American National Bank & Trust Co. v. Equitable Life Assurance Society of the United States

In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 04-2992 & 04-3120
AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO, as Trustee f/b/o
Emerald Investments LP; and EMERALD
INVESTMENTS LP, an Illinois Partnership,
Plaintiffs-Appellees/Cross-Appellants,
v.
EQUITABLE LIFE ASSURANCE SOCIETY OF
THE UNITED STATES,
Defendant-Appellant/Cross-Appellee.
____________
Appeals from the United States District Court for
the Northern District of Illinois, Eastern Division.
No. 00 C 6786—Charles P. Kocoras, Chief Judge.
____________
ARGUED JANUARY 14, 2005—DECIDED MAY 4, 2005
____________
Before RIPPLE, MANION, and KANNE, Circuit Judges.
MANION, Circuit Judge. The Equitable Life Assurance
Society of the United States invoked the attorney-client
privilege to protect a large number of documents during
2 Nos. 04-2992 & 04-3120
discovery and used a privilege log to inform its opponent,
Emerald Investments LP, of the documents being withheld.
On Emerald’s motion, however, a magistrate judge struck
Equitable’s entire privilege log as a discovery sanction
because Equitable left five non-privileged documents on its
log, which included more than 400 documents. The sanction
forced Equitable to disclose all the log documents irrespec-
tive of whether the attorney-client privilege actually applied.
Equitable filed objections, but the district court overruled
them. After the action was dismissed, Equitable appealed
the sanction. Because the imposition of the sanction con-
stitutes an abuse of discretion, we reverse the sanction and
remand the matter with instructions for Emerald to return
the pertinent documents to Equitable. We affirm, on the
other hand, the district court’s denial of Emerald’s separate
motion for additional discovery sanctions, in the form of
attorneys’ fees and costs, against Equitable.
I. Background
Relying on diversity jurisdiction, Emerald sued Equitable
in the Northern District of Illinois, alleging a number of
state contract and tort claims. There are additional parties
on both sides, but there is no need in this appeal to discuss
them. Equitable and Emerald entered into a contract under
which Equitable sold annuities to Emerald. Emerald then
traded these annuities with third parties. Displeased,
Equitable then took steps to restrict Emerald’s sub-trading.
The core dispute was whether the contract gave Emerald the
unlimited right to engage in such sub-trading. This appeal,
however, only concerns a discovery sanction and not the
underlying claims.
Nos. 04-2992 & 04-3120 3
A. Privilege Log Proceedings
The district court referred all discovery matters to a
magistrate judge under Federal Rule of Civil Procedure
72(a). The discovery proceedings that form the basis of this
appeal are cumbersome, but the detailed discussion of those
proceedings that follows is a prerequisite to explaining why
and how the magistrate judge (and thereby the district
court) abused his discretion in sanctioning Equitable.
During discovery, Equitable produced more than 20,000
documents but initially withheld approximately 750 docu-
ments, asserting the attorney-client privilege. Equitable sub-
mitted a privilege log listing the withheld documents. Based
on Equitable’s descriptions of the withheld documents,
Emerald challenged the privilege log, suspecting that some
documents were not privileged. Specifically, on December
6, 2001, Emerald moved to strike the log and requested that
all non-privileged documents on the log be disclosed. At a
hearing on December 11, 2001, the magistrate judge ex-
pressed concern about having to review a large number of
1
documents in camera, and Equitable conceded the need to
improve its document descriptions and revise the log.
Equitable submitted an amended privilege log on Decem-
ber 27, 2001. Unsatisfied, Emerald moved, on January 4,
2002, to strike the amended log and to compel production of
all non-privileged documents on the log. Shortly before the
January 9, 2002, hearing on the motion, Equitable volun-
teered a second-amended privilege log to address Emerald’s
1
For instance, the magistrate judge said to Equitable: “[I]f you
think I’m going to go through 1500 documents, read them all, and
decide from this kind of stuff, you are mistaken. . . . I’m not going
to allow somebody to put me in a position where I’m going to be
reading documents in camera.” R.91-1 at 4-5.
4 Nos. 04-2992 & 04-3120
concerns. In these logs, Equitable was tackling privilege
issues involving in-house counsels, their notes, their e-mails,
and fine line distinctions between legal and nonlegal (i.e.,
business) advice. At the hearing, Emerald balked at the
second-amended log, and the magistrate judge required
Equitable to produce a third-amended privilege log.
Five days later, Equitable submitted the third-amended
log. At a status hearing on January 18, 2002, Emerald in-
formed the magistrate judge that it had some qualms about
the third-amended log but reported that it was pleased with
Equitable’s willingness to work with Emerald to resolve its
remaining concerns. The magistrate judge therefore in-
structed the parties to continue to meet and confer on the
matter. By this juncture, Equitable had reduced the log to
some 465 entries, about a half box of documents.
