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Production of Servers without Review Waives Privilege and so Might Storage of Privileged Materials on Servers Shared with Other Entities

Posted in CASE SUMMARIES

In re Fontainebleau Las Vegas Contract Litig., 2011 WL 65760 (S.D. Fla. Jan 7, 2011)

In this case, the court found that privilege had been waived as a result of a third party’s voluntary production of servers believed to contain privileged materials without review.

The Term Lenders sought production of documents related to the financing of the construction of the Fontainebleau Resort and Casino in Las Vegas from the third-party parent of Fontainebleau Las Vegas, Fontainebleau Resort, LLC (“FBR”).  FBR resisted production of its documents, albeit without formal motions, until approximately six months after receipt of the subpoena.  During that time, FBR initially alleged that production would be delayed because of the shared status of the servers on which its information was stored and the need to separate its documents from those of other entities by allowing those entities to review all documents stored thereon to determine ownership, privileged status, etc.  FBR had previously raised this issue in the context of an unsuccessful motion to quash similar subpoenas from other banks.  The court’s footnote regarding the shared servers is illuminating:

FN1. Fontainebleau did not explain in its motion to quash why the shared documents on the computer servers would still be privileged (assuming they were privileged in the first place) if they were stored together on servers presumably accessible by other entities.  Fontainebleau represented in its motion that the servers "are owned by Fontainebleau Resorts, LLC (one of The FBR Entities) but [ ] contain documents belonging to various Fontainebleau and Turnberry Construction entities, including the Debtors" (DE# 93, at 2).  Likewise, Fontainebleau did not explain in its motion why the entities would not lose privilege protection under a plan where each entity would receive "a full copy of each of the servers" (and presumably have unfettered access to all material, including information and privileged matter belonging to others).

If all of the legally separate entities are sufficiently affiliated, then they likely would be permitted to safely share privileged information without losing privilege, but Fontainebleau did not address the issue in its motion and did not discuss, let alone establish, that all of the entities having material on the servers (and which would obtain full copies of the servers) are all in parent-subsidiary relationships or are otherwise sufficiently affiliated.  See, e.g., Roberts v. Carrier Corp., 107 F.R.D. 679, 687 (N.D.Ind.1985) (explaining that privilege can extend to corporate subsidiaries).  In addition, Fontainebleau did not state that it had entered into a joint defense, shared information, or common interest agreement with the separate entities.

As time passed, FBR shifted its position and alleged that it would be unduly burdensome to comply with the Term Lenders’ subpoena.  Unconvinced, the court granted the Term Lenders’ motion to compel after approximately four months had passed without production.  Again, however, no production was forthcoming.  Approximately six months after receipt of the subpoena and in danger of failing to comply with the court ordered discovery deadlines, FBR filed an “eleventh hour” motion asserting that “it would be too onerous to conduct an adequate privilege review within the time period provided by the court” and seeking a confidentiality order that would requiring the requesting party to produce back to FBR all materials copied from the servers and to identify all privileged materials found in their review.  The court denied this motion but provided FBR the opportunity to file motions at a later date to address inadvertently produced materials and to extend the deadline for production of a privilege log.

Apparently declining to adopt the court’s suggested approach, FBR instead produced two servers – the “documents server” and the “accounting server” – without conducting any review of the materials.  At least one of the servers had previously been produced to other banks involved in the underlying litigation.  As to a third server, the “email server,” FBR belatedly produced a privilege log identifying withheld materials.  Indicating their willingness to bear the costs of sorting through the documents if they had the ability to use the data produced, the Term Lenders sought guidance regarding how to proceed and whether privilege had been waived.

The court found that privilege had been waived as to the accounting and documents servers.  The court’s discussion included consideration of FBR’s failure to conduct any review of the servers, FBR’s inability to specifically identify any privileged materials present on the servers, the considerable delay in production and failure to seek a protective order, and the “continued failure to establish that the servers in fact contain privileged material which was not previously waived through the sharing of servers by different entities.”  Specifically regarding the failure to review the servers for privileged materials, the court noted that FBR’s production was “inconsistent with the notion that the effort necessary to avoid inadvertent disclosure must increase as the volume of documents increases.”  The court also focused on FBR’s failure to exhaust its privilege objections, noting that “‘voluntary compliance with a subpoena without fully exhausting attempts to defeat the subpoena or pursue privilege claims vigorously, will generally be deemed a waiver of any privilege or work-product protection.’”

Privilege was not waived as to the email server, however, in light of the production of a privilege log, albeit delayed.

Seeking to provide “limited protection” to FBR, the court ordered the Term Lenders to notify FBR of any privileged materials it identified in its review, but was careful to establish that the documents were fair game for use in pretrial preparation (although admissibility at trial remained an open question) and that the Term Lenders would not suffer adverse consequences “should they inadvertently omit privilege materials” from their court-ordered notification(s).