by Alexander J. Pinto
The Evolution of the State Fund Rule
In our e-discovery age, parties exchange thousands—even millions—of documents in their litigation matters. Attorneys, at times, inadvertently send their clients’ confidential or privileged documents to the opposing party. This very situation was the backdrop for the pivotal California Court of Appeal decision, State Compensation Ins. Fund v. WPS, 70 Cal. App. 4th 644 (1999). In State Fund, the Court articulated what has become known as the State Fund Rule (the “Rule”), which was initially intended to govern attorneys’ ethical obligations when receiving inadvertently sent, confidential or privileged material from the opposing party. The Rule states:
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.
Id. at 656–57.
Since then, the Rule has proven notoriously difficult for receiving attorneys to apply. As more than a few attorneys have since been disqualified for violating it, the Rule has evolved through case law, and attorneys who fail to keep up with the Rule’s evolution run the risk of running afoul of it. The Rule’s most notable evolution came from the California Supreme Court’s decision in Rico v. Mitsubishi Motors Corp., 42 Cal. 4th 807 (2007). There, the Supreme Court found that the Rule is an objective test and applies not only to inadvertent disclosures by the opposing party but also unauthorized disclosures from third parties. Id. at 818. Prior to November 1, 2018, the Rule was not articulated in California’s Rules of Professional Conduct, but that has changed. Rule of Professional Conduct 4.4 was adopted by the California Supreme Court effective November 1, 2018. The essence of the State Fund Rule is now incorporated into Rule of Professional Conduct 4.4.
While most attorneys understand that the State Fund Rule imposes an ethical obligation to protect the opposing party’s inadvertently sent, confidential, or privileged material, few know that the Rule pertains to all confidential or privileged material disclosed by a source that is not authorized by the privilege holder. Id.; see also O’Gara Coach Co., LLC v. Ra, 30 Cal. App. 5th 1115, 1128 (2019) (“if the holder of the attorney-client privilege has not waived the privilege, lawyers representing an adverse party who have received such information knowing it is privileged have an ethical duty not to use it. It does not matter whether the information has been provided deliberately or inadvertently.”) Simply put: an “attorney has an ethical obligation to protect an opponents’ privileged and confidential information.” DP Pham, LLC v. Cheadle, 246 Cal. App. 4th 653, 675 (2016).
Therefore, attorneys must properly apply the Rule whenever they receive confidential or privileged material from any source not authorized to disclose such material or to waive the privilege attached to it. This unauthorized source may be anyone, for example, an estranged spouse, a disgruntled business partner, a recently terminated employee, etc. Attorneys who receive confidential or privileged material from the source and fail to follow the Rule risk disqualification or, depending on circumstances of the litigation, sanctions, as determined by the trial court. This is particularly true where a violation of the Rule affects the integrity of the judicial process. See McDermott Will & Emery LLP v. Superior Court, 10 Cal. App. 5th 1083, 1123 (2017) (disqualifying counsel because, among other things, “continued representation . . . could trigger doubts about the integrity of the judicial process because whenever [counsel’s] advocacy touched on the [confidential or privileged material], questions inevitably would surface about the source of [counsel’s] knowledge.”); see also Bak v. MCL Financial Group, Inc., 170 Cal. App. 4th 1118 (2009) (imposing sanctions against counsel who reviewed and copied privileged documents that the opposing party inadvertently produced).
Applying the State Fund Rule
An attorney should exercise caution in reviewing any material received from an unauthorized or inadvertent source and should consider whether a reasonably competent attorney would conclude the material to be privileged or confidential. See State Bar of Cal. Standing Comm. on Prof’l Resp. and Conduct, Formal Opinion 2013-188 at 5 (“Given the state of the law and the value placed on the attorney-client privilege, attorneys must use caution when faced with an inadvertent or unauthorized disclosure situation.”). If the receipt of the material triggers the Rule, the receiving attorney should follow these five steps:
Refrain from reviewing the material. See State Compensation Ins. Fund, 70 Cal. App. 4th at 656-57. This must occur immediately after a reasonably competent attorney would ascertain the materials to be privileged or confidential and from an unauthorized source. Additionally, it would serve the attorney well to have someone designated and trained in managing discovery to electronically or physically sequester the material from all the attorneys at the firm. In this way, the receiving attorneys can later provide evidence that they refrained from review by submitting a declaration demonstrating the care exercised in sequestering the material.
Immediately notify the opposing party. Id. Because State Fund clearly stated that a receiving attorney must “immediately notify” the opposing party and no case has since altered this requirement, the receiving attorney should immediately notify the opposing one. While a court may decide to excuse a short period in which the receiving attorney delays notice, a court is not likely to give the same grace to an attorney that unreasonably delays providing notice.
