Can You Clawback Privileged Documents over Objections to an FRE 502 Agreement?

United States v. Captive Alternatives, LLC

M.D. Fla. 8/29/23 7:00

Why This Case Is Important

This case can help potential litigants understand why it’s important to reach agreement on a clawback agreement under Federal Rule of Evidence (FRE) 502(d) with the opposing party before producing ESI.

Overview

In this action seeking to enforce an administrative summons seeking documents from the defendant, Captive Alternatives, LLC, Defendant sought to impose a FRE 502(d) nonwaiver and clawback order for potentially privileged communications on the other party, the Internal Revenue Service.<\/p>In 2020, the IRS served the defendant with document requests for several types of documents and an administrative summons enforcing the request. Defendant refused to provide many of the documents and sought protection from the federal courts.

The parties negotiated in order to reach an agreement on a clawback order, which would allow for the non-waiver of privileged information that was inadvertently produced to the IRS by Defendant. The parties ultimately were unable to negotiate a mutually agreeable order.

In this action, Defendant argued that it should not have to review over a million potentially responsive documents for privilege first; but rather should be able to produce the materials and later assert privilege claims for particular documents and requested that the court impose a clawback order over the IRS’ objections.

Ruling

• Clawbacks Can Be Entered over Objections. While noting that clawback orders may be entered over a party’s objection for “good cause,” the ruling found that the “good cause” standard did not apply in the context of an IRS summary proceeding, which has a different understanding of discovery than civil litigation. The IRS’ previous consent to clawback orders were “the exception rather than the rule.”
• Who Determines Privilege? Shifting the requirement of determining privilege to the IRS was problematic for two main reasons. First, the order requested in this issue would have given Defendant, the target of an IRS investigation, “insight into the particulars of the IRS’s Inquiry,” an inappropriate strategic advantage. Second, the ruling found that IRS agents “are not trained to evaluate whether a communication is subject to the attorney client privilege,” and that the information might solely be able to be provided by the Defendant.
• Request for Clawback Order Rejected. The court declined to impose the clawback order. In addition to the reasoning above, the Defendant requested the ability to assert privilege over documents years after production and that it would prevent the use of materials in other IRS proceedings. The IRS’ failure to agree to a clawback did not constitute a failure to negotiate “in good faith,” and therefore was in compliance with the previous court order.

Expert Perspective

by: Hon. Andrew Peck (Ret.), Sr. Counsel, DLA Piper

I have repeatedly advocated for parties to get Federal Rule of Evidence 502(d) non-waiver of privilege orders (or state equivalents) in civil litigation. The court here recognized the utility of Rule 502(d) orders in traditional litigation. The court also recognized that party agreement is not required. But an IRS proceeding is different, and there were good reasons for the IRS to object to entry of such a clawback order here.