The Lurking Risk in Arbitrations of Producing – and Clawing Back – Privileged Documents
4.29.2024
Sophisticated litigators have come to rely on court-ordered stipulations that allow them to claw back otherwise privileged materials that were inadvertently produced. There are cogent reasons why counsel in arbitrations should enter similar stipulations that create the presumption that privileged materials were produced inadvertently. While highlighting the benefits of such a stipulation, this article also exposes the lurking risks that are present when the stipulation is entered in an arbitration, and not “so ordered” by a federal judge.
The Problem
Arbitration is now favored by many as a method of resolving commercial disputes quickly, inexpensively, and confidentially.[i] Courts have upheld the exclusivity of arbitration when the parties enter valid arbitration agreements, even if the disputes are complex and involve megabytes of documents.[ii] Arbitration panels accustomed to traditional, big-case litigation usually allow the parties to engage in discovery that contemplates the exchange of documents and sometimes deposition of witnesses; however, arbitrators also are mindful that the cost of unbridled discovery can thwart the goal of achieving an award quickly and inexpensively. Consequently, arbitrators often urge the parties to find practical solutions to sticky discovery problems.
One of those sticky problems arises when there are privileged documents that are relevant to the issues but conducting a privilege review prior to production will cause delay and increase costs. The federal courts adopted a rule that makes it possible to bypass these problems in civil cases. Rule 502(d) of the Federal Rules of Evidence allows the parties to obtain a federal court order eliminating the burden of proving whether the production of privileged documents was inadvertent, allowing the producing party the presumptive right to claw back those privileged materials.[iii]
The advantages of Rule 502(d) in civil cases are especially attractive because the rule provides that documents that are clawed back may not be used at the trial or by anyone else in any federal or state court – at least not on the basis of their production (inadvertent or not) in the pending litigation. In the absence of an order pursuant to Rule 502(d), inadvertent disclosures of privileged materials are governed by Rule 502(b), which imposes a burden of proof on the producing party to show it has satisfied the conditions to claw materials back.[iv]
Commentators and practitioners have urged lawyers to obtain so-ordered Rule 502(d) stipulations whenever possible, because the advantages cannot be overstated. First, Rule 502(d) orders extend protection beyond the pending litigation, which a simple stipulation between the parties does not. Second, a court order removes, or at least significantly reduces, the cost and burden to establish that privileged materials should be returned.[v] Third, a so-ordered Rule 502(d) stipulation provides greater certainty that the parties’ assertions of privilege will be respected and permits them to engage in discovery with greater comfort that the production of privileged matters will be presumed to have been inadvertent and not to constitute a waiver of the privilege.[vi]
Applying Rule 502(d) to Arbitrations
Arbitration counsel have the same incentive to enter stipulations that provide Rule 502(d) protections, so that they can take advantage of the presumption that the disclosure of privileged materials was inadvertent and that reasonable steps were taken to protect the privilege.
But there is a rub. Arbitration provides no method for the parties to obtain a federal court order that would give a Rule 502(d) stipulation its full effect beyond the arbitration. Under Rule 502(f), absent a federal court order, a stipulation between the parties “is binding only on the parties to the agreement.”[vii]
Rule 502(d) is very clear: Orders must be entered by “[a] federal court” in connection with “litigation pending before the court.” A Rule 502(d) order signed by an arbitrator will not provide the same protection as an order signed by a federal judge. A stipulation “so-ordered” by an arbitrator presumably would operate solely as an agreement that binds the parties and is enforceable only in the current arbitration.
The Lurking Risk
This means that there are real dangers lurking if a Rule 502(d) stipulation is adopted in an arbitration. First, if a claimant or respondent sought a court order from a federal judge endorsing a Rule 502(d) stipulation, the parties would lose one of the essential benefits of arbitrating: confidentiality. Court proceedings are not secret, and there is growing resistance by courts to sealing parties’ agreements, motions to confirm awards, or court orders.[viii] Seeking a court order could therefore lose the privacy afforded by arbitration that publicly filed litigation does not.
Second, there is no basis to believe that absent a federal court order, an arbitral agreement would bind third parties. Rule 502(d) itself requires a federal court order to afford its full protection. An order from a state judge or arbitrator would not establish Rule 502(d) protections. That means the producing party would be at risk that its privileged documents could be used in another proceeding – even by a party to the arbitration.
