In Mechel Bluestone v. James C. Justice Cos., C.A. No. 9218-VCL (Del. Ch. Dec. 12, 2014), the Delaware Court of Chancery decided a motion to compel the production of documents and a request for sanctions related to purportedly deficient privilege logs. The defendants claimed that the plaintiffs' original privilege log, and four subsequent amendments to that log, were "so flawed" that the plaintiffs should be ordered to produce all of the documents listed on the log. The court did not impose this harsh sanction, but it did hold that the plaintiffs waived the privilege with respect to documents that were not adequately described on the privilege logs. In so finding, the court reiterated that "preparing a privilege log with integrity requires the involvement and oversight of senior lawyers who know the applicable standards, understand the roles of the individuals involved in the communications, and can make textured judgment calls on a principled basis."
The facts underlying the discovery dispute involved a merger agreement between plaintiffs Mechel Bluestone Inc. and Mechel Mining OAO and defendants associated with James C. Justice Cos. Inc. Under the agreement, Mechel acquired from Justice certain entities that owned coal properties and associated assets in West Virginia. As part of the consideration under the agreement, the parties agreed that if additional coal were to be discovered within two years, referred to as contingent reserves, Mechel would be required to pay additional amounts to Justice. The agreement called for a mining consultant, Weir International Inc., to assess the volume of any contingent reserves.
In September 2011, Weir identified approximately 60 million tons of contingent reserves, which equated to a contingent payment of $165 million to Justice. Mechel disputed Weir's determination and claimed that it failed to comport with the terms of the agreement. Mechel thereafter initiated an action in the Chancery Court seeking, among other things, a declaration that it does not owe Justice the contingent payment. Under the case schedule, the parties agreed to substantially complete their document productions by Aug. 15, to exchange privilege logs on Sept. 12 and to take depositions between Sept. 1 and Dec. 5.
Mechel produced its initial privilege log Sept. 12. The log was 672 pages long and contained 6,125 entries, which, according to the court, constituted more than one-third of Mechel's responsive documents. With its initial log, Mechel produced a list of 10 organizations with 39 people Mechel identified as attorneys or individuals otherwise involved in providing legal advice, referred to as the players list. The court found that the list "did not identify the clients that the organizations represented or the purposes for which they were engaged." The list also "did not identify all of the individuals on Mechel's initial privilege log," including "all of the law firms or lawyers that appeared on the log." After Justice's counsel issued a deficiency letter, to which no response was provided, Justice filed a motion to compel. After Justice filed the motion to compel, Mechel served an amended privilege log, an amended players list and an additional 6,739 documents.
On Oct. 1, Justice forwarded an additional deficiency letter identifying various problems with Mechel's amended privilege log, including that it listed documents shared with third parties who were not on the players list and whose role in providing legal advice was not explained. Mechel thereafter amended its privilege log two additional times and served two additional amended redaction logs and lists. At oral argument on Justice's motion to compel, it was conceded that the original privilege log contained errors but argued that such errors were not made in bad faith.
The court began its analysis by discussing the general scope of discovery under Rule 26(b)(1) and the burden of establishing that a communication is properly withheld as privileged. Citing International Paper v. Fibreboard, 63 F.R.D. 88, 93-94 (D. Del. 1974), the court found "a party must provide 'sufficient facts as to bring the identified and described document within the narrow confines of the privilege.'" Expanding on this principle, the court stated: "When a log invokes the attorney-client privilege for items that have been shared with a third party, the party asserting the privilege must explain the role played by the third party that enables the privilege to be maintained." The court found that if a party falls "substantially short of the well-established requirements, then waiver is an appropriate consequence that helps dissuade parties from engaging in dilatory tactics."
In reaching the conclusion that Mechel's privilege log failed to meet the applicable standards, the court reiterated the need for senior counsel, "especially the senior Delaware lawyers," to provide guidance and be involved in the process. First, the court recognized that "lawyers are concerned about making a mistake and producing a privileged document, which often leads to overdesignation." Due to this risk, the court found that senior lawyers "must provide guidance about how the privilege assertion process should unfold." Similarly, the court stated it was "important" for "senior lawyers, including senior Delaware lawyers, [to] ensure that the guidance is followed." In part because the senior lawyer was traveling when the original log was produced, the court found participation by a senior lawyer to be lacking.
In determining the appropriate sanction to impose for the deficient original and amended privilege logs, the court considered whether the sanction imposed in Klig v. Deloitte, C.A. No. 4993-VCL (Del. Ch. Sept. 7, 2010), was appropriate. The court noted that, in Klig, 97 percent of the documents were identified by "one of five rote descriptions and 'afforded [the plaintiff] no way to assess the propriety of the assertion of privilege.'" After the plaintiff identified the deficiencies in the defendants' log, the defendants failed to correct them. The court in Klig held that the privilege log was prepared in bad faith and deemed the privilege waived with respect to every document on the log.
Although Mechel's privilege logs were found to be deficient, the court distinguished the efforts of counsel in Mechel from those of counsel in Klig. While those efforts ultimately fell short, the court found they were enough to avoid the sanction imposed in Klig. Instead, the court held that Mechel waived the attorney-client privilege only with respect to the documents that were not adequately described on the privilege logs.
The lesson to be learned from this decision is clear. Senior Delaware counsel needs to guide, and be closely involved in, the preparation of privilege logs. It clearly is not sufficient to rely on less experienced lawyers to handle this task. Additionally, this decision points to the importance of promptly responding to deficiency letters and making every effort to address legitimate issues raised by opposing counsel. The failure to do so can easily result in the imposition of sanctions.