In episode 24 of #CaseoftheWeek, Kelly Twigger discusses the increasing importance and potential downsides of not complying with your duty on initial disclosures as well as sanctions for flouting the FRCP. The case, presided over by United States Magistrate Judge Robert T. Numbers II, is U. S. Tobacco Coop. V. Certain Underwriters at Lloyd’s 2021 WL 1341360 (E. D. N. C. 2021), April 9, 2021.
Good morning and welcome to our #CaseoftheWeek for May 11th, 2021. My name is Kelly Twigger, and I am the CEO and founder of eDiscovery Assistant, as well as the principle of ESI Attorneys. As you know, if you’re with us each week, we come together to talk about an individual decision in the eDiscovery universe through our partnership with ACEDS, with the goal of identifying the practical implications of that decision for you, your practice, and for how it impacts your clients.
Today on whatever platform you’re watching us on, the public link to the decision from eDiscovery Assistant is available in the comments section on your platform. You’ll also find a link to our 2020 Case Law Report that we put together in conjunction with Doug Austin at eDiscovery Today. Let’s get into this week’s case.
Our decision this week comes out of the United States, FRCP in 𝐔.𝐒. 𝐓𝐨𝐛𝐚𝐜𝐜𝐨 𝐂𝐨𝐨𝐩. 𝐯. 𝐂𝐞𝐫𝐭𝐚𝐢𝐧 𝐔𝐧𝐝𝐞𝐫𝐰𝐫𝐢𝐭𝐞𝐫𝐬 𝐚𝐭 𝐋𝐥𝐨𝐲𝐝’𝐬 of London. This is a decision from April 9th, 2021 from Judge Robert Numbers II who is the United States Magistrate Judge in the Eastern District of North Carolina. We have twelve decisions from Judge Numbers in eDiscovery Assistant, so if you’re in front of Judge Numbers, you’ll want to be able to log in, take a look at the decisions that he’s rendered so you have an understanding of where he sits on various discovery issues.
As always, our decisions, in eDiscovery Assistant are tagged with our proprietary issue tags. This case has a variety of discovery issues that are involved and so there are numerous tags, including: 30(b)6 or corporate designee, cooperation of counsel, attorney client privilege, cost shifting, privilege log, failure to preserve, waiver of privilege, attorney work product, costs and fees, failure to produce and sanctions. All of those issues are addressed in this opinion in some way, shape or form.
OK, what are the facts in this case? We are before the court in this decision on a second motion to compel by the cooperative. We’ll refer to the parties here as the Cooperative and the Insurers. USTC is the Cooperative. It is a grower owned tobacco cooperative that involves 700 growers throughout the Southeast and maintains thirteen locations across the southeast, including one in North Carolina that is at issue here. In addition to those locations, the Cooperative maintains insurance on each of those locations and products that are provided by thirteen distinct syndicates of Lloyd’s of London, which, as I mentioned, are referred to here as the Insurers.
In October of 2016, Hurricane Matthew ripped through North Carolina, causing severe flooding. The Cooperative learned that tobacco products stored in its North Carolina facility suffered damages from mold, humidity and water, and subsequently notified the insurers of the loss, and the insurers denied the claim. This litigation resulted from that denial of the claim. Litigation was originally brought by the Cooperative in state court in North Carolina, and the insurers then removed it to federal court.
What ensues starting in 2019 is essentially a long litany of failures by the Insurers to abide by the federal rules of civil procedure and the process that the court undertakes to handle each one of those on multiple motions to compel. The Cooperative made an original motion to compel that the court then denied pending some additional information that’s happening. Let’s talk a little bit about what was at issue from the first motion to compel prospective.
Throughout both the first and the second motion to compel, we’ve got overlapping issues that were not resolved following the court’s decision on the first motion to compel. The Cooperative alleged that the Insurers failed to file financial disclosures, failed to file timely answers, failed to complete initial disclosures and provide any documents, failed to respond to interrogatories, failed to respond to requests for productions and to produce documents.
The court starts out its opinion in this long litany of failures that the insurers have engaged in that are in violation of the Federal Rules of Civil Procedure. It even starts out by saying that they didn’t even follow the processes associated with removal to both notify the state court and to file an answer timely in the federal courts under the FRCP. That’s sort of the groundwork that we’re working from in dealing here.
On the first motion to compel, the timing’s not really laid out in the opinion, but it looks like that there were several months that transpired from when the first motion to compel was fully briefed, to when the Court actually ruled on it. The court looked at the first motion to compel, many months had passed; the parties had continued to engage in negotiations and the Court essentially denied the first motion to compel but did instruct the Insurers that they needed to respond to the initial disclosures, to the request for production, to the interrogatories, to the request for a corporate representative. As we get on to the second motion to compel, we find that the Insurers have not done most of those things, according to the filings by the Cooperative.
