[Editor’s Note: This article has been republished with permission. It was originally published December 20, 2023 on the eDiscovery Assistant Blog]
In Episode 127, on the ACEDS and eDiscovery Assistant #CaseoftheWeek, Kelly Twigger discusses the applicability of Rule 502(d)’s protections for documents sought in a government investigation in U.S. v. Captive Alternatives,LLC, 2023 WL 5573954 (M.D. Fla. 2023), August 29, 2023, presided over by United States Magistrate Judge Christopher P. Tuite.
Introduction
This week’s decision comes to us from the case of U.S. v. Captive Alternatives, LLC. This is a decision from August of 2023 from United States Magistrate Judge Christopher Tuite. This Judge has 21 cases in our eDiscovery Assistant database, and the issues, as always, tagged from our proprietary issue tagging structure include privilege log, attorney-client privilege, clawback, and 502(d).
Background
We are before the Court on an order from Captive, asking the Court to enter a Rule 502(d) order providing for the non-waiver and clawback of any privileged materials that Captive turns over to the IRS. Captive operates a risk management program that allows businesses directly to procure insurance coverage.
In October 2021, the IRS served Captive with an administrative summons that sought the disclosure of 29 categories of records, including subparts, for the time period beginning on January 1, 2011 — so about 10 months before the subpoena was entered. When Captive failed to respond, the IRS filed a petition in February 2022 to enforce the summons.
The Court found at that time that the government had made a prima facie showing that it had met the requirements for the summons, and the Court then directed Captive to show cause at a hearing as to why it should not be compelled to comply with those summonses. There was a four-part test under a decision called Powell that set forth the required basis for the summons for the IRS to meet.
At the hearing, the Magistrate Judge found that Captive had not met its burden to disprove cause and issued a Report and Recommendation to the presiding District Judge recommending that he grant the IRS’s petition and instruct Captive to produce all responsive documents and materials and all non-privileged correspondence or records of communications within 60 days of the Court’s order. The original set — the documents to be ordered to be produced were to be produced within 45 days of the Court’s order. The privileged communications were also to be accompanied by a privilege log.
One month after the Report and Recommendation was issued, the parties filed a joint motion requesting that the District Judge adopt the request and the Report and Recommendation with the minor caveat that Captive be permitted to “make document productions on a rolling basis” and that the covered time period for Captive to produce documents be modified. The parties also included the following caveat in that order:
The parties are discussing whether an order pursuant to Federal Rule of Evidence 502 may be appropriate. Therefore, the parties will negotiate, in good faith, proposed language for such an order, and, if successful, jointly petition the [C]ourt for the entry of such an order. If the parties are unsuccessful and fail to reach an agreement on proposed language for such an order, the parties agree that [Captive] will retain its ability to petition the [C]ourt in its own right for the entry of such an order. [The IRS] agrees that Captive may file a petition seeking such an order.
The presiding District Judge subsequently issued an order adopting the Report and Recommendation from the Magistrate Judge, subject to these conditions and directed that Captive disclose the requested items and a privilege log by October 1, 2023.
The parties could not reach an agreement on the 502(d) order, and we are now before the Court on a motion from Captive asking the Court to enter an order that includes the following provisions: First, authorizing Captive “to produce summonsed materials to the IRS without first reviewing every record for privilege”; second, stating that Captive would not be deemed to waive any privilege or protection as a result of such disclosures in connection with the litigation proceeding before the Court or “in any other federal or state proceeding”; third, precluding the IRS and the Department of Justice’s Tax Division from “mak[ing] any public use of any document produced pursuant to the Summons without first giving Captive … ten days advance notice”; and fourth, allowing Captive thereafter to assert a claim of privilege in writing within 10 days, which would then foreclose the government from making any public use of the document until the privilege question was resolved either by the parties or by the Court. That’s a lot of qualifications sought by Captive.
In support of this proposed order, Captive explains that the documents that it is required to deliver to the IRS total over 1.1 million and that the protections it seeks are necessary given the costs associated with reviewing and producing such a volume of documents.
It also notes that there is an inevitability “of making mistakes in doing so.” Not surprisingly, the IRS opposes Captive’s motion.
Analysis
What is the Court’s analysis here? The Court begins with the IRS’s broad and expansive authority to investigate and issue administrative summonses pursuant to 26 U.S.C § 7602, and the Court is charged with enforcing those summonses. The Court also states that enforcement proceedings are, nonetheless, “subject to the traditional privileges and limitations.” Also, interestingly, the Court states that a respondent asserting a claim of attorney-client privilege must generally declare it on a question-by-question and document-by-document basis, rather than through a categorical privilege log. We’ve talked about categorical privilege logs in the past and the pluses and minuses associated with them.
