October's Notable Cases and Events in E-Discovery

1. In Six v. Generations Federal Credit Union, 2018 WL 2435430 (4th Cir. Mar. 10, 2018), the U.S. Court of Appeals for the Fourth Circuit affirmed a lower court’s order imposing sanctions totaling $150,000 on three attorneys for acting in bad faith and violating their duty of candor by hiding a relevant and potentially dispositive document from the court in connection with a long-running dispute.

Borrower James Dillon obtained an online payday loan with an allegedly usurious interest rate. In October 2013, he filed a putative class action on behalf of a class and subclass of borrowers against several nonlender banks seeking to impose liability on these nonlender banks, not parties to the loan agreements, for providing aid to online lenders by processing loan-related transactions. Generations Community Federal Credit Union processed debit transactions from Dillon’s bank account under the loan agreement, and Dillon alleged that Generations “derived a benefit through the receipt of fees” from the allegedly usurious loans by processing these debit transactions. Id. at 2.

Attorneys Stephen Six, J. Austin Moore and Darren T. Kaplan, among others, represented Dillon in his suit. Generations promptly moved to dismiss Dillon’s complaint, attaching a copy of the loan agreement as an exhibit to its motion. Dillon challenged Generations’ reliance on the loan agreement because it originated online and did not “bear [Dillon’s] signature (or any signature)” and argued that Generations “fail[ed] to offer any explanation as to how it came into possession of the Loan Agreement or whether it is authentic.” Id. (emphasis in original).

At some times and for some purposes, Dillon’s counsel would characterize this challenge as one to the authenticity of the document — a substantive challenge that the document was not in fact what its proponents purported it to be. At other times and for other purposes, Dillon and his attorneys would characterize this challenge as one to the authentication of the document — a challenge to Generations’ failure to follow proper procedures under Fed. R. Evid. 901. The district court perceived Dillon’s challenge as one based on authenticity, not authentication, and Dillon’s attorneys made no effort to correct that impression. Dillon’s counsel Six repeatedly challenged the authenticity of the loan agreements. Id. at *3.

Under the impression that a good-faith basis existed to challenge the authenticity of the copy of the loan agreement that Generations produced, the district court denied Generations’ various motions to dismiss or to compel arbitration. Generations and other banks appealed, and in arguments before the Fourth Circuit, Dillon’s attorneys argued that counsel did not have the loan agreement at the time the complaint was filed. Id. at *4. The Fourth Circuit vacated the district court’s order and remanded for discovery on whether the case should be arbitrated.

In the course of this discovery, in response to requests for admissions on August 28, 2015, Dillon’s attorneys surprised Generations by admitting for the first time “that the [loan agreement] is a true and correct copy of the agreement [Dillon] electronically clicked-through over the Internet.” Id. at *5 (citation omitted). At Dillon’s deposition the following month, Dillon revealed for the first time that he had printed a copy of the loan agreement, possibly close to the time he took out the loan, and provided the copy to his attorneys.

Dillon’s attorneys explained that “[i]n contrast to other loan agreements in this litigation, Plaintiff concedes the authenticity of the [loan agreement] because he was able to locate a copy of the agreement in his own files that is identical to the agreement produced by Generations.” This statement suggests that an authenticity challenge could not be sustained in good faith if Dillon had an identical copy of the contested document and that Dillon’s attorneys dropped the authenticity challenge as soon as Dillon’s copy of the loan agreement was discovered. However, this was not the case. Generations did not know that Dillon’s attorneys had also possessed the same document since before filing the complaint. A forensic investigation of Dillon’s laptop computer revealed that Dillon had provided his copy of the loan agreement to his attorneys on October 1, 2013 — one week before the original complaint in the suit was filed. Nevertheless, Dillon’s counsel continuously challenged the authenticity of the loan agreement, at the same time his law firm had a copy identical to the one that Generations claimed was genuine.

