E3 Biofuels, LLC v. Biothane Corporation et al

Filing 122

MEMORANDUM AND ORDER that the 115 Objection filed by the Defendant, Perennial Energy, Inc., is denied; and The Order entered by Magistrate Judge F.A. Gossett (Filing No. 114) is affirmed. Ordered by Chief Judge Laurie Smith Camp. (ADB)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEBRASKA
E3 BIOFUELS, LLC,
Plaintiff,
vs.
BIOTHANE, LLC, and
PERENNIAL ENERGY, INC.,
Defendants.

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CASE NO. 8:11CV44

MEMORANDUM
AND ORDER

This matter is before the Court on the Statement of Objection (Filing No. 115) to the
Order entered by Magistrate Judge F.A. Gossett (Filing No. 114) filed by the Defendant,
Perennial Energy, Inc. (“Perennial”). The Court has considered the parties' briefs (Filing
Nos. 120, 121).
Under 28 U.S.C. § 636(b)(1)(A), the court has reviewed the order from which this
appeal has been taken. In an appeal from a magistrate judge's order on a pretrial matter
contemplated by 28 U.S.C. § 636(b)(1)(A), a district court may set aside any part of the
magistrate judge's order shown to be clearly erroneous or contrary to law. 28 U.S.C. §
636(b)(1)(A).
FACTUAL BACKGROUND
The pertinent facts were stated by Judge Gossett:
On or about September 26, 2011, in response to a discovery request,
Plaintiff mailed a computer disc to the defendants in this case. On
September 27, 2011, before the defendants received the disc, Plaintiff’s
counsel discovered that, due to a technical error, hundreds of documents
purportedly protected by the attorney-client privilege and attorney work
product doctrine were mistakenly included on the disc. Plaintiff’s counsel
immediately notified Perennial’s counsel of the error and requested the
return of the unopened envelope. Perennial’s counsel refused. As a result,
Plaintiff filed a motion to compel Perennial to return the disc. Subsequently,
Perennial filed a motion requesting that the Court declare that the privileges

