State Fund Strikes Again

McDermott Will & Emery LLP v. Superior Court, No. G053623 (Apr. 18, 2017)

The underlying litigation in this writ is a malpractice case arising from messy probate fight over the control of a family office. It involves way too many names and a whole lot of factual detail, but I’ll try to simplify as best as I can, without losing the key flavor as relevant to the procedural issues, which deal with the disqualification of one party’s lawyers for failing to return privileged materials.

Client inadvertently forwarded a privileged email from his attorney to his Brother-in-Law. Two years later, Opposing Counsel in the probate matter came across it in discovery and flagged the issue for Client’s litigator. While the parties agreed to disagree about privilege and waiver issues, Probate Opposing Counsel agreed to destroy all copies of the email save for one that he sealed to use in the event that litigation over the inadvertent disclosure became necessary and to refrain from further use or review without seeking relief from the court. It does not seem that court intervention was sought in the probate case.

It also turned out, however, that Brother-in-Law had forwarded the email to someone who gave a copy of it to one of the Law Firm Defendants in the malpractice case. They produced a copy in discovery in the probate matter in response to a subpoena. Unlike counsel in the probate matter, Law Firm Defendants’ lawyers in the malpractice case—let’s call them “Defense Counsel”—tried to use the email to cross-examine one of Client’s children. Defense Counsel disputed that the email was privileged and claimed that, in any event, the privilege was waived. When Client’s lawyers in the malpractice case objected, Defense Counsel would not return the email.

Client moved for return of the email on the basis of privilege. The court granted that motion. Client subsequently moved to DQ Defense Counsel for using and failing to return the email. The trial court granted that motion too. Defense Counsel took a writ.

There’s a threshold issue about whether Defense Counsel can seek writ relief on the privilege determination, because they filed their writ more than 60 days after the order issued. While there’s no hard and fast deadline to petition for a writ, the Court of Appeal applies a 60-day rule of thumb, akin to the time to file a notice of appeal. But since the deadline is equitable, the court can relax it. And further, in the course of deciding an issue raised by a timely petition challenging a later order in which an earlier order is inextricably intertwined, the court can review the prior order as well. Since here, the question of whether the prior email was actually privileged is predicate to the DQ motion, the court sees no reason it can’t get to that question on this writ.

On the merits, California law tends to treat waivers of the attorney-client privilege narrowly. The waiver statute—Evidence Code § 912—is basically interpreted so that a voluntary disclosure to a third party will waive, but an inadvertent one generally will not. Here, the trial court didn’t err in its determination that the forwarding was inadvertent. Client is an older gentleman with MS. The email was forwarded without any separate text, and Brother-in-Law had no involvement in the subject matter of the email. Client testified that he didn’t intentionally send the forward, and that he in fact rarely communicated with Brother-in-Law. So, despite the fact that Defense Counsel point to some evidence to the contrary, there was substantial evidence to support the trial court’s finding of non-waiver. Nor did the subsequent disseminations by Brother-in-Law or various others waive the privilege, because only the holder has the power to do that. 

So far as the DQ, the question is whether the rule in State Comp. Ins. Fund v. WPS, Inc., 70 Cal. App. 4th 644 (1999) extends to the facts at hand. In State Fund, a party produced a document in discovery. It was readily apparent that the document was privileged and that the disclosure was inadvertent. But the receiving party never told the producing party that a potentially privileged document might have been inadvertently produced. Instead, it sat on the document and ultimately tried to use it to its advantage in the ligation. The court held that the receiving attorney should have informed the producing attorney of the inadvertent disclosure and that failure to do so merited disqualification. The court justified the rule both because of the importance of protecting the attorney-client privilege as well as the importance of policing the ethical obligations of attorneys to ensure the fair administration of justice.

That said, the State Fund opinion is a little inconsistent in its particulars, especially as to how clear the privilege and inadvertence need in order trigger the obligation of disclosure and the potential sanction of disqualification. 
Defense Counsel points to some language suggesting that the duty attaches when the privilege is obvious or clear and that the inadvertence was reasonably apparent. Client points to other language suggesting a lower standard—that the duty attaches when the receiving attorney ascertains that she “may have” inadvertently disclosed privileged materials. 