The spirit of cooperation was short-lived. At a hearing
on February 8, 2002, Equitable sought the return of certain
documents that it had inadvertently produced, i.e., privi-
leged documents mistakenly released to Emerald. That nar-
row issue spilled over into a larger debate about Equitable’s
third-amended log and about when e-mails to an in-house
counsel are protected by the attorney-client privilege. One
document sparked the debate (and is illustrative of the
privilege issues that led to this appeal). The document was
an e-mail to an in-house counsel recounting a high-level
meeting between Equitable and Emerald. Equitable viewed
the e-mail as a confidential communication seeking legal
advice. The magistrate judge disagreed, ruling that the
document was not privileged, and, as a result, denied the
request for the document to be returned. Emerald seized
this opportunity to raise concerns about Equitable’s ability
to evaluate the other documents still listed on the third-
amended log. Emerald expressed a lack of confidence in
Equitable and its log as a whole. However, at the previous
Nos. 04-2992 & 04-3120 5
hearing, the magistrate judge had again expressed reluctance
at a full, document-by document, in camera review. Emerald
thus asked the magistrate judge to review, not the half box
of documents that remained, but rather a sample of the
documents in camera to check and see if all non-privileged
documents had been purged. Under the proposal, the
magistrate judge would review every fifteenth document on
the log until he reached a total of ten documents. The
magistrate judge adopted the proposal.
The magistrate judge announced his results on March 20,
2002, in a written opinion. Equitable properly claimed the
privilege in six of the ten documents and in portions of two
others. However, the magistrate judge also found that two
full documents were not privileged. The ten-document
sample was composed of e-mails, handwritten notes, and
the like, involving in-house counsels. The magistrate judge
closely parsed these documents. For example, he found that
one e-mail—authored by an in-house counsel and sent to
several Equitable employees, including two other in-house
counsels—was privileged but that nine handwritten words
by an in-house counsel on a copy of the e-mail were not
privileged because it appeared that the handwritten words
were not shared with anyone and did not concern legal ad-
vice. The magistrate judge then ordered Equitable to dis-
close the non-privileged material.
At another status hearing on March 27, 2002, Emerald
made an oral motion to strike the third-amended log and to
order Equitable to disclose each document—non-privileged
as well as privileged—on the log. Emerald argued for this
global disclosure by again claiming that the log as a whole
was unacceptably tainted by erroneous assertions of
privilege, citing the February 8 and March 20 rulings for
support. To further bolster its proposal, Emerald allied itself
with the magistrate judge’s previously expressed reluctance
6 Nos. 04-2992 & 04-3120
for full in camera review, claiming that inspecting all the
documents would be an “outrageous task.” R.181 at 13. The
magistrate judge declined global disclosure but required
Equitable to produce a fourth-amended privilege log,
encouraging Equitable to reduce the number of log entries.
However, with an eye on the future, the magistrate judge
agreed with Emerald’s comments about in camera review
and stated: “I don’t think I’m going to be prepared to go
through 400 documents.” Id. at 17.
Equitable submitted the fourth-amended log on April 19,
2002, and disclosed a number of additional documents,
thereby reducing the number of log entries to 432. Unap-
peased, Emerald immediately began insisting on a global
disclosure of each document on the log at the next status
hearing on April 22, 2002. Emerald again claimed a lack of
confidence in the log and orally moved to strike it based
upon Equitable’s past performance. Emerald’s counsel re-
quested additional sampling, telling the magistrate judge:
“[O]bviously, I don’t think you need or should sit down and
go through 432 documents.” R.147 at 11. To which the
magistrate judge responded: “Well, I’m not going to.” Id.
Equitable countered Emerald’s position by arguing that it
should not be forced to disclose indisputably privileged
material (such as the documents from the March 20 opinion
that the magistrate judge found to be completely privileged)
simply because the magistrate judge disagreed with Equita-
ble’s good-faith assertions of the privilege for another
document. The magistrate judge, wanting to see if Emerald
had concrete problems with the new log (as opposed to
problems with Equitable’s past performance), declined to
sample or strike the log at that juncture and instead re-
quired both sides to confer with each other on any specific
problems identified in the new log and report back.
Nos. 04-2992 & 04-3120 7
At yet another status hearing on May 9, 2002, Emerald
reported concerns over a number of entries on the fourth-
amended log. Realizing that, in light of his prior comments,
the magistrate judge was inclined against full in camera
review, the parties proposed the following procedure to re-
solve Emerald’s concerns: Emerald would move to compel
the production of ten or fifteen documents and then the
magistrate judge would review that limited number in camera.
On May 20, 2002, Emerald filed its motion to compel,
requesting sixteen documents. After Emerald filed the
motion, Equitable released two of the sixteen, believing that
the two were privileged but deciding to waive the privilege
as a good-faith effort to help bring an end to the matter. On
June 5, 2002, the magistrate judge ruled from the bench on
the remaining fourteen documents and found eight to be
privileged, two to be partially privileged, and four to be
non-privileged. He then ordered the production of the non-
privileged material. The matter appeared to be at an end.
