The opinion of the court was delivered by: Magistrate Judge Morton Denlow
MEMORANDUM OPINION AND ORDER
This case comes before the Court on Plaintiffs' motion for return of privileged documents and Defendants' joint motion to determine waiver of claimed privilege. Both sides bring their respective motions pursuant to Federal Rule of Civil Procedure 26(b)(5)(B). The motions arise from Plaintiffs' production of privileged communications in their Rule 26(a)(1)(A)(ii) initial disclosures and Defendants' use of the material in Plaintiff Sidney Pilot's deposition. Plaintiffs claim the documents remain privileged despite their production, while Defendants assert Plaintiffs waived the privilege by disclosing the documents and failing to object to their use at the deposition. For the following reasons, the Court grants in part and denies in part Defendants' joint motion and denies Plaintiffs' motion.
These motions arise from a discovery dispute in a case involving Plaintiffs' investment in certain of Defendants' shopping centers. Plaintiffs claim Defendants fraudulently induced them to invest in shopping centers in Ohio, Georgia, and North Carolina and that the Defendants failed to make certain payments to Plaintiffs' Trust. Plaintiffs are represented by attorneys in California ("California counsel") and Chicago ("Chicago counsel"). In the course of discovery, Plaintiffs' Chicago counsel produced to Defendants a number of privileged communications between Plaintiff Sidney Pilot ("Pilot") and California counsel. At Pilot's deposition, defense counsel introduced two of these documents. Plaintiffs' counsel did not object to Defendants' use of the privileged correspondence at the deposition, but Chicago counsel later sent Defendants a letter demanding that Defendants return them and the other privileged correspondence. The present motions present the issue of whether and to what extent Plaintiffs waived the attorney-client privilege.
A. Plaintiffs Disclose Privileged Communications in their Rule 26 Disclosures.
Plaintiffs disclosed the documents in question to Defendants as part of their initial disclosures produced pursuant to Federal Rule of Civil Procedure 26(a)(1)(A)(ii). On April 22, 2010, Plaintiffs produced 588 pages of documents in their initial disclosures. Among those documents were eight letters totaling eleven pages between Pilot and California counsel. Plaintiffs' Chicago counsel sent a transmittal letter along with the initial disclosure, but did not include a privilege log. Plaintiffs' counsel did not mark the disclosed documents for identification with Bates stamping or page numbers. Between the initial disclosure and Pilot's deposition, Plaintiffs' counsel did not request the return of any documents produced to Defendants' counsel.
Plaintiffs' Chicago counsel states that he did not mean to include the privileged documents in the Rule 26 production. He had received documents related to the case from California counsel. By February 2010, he reviewed the documents, segregating privileged correspondence from the remainder of the documents. He forgot, however, that his file also contained a duplicate set of these documents, with the privileged and unprivileged material still intermixed. In April 2010, Chicago counsel instructed his assistant to copy the documents related to this case and send them to opposing counsel. Counsel did not inspect the documents that his assistant assembled for production and does not mention giving his assistant any instructions related to screening privileged documents. Apparently, his assistant copied the set of documents that contained the privileged material, rather than the set from which privileged correspondence had been segregated.
B. Defendants Use the Privileged Materials in Plaintiff Sidney Pilot's Deposition.
On January 6 and 7, 2011, Defendants deposed Pilot in California. During the deposition, Defendants' counsel introduced two of the privileged documents that had been disclosed. The first was a one-page fax cover sheet on California counsel's letterhead with a message from California counsel to Pilot, dated December 19, 2006. The fax as it was used at the deposition had attached a letter from Pilot to a third party, but Plaintiffs assert that the attachment was not included with the fax in its original form, and they do not claim a privilege as to it.*fn1 At the deposition, defense counsel presented Pilot with the cover sheet and attachment as a single exhibit but questioned Pilot only about the attachment. The second privileged document used at the deposition was a two-page letter from California counsel to Pilot dated June 5, 2008. Defense counsel read this letter into the record and questioned Pilot about it. Defense counsel also entered both documents as exhibits, tendering them to the court reporter at the conclusion of the deposition. Plaintiffs' counsel did not object to any of this during the deposition, even though the same lawyer who had authored both privileged documents was defending the deposition. Pilot, himself an attorney, also did not object, though the parties disagree whether a stroke has affected his mental capacity.
On Monday, January 10, 2011, the next business day, Plaintiffs' Chicago counsel sent Defendants a letter demanding the return of the privileged correspondence used at Pilot's deposition. Plaintiffs claimed the letters were protected by the attorney-client privilege and demanded Defendants return the original letters and any copies pursuant to Federal Rule of Civil Procedure 26(b)(5)(B). Plaintiffs also identified the remaining privileged documents, asserted the attorney-client privilege, and demanded their return. Defendants refused, arguing that Plaintiffs waived the attorney-client privilege by producing the documents and not objecting to their use at the deposition.
The parties agree that the attorney-client communications at issue were privileged. Both sides filed motions to determine whether the privilege was waived. Oral argument was held on March 24, 2011.
A. Federal Law Governs the Waiver of Attorney-Client Privilege.
Federal Rule of Evidence 502 addresses waiver of attorney-client privilege, and Rule 502(b) sets forth a test for whether inadvertent disclosures "made in a Federal proceeding" operate as a waiver of privilege. But Plaintiffs argue that state law should govern the issue of waiver, because this is a diversity case. They rely on Rule 501, which directs courts to apply state privilege law where state law provides the rule of decision. Rule 502, however, operates as an exception to Rule 501's choice of state privilege law for diversity cases. Rule 502(f) says as much: "[N]otwithstanding Rule 501, this rule applies even if State law provides the rule of decision." In other words, even though state law governs the attachment of attorney-client privilege in this diversity case, Rule 502 governs waiver of the privilege. See Coburn Grp., LLC v. Whitecap Advisors LLC, 640 F. Supp. 2d 1032, 1042--43 (N.D. Ill. 2009) (applying Rule 502 in a diversity case). Plaintiffs also argue that Rule 502 is unconstitutional, but their argument lacks merit. Rule 502(f) applies the rule's waiver standards even to state proceedings, and Plaintiffs argue that this portion of the rule exceeds Congress's Commerce Clause power. As the rule applies to this action, however, ...