Third, there is also no reason to believe that the arbitral confidentiality agreement would be binding in federal or state litigation.[ix]
Clark County v. Jacobs Facilities, Inc.,[x] illustrates the risk that there could be extensive litigation over waiver where parties to an arbitration agreed to a 502(d)-like stipulation without a court order. Jacobs Facilities, Inc. discovered that it had produced a privileged document in arbitration in response to a subpoena. Jacobs was a signatory to an agreement between the parties that the production of privileged documents would be deemed “an inadvertent and unintentional disclosure,” and that “the parties would not take the position any applicable privilege was waived.”[xi] Jacobs invoked the stipulation and clawed back the privileged document.[xii] Clark County, the claimant in the arbitration, commenced a separate lawsuit against Jacobs, arguing that privilege over the document had been waived by virtue of prior production in the arbitration.[xiii] After extensive briefing[xiv] concerning the complex procedural and factual background in which the parties addressed the Rule 502(b) factors,[xv] the court held that the privilege had not been waived.
The outcome of the Clark County case was ultimately that there was no waiver, but it is a cautionary tale worth noting. Absent a federal court order, an agreement in arbitration that the parties will deem any privileged documents to have been inadvertently produced affords little protection against a full-scale discovery dispute over whether the documents may be clawed back and who will bear the burden of proving or disproving inadvertence and whether reasonable care was taken.
Concluding Thoughts
Arbitration counsel should proceed with open eyes before producing documents pursuant to a stipulation that privileged documents will be presumed to have been inadvertently produced. There are risks that the full protections of Rule 502(d) will not be enjoyed even if the stipulation is so-ordered by the arbitration panel. Until a federal court so-orders a Rule 502(d) stipulation, the producing party risks bearing the costly burden of establishing that privileged documents should be returned.
We offer no prescription on how to extend full Rule 502(d) protections to arbitrations other than to look to the Rules Committee to consider whether the public policy favoring arbitration embodied by the Federal Arbitration Act warrants recommending that Congress consider modifying Rule 502(d).[xvi]
The best alternative to protect arbitration confidences, for the present, is for the parties to draft a confidentiality agreement that would be enforceable as to the signatories. Counsel would be well served to incorporate confidentiality provisions from applicable administrative agencies or courts and to complement them as needed, and to have the parties execute the final agreement. The nature and scope of confidentiality should spell out the information to be shared by the parties and arbitrators during the course of the arbitration (e.g., documents and oral presentations), and include the participants at the arbitration, including the parties and witnesses – all of whom should sign the confidentiality stipulation. The parties also should provide that the arbitrators’ statements and files will be protected as confidential.[xvii] Finally, parties should include a provision that the parties and arbitrators will destroy documents within 60 days of completion of the arbitration and agree that they will confirm that the confidential documents were destroyed.
John S. Siffert, a founding partner at Lankler Siffert & Wohl, is a fellow of the Chartered Institute of Arbitrators (CIArb). A CIArb accredited mediator, he is an adjunct professor at NYU Law School, co-author of “Sand Modern Federal Jury Instructions” (Matthew Bender), and a fellow and former regent of the American College of Trial Lawyers.
Angela Zhu, an associate at Lankler Siffert & Wohl, represents clients in civil and criminal matters, and in alternative dispute resolution.
The thoughts expressed herein are the authors’ alone and do not reflect the opinion of the Judicial Advisory Committee on Evidence Rules on which John S. Siffert sits as a member. This article previously appeared in NY Dispute Resolution Lawyer (2024, vol. 17, no.1), a publication of NYSBA’s Dispute Resolution Section. For more information, visit NYSBA.ORG/DISPUTE.
[i]Arbitration vs. Litigation: The Differences, Thomson Reuters, Oct. 4, 2022, https://legal.thomsonreuters.com/blog/arbitration-vs-litigation-the-differences/.
[ii] Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63 (2010).
[iii] Rule 502(d) provides: “A federal court may order that the [attorney-client] privilege or [work product] 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.”
[iv] Under Rule 502(b), the party asserting privilege has the burden to show “(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).”
