McDermott Will & Emery LLP v. Superior Court (2017) 10 Cal. App. 5th 1083
State Fund Rule Violated and Law Firm Disqualified Over Use of a Client's Inadvertently Forwarded E-mail
By Justin P. Karczag
Justin P. Karczag launched his own Los Angeles law firm Karczag & Associates, PC, practicing in all areas of civil litigation. KAPC emphasizes representing plaintiffs and defendants in complex business litigation, partnership/shareholder disputes, class and mass plaintiff actions, Ponzi litigation, employment, and lender liability. The opinions expressed here are the author's own.
In an opinion filed April 18, 2017, the Fourth Appellate District considered several issues relating to a confidential attorney-client communication, including: 1) whether a client (Richard P. Hausman, Sr. ("Dick")) waived the attorney-client privilege by inadvertently forwarding a confidential e-mail from his iPhone; 2) whether opposing counsel Gibson Dunn's use of the e-mail violated the State Fund rule; and 3) whether the trial court erred in disqualifying Gibson Dunn because its attorneys failed to notify Dick or his attorney that counsel had obtained a copy of the communication, reviewed and analyzed the communication, and used it in the lawsuit.
On the first issue (Dick's waiver by inadvertent forward of the e-mail), the Court of Appeal held that substantial evidence supported the trial court's conclusion that the privilege was not intentionally waived by Dick's forwarding of an e-mail from his attorney to his sister-in-law on his iPhone. In addition to witness testimony, the appellate court took note of: 1) the absence of any text in Dick's e-mail to his sister-in-law explaining why he forwarded the confidential e-mail to her; 2) the forwarded e-mail came from Dick's iPhone; 3) Dick's elderly age (nearly 80 years old); 4) Dick's reduced dexterity caused by multiple sclerosis; and 5) the lack of any connection between the sister-in-law and the subject of the e-mail.
As for the second issue (Gibson Dunn's violation of the State Fund rule), the Court of Appeal observed that under State Fund and its progeny, an attorney's obligation is to review the materials no more than necessary to determine whether they are privileged, and then notify the privilege holder's counsel. At that point, the parties may confer about whether the material is privileged and whether there has been a waiver. If the parties are unable to reach an agreement, either side may seek guidance from the trial court. The attorney receiving the material, however, is not permitted to act as judge and unilaterally make that determination.
Ultimately, the Court of Appeal found that the e-mail on its face and the circumstances surrounding its disclosure supported the trial court's finding that Gibson Dunn should have realized the State Fund rule applied. It found that, at a minimum, Gibson Dunn should have realized the rule applied after a deposition when the attorney (in Dick's separate probate action) objected that the e-mail was an inadvertently disclosed, privileged document and demanded that Gibson Dunn return all copies. At that point, the State Fund rule required Gibson Dunn to stop using the e-mail and either return it to Dick or schedule further discussions with his lawyers to evaluate the status of the e-mail. Gibson Dunn violated its State Fund duties by using the e-mail and reading substantial portions of it into the record during depositions, quoting the e-mail in interrogatory responses, producing a copy of the e-mail in responding to a discovery request, and submitting a copy to the court in opposition to a privilege motion.
Finally, in resolving the third and final issue (the disqualification of Gibson Dunn), the Court of Appeal held that substantial evidence supported the finding that disqualification was appropriate to prevent future prejudice or harm to Dick (notwithstanding any privilege order) because the disclosed e-mail included information that Gibson Dunn believed it could use to Dick's disadvantage. On the record before it, the Court of Appeal could not say the trial court abused its discretion in selecting disqualification as the appropriate remedy for Gibson Dunn's violation of its State Fund duties.
Interestingly, in dicta, the Court of Appeal set forth its "observations" concerning the parties' dispute over the proper standard for determining whether an attorney's State Fund duties are triggered. The dispute centered over this excerpt from the State Fund decision:
When a lawyer who receives materials that obviously appear to be subject to an attorney-client privilege or otherwise clearly appear to be confidential and privileged and where it is reasonably apparent that the materials were provided or made available through inadvertence, the lawyer receiving such materials should refrain from examining the materials any more than is essential to ascertain if the materials are privileged, and shall immediately notify the sender that he or she possesses material that appears to be privileged. The parties may then proceed to resolve the situation by agreement or may resort to the court for guidance with the benefit of protective orders and other judicial intervention as may be justified. We do, however, hold that whenever a lawyer ascertains that he or she may have privileged attorney-client material that was inadvertently provided by another, that lawyer must notify the party entitled to the privilege of that fact.
