American National Bank and Trust Co. of Chicago v. Equitable Life Assurance Society of the United States, 406 F.3d 867 (7th Cir. 2005)
American National Bank and Trust Co. of Chicago, as Trustee f/b/o Emerald Investments LP, and Emerald Investments LP ("Emerald") sued Equitable Life Assurance Society of the United States ("Equitable") in tort and contract, asserting that Equitable was trying to restrict Emerald's sub-trading of annuities purchased from Equitable. Equitable tried to protect a number of documents by asserting attorney-client privilege. Emerald resisted by arguing that Equitable was withholding non-privileged material and repeatedly challenging defendant's privilege log.
This resulted in multiple privilege log revisions and interventions by the magistrate judge handling the discovery process. Finally, not wanting to review a substantial number of documents in camera and finding that samples of withheld documents included substantial non-privileged material, the magistrate judge ordered Equitable to produce all documents still listed on the log. The matter was dismissed for lack of subject matter jurisdiction, and Equitable appealed the discovery order. The 7th Circuit reversed the sanction, finding that the magistrate judge had abused his discretion.
Equitable initially produced 20,000 documents and withheld 750 based on attorney-client privilege. It issued a privilege log listing these withheld documents. Emerald challenged the log on December 6, 2001, suspecting that some of the withheld documents should have been released. The magistrate judge expressed unwillingness to review "1500 documents" in camera. Equitable's privilege log, which reflected issues involving in-house counsel and fine distinctions between legal and non-legal business advice, was revised multiple times. By January 18, 2002 the number of documents listed was down to 465 and a resolution to the dispute seemed possible.
On February 8, Equitable sought the return of some documents which had been produced by mistake. Over-application of the attorney-client privilege again became an issue when the magistrate judge disagreed with an assertion of privilege on a particular document. It was an email to in-house counsel recounting a high-level meeting between the litigants which Equitable claimed was a confidential communication seeking legal advice. The judge adopted Emerald's proposal that he review every 15th document on the log until 10 documents had been reviewed in order to check privilege assertions.
On March 20, the judge issued an opinion in connection with the ten documents. Six were privileged, two were partially privileged, and two were entirely non-privileged. (One of the partially privileged documents was an email between in-house counsel and Equitable employees that was privileged other than nine handwritten words apparently not shared with anyone and not constituting legal advice.) Equitable was ordered to disclose the non-privileged material.
On March 27, Emerald argued for global disclosure, asserting that the log contained incorrect assertions of privilege as demonstrated by previous rulings. The judge ordered Equitable to produce yet another version of the log (version four), preferably with fewer entries this time.
On May 20, Emerald filed a motion to compel production of 16 more documents from the log. Equitable released two to show good faith (despite believing that they were privileged), and the judge reviewed the remainder. Eight were found to be privileged, two partially privileged, and four non-privileged.
On July 25, Emerald filed a motion for discovery sanctions under FRCP 26 and 37 requesting global disclosure as in camera inspection of more than 400 documents was unmanageable. In the alternative, it requested that a special master review the remaining documents at Equitable's expense.
On August 14, the judge sua sponte established a procedure for handling documents remaining on the log. Emerald was to pick 20 documents for in camera review, and if the judge found four or more to contain non-privileged material he would sanction Equitable by ordering the disclosure of all remaining documents. Equitable argued for the special master alternative and an opportunity to evaluate the latest log to prevent Emerald from taking unfair advantage of the judge's plan. The judge proceeded with the plan, eventually finding five documents containing non-privileged material and granting the motion for production of all remaining documents (including documents that the judge himself had found to be privileged.) Equitable lost its motions for reconsideration and petition for mandamus, and released the documents as ordered.
In 2004, Emerald realized that it had lacked diversity of citizenship when it filed suit in 2000 and thus subject matter jurisdiction was lacking. It now had true diversity, and re-filed a slightly modified lawsuit. The original action was dismissed without prejudice, leading to this appeal of sanctions. These sanctions had continued to adversely affect Equitable since Emerald was availing itself of hitherto withheld documents such as Equitable's in-house counsel's evaluation of the matter.
The magistrate judge's test to determine whether he would sanction Equitable by releasing all documents on the log was not fair and an abuse of discretion. Emerald was able to pick 20 documents which it thought were most vulnerable to challenge, and if the magistrate judge disagreed with Equitable on four or more documents, despite no bad faith behavior by Equitable, the whole log would be stricken. Equitable zealously protected documents wherever it could make a good faith argument in support of privilege, as expected. "Sanctioning Equitable for having too many good-faith differences of opinion was fundamentally wrong. Moreover, the process for arriving at the sanction was arbitrary."
Even if Equitable had engaged in sanctionable conduct, striking the entire log based on Emerald picking 4 vulnerable documents out of 400 is arbitrary and harsh. A full in camera review of the half-box of documents remaining in controversy beginning February 8 would have been appropriate. The sanction was reversed and Emerald must return all documents that it received as a result (other than the five specifically found non-privileged). Any reacquisition of documents must be done via in camera review. Emerald's cross-appeal challenging denial of expenses for the privilege log proceedings was denied.