Opinion ID: 790117
Heading Depth: 1
Heading Rank: 3

Heading: Analysis of Equitable's Appeal

Text: 37 In challenging the sanction, Equitable has not asked us to rule on the magistrate judge's privilege decisions on the five documents that immediately resulted in the global-disclosure sanction or any other privilege decisions that led to the sanction proceedings. Rather, Equitable's attack on the sanction is foundational. Equitable challenges the magistrate judge's procedure from which he inferred bad faith and then imposed the sanction. 38 Discovery sanctions may only be imposed where a party displays wilfulness, bad faith, or fault. Langley v. Union Elec. Co., 107 F.3d 510, 514 (7th Cir. 1997). Here, the magistrate judge was silent on wilfulness and fault, addressing only bad faith. Discovery sanctions are reviewed for an abuse of discretion. Maynard v. Nygren, 372 F.3d 890, 892 (7th Cir.2004). While deferential, this standard is not without teeth. Salgado v. Gen. Motors Corp., 150 F.3d 735, 737 (7th Cir.1998). A district court [does not] possess[] unfettered discretion to impose sanctions upon a recalcitrant party. In re Golant, 239 F.3d 931, 937 (7th Cir.2001). Accordingly, the method for arriving at the sanction must be fair. See Salgado, 150 F.3d at 740 ([W]e must ... scrutinize the district court's methodology. Although the district courts have significant flexibility in the application of the [discovery] rules in question, that latitude is clearly constrained by the principles of due process of law.). The upshot is that, under the abuse of discretion standard, we will reverse a discovery sanction if its imposition strikes us as `fundamentally wrong,' or is `clearly unreasonable, arbitrary, or fanciful.' Maynard, 372 F.3d at 893 (quoting Anderson v. United Parcel Serv., 915 F.2d 313, 315 (7th Cir.1990)). 39 The process for winnowing down the number of privileged documents was tedious and protracted. But the final test to determine whether Equitable's claim that some 400 documents were privileged was clearly not fair. The magistrate judge's sampling procedure to determine bad faith was too arbitrary to be accurate and with a consequence that was onerous. At the August 14 hearing, the magistrate judge set forth his procedure in the following terms: 40 So here's what we're going to do. [Emerald] is going to select 20 documents, any 20 documents of the existing privilege log. They will be submitted in camera. If 20 percent or more are deemed to be non-privileged, then the Court will therefore find that ... the entire Fourth Amended Privilege Log is tainted. That's 20 percent or more, 20 percent of 20 is four.... I understand that there are good faith differences of opinion. . . . [However,] considering the intense spotlight on this privilege log issue for the last few months, there cannot be more than three out of 20 that there is a good faith difference of opinion. If more than three are found by the Court to be non-privileged, then the entire privilege log will be stricken and all of the documents will be ordered to be produced. 41 R.202 at 31-32 (emphasis added). Further, before imposing the sanction at the September 23 hearing, the magistrate judge admitted that he had no direct information [of] bad faith. R.228 at 7. 42 This process allowed Emerald to pick the twenty documents it deemed to be most vulnerable to challenge. Then, if the court found four or more in that group that it judged not to be privileged, the whole lot would be stricken from the privileged list. He found five, and Equitable was sanctioned for having too many good-faith differences of opinion with the magistrate judge. That is unacceptable. Simply having a good-faith difference of opinion is not sanctionable conduct. That especially holds true in this situation. Because the attorney-client privilege promotes full and frank communication between those in need of legal assistance and their advocates, courts have long recognized the vital role the privilege plays in the administration of justice. See Hunt v. Blackburn, 128 U.S. 464, 470, 9 S.Ct. 125, 32 L.Ed. 488 (1888); Upjohn Co. v. United States, 449 U.S. 383, 389, 101 S.Ct. 677, 66 L.Ed.2d 584 (1981); Denius v. Dunlap, 209 F.3d 944, 954 (7th Cir.2000). As candid attorney-client communications are therefore worthy of maximum legal protection, it is expected that clients and their attorneys will zealously protect documents believed, in good faith, to be within the scope of the privilege. Haines v. Liggett Group, Inc., 975 F.2d 81, 90 (3d Cir.1992). Which, as acknowledged by the magistrate judge in the block quotation above, is what Equitable did here. Equitable sought to protect documents for which a good-faith argument in support of privilege could be made, 6 and it did so while treading in an area of privilege law that is generally recognized to be especially difficult, namely, distinguishing in-house counsels' legal advice from their business advice. Rice, 1 Attorney Client Privilege in the United States § 5:7. Furthermore, Equitable exhibited good faith throughout the privilege log proceedings: among other acts, Equitable conceded the need to revise its initial log; it volunteered a second-amended log; it cooperated with Emerald to resolve outstanding disputes, as Emerald acknowledged in January 2002; it waived the privilege for two documents in May 2002 to help close the matter; and, it promptly complied with the magistrate judge's orders for the disclosure of documents and for amended logs. Accordingly, given the absence of bad faith, wilfulness, or fault, Equitable should not have been sanctioned. The sanction must be reversed. The magistrate judge's fundamental error was estimating bad faith from good-faith assertions of the privilege. 