A clawback arrangement, according to the Court — like the one sought by Captive here — allows the return of documents that a party belatedly determines are protected by the attorney-client privilege or the work product doctrine. The Court goes on to talk a bit more about clawbacks and the applicability of Rule 502(d). It states that clawbacks are governed by Rule 502, not limited to Section (d), which authorizes the court to enter an order directing the attorney-client or work product protections are not waived by disclosure connected with the pending litigation, which in turn prevents the disclosure from constituting a waiver in any other federal or state proceeding. That is specifically from Section (d) of Rule 502.
As a result, once the court issues a 502(d) order, the producing party can typically clawback a protected document that it produced to the receiving party. The Court cites a number of cases in its decision here about 502(d) that are really important, whether you’re talking about 502(d) in the context of your average civil litigation or an administrative proceeding like we have here. The Court notes here that clawbacks are regularly issued by courts and, based on language from the committee notes to Rule 502, may be entered over another party’s objection. We’ve had a number of decisions here on Case of the Week in which one party has sought and been granted a 502(d) order over the other party’s objection, consistent with those notes from the Advisory Committee.
But the Court here also notes that at least one court has taken a very dim view of clawback arrangements in the context of enforcement proceedings where the IRS has not acquiesced to such a framework. In that decision, the Court rejected the respondent’s arguments that the IRS should be compelled to follow this type of approach, and in doing so, explained:
[The respondent] contends that it needs to be protected from inadvertent disclosures. However, as [the United States] correctly points out, there is no requirement that the IRS enter into a Rule 502 [a]greement…[The respondent] also argues that a Rule 502 agreement would have been a ‘reasonable accommodation’ by the IRS. However, the IRS’s obligations are not governed by what [the respondent] believes to be reasonable and proper. [The respondent] is required by law to provide the necessary information to the IRS regardless of [the respondent’s] opinion as to what the most reasonable method for production would be. [The respondent additionally] presents extensive arguments as to why the IRS’s reasoning for not entering into a Rule 502 agreement is flawed and how the IRS will not be prejudiced by such an agreement…However, it is for the IRS to decide whether it will enter into such an agreement, and the court will not review the IRS’s reasoning for such a decision. [The respondent] cannot force the IRS to enter into such an agreement. Nor can [the respondent] use the absence of a Rule 502 agreement as an excuse for refusing to provide the IRS with the requested information.
Now that’s a long quote, but it’s really important because it’s incredibly valuable to the Magistrate Judge’s analysis here.
In the end, the Court notes that the decision of whether to enter into a Rule 502(d) order is left to the Court’s discretion. Here, the Court takes its discretion into account and lists five reasons why Captive’s motion for the 502(d) order fails.
First, the Court noted that the current proceeding is summary in nature and does not even involve discovery as that term is understood in civil litigation. Stating specifically that the action is distinct from other matters in which courts traditionally enter Rule 502(d) orders, the Court says that if Captive had complied with the summons upon receiving it, the IRS would not have had to initiate this proceeding, and Rule 502(d) would not come into play at all.
In response to that, Captive argued — hey, wait a minute. The IRS has entered 502(d) orders before, and it pointed to actions brought by the IRS against Microsoft and Facebook, in which more limited 502(d) orders were entered. But the Court noted that both Microsoft and Facebook had already identified the privileged documents in their production. Here, Captive purports to just provide a document dump to the IRS with no review and then be entitled to a clawback and to a determination that the privileged nature of the documents exists to which the clawback orders applied. Further, in the Microsoft case, the party’s clawback agreement did not — as Captive proposes to be permitted to do here — entitle Microsoft to produce, cart blanche, all items responsive to the IRS’s summons with the ability to assert privilege over the disclosed documents at some unspecified later date.
On the second reason for the Court to deny the motion, the Court points to the guidance from the IRS’s Chief Counsel’s office, which takes the position that clawback arrangements should be avoided because they put the IRS, as the receiving party, in the position of doing Captive’s job for it and identifying the potential responsive documents and then advising Captive. Here, Captive’s proposed Rule 502(d) order would essentially relieve Captive of any responsibility for designating the protected records as such before turning them over to the IRS. Citing case law, as well as the Sedona Conference, the Court states that a Rule 502(d) order cannot be used as a cost-shifting tool to allow a producing party to make a data dump and requiring the requesting party to identify the privileged documents. The Court also notes that such an order, as proposed by Captive, would require the IRS to decide whether each document disclosed by Captive was privileged, assess any third-party privileges that could defeat the privilege, and then advise Captive. That process would impede the IRS’s investigation by providing Captive with insight into the particulars of the IRS’s inquiry, including the entities and/or the individuals with whom the IRS wishes to share the materials provided.