Based on these actions, Generations moved for sanctions under the district court’s inherent authority and 28 U.S.C. § 1927. Id. at *6. Generations argued that the existence of Dillon’s copy of the loan agreement rendered Dillon’s attorneys’ authenticity arguments disingenuous and in bad faith, misleading to the court, and calculated to obstruct and multiply the proceedings. Generations sought compensation for the attorneys’ fees and costs incurred because of the added years of litigation stemming from Dillon’s attorneys’ bad-faith challenges to the authenticity of the loan agreement.

The district court granted Generations’ motion for sanctions, finding that Six, Kaplan and Moore “acted in bad faith and vexatiously and violated their duty of candor by hiding a relevant and potentially dispositive document from the Court in connection with a long-running dispute over arbitrability.” Id. at *7. Their conduct “multiplied the proceedings, wasted court resources, misled the Court, and caused Generations to incur unnecessary attorney’s fees.” In total, the court held Six, Kaplan and their law firms jointly liable for $150,000 in attorneys’ fees. The sanctioned attorneys appealed the orders imposing sanctions and argued that the court was imposing a rule requiring preliminary disclosure of documents prior to discovery.

The Fourth Circuit affirmed the district court’s ruling and in its analysis examined each basis for the district court’s imposition of sanctions. The Fourth Circuit first reviewed the federal court’s inherent authority to sanction, which derives from courts’ “certain ‘inherent powers,’ not conferred by rule or statute, ‘to manage their own affairs so as to achieve the orderly and expeditious disposition of cases.’ ” Id. (citations omitted). In this case, the district court invoked its inherent authority to address bad-faith behavior that abused the judicial process by counsel who “intended to hide and did hide relevant facts” for two years and “intentionally misled the [district court] about the relevant facts to gain a tactical advantage and prevail on pending arbitration motions.” Id. at *9 (citations omitted). The district court found that this conduct justified sanctions imposed under the court’s inherent authority, and the Fourth Circuit concluded that the district court did not abuse its discretion in so finding.

The Fourth Circuit also examined the district court’s imposition of sanctions under 28 U.S.C. § 1927, which provides that an “attorney ... who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct.” Section 1927 permits sanctions only for bad-faith conduct that wrongfully multiplies proceedings and is compensatory in nature — not punitive — and there must be a causal link between wrongful conduct and an unreasonable and vexatious multiplication of proceedings, with the costs wrongfully incurred as a result of the sanctioned attorney’s conduct being the amount awarded to the moving party.

In this case, the district court found that Dillon’s attorneys engaged in bad-faith conduct through multiple misrepresentations, post hoc explanations that were not credible and attempts to “rewrite history.” In the district court’s view, this conduct multiplied the proceedings unreasonably and vexatiously, generating additional costs incurred by Generations’ attorneys.

The Fourth Circuit concluded that the district court applied the appropriate legal standard under Section 1927, made appropriate factual findings and supported its findings with “ample evidence from the record.” Id. at *10. The Fourth Circuit rejected Dillon’s attorneys’ claim that they were being sanctioned for their failure to disclose Dillon’s copy of a loan agreement and stated that the district court did not purport to impose a duty to compel production of any particular document before discovery, nor did it impose sanctions based on any single misrepresentation. Instead, the Fourth Circuit pointed to the fact that the district court held that “[a]ll of the conduct, taken together” led it to conclude that sanctioned counsel “intended to hide and did hide relevant facts from the [district court] and opposing counsel for almost two years,” and such conduct “violated their duty of candor to the [district court],” warranting sanctions.

2. In West Bend Mut. Ins. Co. v. Zurich Amer. Ins. Co., 2018 WL 1736153 (N.D. Ill. Apr. 11, 2018), Magistrate Judge Jeffrey Cole rejected plaintiff’s privilege waiver argument, finding that defendant’s “bad faith in settlement” counterclaim did not constitute issue injection that would waive defendant’s privilege, as the counterclaim related solely to plaintiff’s conduct and did not inject any facts or issues relating to defendant’s own conduct.

