Clawback Agreements In Commercial Litigation: Can You Unring A Bell?

Feb 26 16:08 2009 Ashish S. Joshi Print This Article

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Imagine this scenario: Woe Mart,Guest Posting Inc. – a multibillion dollar corporation with hundreds of employees and offices all over the country – has been embroiled in several commercial disputes with its suppliers. Woe Mart’s General Counsel and his team have been trying to negotiate a settlement to avoid litigation for the past couple of months. However, one fine Monday, Woe Mart receives a notice from the suppliers’ lawyers of an imminent lawsuit to be filed in a federal court along with a request to preserve “any and all evidence, including but not limited to electronic evidence.” Woe Mart decides to hire a brilliant and seasoned litigator to defend against this (frivolous!) lawsuit. Naturally, you get the call. You have not spoken to your client at length about the case, and you have not reviewed any documents. However, your brief chat with Woe Mart’s General Counsel tells you that this is a high stakes, multi-party complex commercial litigation. The first thing that you do is to have Woe Mart’s General Counsel send an email to all of its employees instructing them to suspend all document-destruction policies and institute a “litigation hold.” Next, you ask to meet with Woe Mart’s IT personnel. Being the seasoned litigator that you are, you are well aware that discovery disputes are the black holes of the modern day complex commercial litigation. Woe Mart’s IT personnel informs you that your client possesses several types of electronic data that may be subject to discovery: email (including attachments), word processing documents, spreadsheets, presentation documents, graphics, animations, images, audio, video and audiovisual recordings, instant messaging and voicemail. After a preliminary review of Woe Mart’s electronically stored information, you realize that responding to the plaintiffs’ discovery requests may prove to be a Herculean task – both in terms of effort and cost.

Soon you find yourself in a Rule 26(f) conference with the opposing counsel. You discuss with opposing counsel a proposed discovery plan and try to agree with opposing counsel on the repositories of electronically stored information that are relevant to the case. During the discussion, the opposing counsel tells you that they will soon serve discovery requests on your client seeking copies of all emails sent or received by any Woe Mart’s employee concerning Woe Mart’s suppliers. You argue that this amount of information is voluminous and warn that if the opposing counsel insists on seeking this information, it will take months to review the emails for applicable privileges and protections. The opposing counsel proposes that you forgo the customary preproduction privilege review and produce all responsive data under a “clawback agreement.” You decide to discuss this matter with Woe Mart’s General Counsel and promise the opposing counsel that you would soon get back to him with a discovery proposal. Before calling the General Counsel, you wisely decide to brush up your knowledge about the clawback agreements and their use in commercial litigation in federal courts.

What is a Clawback Agreement?

            The clawback agreement evolved as a contractual safeguard to mitigate the risk of inadvertent waiver of the attorney-client privilege or work product doctrines – especially when dealing with a large volume of documents. In a clawback agreement, both parties to a dispute agree in writing that inadvertent production of privileged materials will not automatically constitute a waiver of privilege. If the producing party realizes the disclosure in a reasonable time, he can request the document’s return, or “claw it back” and the other party must comply. The requesting party is presumptively barred from using the privileged document to further his client’s case.

Federal Rules of Civil Procedure were recently amended to provide for this “claw back” scenario in case of inadvertent production. The Federal Rules of Evidence appear to follow the suit. However, parties (with the apparent encouragement of courts) have been using agreements to clawback the inadvertent disclosure of privileged material even before the amendment of the Federal Rules. The general rule that partial disclosure on a given subject matter will bring in its wake total disclosure can be avoided by entering into a contract. Courts are willing to enforce “partial” waiver between two parties, whereby the waiver of some privileged materials will not constitute waiver of all between the two parties to the contract.

A sample of a clause in a clawback agreement might read as follows:

(1)     Any inadvertent disclosure or production of documents protected by the attorney-client privilege or work-product protection shall not constitute a waiver of either any available privilege or protection by the disclosing party.

(2)     In the event that the receiving party discovers that it has received either attorney-client privilege or work-product-protected documents, it shall bring that fact to the attention of the producing party immediately upon that discovery.

(3)     Upon the request of the producing party, the receiving party shall promptly return any attorney-client privilege or work-product-protected document and any copies which the receiving party may have made thereof to the producing party.

(4)     Upon the request of the producing party, the receiving party will promptly disclose the names of any individuals who have read or have had access to the attorney-client privilege or work-product-protected document.

(5)     No such inadvertently produced attorney-client privilege or work-product-protected document may be used in evidence against the producing party.

(6)     In the event that either party must seek judicial enforcement of this agreement, the costs and reasonable attorney’s fees of the party seeking enforcement will be paid by the party against whom such enforcement must be sought, but only in the event that the court finds the existence of a valid privilege and grants enforcement of this agreement by ordering the return and non-evidentiary use of the produced document.

