Practice Tip: Clawback Agreements

As construction attorneys, we're no strangers to voluminous productions of client documents and communications, both in electronic and hardcopy formats, during discovery.  Even with proper safeguards in place during document review, there exists the possibility that some privileged material may accidentally slip over to an opposing party.  Production of such material to a third party, especially an adversary, runs the risk of waiving attorney-client privilege or attorney work product privilege.

Rule 502(b) of the Federal Rules of Evidence creates somewhat of a safety net for inadvertent disclosures, but requires compliance with a number of steps that, without a prior agreement between the parties, the compliance could be challenged.  Fed. R. Evid. 502(b) ("disclosure does not operate as a waiver in a federal or state proceeding if: (1) the disclosure is inadvertent; (2) the holder of the privilege or protection took reasonable steps to prevent disclosure; and (3) the holder promptly took reasonable steps to rectify the error, including (if applicable) following Federal Rule of Civil Procedure 26 (b)(5)(B) [concerning inadvertent production of trial preparation materials].") Note also that the term "inadvertent" is not defined.

Clawback agreements, pursuant to Federal Rule 502(d) & (e) and equivalent state rules, are aimed at avoiding waiver of privileges without having to resort to proof under Rule 502(b). See Fed. R. Evid. 502(d) ("A federal court may order that the privilege or protection is not waived by disclosure connected with the litigation pending before the court—in which event the disclosure is also not a waiver in any other federal or state proceeding."); Fed. R. Evid. 502(e) ("An agreement on the effect of disclosure in a federal proceeding is binding only on the parties to the agreement, unless it is incorporated into a court order.").  Likewise, scheduling orders under Rule 16 of the Federal Rules of Civil Procedure contemplate the Court approving the parties' clawback agreement in this regard ahead of time.  Fed. R. 16(b)(3)(iv) ("The scheduling order may . . . include any agreements the parties reach for asserting claims of privilege or of protection as trial-preparation material after information is produced, including agreements reached under Federal Rule of Evidence 502"). 

Here's the concern with clawback agreements - in the event of a dispute between parties, a court, depending on the circuit or state, may not be willing to enforce a generally stated agreement unless it explicitly speaks to the Rule 502(b) standard.  For example, in IRTH Solutions, LLC v. Windstream Communications, LLC, No2018 WL 575911 (S.D. Ohio Jan. 26, 2018), the district court confirmed the magistrate judge's decision that, per Federal Rule of Evidence 502(b), the defendant had waived its attorney-client privilege by twice producing 43 privileged documents to plaintiff’s counsel notwithstanding that the parties had a clawback agreement.  Though the defendant's counsel did not dispute that the production of the 43 documents was "reckless," the defendant's counsel argued that the clawback agreement should trump the requirements of 502(b), which avoids waiver only upon an "inadvertent" disclosure.  The district court disagreed instead focusing on whether the parties' agreement even spoke to dispensing with Fed. R. Evid. 502(b)(2) requirement to "take reasonable steps to prevent disclosure."  The Court noted that "the clawback agreement [in IRTH] lacked any language to support a finding that the parties came to an understanding that there would be no pre-production review [and] [m]oreover, the email memorializing the parties' clawback agreement also contained a provision requiring the parties to provide privilege logs  . . . [indicating to the Court] that the parties did in fact contemplate meaningful pre-production privilege review."  Accordingly, the Court concluded that the defense had waived the privilege by producing the documents notwithstanding the clawback agreement. 

The IRTH case recently was granted an interlocutory appeal to the Sixth Circuit to answer the question "what is the legal standard for determining whether a clawback agreement displaces the test under Rule 502(b) for evaluating if an inadvertent disclosure of privileged documents constitutes waiver of the attorney-client privilege? Defendant argued that a clawback agreement, no matter how cursory, always prevails, such that an inadvertent disclosure does not waive the privilege."
Therefore additional guidance in this circuit is forthcoming.  However, regardless of the circuit or state, drafting clawback agreements so each  Rule 502(b) element is identified and addressed is a good rule of thumb to avoid the possible waiver of privileges.

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Katharine Kohm, Esq. is a committee member for The Dispute Resolver.  She practices construction law at Pierce Atwood, LLP in Providence, Rhode Island. 