An employer tendered the defense of a suit of an injured construction worker to West Bend, and the construction worker prevailed at trial and obtained a judgment of over $1.7 million. West Bend then sought from its secondary insurer Zurich the amount it paid over the $1 million policy limit. Zurich refused, contending that West Bend acted in bad faith in not settling the case for less than $1 million. Id. at *1.

West Bend sued Zurich and, in the course of discovery, asked for documents in Zurich’s claim file and communications with one of its attorneys. The documents were created in the course of Zurich’s observation of the underlying proceedings with the injured construction worker. Zurich initially made sweeping claims of privilege relating to 200 documents but agreed to produce all but 80 of the requested documents after West Bend moved to compel. The sole remaining issue was whether Zurich had waived privilege as to those 80 documents.

Under Illinois law, insurers have a duty to settle in good faith on behalf of the insured; this duty “arises from the covenant of good faith and fair dealing implied in an insurance contract.” The duty implicates three parties: the injured third party, the insured who is being sued and the insurer who controls the insured’s defense. This creates a conflict of interest when the third party sues the insured for an amount above the policy limit and also seeks a settlement at the upper limit of the policy. In this circumstance, according to the Seventh Circuit, “[i]t makes no difference to the insurer’s bottom line whether the case is settled or the jury awards astronomical damages; in either event it will pay out only the maximum on the policy. And if the case goes to trial, at least there’s a shot that they will win and pay nothing.” Id. (quoting Iowa Physicians’ Clinic Med. Found. v. Physicians Ins. Co. of Wisconsin, 547 F.3d 810, 812 (7th Cir. 2008)).

In light of these incentives, the magistrate judge noted that Illinois law imposes a duty of good faith and fair dealing in responding to settlement offers, and Zurich invoked this doctrine in filing its counterclaim. Id. at *2.

West Bend argued that Zurich had waived its attorney-client privilege by injecting the bad faith claim into the litigation. But the magistrate judge disagreed with West Bend that these circumstances resulted in Zurich waiving its attorney-client privilege by putting the bad faith claim “at issue.” Such waiver occurs, he found, only when holder injects new facts or legal issues into the case, usually by asserting an affirmative defense, but in this case, the settlement discussions related solely to West Bend. The magistrate judge cited a number of cases for the issue injection principle in the insurance context, concluding that “[t]aking West Bend at its word, we can’t see how Zurich has waived its attorney-client privilege or work product protection” as it was West Bend’s good faith (or not) that was at issue, not any action by Zurich or its attorney regarding that decision.

The magistrate judge rejected the claims and case law cited by West Bend, concluding that none of these cases dealt with an analogous situation and that West Bend had provided no authority to support its assertion that privilege did not apply because the Zurich attorney was working as a claims handler, not a lawyer. The magistrate judge also rejected as unsupported West Bend’s assertion that the work product protection was inapplicable, noting that litigation had been reasonably anticipated well before the documents at issue were created. Id. at *3.

The magistrate judge concluded by telling the parties to take seriously the duty to meet and confer prior to the filing of discovery motions: “Chatting for a bit about a dispute and maintaining an untenable position at worst or a tenuous position at best, is not engaging in a good faith meet and confer.” Id. at *4. Further, because discovery disputes are governed by discretion, not hard-and-fast rules, parties should keep in mind that there is often more than one “right” answer and it therefore “behooves parties to work things out on their own” as a “negotiated outcome is more likely to give both sides at least a somewhat satisfactory resolution.”

3. In Tanner v. BD LaPlace, LLC, 2018 WL 3528023 (E.D. La. July 23, 2018), U.S. District Court Judge Martin L.C. Feldman found that nonprivileged medical records and Social Security benefit information were relevant in a disability discrimination lawsuit against an employer and rejected a plaintiff’s challenge to a magistrate judge’s order so finding.

Plaintiff Paul Tanner was employed at defendant BD LaPlace, LLC, as a crane operator. BD LaPlace opened an investigation of Tanner due to complaints about Tanner’s workplace behavior and required Tanner to submit a fitness-for-duty evaluation, administered by a mental health professional. When Tanner refused to submit to the evaluation, BD LaPlace determined that Tanner had abandoned his job and terminated his employment. After this termination, the Social Security Administration designated Tanner as disabled.

