This Sidley Update addresses the following recent developments and court decisions involving e-discovery issues:

  1. a Western District of Virginia decision holding that a plaintiff did not waive privilege or work product protection due to inadvertent disclosure as a result of a file-sharing site error and imposing evidentiary sanctions after finding that defense counsel acted unethically in using the protected materials without notifying plaintiff’s counsel
  2. a state Appellate Court of Illinois decision ruling that the trial court abused its discretion in ordering a new trial as a discovery sanction for defendants’ failure to produce documents subpoenaed from a third party
  3. a Southern District of Ohio ruling reversing a prior decision ordering defendant to produce documents disclosed to third parties after defendant presented evidence demonstrating that such disclosure did not waive privilege
  4. a South Carolina district court decision refusing to consider electronic evidence that defendant attached to its motion for summary judgment after failing to produce the evidence during discovery

1. In Harleysville Insurance Co. v. Holding Funeral Home, Inc., 2017 WL 4368617 (W.D. Va. Oct. 2, 2017), District Court Judge James P. Jones held that plaintiff did not waive privilege or work product protection due to inadvertent disclosure as a result of a file-sharing site error and imposed evidentiary sanctions after finding that defense counsel acted unethically in using the protected materials without notifying plaintiff’s counsel.

In this insurance coverage litigation between Harleysville Insurance Co. and Holding Funeral Home, Inc., over a fire loss, Harleysville worked with an independent investigator — National Insurance Crime Bureau (NICB) — during its investigation. Id. at *1. A Harleysville employee put fire-scene surveillance video footage in an electronic folder on a file sharing site and sent an email, which included a confidentiality notice, to an NICB agent so the agent could access the video.

Several months later, the same Harleysville employee uploaded the company’s entire confidential claims file to the same file sharing site, generated a sharing link to the folder, and e-mailed the link to the company’s outside counsel. Id. at *2. The employee did not realize that the link he provided in that e-mail was identical to the link he had previously given to NICB. NICB was not notified that the folder now had a confidential claims file on it, nor did NICB access the file.

Shortly after, counsel for Holding sent a subpoena to NICB for documents relevant to the case. NICB’s response included the original email from the insurer to the NICB that shared the link to the video, thinking that only the video was there. As the claims file had been uploaded in the meantime, this gave Holding counsel access to the claims file, and that very same day counsel downloaded and read the claims file and then shared it with all of the other defense counsel, their clients and law enforcement officials in a related criminal case.

Later in discovery, Holding’s counsel produced the Harleysville claims file back to the company as part of a response to a request for production. Within a few days, Harleysville’s counsel requested the destruction or return of the file, which Holding refused to do. Harleysville then filed a motion seeking the return of the file and the disqualification of defense counsel.

The magistrate judge hearing the matter ruled that the Harleysville employee should have known that anyone could access the claims file by clicking on the hyperlink to the folder, which was not password protected, and concluded that any privilege had been waived. Id. at *3. Having found that privilege was waived, the magistrate judge concluded that disqualification of Holding’s counsel was unwarranted. The magistrate judge did find that Holding’s counsel knew or should have known they had accessed potentially privileged information, and should have revealed this access to Harleysville’s counsel and asked the court to decide the question of waiver before making use of the information. Based on Holding’s failure to do this, the magistrate judge imposed monetary sanctions on Holding’s counsel.

On appeal of the magistrate’s order, District Court Judge James P. Jones reached a different conclusion. He first noted that the folder was not searchable through any search engine or through the file sharing service’s website. Id. at *7. No one could access the folder without entering the specific sharing link that consisted of 32 randomly generated alphanumeric characters. Given this finding, the district court disagreed with the magistrate judge’s analogy comparing the Harleysville employee’s mistake to leaving a briefcase on a “public park bench,” stating that “as far as real-world equivalents go, it is more appropriate to characterize the briefcase as having been buried somewhere in a large park, technically publicly-accessible, but for all practical purposes, secured.” The district court also found that because NICB was not aware of the inadvertent disclosure of the claims file and because Harleysville had reason to believe the claims file was secure and was not notified of the disclosure until it was produced, these factors weighed against a finding of waiver. Thus, the district court disagreed with the magistrate judge and found that the attorney-client privilege and work product protection were not waived. Id. at *7–*10.