Materials "Considered" by Construction Expert Are Off Limits

The Rhode Island Supreme Court, in Cashman Equipment Corporation, Inc. v. Cardi Corporation, Inc. interpreted Rule 26 of the R.I. Superior Court Rules of Civil Procedure to hold that the Plaintiff subcontractor could not discover all materials that the Defendant general contractor's testifying expert considered when formulating his opinions.

The underlying matter concerned work on a bridge that spans the Sakonnet River in eastern Rhode Island.  Plaintiff served as the bridge foundation subcontractor on the project. Plaintiff alleged that it incurred additional costs because the Defendant general contractor issued a defectively designed cofferdam and materials to Plaintiff.  Defendant disagreed and tapped an engineering expert who opined that cofferdam design was not defective.  Plaintiff sought to investigate the underpinnings of that opinion and requested "all materials and documents, less core attorney work product, including all computer models and drafts of materials and documents, developed and considered by [Defendant's] testifying expert . . . in the process of formulating his written expert opinions.”  Defendant refused to produce the drafts of its expert's models and documents.  Plaintiff retorted with a motion to compel thatthese materials "considered" by the expert were within the scope of Rule 26, were discoverable, and were necessary to "assure effective cross-examination of testifying experts." The Superior Court disagreed and denied the motion to compel.

On writ of certiorari on the interlocutory issue, the Supreme Court started with the section of Rule 26 that embraces expert discovery:
A party may through interrogatories require any other party to identify each person whom the other party expects to call as an expert witness at trial, to state the subject matter on which the expert is expected to testify, and to state the substance of the facts and opinions to which the expert is expected to testify and a summary of the grounds for each opinion. A party may depose any person who has been identified as an expert expected to testify when the expert interrogatory has been responded to by the other party.

Rule 26(b)(4)(A) of the R.I. Superior Court Rules of Civil Procedure.  With a nod to the reasonableness of the Plaintiff's request, but constrained by this plain language in the rule, the Court concluded that investigation of experts "is confined by its very terms to discovery through interrogatories or deposition." As a result, Plaintiff was not entitled to review Defendant's expert's documents considered.  The Court went on to hint that a rule change may be in order.

After reaching this decision, the Supreme Court observed that Rhode Island's current Rule 26 diverges from the current Federal Rule, which does require a party to disclose a testifying expert witness's report along with, inter alia, "the data or other information considered by the witness in forming the opinions."
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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

Hawaii Finds Arbitration Agreement With “Severe Limitations on Discovery” is Unconscionable, By Liz Kramer*

Hawaii issued a bold arbitration decision this month. It applied its state contract law to conclude that the parties did not form a clear arbitration agreement, but even if they did, it was unconscionable because it prohibited both discovery and punitive damages.  Narayan v. The Ritz-Carlton Dev. Co., Inc., __ P.3d __, 2015 WL 3539805 (Haw. June 3, 2015).

Kapalua Bay Beach

The plaintiffs purchased the first condos in a development in Kapalua Bay.  The developer defaulted on loans, however, and it or its agent withdrew over a million dollars from the association’s operating fund.  The plaintiffs sued for breach of fiduciary duty and other claims.

In response, the developer moved to compel arbitration.  It argued that the plaintiffs’ purchase agreements incorporated the condominium declaration, which had an arbitration clause.  The trial court denied the motion to compel, but the intermediate court of appeals reversed.  The Hawaii Supreme Court found the intermediate court gravely erred and the plaintiffs did not have to arbitrate their claims.

Under Section 2 of the FAA, the Hawaii Supreme Court applied state law to decide whether an arbitration agreement existed and whether it was valid.

On the first question, the Hawaii Supreme Court found the parties did not form an agreement to arbitrate, because the purchase agreement was ambiguous regarding the parties’ intent to arbitrate.  Notably the purchase agreements themselves did not mention arbitration and instead stated that the venue for any action shall be in Hawaii state court.  The arbitration clause was only included in the separate condominium declaration.  The court found “it is facially ambiguous whether those disputes would be consigned to arbitration in Honolulu pursuant to the condominium declaration or the [state court] pursuant to the purchase agreement.”  The court’s analysis applied Hawaii case law that appears to create different (and higher) standards for proving the existence of an arbitration agreement than the standards required to prove other contracts.  But, Hawaii avoided any FAA preemption problem by offering up a second, independent basis for its refusal to enforce the arbitration clause: unconscionability.