In response to the first motion to compel one of the reasons that the Court denied it is that the Insurers did produce about 2000 documents and that their responses to the written discovery requests included objections to attorney client privilege and to attorney work product, but they did not include whether or not documents were withheld. They also produced privilege logs that the Cooperative said were inadequate. And those are the issues that we find ourselves with on the second motion to compel.
There are also three or four other issues that are not what we’re going to focus on for today’s #CaseoftheWeek, but one of them was important, and that is that there was a whole tranche of documents from a consultant that was hired to investigate the origin of the damage to the tobacco, and all of those documents were withheld based on privilege.
There’s a key quote from the case that I think is really important here from what the court says,
[I]f someone familiar with federal litigation were to review the defendant insurers conduct here, they would be left with the distinct impression that compliance with the federal rules was optional, or at best, they would conclude that there was no penalty for disregarding them, but that is not the case. The federal rules are mandatory, and they require parties to make a good faith effort to comply with them. They also empower courts to sanction parties or attorneys who flout the rules and unduly delay the discovery process. For more than a year the insurers have continuously violated the federal rules. They have largely ignored their obligation to participate in the discovery process, and in many cases, they have refused to participate at all. On top of that, when they did participate their responses were largely inadequate.
That’s the base with which this court starts its opinion in this case, and that’s where we’re working from. All of those failures that I identified previously are what come after that quote from the court.
How does the court look at all of these individual failures? There’s a lot of factual detail in the Court’s decision here, and it really made me feel like that the Cooperative did a great job in laying out the timeline associated with each of the individual issues, because we’ve got multiple issues with regard to privilege logs, the request for production interrogatories, the individual consultant documents.
We all know that unless your briefing is very clear on each of these individual issues, it’s very difficult for the Court to sort all of this information out and to be able to provide a clear, articulate decision which the Court does a great job of here.
The court goes through the timeline of failure to provide information in accordance with the federal rules and includes, in fact, when all of the insurers are not participating. There are 13 total insurers here and the court denotes each time when maybe one or two or four insurers responded to something, but there’s not a complete response from all 13 insurers. They also go through all of the need to comply and provide responses to the interrogatories, the request for production and the initial disclosures and at the end of this particular decision, the court says we’ll consider sanctions on a separate motion once a lot of this information is responded to.
What we have here on the motion to compel is the granting of the motion to compel with regard to what the Cooperative has asked for and the court stating that sanctions are appropriate here, that bad faith has been demonstrated and that it’ll take up sanctions at a separate hearing at the time and date to be determined.
Really the key piece of this decision that I want to focus on with you today are the privilege issues, because this court goes through — and we’ve talked about on a number of our #CaseoftheWeek decisions over the last few weeks, the issues associated with privilege, withholding documents for attorney-client privilege and attorney work product issues, and also how those documents are logged on a privilege log such that the other side can be able to make an adequate determination of whether privilege has been properly applied — the discussion of privilege here. I think it’s really important and it’s something you want to take a look at, even if this jurisdiction is not one that you can cite, there are cases that are cited in here from the United States Supreme Court that you can leverage in your jurisdiction, and it is a really well laid out process of how you have to go about determining whether in fact, privilege applies.
The Court talks about the fact that the attorney client privilege is the oldest of the common law privileges that serves to encourage free communication between attorneys and their clients, but to show that privilege applies, a party has to establish five things. First, that there wasn’t an attorney client relationship when the communication occurred. Second, that the communication was made in confidence. Third, that the communication relates to a matter about which the attorney is being professionally consulted. Fourth, that the communication was made in the course of giving or seeking legal advice for a proper purpose. And fifth, that the client has not waived the privilege. Those five pieces are what we’re looking at.
Additionally, the party that is asserting the privilege bears the burden of showing that it has satisfied each element. Any conclusory allegation that the privilege applies is not sufficient, and the actual proponent must present, “sufficient evidence to establish the privilege with respect to each disputed item.”
Now, the Court notes that this is usually done by means of an affidavit or a declaration. Here under North Carolina law, there’s a specific provision that is impacted because this is an insurance case. Under North Carolina law, when attorneys act in a claims handling capacity, the attorney-client privilege does not attach to communications with those attorneys and the insured or its agents. If an attorney is doing the claims handling process and engaged in an investigation prior to reasonably anticipating litigation, those documents or that information are not going to be subject to attorney-client privilege, because it is not work product and it is not in reasonable anticipation of litigation.
According to the Court here, under North Carolina law, the fact that an attorney communicated with the insurers or their agents is not enough to establish that the communications are privileged, but the insurers must show that the communication related to the provision of legal advice and not just general business matters. Insurers can only withhold documents if they can prove they have a good faith basis to believe that the communication related to the provision of legal services.