Tanner sued BD LaPlace alleging that it violated the Americans With Disabilities Act (ADA) by requiring him to submit a mandatory medical evaluation to continue employment. During discovery, BD LaPlace propounded interrogatories and requests for production of documents seeking, among other things, Tanner’s medical records and information relating to his Social Security disability designation and benefits. Tanner refused to provide any information regarding his mental health or access to any of his medical records. BD LaPlace moved to compel discovery, and the magistrate judge granted the motion to compel Tanner’s medical records for the last 10 years and financial records from 2014 to the present. Tanner moved for a review on the magistrate judge’s order on the grounds that the mental health and financial records were not relevant and also claimed that pretermination financial records were irrelevant to any damages issues.

The district court first noted that a party may appeal a magistrate judge’s ruling to the district court pursuant the Fed. R. Civ. P. 72(a), but the district court will not disturb the magistrate judge’s ruling unless it is “clearly erroneous or is contrary to law.” Id. at *1 (citing Castillo v. Frank, 70 F.3d 382, 385 (5th Cir. 1995)). A finding is “clearly erroneous” when the reviewing court is “left with the definite and firm conviction that a mistake has been committed.” Id. (citing United States v. Stevens, 487 F.3d 232, 240 (5th Cir. 2008)).

In reviewing plaintiff’s motion, the district court noted that Tanner failed to reference any case law or provide any further support to demonstrate that the magistrate judge was clearly erroneous in his rulings. Citing the Rule 26 relevance standard permitting discovery of any nonprivileged matter relevant to any party’s claim or defense and proportional to the needs of the case, Judge Feldman noted that courts have consistently held that the production of medical information and Social Security benefit information is relevant and proportional to an ADA disability discrimination claim. Thus, the district court found that the magistrate judge was “not unreasonable” in determining that the medical records were relevant. Judge Feldman also found that Tanner waived any potential privilege claim over these records by bringing the suit and seeking damages based on his emotional distress, thus putting his medical condition at issue. The district court also held that it was “not unreasonable” to conclude that medical records are relevant to evaluating whether Tanner was qualified for the job or to determine whether BD LaPlace violated the ADA when it ordered the plaintiff to undergo a medical evaluation after concerns were raised about Tanner’s mental health. As a final matter, the district court determined that Tanner’s financial records were “obviously relevant” to the determination of damages.

4. In Fluidmaster, Inc. v. Fireman’s Fund Ins. Co., 235 Cal. Rptr. 3d 889 (Ct. App. Jun. 26, 2018), the California Fourth District Court of Appeals remanded a trial court decision disqualifying a law firm from a lawsuit following its hiring of a conflicted e-discovery attorney who subsequently left the firm.

This dispute arose in a subrogation dispute between Fluidmaster, Inc., a plumbing supply company alleged to have manufactured a defective plumbing part, and Fireman’s Fund, an insurance company that paid homeowner claims arising from failures of Fluidmaster’s allegedly defective product. Fireman’s Fund retained Crowell & Moring (Crowell) to represent it in the product liability lawsuit in 2015. Id. at 890.

In 2017, Crowell hired e-discovery attorney Elizabeth Pollock, who before joining Crowell had worked for a handful of e-discovery vendors. In 2014, Fluidmaster had hired an e-discovery vendor to help with discovery in lawsuits arising from the allegedly defective plumbing part. Pollock served as the vendor’s lead attorney on that project. Id. at 891.

The conflict had been discovered in the hiring process, and the outside recruiters and Pollock and Crowell indicated that Powell had communicated no confidential information to Crowell in the course of the interview process. On her first day at Crowell, the firm sent out an “ethics wall notice” prohibiting communication with Pollock about the Fluidmaster case and barring her from working with attorneys assigned to the Fluidmaster litigation.

