Inadvertent Disclosure of the Claim File – When Is It a Waiver of Privilege?

Written by Stephanie G. Cook, Esq.

Edited by William J. Pfund, Esq.

A recent opinion in the United States District Court for the Western District of Virginia, Abingdon Division, provides an excellent guide as to what arguments to make upon the inadvertent disclosure of privileged documents. It includes an in depth analysis of whether the attorney client privilege and the work product privilege have been waived.  Harleysville Ins. Co. v. Holding Funeral Home, Inc., 2017 U.S. Dist. Lexis 162058 (October 2, 2017) (vacating Harleysville Ins. Co. v. Holding Funeral Home, Inc., 2017 U.S. Dist. Lexis 18714 (Feb. 9, 2017).

In Harleysville, an insurance company filed a declaratory judgment action asking the court to find that it had no duty to pay benefits under a policy to its insured, Holding Funeral Home. The funeral home had burned to the ground, and an expert hired by Harleysville determined the fire had been intentionally set. Harleysville sought to deny coverage on the grounds of material misrepresentation.

During Harleysville’s investigation, an investigator for Harleysville shared information with the National Insurance Crime Bureau (NICB) by uploading it to a “Box Folder” on an internet file sharing service.  An email with a sharing link was sent by the investigator to NICB. No password was required in order to access the folder.

During the course of discovery in the declaratory judgment action, counsel for Holding issued a subpoena to NICB requesting their entire file pertaining to the fire. NICB produced the email from Harleysville’s investigator. By this time, the Box Folder included the entire claim file. Using the link in the email, counsel for Holding reviewed the entire claim file. Holding then made its own inadvertent disclosure, by producing a thumb drive to Harleysville’s attorneys which contained its own privileged material. Unlike counsel for Holding, however, counsel for Harleysville notified Holding’s attorneys immediately of the inadvertent disclosure and complied with Holding’s request to destroy the privileged material. During this process, Harleysville became aware that its own claim file was on the thumb drive and asked Holding to destroy it. Holding refused, and Harleysville filed a Motion to Disqualify Holding’s attorneys and to exclude the use of any claim file materials in the declaratory judgment action.

The Motions were first heard by the Magistrate Judge who denied the Motion to Disqualify Counsel and found that any privilege had been waived, since Harleysville uploaded the files to a “publically accessible, non-password protected website.” However, the Magistrate Judge awarded monetary sanctions against Holding’s attorneys, since they knew they had access to potentially privileged information and did not disclose this to Harleysville or ask the court to make a ruling on waiver before reviewing the file. Both sides filed objections to these rulings, and the issues were then heard by U.S. District Judge James P. Jones.

Judge Jones found that the attorney-client privilege applied to many of the documents, such as reports by the attorneys to Harleysville which included advice on litigation tactics, conclusions from their factual investigation, and analysis of law. He then examined the work product doctrine, which generally states that documents prepared by an attorney in anticipation of litigation are privileged. He concluded that many of the documents also constituted work product.

The Judge reversed the Magistrate’s opinion by concluding the privileges were not waived because the disclosure of the claim file was inadvertent.  He specifically found that “[t]his is a case where the client unknowingly and unintentionally made privileged documents available to a third party, and such disclosure is inadvertent under the law.” The Judge found that the precautions taken by Harleysville’s investigator were reasonable, since the Box Folder was not searchable through the internet. He noted that a person must have the specific URL of the sharing link in order to access the folder and concluded the URL was effectively a password. He likened the scenario to a briefcase buried in a large park – “technically publicly-accessible, but for all practical purposes, secured” as opposed to the Magistrate’s analogy of “a briefcase on a public park bench and telling its counsel where it could be found….” The Judge also took into consideration that this was the investigator’s first time using the file sharing service; that he reasonably believed he was taking security precautions when using the site; and that he did not know he had used the same sharing link. In addition, the materials were marked as “privileged and confidential.”

The Judge found that Harleysville’s counsel acted swiftly by contacting opposing counsel within four days of discovering that opposing counsel had the claim file materials in his possession. He disagreed with the Magistrate’s reasoning that the file had been shared, and therefore disclosed, when the investigator uploaded the claim file to the Box Folder, since no one from Harleysville was aware of the disclosure at that time.

The Judge concluded the disclosure was not extensive, as Harleysville “only inadvertently disclosed the privilege documents to its insured’s counsel.” Since NICB was unaware it had access to the claim file, the production to NICB did not constitute a disclosure. The Judge further found that any dissemination of the privileged documents by Holding did not count against Harleysville and was “beyond its control.”

The Judge next examined whether the work product privilege had been waived. In doing so, he noted that the work product privilege “may be waived expressly or by conduct, by either the attorney or the client.” As noted above, the Judge had already concluded the disclosure was inadvertent and that Harleysville had taken reasonable measures to prevent disclosure. In addition, he placed emphasis on the fact that Harleysville acted promptly to maintain the confidentiality of its documents as soon as it discovered the inadvertent disclosure. The Judge further found that Harleysville also took reasonable steps to correct the error by complying with Federal Rules of Civil Procedure 26(b)(5)(B) and 45(e)(2)(B), which required Harleysville to notify opposing counsel of their claim of privilege.

The Judge then addressed sanctions against the funeral home. He vacated the Magistrate’s award of monetary sanctions but awarded evidentiary sanctions instead by preventing the funeral home from using any information contained in the privileged material. In justifying the sanctions, he admonished Holding’s attorneys for not complying with the Federal Rules or with ethical standards. Federal Rule of Civil Procedure 45, for instance, required Holding to “promptly return, sequester, or destroy” the privileged materials upon notice by Harleysville of their claim of privilege. In addition, ethical rules require “a lawyer who receives inadvertently transmitted confidential documents from the opposing lawyer to notify the opposing lawyer promptly.” LEO 1702. The Judge further found that Holding’s attorneys attempted to conceal their possession of the claim file from Harleysville when it produced the thumb drive but failed to specifically indicate that the claim file was on it. More specifically,  Holding’s attorneys “misleadingly named” the subfolder containing the claim file as “NICB Video” while “knowing that the folder included far more than a video.”  In addition, he found it “impermissible” that Holding’s attorneys did not request the court’s assistance in determining whether the documents were privileged.

Finally, the Judge declined to grant Harleysville’s motion to disqualify Holding’s attorneys. In doing so, he relied on a six prong test: (1) whether the attorneys knew or should have known that the material was privileged; (2) the promptness with which the attorneys notified opposing counsel of receipt of privileged information; (3) the extent to which the attorneys reviewed and “digest[ed]” the material; (4) the significance of the privileged information, such as the extent which its disclosure would prejudice the movant’s claim or defense; (5) the extent to which the movant may be at fault for the unauthorized disclosure; and (6) the extent to which the non-movant would suffer prejudice from the disqualification of his attorney. Judge Jones found the first three factors weighed in favor of disqualification, and the last three factors weighed against disqualification. Ultimately, he was concerned with the prejudicial effect disqualification would have on the funeral home and therefore denied the Motion for Disqualification.




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