That’s really important because essentially, we’ve got the timing of these consultant documents who investigated the cause of the destruction of the the tobacco, that’s really at issue for purposes of coverage and all of those documents were withheld by the Insurers on the basis of privilege. What the court is saying here is, no, all of that was investigation work that was done prior to you knowing that the Cooperative was going to bring litigation for denial of coverage
That’s a really important piece on the attorney-client privilege that I think is relevant to any time you’re making a determination, where you’re setting up a review team to be able to make a determination. We’ve had a lot of discussions about those things on the case of the week previously.
Now separate and apart from those, we talk about in this decision privilege log issues and information that is included on the privilege log. Again, the court goes into a great explanation of the different types of attorney work product that can be included. We talked about attorney-client privilege and the five requirements there, now we’re jumping to what you have to look at for attorney work product and when documents can be withheld as attorney work product. The court distinguishes between two different types of attorney work product, fact work product and opinion work product.
Fact work product consists of documents that lack attorneys’ mental impressions, and the court finds that those can be discovered upon a showing of both a substantial need and an inability to secure the substantial equivalent of the materials by alternate means without undue hardship. The party who seeks the disclosure of fact work product must show a substantial need for the document. That’s still really going to be a high bar to be able to get a fact-based attorney work product, but there is an ability to get it.
Opinion work product, on the other hand, is going to be really hard to get and generally is protected. Opinion work product contains an attorney’s mental impressions, opinions and legal theories and is, “more scrupulously protected as it represents the actual thoughts and impressions of an attorney.” Once a document qualifies as an opinion, according to the court, and it is immune from discovery, except in very rare and exceptional circumstances, as we know.
As we talked about earlier, in the insurance context, courts will generally not find that an insurer gathered information in anticipation of litigation until after it denied the claim. Here, anything that was done in order to determine acceptance or denial of a claim by the Lloyd’s Syndicate Group is going to be discoverable. What the Court is saying here is that is not privileged. When reviewing the party’s arguments regarding what is privileged, the court will look to the point where the probability of litigating the claim is substantial and imminent or reasonably foreseeable. That’s what we always talk about with regard to anticipation of litigation. That’s when the duty to preserve kicks in. That’s also when privilege attaches. Any work done in investigating the claims prior to reasonably anticipated litigation is not protected.
Now, the Court also goes through what is referred to as the process to invoke the work product doctrine. It talks about the two-step process articulated under FRCP 26(b)(5)(a)(i) and that two process means that the withholding party needs to expressly make the claim that the documents are immune from discovery, and that the description of the documents has to provide sufficient information to enable other parties to evaluate the applicability of the claimed privilege.
This is what we talked about last week with regard to how much information is actually provided on the privilege log. I told you that I think we need more guidance from the Federal Rules on what needs to be included on a log that will give parties sufficient information, because taking up the court’s time with determining each individual entry on a privilege log for one case as to whether or not it provides enough information is not a good use of the court’s time. We talked about the potential of needing a third party, neutral, to be able to make those kinds of determinations for the court.
Per the Court here, in order to comply with the federal rules, a law must contain enough information to allow the requesting party to evaluate the claim of privilege, and at a minimum, that means a log should contain the nature of each document, the date of its transmission or creation, the author and recipients, the subject and the privilege asserted, but in the end, the sufficiency of the law will turn on whether or not each document as listed contains specific facts that, if credited, would suffice to establish each element of the privilege or the immunity that’s claimed.
Practically speaking, here’s where I see the rub. A lot of times what gets entered here is the subject of the document. If you have an email subject line, that is often what gets entered as the information about the nature of the document. All the other pieces, the date, the author and the recipients, the subject, all those things get included, but it’s that nature of the document that often gets substituted with metadata that doesn’t provide enough information for the opposing party or the receiving party to be able to evaluate the effectiveness of the privilege.
Now, here, the Court found that the Insurers did not meet their burden to show that it believed the litigation was eminent before the cooperative sued, everything that was created prior to the date that the lawsuit was filed was deemed to be not privileged and had to be produced.
The Court also required the Insurers to produce documents that it withheld but left off of the privilege log, including partially redacted documents. Now, this is a different issue entirely than completely withheld documents. A lot of times parties will not specifically discuss in either an ESI protocol or in a protective order, whatever articulates how privilege logs will be defined, they don’t deal with redact documents. If you don’t deal with redacted documents, do those need to be included on the privilege log? Ostensibly, yes, if you’re withholding information related to privilege. You need to articulate in your ESI protocol or in another document how you’re dealing with redactions for privilege. Those need to be covered. Here the court said you got to produce a log with those redactions. If you don’t, you’ve got to produce the entirety of the document.