Crowell also sent a courtesy letter to Fluidmaster’s general counsel informing him of the hire and the screen. Fluidmaster then successfully moved to disqualify Crowell. Crowell and Fireman’s Fund appealed, and the coverage litigation was stayed. While the appeal was pending, Pollock left Crowell, and the appellate court noted that “[a]ppellants’ counsel made a motion for [the court of appeals] to take evidence to establish the fact of her discontinued employment.” Id. at 891. The court of appeals also “asked whether there was any evidence before the trial court on the disqualification motion that showed Pollock had shared any of Fluidmaster’s confidential information with any person at Crowell. In its letter brief Fluidmaster concede[d] there was no such evidence.”

The court of appeals then considered the impact of the attorney’s departure on the appeal, relying heavily on Kirk v. First Am. Title Ins. Co., 183 Cal. App. 4th 776, 785 (Ct. App. 2010), which had confronted a very similar situation. The court of appeals explained: “Kirk is really two separate opinions: (1) a major disquisition on the topic of vicarious disqualification which appears to have been prepared prior to the court’s receiving the news that the disqualified attorney had left the mega-firm; and (2) a secondary opinion exploring the issue of the disqualified attorney’s leaving the target mega-firm during the pendency of the appeal.” Fluidmaster, Inc., 235 Cal. Rptr. 3d at 893.

The first section in Kirk explained that the California Supreme Court had not laid down any rule of automatic vicarious disqualification and that disqualification should not be automatic when an ethical screen had been erected but should be considered on a case-by-case basis. The second section concluded that the appropriate course when a disqualified lawyer leaves a disqualified firm was to remand the matter to the trial court to consider whether any confidential information had ever been conveyed by the now-departed disqualified attorney.

The Fluidmaster court concluded that the lack of evidence at the original hearing of any shared confidences similarly warranted remand so that the trial court could consider the matter in the first instance. On remand, the trial court was instructed to consider various factors set forth in the Kirk decision: (1) the size of the firm, (2) the geographical distance between the disqualified attorney and the attorneys working on the Fluidmaster litigation, (3) the nature of the “ethical wall,” (4) Crowell’s rules and procedures for preventing access to confidential information and files, (5) whether the disqualified attorney had some financial incentive to work against the former client, (6) the existence of any supervisorial relationship between the disqualified attorney and the attorneys working on any former client matters and (7) the speed with which the former client was notified of the hiring of the disqualified attorney. Id. at 894-95. The Kirk court stated that at a minimum, the disqualified firm should provide declarations from the disqualified attorney, each member of the team working on the former client’s matter and those attorneys (often from the professional responsibility unit of a large firm) who learned of the facts giving rise to the imposition of the ethical screen.

In rejecting Fluidmaster’s arguments that the trial court had found that a conflict existed, thereby making a remand unnecessary, the court of appeals determined that the trial court had not already found that such a conflict existed. According to the appellate court, “[t]he sole support for this contention is the trial court’s reference to the Crowell firm’s not having ‘maintained ... a cone of silence.’ ” Id. at 895 (ellipsis in original). The appellate court found that this reference to the “cone of silence” merely indicated “that Pollock had conversations with Crowell attorneys ‘about’ the Fluidmaster litigation prior to being hired — conversations presumptively necessary to a proper conflicts check.” The court of appeals found nothing wrong with such discussions:

What was Pollock to do? Not disclose the fact that she had worked for a firm that had been employed by Fluidmaster? What was Crowell to do? Not disclose sufficient information to let Pollock know she would need to be screened off from one of the firm’s cases? Prospective hiree and hirer must at least share enough information about past and current work to ascertain, evaluate, and remediate potential conflicts. Further, based on the ethical screen memo sent out the day Pollock was hired, the Crowell firm did impose a cone of silence on any of its attorneys talking about what she learned about Fluidmaster at [the e-discovery vendor] with her.

The Court of Appeals therefore remanded the matter to the trial court for further consideration of whether confidential information was disclosed, applying the factors set forth in Kirk.