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Clawback Orders Can Prevent Fighting Tooth and Claw Over Discovery – A Caselaw Update

In a recent case involving an administrative summons issued by the IRS, a federal court denied the respondent’s request for a clawback order under Rule 502(d) of the Federal Rules of Civil Procedure. The court’s analysis hinged on the fact that a summary proceeding before the IRS is unlike civil litigation, in which 502(d) orders are routinely entered to allow the return of documents that a party belatedly determines are protected by the attorney-client privilege or the work product doctrine. A 502(d) order allows parties to claw back inadvertently produced privilege documents with “no questions asked,” while such documents are otherwise handled under Rule 502(b), which requires a party to make a number of showings before it is allowed to claw back documents.

February 07, 2024 — by Nicole Gill, Counsel, CODISCOVR

In a recent case involving an administrative summons issued by the IRS, a federal court denied the respondent’s request for a clawback order under Rule 502(d) of the Federal Rules of Civil Procedure. The court’s analysis hinged on the fact that a summary proceeding before the IRS is unlike civil litigation, in which 502(d) orders are routinely entered to allow the return of documents that a party belatedly determines are protected by the attorney-client privilege or the work product doctrine. A 502(d) order allows parties to claw back inadvertently produced privilege documents with “no questions asked,” while such documents are otherwise handled under Rule 502(b), which requires a party to make a number of showings before it is allowed to claw back documents.

As the order in the case makes clear, courts embrace 502(d) orders in the context of civil litigation. CODISCOVR can assist in preparing such orders for clients’ use in civil cases, negating the need for unnecessary motion practice under 502(b) in the event of an inadvertent disclosure of privileged materials. 

U.S. v. Captive Alternatives, LLC, No. 8:22-cv-406-TPB-CPT, 2023 WL 5573954 (M.D. Fla. Aug. 29, 2023) was initiated after the IRS served the respondent, an insurance consultancy company, with an administrative summons seeking disclosure of certain records. Captive failed to respond, and the IRS filed a petition with the court to enforce the summons. After a show cause hearing, the court found that the IRS’s petition should be largely granted. 

During negotiations over document production, the parties were unable to come to an agreement regarding Rule 502 and the treatment of privileged documents. Captive filed a motion asking the Court to enter a Rule 502(d) order. Captive argued such an order was necessary in part because there were over a million documents responsive to the summons, and reviewing all documents for privilege before producing them to the IRS would be too costly.

The court rejected Captive’s request for a 502(d) order, finding:

  • The proceeding was summary in nature and did not involve discovery as that term is understood in civil litigation. As such, the action was distinct from other matters in which courts traditionally enter 502(d) orders.
  • Had Captive complied with the administrative summons issued by the IRS when it received it, the IRS would not have initiated the court proceeding and 502(d) would not have come into play at all.
  • The case was distinguishable from others IRS summons enforcement proceedings in which the IRS agreed to 502(d) orders, because there the respondents had already determined the privileged nature of the documents to which the clawback order applied and had only agreed to give the IRS a “quick peek” at protected documents.
  • If a 502(d) order were entered, the IRS would be required to discern whether a document disclosed by Captive contained privilege information and then inform Captive before using the document, a process which would allow Captive to shift the costs of determining privilege and could impede IRS investigation by providing the party being investigated with insight into the investigation.
  • Unlike in a civil investigation where both sides’ attorneys would review information exchanged, IRS agents investigating Captive are not training to evaluate privilege, making the identification of privileged documents difficult.
  • The proposed 502(d) order had no temporal restriction on when Captive could designate documents as privileged, which would require the court to retain jurisdictions over an administrative summons indefinitely in order to resolve any potential disputes.
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