Third, the Court notes that the IRS agents that would review the documents are not trained to evaluate whether a communication is subject to the attorney-client privilege and might not know what is privileged. In reality, only Captive can know what is privileged from its document collection.
Fourth, the Court notes that Captive’s proposed order requiring that the IRS not make any public use of the disclosed records without first affording captive 10 days’ notice is not acceptable. The Court states that Captive’s proposed definition of “public use” was very expansive and would effectively require the IRS to notify Captive anytime it wanted to use a document during a proceeding and allow Captive an opportunity to determine whether it was privileged.
Fifth, the Court notes that Captive’s proposed order has no restriction on when it can assert privilege, leaving Captive the ability to assert privilege years later, which is unacceptable.
Captive’s response to the Court’s concerns was simple. There are 1.1 million documents and it’ll cost more than seven figures to review. But the Court had already rejected that argument from Captive in a previous proceeding and it was not going to re-entertain the argument here. Finally, Captive argued that the IRS breached its agreement to adopt a 502(d) order, and the Court again disagreed, citing the express written language of the party’s agreement — which I read to you earlier — that stated that the parties would attempt to negotiate a 502(d) order, and if it was unsuccessful, they would then seek the input of the Court. That’s exactly what the IRS did here following Captive’s motion.
Takeaways
What are our takeaways from this decision? Well, obviously, we’re talking about a decision from a Magistrate Judge on an administrative summons in the IRS. This doesn’t have perhaps as broad applicability as a general civil litigation decision, but there are some key takeaways.
First, a lot of you are dealing with these administrative summonses from government agencies. They’ve become much more commonplace over the last 3-5 years, and the need to respond to them is not necessarily governed by the same guidelines we have in civil litigation. That’s an important takeaway. Know exactly what arguments you can make and look at the specific decisions, as the Court noted here, in which the IRS has the ability not to agree to a 502(d) order.
Second, what’s important here is the scope of Rule 502(d) and the language of the courts that have been interpreting it. Now, Captive’s challenge here is that it tried to expand the purview of Rule 502(d)’s protections against inadvertent disclosure and it tried to do it in an enforcement proceeding after it failed to respond to an administrative summons. So it’s not a civil matter where we would normally see 502(d) being leveraged. We’ve talked about that.
In addition to that, Captive sought something that Rule 502(d) and the case law interpreting it does not contemplate or, frankly, that any party has ever been granted — the ability to just dump documents on the other side and then be able to clawback a document at any time. As the Court cited, case law precludes such an interpretation, and we’ve not seen any court that has granted that even on the civil litigation side.
Captive’s strategy here to me is hard to discern. The Court had previously denied Captive’s arguments that the review and cost of producing 1.1 million documents presented an undue burden. So it was really unlikely to accept this new approach of dumping documents on the IRS and expecting the IRS to manage those privilege considerations. It also isn’t in Captive’s best interest that it doesn’t want to protect those documents in case something gets out, which it usually does.
This decision is both relevant in terms of responding to administrative requests from government agencies but also in civil litigation. You need to know and understand how you can leverage Rule 502(d) by understanding both the language of the rule and the case law interpreting it. The language of the Rule is short. You need to read the underlying comments for the rule from the Advisory Committee, as well as the case law that interprets it, including this decision today. Captive’s arguments here really did neither of those things.
Finally, this issue was before the Court on a government-issued request that was determined to be reasonable and met the requirements for Captive to provide documents. It’s not the same as civil litigation, so Captive’s arguments to expand the scope of 502(d) here had even less of a chance of success. It’s hard to evaluate the cost effectiveness of bringing this motion by Captive, and that’s something we talk about a lot here on Case of the Week. But I’m guessing there must have been an underlying strategy to delay incurring the cost, or perhaps it really was a last-ditch effort to preclude incurring those costs at all. Either way, it was unsupported by Rule 502(d) and the underlying case law.
She is a co-author of Electronic Discovery and Records and Information Management, and host of Case of the Week at eDiscovery Assistant. As Principal at ESI Attorneys, Kelly manages the boutique eDiscovery and information law firm that acts as operational business partners with its clients to advise law firms, corporations, and municipalities on all areas of electronic information including eDiscovery, privacy, cybersecurity, and information governance.
Kelly is also the CEO of eDiscovery Assistant — a SaaS-based practical resource for litigators handling eDiscovery — that curates discovery decisions, rules, and additional content. She is developing an online academy to provide on-demand education for lawyers and legal support professionals to stay abreast of changes in the law and technology that affect litigation and clients’ obligations to respond.
You can reach Kelly at [email protected], join her Facebook community group at Let’s Talk eDiscovery, or connect with her on Twitter @kellytwigger.