43 Additionally, as noted above, the magistrate judge's sanction procedure was inherently arbitrary. Maynard, 372 F.3d at 893. Selecting twenty documents from a list and then applying a 20% (four documents) error rate has no logical foundation. The magistrate judge left the composition of the sample entirely up to Emerald's unrestricted discretion. As a result, there is no reason to believe that the twenty documents selected were representative of the entire log. In fact, it is likely that the sample was unrepresentative because, given the possibility of a windfall, Emerald had every incentive to cherry-pick the most vulnerable documents: if it could just find four documents out of more than 400, Emerald would get everything. R.228 at 4. Therefore, even had Equitable engaged in sanctionable conduct, we would still reverse the sanction as impermissibly arbitrary, with an extremely harsh result. 44 This severe sanction developed from only a half box of documents. The magistrate judge's continued refusal of a full, document-by-document, in camera inspection was not helpful. By effectively taking full in camera review off the table, the magistrate judge created a situation that got out of hand: with that option unavailable, the magistrate judge inevitably struggled to find a way of fairly resolving the parties' privilege disputes. The result was the flawed sampling procedure for sanctioning Equitable. To avoid this unfortunate situation, while still addressing Emerald's privilege concerns, the magistrate judge should have reviewed more documents in camera than the total of forty-four reviewed for his March 20, June 5, and September 23 rulings. The quantity of log documents was down to a half box by February 8, and, on that date, when Emerald proposed the first sampling procedure, it was evident that Emerald lacked confidence in the log as a whole. As early as that juncture or certainly by the time the sanction proceedings began, the magistrate judge, given the manageable quantity of documents at issue, should have simply instituted a procedure by which he would review (himself or through a special master) every document contested by Emerald— even if that meant reviewing every document in that half box. See In re BankAmerica Corp. Secs. Litig., 270 F.3d 639, 644 (8th Cir.2001) ([D]istrict courts should be highly reluctant to order disclosure without conducting an in camera review of allegedly privileged materials.). 7 Such a process would have struck the right balance between the parties' competing interests and would have— given the protracted log proceedings that continue to this day—saved judicial resources. See Kerr v. U.S. Dist. Ct. for N. Dist. of Cal., 426 U.S. 394, 405, 96 S.Ct. 2119, 48 L.Ed.2d 725 (1976) ([A]n in camera review of the documents is a relatively costless and eminently worthwhile method to insure that the balance between petitioners' claims of ... privilege and plaintiffs' asserted need for the documents is correctly struck.). In short, rather than resorting to an ill-advised sanction and imprudent sampling procedure, a full in camera review of the log documents would have been a highly appropriate and useful means of dealing with the sensitive privilege issues in this case. Id. at 406, 96 S.Ct. 2119. 45 Having determined that the magistrate judge erroneously sanctioned Equitable, we now consider how to remedy that error. Clearly, as Equitable conceded at oral argument, we cannot give it total relief. Emerald has seen documents it never should have had. We cannot wipe Emerald's collective mind clean of the information it has acquired. Nevertheless, we can fashion partial relief for Equitable. Accordingly, we will reverse the sanction and remand the matter with the following instructions: first, deny Emerald's motion for discovery sanctions; second, order Emerald to return to Equitable all the documents that Emerald received as the result of the sanction, except for the five documents specifically found to be non-privileged; and, third, order Emerald to provide to Equitable all copies of the aforementioned documents that are in Emerald's possession, custody, or control. Cf. In re Bridgestone/Firestone, Inc., ATX, ATX II, 129 F.Supp.2d 1207, 1219 (S.D.Ind.2001) (remedy for inadvertent disclosure). Should Emerald wish to reacquire particular documents, Emerald may not do so within the confines of the now-closed original action. Rather, any such reacquisition will require additional discovery (non-sanction) proceedings with the documents being reviewed in camera. The new action would appear to be the most appropriate venue for any such proceedings.