Clawback Agreements - the Pros and Cons:

During your research on the clawback agreements, you come across a case that jolts you awake - Victor Stanley, Inc. v. Creative Pipe, Inc. Victor Stanley highlights for you the danger of not using a clawback agreement in commercial litigation. In Victor Stanley, defendant’s counsel, acknowledging the vast volume of documents that were to be produced pursuant to a preproduction review for privileged and protected documents, initially requested that the court approve a clawback agreement. The court, after holding a telephone conference to discuss the proposed clawback agreement, expressed its willingness to approve one. However, upon obtaining an extension of time to produce documents, defendant’s counsel withdrew his request for a clawback agreement. Parties did not enter into a clawback agreement prior to producing documents pursuant to discovery requests. Apparently, defendant’s counsel had not utilized proper review procedures and had produced documents that were clearly within the parameters of attorney-client privileged information and should have been withheld from production. The court ruled that the defendant’s counsel was aware that the case involved review of voluminous material and that there was a danger of inadvertent production of privileged information. The court also observed that the defendant’s counsel had initially wisely sought the protection of a clawback agreement. Had the defense counsel not abandoned his request for a court-approved clawback agreement, defendant would have been protected. However, having abandoned their request for a clawback agreement, the defendant’s counsel had waived any privilege for the documents in question. Once the disclosure of privileged material is made, any order issued to redress the disclosure – in absence of a clawback agreement – would be the equivalent of “closing the barn door after the animals have already run away.” After reading the Victor Stanley opinion you make a note to yourself to include clawback agreements as a standard tool in your litigator’s toolbox. 

However, upon doing further research you find out that clawback agreements may not be the right answer in every situation. A clawback agreement, despite all its protective clauses, simply cannot guarantee against privilege waiver in other litigation contexts. Courts have rejected parties’ claims of privilege pursuant to protective agreements from prior litigation. In Genentech, Inc. v. U.S. International Trade Commission, the plaintiff inadvertently disclosed 12,000 pages of privileged documents in a multi-district patent infringement suit. After the district judge held that privilege as to those documents had been waived, the administrative law judge (ALJ) presiding over another patent suit involving Genentech and different defendants ruled that the privilege waiver extended to that proceeding. Genentech argued that no general waiver applied to the second case because the parties to the district court case had been subject to a protective order. Because the appeals court determined that Genentech had failed to use adequate screening procedures to review for privilege in the first action, the ALJ’s finding of waiver in the second proceeding was sustained.

      Also, clawback agreement will be of little help if used to offer “selective” waivers. This is a situation wherein a party is willing to disclose privileged information to one party; for example, a governmental agency and not to other parties. Federal courts – including the Federal Sixth Circuit, you note – have repeatedly struck down such “selective” waivers (even when unconditional confidentiality agreements are entered into prior to the disclosure). Although there are some decisions that have held that entering into an unconditional confidentiality agreement might, under some circumstances, protect the materials from subsequent compelled exposure, commercial litigators would do well to not to bank on this notion. As the court in Navajo Nation v. Peabody Holding Co., upbraiding a party for its strategic use of disclosures, held: “[P]arties should not be permitted to disclose documents for tactical purposes in one context, and then claim attorney-client privilege in another context.”

            You also find out that clawback agreements do not offer a license to ‘be asleep at the switch.’ Any attempt before the fact by the attorneys to excuse negligent production of privileged or work-product documents by way of “blanket” agreements that such production will not constitute waiver are generally frowned upon and not enforced by courts.

At this time you pause. You wonder about a strategic dilemma of using clawback agreements. It is virtually impossible for the receiving lawyer in such an arrangement to erase from memory the privileged material that he has glimpsed. Can you unring a bell? Regardless of whether a subsequent court decides to enforce a clawback, the fact remains that the receiving attorney has been exposed to privileged information and may still be able to use it to further his client’s case. Even if that attorney does not formally seek to enter an inadvertently disclosed document into evidence, he can use the information contained therein as a springboard to related documents or testimony. In effect, you fear that you may very well assist your opponent in developing his trial plan. This however is a matter of strategy and a decision to use or not use a clawback agreement would have to be made on a case by case basis. You plod on.

Your research also tells you that there is a danger that use of a clawback agreement in federal litigation may be deemed as a waiver of the privilege in subsequent state court litigation. Clawback provisions in the Federal Rules while respected in federal courts may be deemed a common law waiver of privilege in state courts – not only for the document in question but also as a broad waiver of the subject matter involved. Therefore, care must be taken to identify the controlling law in each jurisdiction. You decide to find out the controlling law in your state – Michigan.


Michigan’s Jurisprudence vis-à-vis waiver of privilege

Michigan has recognized the attorney-client privilege as “the oldest of the privileges for confidential communications known to the common law.” Michigan has long held that a waiver of the privilege does not arise by accident. Michigan courts have cogently set forth principles explaining the privilege and its waiver:

(1) In Michigan the attorney-client privilege has a dual nature, i.e., it includes both the security against publication and the right to control the introduction into evidence of such information;

(2) This dual nature of the privilege applies where there has been inadvertent disclosure of privileged material;

(3) An implied waiver of the privilege must be judged by standards as stringent as for a “true waiver,” before the right to control the introduction of privileged matter into evidence will be destroyed, even though the inadvertent disclosure has eliminated any security against publication;

(4) A “true waiver” requires an intentional, voluntary act and cannot arise by implication or the voluntary relinquishment of a known right and

(5) Error of judgment where the person knows that privileged information is being released but concludes that the privilege will nevertheless survive will destroy any privilege.