[v] The opposing party may still assert a challenge as to whether the documents, in fact, are privileged, but a robust Rule 502(d) order will mean that the opposing party will have no basis to challenge inadvertence, the reasonableness of steps taken to prevent disclosure, or the reasonableness of steps taken to rectify the error. See The Sedona Conference, Commentary on the Effective Use of Federal Rule of Evidence 502(d) Orders, 23 Sedona Conf. J. 1, 54–55 (Aug. 2022) (Appendix A: Model Rule 502(d) Order). The efficacy of 502(d) orders has consistently been urged at Sedona Conference by Philip J. Favro and the Honorable Andrew J. Peck.
[vi] Attorneys must nonetheless bear in mind ethical duties to prevent the disclosure of privileged materials—as well as ethical duties upon receipt of privileged materials—which vary by jurisdiction. The Sedona Conference, Commentary on the Effective Use of Federal Rule of Evidence 502(d) Orders, 23 Sedona Conf. J. 1, 40–42 (Aug. 2022).
[vii] Federal Rule of Evidence 502(f) provides: “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.”
[viii] See, e.g., Bristol-Meyers Squibb Co. v. Novartis Pharma AG, No. 22 Misc. 124, 2022 WL 1443319 (S.D.N.Y. May 6, 2022) (holding that petitioner had not overcome its burden to show that sealing the motion to confirm the award was essential to preserve higher values, because “[c]onfidentiality agreements alone are not an adequate basis for sealing”). Id. at *1.
Courts have also found that confidentiality agreements may not prevent a third party from seeking disclosure of an arbitral award, as that third party may not be bound by any agreement to which it is not a party. See, e.g., Gotham Holdings, LP v. Health Grades, Inc., 580 F.3d 664 (7th Cir. 2009) (affirming district court decision to enforce subpoena seeking confidential arbitration award from a non-party to arbitration award); Pennsylvania Nat’l Mut. Cas. Ins. Grp. v. New England Reinsurance Corp., 840 F. App’x 688 (3d Cir. 2020) (after reinsured filed arbitration award under seal and sought to reduce award to judgment, third-party reinsurer that was not subject to the arbitration proceeding successfully moved to intervene and unseal the award).
Some courts have found that confidentiality agreements are unenforceable on public policy grounds, because they are unconscionable. See, e.g., Ting v. AT&T, 319 F.3d 1126, 1152 (9th Cir. 2003). But see, Biller v. S-H OpCo Greenwich Bay Manor, LLC, 961 F.3d 502, 518–19 (1st Cir. 2020); Chandler v. Int’l Bus. Machines Corp., No. 21-cv-6319, 2022 WL 2473340, at *7 (S.D.N.Y. 2022).
[ix] The Sedona Conference, Commentary on the Effective Use of Federal Rule of Evidence 502(d) Orders, 23 Sedona Conf. J. 1, 42 (Aug. 2022).
[x] No. 2:10-CV-00194-LRH, 2012 WL 4609427 (D. Nev. Oct. 1, 2012).
[xi] Id. at *6, *12. In reliance on these provisions, Jacobs did not conduct a privilege review prior to production in the arbitration. Id. at *6. Indeed, reducing the costs of privilege review is one of the primary purposes of Rule 502(d).
[xii] Id. at *4.
[xiii] Id. at *6–7. The document had also been produced in a second arbitration and multiple times in the pending litigation. The producing party explained that the production in a second arbitration was made by another party without its knowledge, and that production in the pending litigation was the result of typos in privilege headers and incorrect indexing of documents—a good reminder to make sure privilege headers are accurate. Id. at *4.
[xiv] The parties filed a status report, supplemental briefing, and multiple affidavits and exhibits detailing years-old facts about the circumstances of each instance of production of the privileged document. Id. at *3, *12. The court’s opinion, dedicated solely to this privilege dispute, was 19 pages long.
[xv] Those factors, as noted earlier, are: “(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).” Rule 502(b).
[xvi] Unlike rules adopted by the Judicial Conference that become effective unless Congress objects, Rule 502 was enacted by Congress pursuant to 28 U.S.C. § 2074(b), because it affected an evidentiary privilege. Accordingly, an affirmative action by Congress would be required for Rule 502 to be modified.
[xvii] These are among the proposed best practices for arbitration confidentiality protections currently under consideration by a subcommittee of the New York City Bar that is chaired by Myrna Barakat Friedman and comprised of representatives of the ADR, Arbitration, Litigation and International Commercial Disputes Committees.