Gibson Dunn pointed to the language stating that the duties are triggered when the materials "obviously…or…clearly appear" to be privileged and it is "reasonably apparent" the materials were inadvertently disclosed. Dick pointed to the language stating that the duties are triggered "whenever a lawyer ascertains that he or she may have privileged attorney-client material that was inadvertently provided by another."
According to the Court of Appeal, a reasonable way to reconcile the apparent conflict between these two standards would be to interpret State Fund as establishing two standards, with each one applying to slightly different situations. The language Gibson Dunn quoted applies when an attorney receives materials that obviously or clearly appear to be privileged and it is reasonably apparent the materials were inadvertently disclosed. In that situation, the attorney receiving the materials must refrain from examining them any more than is necessary to determine their privileged nature, immediately notify the privilege holder the attorney has received materials that appear to be privileged, attempt to reach an agreement with the privilege holder about the materials' privileged nature and their appropriate use, and resort to the court for guidance if an agreement cannot be reached. The attorney must not further review or use the materials for any purpose while the issue remains in dispute.
The language Dick quoted applies when an attorney ascertains that he or she received materials that are not obviously or clearly privileged, but nonetheless may be privileged materials that were inadvertently disclosed. This, plainly, is a lower standard, and it triggers a more limited response. In this situation, the attorney's duty is simply to notify the privilege holder that the attorney may have privileged documents that were inadvertently disclosed. At that point, the onus shifts to the privilege holder to take appropriate steps to protect the materials if the holder believes the materials are privileged and were inadvertently disclosed.
Again, the Court of Appeal made clear that its discussion of two State Fund standards was merely the court's "observations" because the facts of the case did not require it to resolve the conflict. But, its reconciliation is reasonable and logical, and resolves an apparent conflict in a manner that counsel who "may have" received privileged material would ignore at his or her peril.
The dissent opined that a) State Fund should not have applied because the evidence did not support that the disclosure was inadvertent or that Dick's lawyers acted to promptly secure the document's return and preserve the privilege; b) State Farm was distinguishable because Dick, not his lawyer, made the claimed inadvertent disclosure; c) Gibson Dunn did not act improperly because it was not reasonably apparent that the disclosure of the document was inadvertent, and the firm effectively notified Dick's lawyers that they possessed it when they produced it in response to a subpoena and used it in deposition; and d) disqualification was therefore unwarranted.
This decision serves as an important reminder to review the affirmative nature of the duties imposed by the State Fund rule. Attorney obligations are immediately triggered when a review of the materials would lead a reasonably competent attorney to conclude the materials are clearly or obviously privileged and it is reasonably apparent they were disclosed inadvertently.
 State Comp. Ins. Fund v. WPS, Inc. (1999) 70 Cal.App.4th 644.
 McDermott Will & Emery LLP v. Superior Court (2017) 10 Cal.App.5th 1083, 1090, 1106.
 Id. at 1113 (citing Rico v. Mitsubishi Motors Corp. (2007) 42 Cal.4th 807, 817; Clark v. Superior Court (2011) 196 Cal.App.4th 37, 48; State Comp. Ins. Fund v. WPS, Inc. (1999) 70 Cal.App.4th 644, 656-657). The court also referenced Formal Opinion No. 2013-188 of the California State Bar Standing Committee on Professional Responsibility and Conduct, which concluded that an attorney's State Fund duties are triggered when the attorney receives a communication that is presumptively privileged as a confidential communication between another attorney and his or her client, even if "the [receiving] attorney reasonably believes that the communication may not be privileged because of the crime-fraud exception to the attorney-client privilege." Id. at 1112-1113 (citing State Bar, Formal Opn. No. 2013-188, at p. 1).
 Id. at 1106-1107(quoting State Comp. Ins. Fund v. WPS, Inc. (1999) 70 Cal.App.4th 644, 656-657).
 This is confirmed by the dissent, which argued that the majority decision constitutes an unwarranted extension of the ethical rule declared in State Fund [Id. at 1126], thus acknowledging the implicit confirmation of the majority establishing an ethical standard in its "dicta."