Notably, the district court, in making its ruling on waiver, cited a five-factor test on whether inadvertent disclosure is a waiver:

(1) [T]he reasonableness of the precautions to prevent inadvertent disclosures, (2) the time taken to rectify the error, (3) the scope of the discovery, (4) the extent of the disclosure and (5) whether the party asserting the claim of privilege ... has used its unavailability for misleading or otherwise improper or overreaching purposes in the litigation, making it unfair to allow the party to invoke confidentiality under the circumstances. Id. at *6 (citing Walton v. Mid-Atl. Spine Specialists, P.C.,694 S.E.2d 545, 549 (Va. 2010)).

The district court noted that because the disclosure was inadvertent, Harleysville took reasonable steps to prevent disclosure of the claims file and Harleysville’s counsel promptly took reasonable steps to rectify the disclosure, the application of the five-factor Walton test weighed against a finding of waiver. Harleysville, 2017 WL 4368617, at *8.

The district court also found that Holding’s counsel violated Fed. R. Civ. P. 45(e)(2)(B) when they refused to return, sequester or destroy the privileged material upon Harleysville’s request. Id. at *11. The district court found that Rule 45(e)(2)(B) applies when information produced in response to a subpoena is subject to a claim of privilege or protection. The district court found that in light of the law governing inadvertent disclosures, Holding’s counsel should have notified either NICB or Harleysville’s counsel about the disclosure of potentially privileged material. Id. at *12. Also, the district court cited a 1997 Virginia ethics opinion that required a lawyer who received privileged information outside the discovery process to notify opposing counsel promptly.

Thus, the district court found that Holding’s counsel did not adhere to the Virginia state bar’s ethical standards requiring lawyers to avoid the appearance of impropriety. Id. at *13. The district court opined that the lawyers fell far short of their responsibility by attempting to conceal their possession of the claims file and by usurping the court’s role and instead making their own determination on the issue of waiver.

The district court then turned to the issue of sanctions. Id. at *14. The district court, like the magistrate judge, found that the circumstances did not warrant disqualification of Holding’s counsel. Id. at *16. The district court, however, vacated the magistrate judge’s monetary sanctions and instead imposed evidentiary sanctions, ordering that Holding may not use any information contained in the privileged material, or information derived from the material, to seek additional discovery, and they may not use it for any purpose in the case or in any related civil action. Id. at *17.

2. In Howard v. Northwestern Mem. Hosp. 2017 IL App (1st) 160932-U (Ill. App. Nov. 9, 2017), Presiding Justice Anne M. Burke of the Appellate Court of Illinois held that the trial court abused its discretion in ordering a new trial as a discovery sanction for defendants’ failure to produce documents subpoenaed from a third party.

In this wrongful death case, plaintiff alleged that a hospital and several doctors and nurses caused her grandmother’s death by failing to properly communicate a dosage change in a blood clotting medication. Id. at *1. At trial, it emerged that defendants had in their possession “plans of care” documents that a third-party home healthcare company had given to the home healthcare nurses involved in the patient’s care. Id. at *7. Plaintiff moved for a mistrial, arguing that defendants had failed to produce those documents in discovery. Id. at *9. The trial court denied the motion and, after the presentation of evidence and closing arguments, the jury found for defendants and against plaintiff.

After trial, plaintiff renewed her discovery violation arguments as part of a motion for judgment notwithstanding the verdict or a new trial. The trial court granted the motion for a new trial, finding that defendants had violated a case management order regarding discovery and Illinois Supreme Court discovery rules.

The record below indicated that defendants had engaged a third-party legal services vendor to issue a subpoena to the home healthcare company for “notes, phone logs, charts, or correspondence” regarding the patient. The legal services vendor issued the subpoena and sent a “notice packet” to plaintiff’s counsel with, among other things, a copy of the subpoena and a form for ordering copies of the documents. The home healthcare company produced the documents, at which point the legal services vendor forwarded the documents to defendants’ counsel and called plaintiff’s counsel to ask whether counsel wanted a copy of the subpoenaed documents. The legal services vendor logged that it contacted plaintiff’s counsel but had not received a response regarding the documents.