Plaintiff asserted in connection with the disc were waived or, in the
alternative, to compel Plaintiff to produce a privilege log.
(Filing No. 114, at 1 (citation omitted).)
A privilege log was provided, albeit later than promised. As Judge Gossett noted,
the amount of the discovery in this case is voluminous and the attorney working on the
privilege log abruptly resigned from his firm. (Id., at 2.)
An identical disc was also sent to the Defendant, Biothane, LLC (“Biothane”), which
returned the disc once it was informed of the error. Perennial refused to return the disc,
“sequestering” it and claiming that the Plaintiff, E3 Biofuels, LLC (“E3”), waived any
privilege by inadvertently disclosing the information in question and failing to produce a
privilege log.
Judge Gossett rejected Perennial's arguments, noting: Biothane immediately
returned the disc upon being informed of the error; E3 immediately supplied Perennial with
a replacement disc and therefore did not delay the discovery process; E3's delay in
producing the privilege log was understandable under the circumstances; and Perennial
may file a motion to compel regarding documents reflected in the privilege log. Judge
Gossett: granted E3's motion to compel, ordering Perennial to return the unopened
package containing the disc; and denied Perennial's motion to declare E3's privileges
waived and to compel E3 to produce a privilege log, noting that the log was provided.
DISCUSSION
Perennial objects to Judge Gossett's order, arguing that Judge Gossett erred in
ordering Perennial to return the disc. Perennial argues it would properly “maintain the
integrity” of the disc while it cannot be sure that E3 would do so. Perennial argues that
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Federal Rule of Civil Procedure 26(b)(5)(B) allows it the right to “sequester” the disc until
E3's claims of privilege are resolved. The rule provides:
If information produced in discovery is subject to a claim of privilege or of
protection as trial-preparation material, the party making the claim may notify
any party that received the information of the claim and the basis for it. After
being notified, a party must promptly return, sequester, or destroy the
specified information and any copies . . . . The producing party must
preserve the information until the claim is resolved.
Fed. R. Civ. P. 26(b)(5)(B) (emphasis added).
E3 responded that under the plain language of Rule 26(b)(5)(B), the rule does not
apply because through its use of the past tense1 the rule does not contemplate a situation
such as the one in this case in which E3 gave Perennial notice of the inadvertently included
privileged information two days before Perennial received the disc with the information.
As support, E3 cites to Am. Express v. Accu-Weather, Inc., 1996 WL 346388 (S.D.N.Y.
June 25, 1996) as a factually similar case. In Am. Express, notice of the inadvertent
disclosure of privileged documents was received before the document arrived. The court
stated that disclosure had not occurred when notice of the error was received, and
therefore no waiver of the privilege occurred. The court found an ethical violation and
sanctioned the attorneys who disregarded the notice and opened the document. Id. at *3.
The Court agrees that technically Rule 26(b)(5)(B) may not apply. Direct authority
does not appear to exist with respect to this question; however, Am. Express lends support
to the nonapplication of the rule. Nevertheless, whether or not the rule applies to the
unique situation presented in this case, it serves as useful guidance where little, if any,
other authority exists. Under the language of the rule, Perennial could “return, sequester,
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E3 points to the words “produced” and received.”
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or destroy” the disc. And, as E3 argued, assuming Rule 26(b)(3)(B) applies, the last
sentence of the rule states that the producing party must preserve the information in
question until the matter is resolved. The commentary to Rule 26(b)(5)(B) states that the
options of sequestering or destroying the material were included “in part because the
receiving party may have incorporated the information in protected trial-preparation
materials,” which did not occur in this case. Fed. R. Civ. P. 26 (2006 commentary).
In determining whether inadvertent disclosure results in a waiver of privilege, courts
have focused on four factors: the reasonableness of the efforts to avoid disclosure; the
delay in rectifying the error; the scope of discovery, as it related to the burden of preparing
the discovery material; and the extent of the disclosure. 8 CHARLES A. W RIGHT , ARTHUR R.
MILLER & RICHARD L. MARCUS, FEDERAL PRACTICE AND PROCEDURE § 2016.3, at 366-374 (3d
ed. 2010). Federal Rule of Evidence 502(b) arose out of the treatment in various courts
of this four-factor test. Id. at 379. Rule 502(b) provides that disclosure does not amount
to a waiver if: “(1) the disclosure is inadvertent; (2) the holder of the privilege or protection
took reasonable steps to prevent disclosure; and (3) the holder promptly took reasonable
steps to rectify the error, including (if applicable) following Federal Rule of Civil Procedure
26(b)(5)(B).”
In this case, the disclosure was inadvertent, and E3 took reasonable and timely
steps to prevent disclosure and to rectify the error. Among the steps taken to rectify the
error, E3 supplied a new disc and requested the return of the disc with the inadvertently
included material, which E3 facilitated through the provision of return postage. Returning
the disc to E3 is the most logical solution under the circumstances and allows E3 to
preserve the disc. The Court is not persuaded by Perennial's argument that E3 cannot be
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trusted to preserve its own disc and that Perennial is the more appropriate party to do so.
Judge Gossett's order directing Perennial to return the disc satisfies the language of Rule
26(b)(5)(B), the most applicable authority relating to the issue.
CONCLUSION
After reviewing the record and the parties' briefs, for the reasons discussed above,
the Court finds that the Magistrate Judge's order is not clearly erroneous nor contrary to
law.
IT IS ORDERED:
1.

The Statement of Objection (Filing No. 115) filed by the Defendant, Perennial

Energy, Inc., is denied; and
2.

The Order entered by Magistrate Judge F.A. Gossett (Filing No. 114) is

affirmed.
DATED this 22nd day of December, 2011.
BY THE COURT:

s/Laurie Smith Camp
Chief United States District Judge

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