Consider returning the material. Though not required by the Rule expressed in State Fund, a comment to Rule of Professional Conduct 4.4, which became effective November 1, 2018, states an attorney “should return” the privileged or confidential material to the sender. Cal. R. Prof’l Conduct, 4.4, Comment [1]. If the receiving attorney believes in good faith that the material is not privileged or confidential, the receiving attorney should consider returning the original document, deleting all copies of the document except for one, and keeping that single copy demonstrably sequestered until either (a) the parties agree that the document is not privileged or confidential, or (b) the court determines it is not privileged or confidential.
Try to resolve the matter by agreement. The parties should try to resolve the matter themselves. State Compensation Ins. Fund, 70 Cal. App. 4th at 656-57. Here, if the privilege holder asserts that the material is privileged, then the receiving attorney should exercise great care with the material and should refrain from further reviewing or disseminating it. McDermott Will & Emery LLP, 10 Cal. App. 5th at 1115.
If the parties cannot agree, they should seek judicial guidance. Either party may seek declaratory relief from the court to determine whether the material is, in fact, privileged or confidential. State Compensation Ins. Fund, 70 Cal. App. 4th at 656-57.
Common Pitfalls in Applying the State Fund Rule
Due to the difficulty of complying with the State Fund Rule and the potentially severe consequences for violating it, the receiving attorney would do well to avoid the following pitfalls:
Do not rely on your subjective determination that the material is not privileged or confidential. The receiving attorney “is not permitted to act as judge and unilaterally” determine the material is not privileged or confidential. McDermott Will & Emery LLP, 10 Cal. App. 5th at 1113. An attorneys’ subjective thoughts are irrelevant because the Rule is an objective one: “whether reasonably competent counsel, knowing the circumstances of the litigation, would have concluded the materials were privileged, how much review was reasonably necessary to draw that conclusion, and when the counsel’s examination should have ended.” Rico, 42 Cal. 4th at 818. The objective standard in Rico holds attorneys to a reasonable standard of professional conduct in determining whether the Rule applies.
Do not assume that the rule has two standards. McDermott recognized, in dicta, that State Fund includes language that could be interpreted as creating two standards for applying the Rule: a heightened standard for obviously privileged documents and a lesser standard for potentially privileged ones. McDermott Will & Emery LLP, 10 Cal. App. 5th at 1106-08. However, this interpretation is not the governing law as no case has ever adopted this two standard application. Even though McDermott suggested how the two standards could be applied, it made clear that this suggestion was not controlling by stating: “[t]he facts of this case do not require us to resolve this conflict.” Id. at 1108. Until the California Supreme Court says otherwise, receiving attorneys should follow Rico’s single objective standard for applying the Rule.
Do not excessively review the materials. Once a reasonably competent attorney would determine the documents to be privileged or confidential, any further review violates the Rule and risks disqualification. Clark v. Superior Court, 196 Cal. App. 4th 37, 53 (2011) (Once the “examination would suffice to ascertain the materials are privileged, . . . any further examination would exceed permissible limits.”); Rico, 42 Cal. 4th at 820 (“Once it is apparent that the writing contains an attorneys impressions, conclusions, opinions, legal research or theories, the reading stops and the contents of the document for all practical purposes are off limits.”).
Do not disseminate the material to others. Attorneys often habitually copy or forward emails to other attorneys in their firm and their clients; however, doing so in violation of State Fund increases the risk of disqualification. Indeed, emailing the material to another attorney could create a snowball effect of Rule violations, as each receiving attorney technically has an obligation to comply with the Rule and an opportunity to further review and disseminate the material. Consequently, dissemination multiplies a firm’s exposure to the material and strengthens a court’s resolve to disqualify counsel. Id. at 819.
Do not delay notifying the opposing party. The Rule requires the receiving attorney to immediately notify the privilege holder. Because attorneys are often busy juggling many matters at once, attorneys are at risk of negligently delaying notice beyond reasonable limits.
Do not threaten to use the privileged information. Threatening to use the material violates the Rule and is sufficient to justify disqualification. O’Gara Coach, 30 Cal. App. at 1128-29 (“Nor is it necessary . . . to make an affirmative showing of existing injury from the misuse of the privileged information; the threat of such use is sufficient to justify disqualification.”)
Alexander J. Pinto is an attorney at Rutan & Tucker, LLP in Costa Mesa practicing business litigation. He can be reached at apinto@rutan.com.