In reviewing the trial court’s decision to grant a new trial on these facts, Justice Burke began by noting that Illinois Supreme Court rules “authorize a trial court to enter any order that is ‘just’ to remedy a party’s unreasonable failure to comply with the supreme court’s discovery rules or with an order issued under those rules.” Id. at *10 (citing Ill. S. Ct. R. 219(c)). This includes ordering a new trial in appropriate circumstances. In reviewing whether a trial court abused its discretion in imposing a sanction, the reviewing court stated that it examines the following factors:

(1) the surprise to the adverse party; (2) the prejudicial effect of the proffered testimony or evidence; (3) the nature of the testimony or evidence; (4) the diligence of the adverse party in seeking discovery; (5) the timeliness of the adverse party’s objection to the testimony or evidence; and (6) the good faith of the party offering the testimony or evidence. Id. (citations omitted).

In granting a new trial, the trial court held that defendants had violated their obligations under a case management order related to discovery and the applicable discovery rules. Id. at *11-*12. Beginning with the case management order, Justice Burke concluded that defendants had not violated the order. Id. at *11. The case management order required the parties to produce home healthcare records by a certain date, at which point defendants represented that they had no home healthcare records. Because defendants subpoenaed and received the records at issue after the end date of the case management order, defendants could not have violated the terms of that order by failing to disclose the subpoenaed records.

Turning to the discovery rules, Justice Burke noted that a party has a duty to “seasonably supplement” prior discovery answers and responses. Id. at *12 (citing Ill. S. Ct. R. 213(i)). Defendants argued that it discharged its continuing obligation to tender discovery documents by engaging the services of the third-party legal services vendor. Justice Burke rejected this argument, finding that the obligations belonged to the defendants themselves and that defendants had failed to supplement their discovery responses despite a discovery request from plaintiff that covered the home healthcare documents.

Because defendants had violated the discovery rules, Justice Burke considered whether the trial court abused its discretion in granting a new trial on this basis. Id. at *15. Justice Burke concluded that the trial court abused its discretion in this case because it failed to sufficiently explain or support its findings. Moreover, Justice Burke determined that the record contained no evidence that defendants had purposefully or intentionally withheld the documents. Indeed, it was undisputed that the legal services vendor notified plaintiff’s counsel about the documents, and plaintiff’s counsel took no action to obtain copies of them.

Justice Burke also concluded that plaintiff suffered no discernible prejudice from the discovery violation and that the trial court had overstated the relevance and impact of the home healthcare documents. The documents consisted of two plans of care and spanned four pages. Id. at *16. According to the court, there was no evidence that defendants used the documents to gain an unfair advantage in the trial, and plaintiff was able to make use of the documents at trial. In addition, Justice Burke concluded that the home healthcare documents would have done little to advance plaintiff’s arguments supporting a claim of wrongful death.

For these reasons, the Illinois appellate court reversed the circuit court’s order and reinstated the jury verdict.

3. In The William Powell Co. v. National Indemnity Co., 2017 WL 4315059 (S.D. Ohio Sept. 26, 2017), Magistrate Judge Karen L. Litkovitz reconsidered and reversed a prior decision ordering defendant to produce documents disclosed to third parties after defendant presented evidence demonstrating that such disclosure did not waive privilege.

In this case, plaintiff challenged defendant OneBeacon Insurance Co.’s privilege log and moved to compel disclosure of hundreds of withheld documents due to waiver as a result of disclosure of the withheld documents to third parties. Id. at *1. Defendant produced a joint defense agreement, but this covered only two of the nine third parties at issue, and as to those two parties, no waiver was found. Magistrate Judge Litkovitz granted the motion to compel, concluding that defendant had failed to submit any evidence regarding the relationship between defendant and the seven other third parties that would rebut a waiver of attorney-client privilege or work product protection.

Defendant moved for reconsideration under Rule 54(b) and federal common law, which allows for relief from interlocutory orders when there is (1) an intervening change of controlling law, (2) new evidence available or (3) a need to correct a clear error or prevent manifest injustice. Id. at *3 (citing Louisville/Jefferson Co. Metro Gov’t v. L.P., 590 F.3d 381, 389 (6th Cir. 2009)). In moving for reconsideration, defendant argued that an in camera review of these documents was required and that newly submitted evidence showed that there was no waiver of the attorney-client privilege or work product protection. Id. at *2.