The court also found the arbitration agreement unconscionable under Hawaii law.  It found it was procedurally unconscionable because the plaintiffs could not negotiate it, it was “buried in an auxiliary document,” and it was ambiguous.  With respect to substantive unconscionability, the court focused on three provisions of the arbitration agreement.  The arbitration agreement provided that the arbitrator could order the parties to exchange copies of “nonrebuttable exhibits” and witness lists, but “the arbitrator shall have no other power to order discovery or depositions unless and then only to the extent that all parties otherwise agree in writing.”  The arbitration agreement  also precluded parties from “disclos[ing] the facts of the underlying dispute…without prior written consent of all parties.” The Hawaii Supreme Court concluded that “if the arbitration clause were enforced as written, the [plaintiffs] would have virtually no ability to investigate their claims, and thus, would be deprived of an adequate alternative forum.”  Furthermore, the arbitration agreement precluded punitive damages, which the court found “substantively unconscionable” in a contract of adhesion.

If there is a continuum of state arbitration decisions, varying from hostile to arbitration on one end to rubber-stamping of arbitration on the other end, I think Hawaii just situated itself on the very hostile end, even further than California and Missouri.  But, this case offers a reminder of two important rules for drafters of arbitration clauses: make the agreement to arbitrate very clear and easy to find; and do not overreach when inserting arbitration provisions that favor your client.

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* Liz Kramer is a partner at Stinson Leonard Street LLP where she handles complex commercial disputes, often in the construction and franchise contexts.  After litigating arbitrability on many occasions, Liz began blogging about arbitration law at www.arbitrationnation.com in addition to her law practice in 2011.  Her blog has been recognized as one of the best in the nation by the ABA Journal for the past three years and educates thousands of lawyers each month about the Federal Arbitration Act and its interpretation.

Discovery in Arbitration: Take Aways from Division 1's Mid-Winter Lunch Program

Division 1: Litigation and Dispute Resolution

This was one of the handouts given during Division 1’s lunch program on Discovery in Arbitration. Special thanks to our speakers: Kelsey Funes, Phelps Dunbar LLP; John Bulman, Pierce Atwood, LLP; Nancy Wiegers Greenwald, Construction Dispute Solutions, LLP; and Linda Turteltaub, Skanska USA Building Inc.  Additional materials relating to the  presentation have been posted  in Division 1’s Dropbox. Please e-mail Division 1 Chair, Nick Holmes, nholmes@nkmlawyers.com, to receive an invitation to the Dropbox. 

The Dirty Dozen:

Best Practices for Discovery in Arbitration

1. Conduct discovery in stages or phases.

2. Use the neutral’s help to create a discovery blueprint.

3. Focus on the relevant facts early. Conduct early witness interviews and think about what you really need to present the case to the arbitrator(s).

4. Require each party with an affirmative claim to specify their damages (category and amount) in the early stages of the case.

5. Use negotiated discovery protocols (search terms; custodians; deposition time limits)

6. Narrow the issues to be arbitrated. Resist the tendency to tell the entire story of the construction project. Focus on the matters in dispute.

7. Select appropriate arbitrators. Select arbitrators with appropriate subject matter and process expertise.

8. Make the most of your preliminary hearing with the arbitrator by having at least a preliminary plan for discovery. Know the schedules of the key participants (including key witnesses) and be ready to commit to a discovery schedule and a hearing date.

9. Include flow-down provisions in your contract to be sure all of the parties can be brought into the arbitration.

10. Work with your client and opposing counsel to craft a written discovery plan before the first call with the arbitrator.

11. Consider allowing direct testimony by written submission.

12. Submit a form of award to arbitrator with post-hearing brief.

Top Five Things to Avoid

1. Don’t – Provide for the Federal Rules of Civil Procedure or other state procedural laws to apply to discovery in an arbitration.

2. Don’t – Provide for judicial review of errors of fact or law. (But, consider the AAA and JAMS appellate process if the case warrants it).

3. Don’t allow motions in limine.

4. Don’t use four witnesses or documents when one will do.

5. Don’t engage in petty discovery disputes.