The court here ultimately doesn’t need to address the issue because it finds that the evidence was sufficient the meet either standard. But it nonetheless tries to thread the needle somewhat to reconcile the inconsistency. First, it notes that even the higher standard does not require privilege and inadvertence to be established as a legal certainty. Moreover, the scale can slide with the appropriate reaction. Some stuff is so obviously privileged that receiving party should cease any further examination of the document, immediately inform the producing party, and either return the material or seek intervention from the court. For less obvious stuff, a more limited response might be sufficient, such as to simply notify the producing party that privileged documents might have been disclosed and wait for that party to take appropriate steps.

The court also rejects an argument that State Fund applies only to inadvertent disclosures by opposing counsel in litigation. It finds no good reason why a disclosure directly by the client outside of litigation should not also receive protection. This position is to some extent supported in prior case law applying State Fund to certain inadvertent disclosures outside of formal discovery.

Applying the rules to the facts of the case, the court holds that substantial evidence supported the trial court’s decision that Defense Counsel had violated their obligations under State Fund. The face of the email and the circumstances known to Defense Counsel merited an inference that it was a privileged communication that had been inadvertently disclosed. The court notes again that the privileged nature of the communication need not be unassailable. 

Otherwise, the State Fund duties would never apply so long as the party on the receiving end could conceive of some non-frivolous argument for why a document might not be privileged or that any privilege had been waived. Given that the production itself generally gives rise to a colorable waiver argument, that would render the obligations pretty toothless, and leave the call in the hands of the receiving attorney to unilaterally make.

The court also court upholds disqualification as an appropriate remedy. As the court notes, disqualification should not be automatic whenever lawyers fail to live up to their State Fund obligations. The contents of an inadvertently produced privileged document could be so collateral or trifling that an adversary's knowledge of its contents wouldn’t make any practical difference. That said, the disqualification remedy is prophylactic—it can be applied even to address a potential misuse. In this case, although the opinion does not detail the contents of the email (for obvious reasons) exposure to it potentially gave Defense Counsel a tactical advantage that they would not otherwise have, and that could not be fully remedied by the document’s return. So the trial court’s first order that the email was privileged and that it could not be further used was not really enough to protect Client from misuse of the email.

Justice Thompson dissents. 

For several reasons, he thinks the court has broadened State Fund past its moorings. First, Client and his attorney both knew of the inadvertent disclosure well before Defense Counsel tried to use the document at a deposition. They even knew that the Law Firm Defendants had a copy because they produced it in discovery in the probate case. Yet, Client did very little to ensure that the document was returned or destroyed during the ensuing time.

Second, the inadvertent disclosure here was by the client himself, not the lawyer. That takes the case away from one of the interests—a client’s interest in candid disclosure to his lawyer—that State Fund is meant to protect. Third, the document was neither disclosed in of document discovery nor obtained in a wrongful fashion, which further takes the facts out of State Farm and similar cases.

Justice Thompson notes that State Fund is meant to avoid a “gotcha”—an inadvertent waiver based on a mistaken production of an otherwise privileged document. But a rule as broad as the one here risks a “reverse gotcha,” where counsel of choice winds up disqualified because an opponent has been sloppy with protecting the privilege. Or worse, based on a devious design to produce privileged materials to gin up a DQ.

The dissent also disagrees with the court’s affirmance of the trial court’s finding that the standard was satisfied. Justice Thompson doesn’t think the circumstances justify a finding that it was reasonably certain to Defense Counsel that the production was, in fact, inadvertent. He also thinks that Defense Counsel’s State Fund obligations were satisfied when they produced the email from Law Firm Defendants’ files. After that time, it was incumbent on Client to affirmatively seek relief in court. 

And finally, the dissent does not agree that disqualification was an appropriate remedy. The facts of this case are so unusual and different from the prior precedent that Defense Counsel’s obligations were, at best, unclear. Under the circumstances, Defense Counsel’s could not be equated with bad faith, so it would be unfair to impose such a harsh sanction them.

Affirmed.