Regarding in camera review, Magistrate Judge Litkovitz declined to revisit the prior decision to forgo in camera review of the disputed documents. Id. at *4. Defendant argued that such review was required under Ohio law before ordering a party to produce allegedly privileged information. Id. at *3. Magistrate Judge Litkovitz rejected this argument, finding that the cases defendant cited did not support the proposition that in camera review was a requirement every time the attorney-client privilege was asserted under Ohio law.

With respect to waiver, defendant argued that its disclosure of documents to third parties did not waive the work product protection unless the disclosure “substantially increased the opportunities for adversaries to obtain the information” or if the disclosure was made to an “adversary.” Id. at *5. Magistrate Judge Litkovitz rejected this argument because defendant had not raised it in opposing the motion to compel.

Magistrate Judge Litkovitz next considered defendant’s newly submitted evidence. Id. at *4, *6–*8. Even though this evidence was available when defendant first responded to the motion to compel, Magistrate Judge Litkovitz elected to consider the evidence in deciding the motion for reconsideration, finding that it clarified the factual issues regarding waiver of the attorney-client privilege. For example, defendant submitted evidence that the third parties listed on its privilege log were part of a group of subsidiaries covered by the joint defense agreement or were successors in interest to parties covered by the joint defense agreement. Id. at *6–*8. Magistrate Judge Litkovitz found this evidence sufficient to reverse the prior finding of waiver. Defendant also submitted a declaration stating that counsel for one of the third parties had been inadvertently copied on several emails. Id. at *8. Magistrate Judge Litkovitz agreed that there could be no waiver if the communications were inadvertently shared with a third party. Finally, defendant noted that some of the third parties were technology vendors that assisted with responding to the discovery request, and Magistrate Judge Litkovitz found it “apparent” that there is no waiver in those circumstances. Id. at *9.

Based on this newly submitted evidence, Magistrate Judge Litkovitz concluded that defendant had not waived the attorney-client privilege by disclosing the documents to third parties.

4. In Moultrie v. Progressive Direct Ins. Co., 2017 WL 4681999 (D.S.C. Oct. 18, 2017), Judge David C. Norton declined to consider evidence that defendant attached to its motion for summary judgment after failing to produce the evidence during discovery.

In this insurance litigation, plaintiff suffered an injury in a motorcycle accident caused by an unknown driver and alleged that defendant had failed to make a meaningful offer of underinsured motorist coverage. Id. at *1. On cross-motions for summary judgment, a critical issue was whether plaintiff had electronically signed a form waiving underinsured motorist coverage in connection with signing up for the policy. Id. at *2.

Defendant had attached to its motion for summary judgment computer code and screenshots from its internal document retention system. This evidence purported to show that plaintiff had electronically signed the relevant waiver form. But defendant had failed to produce this evidence during discovery. Plaintiff had specifically requested “data,” “electronic files,” “recordings” and “screenshots” relating to plaintiff’s insurance policy and the offer of underinsured motorist coverage. Defendant had objected to these requests as “not relevant and not reasonably calculated to lead to the discovery of admissible evidence.” Given defendant’s failure to produce the documents, plaintiff argued that Judge Norton should not consider these documents part of the record on summary judgment.

Rule 37(c)(1) provides that the “default sanction” for failure to provide relevant information requested under Rule 34 is “barring the use of the undisclosed evidence going forward,” subject to an exception in Rule 37(c)(1) when the failure to disclose was “substantially justified.”

Judge Norton began by noting that the “primary purpose of the discovery rules in the Federal Rules of Civil Procedure is to avoid just this type of litigation by surprise.” Turning to potential sanctions under Rule 37(c)(1), Judge Norton concluded that plaintiff suffered “surprise and prejudice” by defendant’s use of evidence not turned over during discovery. Accordingly, Judge Norton held that the evidence would not be considered on summary judgment.

Setting aside this alleged evidence of plaintiff’s waiver, Judge Norton proceeded to consider and deny the cross-motions for summary judgment, finding that issues of material fact remained regarding plaintiff’s electronic signature of the relevant documents. Id. at *3–*5.