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Kmart Corp. v. Footstar

November 2, 2010

KMART CORPORATION, A MICHIGAN CORPORATION, PLAINTIFF,
v.
FOOTSTAR, INC., A DELAWARE CORPORATION, AND LIBERTY MUTUAL FIRE INSURANCE COMPANY, A WISCONSIN CORPORATION DEFENDANTS.



The opinion of the court was delivered by: Magistrate Judge Susan E. Cox

MEMORANDUM OPINION AND ORDER

Defendant, Liberty Mutual Fire Insurance Company ("Liberty Mutual"), has brought a motion for the entry of a protective order [dkt. 98] and an amended motion for protective order that includes a request for sanctions against Plaintiff, Kmart Corporation ("Kmart") [dkt. 101]. Initially, Liberty Mutual filed only the motion for a protective order, seeking the return of four documents (two letters and two emails) that it claims are privileged and were inadvertently disclosed to Kmart. Liberty Mutual then filed the amended motion claiming that a fifth document, a 126-page claim file, was also inadvertently disclosed. Additionally, the amended motion seeks sanctions against Kmart because, allegedly, Kmart misused the documents in question and then misrepresented the use of these documents in open court. As sanctions, Liberty Mutual requests that this Court dismiss with prejudice Count V of the Second Amended Complaint and bar Kmart's request that Liberty Mutual produce a Federal Rule of Civil Procedure 30(b)(6) witness. For the following reasons, both motions are denied.

BACKGROUND

In this case, Kmart is seeking indemnification from Footstar, Inc. ("Footstar") and Footstar's insurer, Liberty Mutual, for an underlying personal injury lawsuit known as the "Patrick lawsuit." The instant motion centers around documents Liberty Mutual produced that relate to a similar coverage lawsuit currently pending in New Jersey ("New Jersey litigation"). The New Jersey litigation is also a suit seeking indemnification between the same parties, but arose out of a different underlying personal injury lawsuit, known as the "Stretavski lawsuit." While the suit before this Court and the New Jersey litigation are not directly related, Kmart sought discovery on Liberty Mutual's handling of the Stretavski lawsuit. Kmart also sought discovery on three additional claims, where Kmart alleges it requested that Footstar and Liberty Mutual defend and indemnify Kmart. However, when Kmart sought the discovery of these four claim files, Liberty Mutual initially resisted. On July 15, 2010, Kmart filed a motion before this Court to compel production of those files.*fn1 We entered and continued that motion and requested that the parties meet and confer on the dispute before the Court intervened.*fn2 On July 27, 2010, Liberty Mutual advised the Court that it had agreed to produce the four claim files.*fn3

Approximately one week later, on either August 2 or 3, 2010, those claim files were produced.*fn4 The production comprised of somewhere between 4,330 and 4,461 pages of documents.*fn5 Contained in this production were two letters, dated October 30, 2009 and December 9, 2009, and two emails, dated April 21, 2010 and April 22, 2010, that relate to the Stretavski lawsuit. Liberty Mutual now states that these four documents contain attorney-client protected communications, are privileged, and were mistakenly disclosed. Also contained in that production was a 126-page claim file from the Stretavski lawsuit. Liberty Mutual asserts that this claim file is also privileged because it contains references to the confidential October 30, 2009 letter.

Liberty Mutual asserts it discovered its mistake at the deposition of Patricia Aurichio on August 6, 2010, when Kmart tried to ask Ms. Aurichio questions about these documents.*fn6 Upon realizing this, Liberty Mutual states that its counsel immediately objected.*fn7 However, the Court has read the transcript of Ms. Aurichio's deposition.*fn8 During that deposition, Kmart's counsel entered the October 30, 2009 letter into evidence without objection from Liberty Mutual's counsel.*fn9

Furthermore, the only objections on the grounds of privilege during that deposition relate to documents from the Patrick suit.*fn10 But Liberty Mutual also submits an affidavit from Liberty Mutual's counsel that states that during Ms. Aurichio's deposition, while off the record, he stated to Kmart's counsel that none of the claim files were to be used because of the potential that they contained privileged information.*fn11 However, Kmart's counsel submits a conflicting affidavit, which states that the conversation about privileged material pertained only to documents from the Patrick lawsuit and not the other claim files.*fn12

On August 18, 2010, Liberty Mutual filed its initial motion to have the documents returned.*fn13

The parties then appeared before the Court on August 24, 2010 and we set a briefing schedule on the issue of whether Liberty Mutual had waived its privilege with regard to these documents.*fn14 At that proceeding, Liberty Mutual also expressed concern that while this motion was pending, the documents in question could be turned over and used by Kmart's counsel in the New Jersey litigation.*fn15 However, Kmart assured the Court and Liberty Mutual's counsel that, according to Federal Rule of Evidence 502, Kmart's counsel was required to sequester the documents until this motion was resolved.*fn16 Kmart's counsel stated that he had advised counsel in the New Jersey litigation to sequester these documents as well.*fn17 Then, on September 3, 2010, Liberty Mutual filed the amended motion now before us seeking sanctions against Kmart, alleging that Kmart's counsel made misrepresentations in open court and improperly disclosed the documents.*fn18 According to Liberty Mutual, it had learned, after the August 24 court date, that Kmart's counsel in the New Jersey litigation had obtained the documents in question prior to the August 24 court date. Liberty Mutual alleges that this disclosure was improper and that Kmart's counsel misrepresented the disclosure to the Court.

ANALYSIS

The Court is presented with two issues. First, we must determine whether Liberty Mutual waived the privilege by disclosing the Stretavski documents to Kmart. Second, we will decide whether Kmart's counsel made misrepresentations regarding the documents and/or misused the documents to the extent that sanctions are warranted.

A. Inadvertent Disclosure and Waiver

Liberty Mutual argues that certain documents, privileged under Federal Rule of Civil Procedure 26(b)(1) and (3), were inadvertently disclosed and asks this Court to issue an order that would permit Liberty Mutual to "reclaw" the documents. Specifically, Liberty Mutual invokes the attorney-client privilege. The Court, however, is somewhat confused about which documents Liberty Mutual wishes to reclaw. Initially, in its opening brief, Liberty Mutual referenced only the two letters and two emails. In its amended motion, Liberty Mutual added the 126-page claim file from the Stretavski lawsuit, claiming that portions of this file are privileged because of references in that file to the October 30, 2009 letter. However, in its reply brief, Liberty Mutual does not seek return of the 126-page claim file in its prayer for relief.*fn19 Ultimately, we believe that, despite the confusing nature of Liberty Mutual's request, Liberty Mutual is in fact seeking the return of the 126-page claim file as well because it references attorney-client privileged communications.

When deciding whether a party should be permitted to reclaw documents, courts previously used a three-step analysis that was outlined in Judson Atkinson Candies, Inc. v. Latini-Hohberger Dhimantec.*fn20 First, the court determined whether the documents at issue were in fact privileged.*fn21 Second, the court decided whether the disclosure was inadvertent.*fn22 Third, the court analyzed whether the privilege was in fact waived.*fn23 To decide whether the privilege was waived, the court used a "balancing approach" that required consideration of the following five factors: "(1) the reasonableness of the precautions taken to prevent disclosure; (2) the time taken to rectify the error; (3) the scope of the discovery; (4) the extent of the disclosure; and (5) the overriding issue of fairness."*fn24 This procedure, known as the Judson test, was somewhat modified with the adoption of Federal Rule of Evidence 502(b). Rule 502(b) states that disclosure ...


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