identified in Foss’s court papers as a potential witness likely to have information about the case. Id. During the meeting, Vorwerk gave Brandewiede’s counsel a wrongful termination letter drafted by Vorwerk and sent to Foss that provided details about his work on the renovation project. Id. The letter contained several emails sent among Vorwerk, Foss’s in-house counsel and other Foss employees. Id. Soon after, Vorwerk provided Brandewiede’s counsel with a thumb drive that contained privileged information, including potentially privileged attorney-client communications. Id. Two weeks after receipt of the thumb drive, Brandewiede’s counsel contacted Foss’s counsel about the thumb drive, stating that he had “reviewed a portion” of the documents on the drive prior to realizing the potential privilege issue. Id. Foss, concerned that Brandewiede’s counsel reviewed privileged materials, asked Brandewiede’s counsel to turn over all materials he received from Vorwerk. Id. at *2.
Foss subsequently moved to disqualify Brandewiede’s counsel and his firm, arguing that counsel’s possession, use and review of privileged information prejudiced Foss in violation of Washington Rules of Professional Conduct (RPC) 4.2 and 4.4(a). The trial court reviewed Vorwerk’s documents in camera, found that various of the documents reviewed by Brandewiede’s counsel “were clearly attorney-client communications,” and granted Foss’s motion to disqualify. The trial court also prohibited the use of evidence “tainted” by Brandewiede counsel’s “wrongful conduct,” including the termination letter, the thumb drive and any information derived from privileged information belonging to Foss but “neither identified what conduct was wrongful nor made findings or entered conclusions identifying what discovery or ethical rules were violated.” Id.
Citing In re Firestorm 1991, 916 P.2d 411 (1996) and Washington State Physicians Insurance Exchange & Ass’n v. Fisons Corp., 858 P.2d 1054 (1993), Acting Chief Judge James R. Verellen stated that any disqualification of counsel based on access to privileged information must consider four factors: “(1) prejudice; (2) counsel’s fault; (3) counsel’s knowledge of claim of privilege; and (4) possible lesser sanctions.” Foss, 2015 WL 5330483, at *3. The court of appeals provided guidance on each element: “prejudice” turns on “the significance and materiality of the privileged information to the underlying litigation.” Id. at *4. “Fault” is an “important factor” to be weighed in deciding disqualification with counsel’s access to privileged information ranging from “an innocuous, inadvertent disclosure by an opposing party to serious ethics violations.” Id. “Counsel’s knowledge of claim of privilege” turns on whether the attorney reviews materials “clearly designated as privileged,” with evidence of the attorney’s continued review despite clear claims of privilege weighing in favor of disqualification. Id. “Lesser sanctions” should be used as opposed to “disqualification” unless it is the “least severe sanction adequate to address misconduct in the form of improper access to privileged information.” Id. at *4. The appellate court noted that none of these four factors predominates or is of greater importance than the others. Id.
Because the trial court did not expressly apply any of these factors in making its ruling, the court of appeals reversed the disqualification order and remanded for further proceedings. Id. at *5. After reaching this conclusion, the court of appeals addressed one practical issue relating to the prejudice issue. Brandewiede’s counsel on appeal decided not to review any of Vorwerk’s materials to preclude any suggestion of impropriety, and as a result, counsel was unable to meaningfully articulate an informed argument about the contents of the alleged privileged communications. Id. The appellate court suggested in such circumstances to allow a special counsel to review the alleged privileged materials—similar to a “quick-peek” arrangement—for the purpose of presenting an argument to the trial or appellate court on the privilege issue. Id.
The appellate court also noted the “vague language” in the trial court’s order regarding “tainted evidence” but found that concessions made by Foss addressed most of the issues. Foss conceded that Brandewiede could use at trial the portions of the allegedly “tainted” evidence that Foss had produced in redacted form without the privileged material.