You are happy to note that in Michigan a document “inadvertently” produced that is otherwise protected by the attorney-client, privilege remains protected. Absent a “true waiver,” a document retains its privileged status, regardless of whether it has been publicly disclosed. You are also happy to note that unlike some federal courts, Michigan courts have held that counsel’s failure to take “reasonable precautions to protect from inadvertent disclosure” of privileged or protected material is not enough to be a “true waiver.”

However, you are troubled by the fact that in Michigan, once privileged information is disclosed to a third party by the person who holds the privilege, the privilege disappears. And privilege need only be validly waived one time to be conclusively destroyed. Unfortunately, no Michigan case discusses a clawback agreement.

Also, you find out that in Michigan “involuntary disclosure” of information upon order of the court does not amount to a waiver of privilege. You finally see light at the end of tunnel. You decide that the best option would be for the parties to agree to a clawback agreement and then request the court to incorporate the clawback provisions into a scheduling or protective order. However, you make sure that your participation in drafting the protective order is not interpreted in any way, shape or manner as a waiver of privilege.

Clawback Agreements and Protective Orders

You now turn to the issue of protective orders. You are aware of the recent amendments to the Federal Rules of Civil Procedure whereby clawback provisions can be adopted and incorporated into a protective order. Protective orders – often negotiated by the parties and entered by the court on a stipulated basis – have become commonplace prior to producing documents in discovery. In a complex commercial litigation, it is not unusual for a court to enter a highly detailed protective order fleshing out all the contours for production and exchange of information, including inadvertent disclosure of confidential or privileged material. Three rules potentially govern the entry of such protective orders: the court can issue a scheduling order under Fed. R. Civ. P. 16; a protective order under Fed. R. Civ. P. 26(c); or a discovery management order under Fed. R. Civ. P. 26(b)(2). You correctly reason that having a clawback provision incorporated into a protective order would allow your client to contend (in a subsequent proceeding) that disclosure of privileged or protected information in the former case was “involuntary” and pursuant to court order. Where there is a protective order in place, courts have allowed the terms of the protective order to “trump” existing case law – in some cases, a protective order may well operate to change the effect of extremely unforgiving case law.

Of course, being an experienced litigator, you are also aware that the existence of a protective order does not allow a privilege holder to sit on its right to retrieve the privileged document. A cavalier attitude toward further disclosure or a failure to act promptly to retrieve the privileged document may act to nullify any “claw back.”


Having researched the federal case law on clawback agreements and having found little or no case law on this matter in Michigan jurisprudence, you sit back to review your options. You are aware that, as was the practice before the adoption of new Federal rules, federal courts have continued to encourage the use of clawback agreements in commercial litigation – even more so after the rules were amended. It is highly likely that your court would agree to (and may even welcome) a proposal of incorporating clawback provisions in a protective order to speed up discovery. Without a clawback agreement, you are faced with an exhaustive and complete pre-production review of physical and electronically stored documents concerning privileged or protected material. You know that this would be a seriously time consuming and expensive (and thereby unrealistic) option. Even then, prudence mandates that you utilize the safety net of a clawback agreement for any inadvertent disclosures. Finally, you distill the essential rulings of the federal courts regarding the clawback agreements, juxtapose them against existing Michigan jurisprudence and come up with three conditions that should protect your inadvertent disclosure from a challenge in your current federal litigation or any future state litigation:

(a) the party claiming the privilege took reasonable steps – in view of the volume of data to be reviewed, the time permitted in the scheduling or protective order to do so, and the resources of the producing party;

(b) the producing party took reasonable steps to assert promptly the privilege once it learned that some privileged information inadvertently had been disclosed, despite the exercise of reasonable measures to screen for privilege and, importantly;

(c) the production had been compelled by court order that was issued after the court’s independent evaluation of the scope of electronic discovery permitted, the reasonableness of the procedures the producing party took to screen out privileged material and the amount of time that the court allowed the producing party to spend on the production.


You surmise that a properly drafted clawback agreement that has been incorporated into a court order would achieve its goal: unring a bell in case of an inadvertent disclosure. You are now ready to call the General Counsel.

Due to space constraints, citations are not given here. Citations and attributions can be found on the author’s website!

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About Article Author

Ashish S. Joshi
Ashish S. Joshi

Ashish Joshi has law degrees from University of Michigan Law School and Gujarat, India. Joshi focuses on civil/commercial litigation and white collar defense in NY and MI and federal courts all over the US. He is co-chair of the Commercial Litigation Committee of the Business Law Section of the State Bar of Michigan. He is also a member of the American Bar Association and National Association of Criminal Defense Attorneys.

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