They also found that the privilege logs produced here by the Insurers did not have the information that was required by the Federal Rules, and as I mentioned, that the consultant documents about the cause-and-effect investigation were not properly withheld.
That’s really a sum of the privilege issues and that’s really the core of this decision that I wanted to focus on for purposes today. There are other issues that are included in this decision that I think we’re going to see follow ups on and we’ll cover them here on the #CaseoftheWeek, in particular, the Cooperative argued that there was a destruction of personally identifying information, or PII, that there was also a need to depose corporate representatives at the insurers and other information regarding failure to provide reinsurance agreements. All of those issues are kind of still hanging out there. We’ll have to see those on future decisions from the court.
The Court did set a hearing on whether an exception to Rule 37 cost shifting provision applies here. That’s really important because the Court said we could have enough bad faith on the basis of the Insurers to require cost shifting, what sanctions it would impose under Rule 26 and 37, as well as the court’s inherent authority and any other matters that are relevant to the conduct of the insurers and their counsel. That’s a pretty broad statement from the court on what it’s going to consider on a sanctions motion. If you go back to January on our case of the week when we talked about the DR distributors case and the court in that decision, Judge Johnson, laid out each of the individual ways in which a party can recover sanctions under each section of Rule 26, Rule 37 and the court’s inherent authority.
I think that we’re likely going to see a substantial sanctions motion brought here by the Cooperative that we’ll see play out in this case. We’ll keep you posted on that for the #CaseoftheWeek.
Now, additional takeaways other than what we’ve already discussed, I think it’s pretty clear here that the failure to follow the rules is going to prejudice your client in the eyes of the judge. Any time that you have not followed the rules for 7 to 10 times and then you come back and say to the judge, we did follow the rules here; it’s going to be hard to take. That’s just human nature.
You’ve got to look at each individual instance and of course, the court will, but when you start to see elements of bad faith, as the Court discussed here, then you’re going to start to see sanctions becoming a real problem and it’s going to be hard to dig your way back out of that hole.
Next takeaway, as I mentioned earlier, it really felt like in reviewing this decision that the Cooperative did an excellent job of articulating the timeline of the dispute here as it pertains to each individual issue. If you can do that effectively in your motion papers, you’re going to go a long way towards having the court rule in your favor, assuming, obviously, that the arguments are in your favor, because if you require the court to do that work, you’re not going to get the result that you want. You’re not going to get the court digging into the case. It’s not their case. It’s your case. You need to do the work. You need to articulate in your motion papers everything that’s happened and the timeline.
Here the Court cited to multiple emails where the insurers promised to do something and then didn’t do it. Ostensibly, all of that information was attached to the papers filed by the Cooperative and it gave the Court an easy basis to create a factual set up for its analysis in this decision.
Next takeaway, do not neglect your duty on the initial disclosures or your duty to supplement them. In this case, the insurer’s initial response on the initial disclosures was to say that they were continuing to investigate and find relevant documents, but not to produce anything. That’s not going to work. You always have a duty to supplement. You can always supplement, but it’s not going to be appropriate for you to file initial disclosures with no documents and to say that you’re continuing to investigate. You’ve got to provide that information. It’s very clear on the initial disclosures what is required. The biggest, broadest category is documents that are in support of your contentions in the case, and those are documents that certainly you can supplement, but insurance agreements, the other pieces that are required, are things that you have to have on those initial disclosures and should be made.
Don’t neglect your duties there. I’ve mentioned this previously on the #CaseoftheWeek, but we have been seeing a lot of instances where the courts are disallowing information that should have been provided in the initial disclosures, and they’re precluding it from evidence at trial. They’re precluding it from evidence on motion for summary judgments because of the party’s failure to provide it on its initial disclosures.
Finally, takeaways with regard to privilege. Understand the five steps that you need to be able to create privilege. Understand that it is your burden as the person putting forth the privilege to be able to demonstrate that it applies. In the insurance context, you need to ensure that your documents are protected by the work product and note that, at least under North Carolina law here, that’s going to be a state law issue, whether or not documents that are created prior to the denial of a claim when litigation is not reasonably foreseeable are going to be protected. Here they were not.
That’s our #CaseoftheWeek for this week. Thanks so much for joining me. I’ll be back next week with another edition and decision from eDiscovery Assistant to discuss. If you are an ACEDS member and interested in using eDiscovery Assistant, there is a discount available to current ACEDS members and a trial for folks who are taking the ACEDS exam. If you’re interested in either of those, please drop us a line at ACEDS@eDiscoveryAssistant.com and one of our team will be in touch to get you signed up.
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Have a great week. Stay safe and healthy and I will look forward to seeing you next week. Thanks.
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