However, still dissatisfied with these partial disclosures,
Emerald resurrected its complaints about the entire log
weeks after the June 5 ruling and again pressed for global
disclosure. It did so on July 25, 2002, by filing a motion for
discovery sanctions under Federal Rules of Civil Procedure
26 and 37. Emerald reasoned that disclosure of every docu-
ment without further review was an appropriate sanction in
part because, with more than 400 documents at issue, “any
plenary in camera inspection [by the magistrate judge would
be] completely unmanageable.” R.186 at 15. Nevertheless, in
addition to the global-disclosure sanction, Emerald alterna-
tively asked that the magistrate judge appoint a special
master to review the remaining documents at Equitable’s
expense.
The magistrate judge did not pursue the special master
alternative. Rather, at the August 14, 2002, hearing on the
8 Nos. 04-2992 & 04-3120
motion, the magistrate judge sua sponte formulated his own
procedure to determine if he would impose the global-
disclosure sanction: Emerald would select twenty of the
remaining documents on the fourth-amended log and then
Equitable would submit those twenty for in camera review.
This was not a random sample; every document that had
not already been reviewed in camera was fair game. Then, if
the magistrate judge found four or more of the twenty to
contain non-privileged material, he would sanction Equitable
by ordering a disclosure of every document remaining on
the log. On the other hand, if he found three or fewer to
contain non-privileged material, he would deny Emerald’s
motion.
Two days later, Equitable moved to amend the magistrate
judge’s procedure, arguing in part for the special master
alternative. Further, since much had happened since the
fourth-amended log was submitted on April 19, Equitable
requested an opportunity to evaluate the log in light of all
the post-April 19 developments so as to prevent Emerald
from unfairly taking advantage of the magistrate judge’s
sanction procedure and gaining a windfall of privileged
material. On August 27, 2002, the magistrate judge rejected
Equitable’s requests from the bench, refusing all alternatives
and marching forward with his sanction procedure from the
August 14 hearing.
After some more wrangling and two additional hearings,
the magistrate judge announced his decision on the record
on September 23, 2002. He first ruled that four documents
were not protected by the attorney-client privilege but that
the other sixteen were. Curiously, he then denied Emerald’s
motion, stating that he would not sanction Equitable be-
cause he believed that his August 14 ruling was that “four
and no more” equaled no sanction. R.228 at 3-4. Emerald
challenged the magistrate judge’s recollection, accurately
Nos. 04-2992 & 04-3120 9
stating that the rule was, if there were four or more non-
privileged documents, “we get everything.” Id. After a re-
cess, the magistrate judge corrected his error and included
a fifth document on the list of the non-privileged. The
magistrate judge thus reversed his earlier ruling and granted
the motion, ruling that he could not “rely on the integrity”
of the log. Id. at 7. To support his sanction, the magistrate
judge only offered the following:
The Court is very well aware of the fact that, generally
speaking, a finding of bad faith is required to strike an
entire privilege log. The Court has no direct information
that [Equitable] is dealing in bad faith, but the Court
draws the inference from a total of five privilege logs on
which a sampling showed at least 25 percent of the
privilege log being non-privileged[;] the Court infers
bad faith from that statistic, especially in view of the
known professional competence of the attorneys for
[Equitable]. They know what they’re doing . . . .
[T]herefore[,] the entire privilege log is stricken and the
order is that all the documents listed on the privilege
log shall be disclosed.
Id. at 7-8. This disclosure was to include thirty-three docu-
ments that the magistrate judge himself found to contain
privileged material: eight from his March 20 ruling, ten
from his June 5 ruling, and fifteen from his September 23
ruling.
Equitable protested the inference of bad faith, the priv-
ilege rulings on the individual documents, and, as it had
done before, the sanction procedure, contending that it was
being unjustly penalized for good-faith differences of opin-
ion on the applicability of the privilege in the difficult area
of material involving in-house counsels. Equitable raised
these arguments at the September 23 hearing, in its motion
for reconsideration, at the September 27, 2002, hearing on
10 Nos. 04-2992 & 04-3120
the motion for reconsideration, in its objections to the
district judge, and at the October 16, 2002, hearing on the
objections, all to no avail. Ultimately, after exhausting all
avenues by the end of October 2002, including an unsuc-
cessful mandamus petition to this court, Equitable released
the documents to Emerald.
B. Post-Privilege Log Proceedings and Dismissal
Long after the privilege log saga had closed, Emerald dis-
covered that complete diversity of citizenship was lacking
for its action brought under 28 U.S.C. § 1332. Emerald, a
limited partnership, realized in 2004 that, at the time it filed
the suit in 2000, one of its limited partners was a trust that
had one trustee who was a citizen of New York. Emerald
was thus a citizen of New York. Equitable also happened to
be a citizen of New York, and, therefore, there was no
subject matter jurisdiction.
By the time Emerald discovered its error, the one non-di-
verse individual no longer served as a trustee for the trust/
limited partner at issue and was replaced by a diverse
individual. Accordingly, at that point, Emerald was no
longer a citizen of New York. Emerald decided to address
its jurisdictional dilemma by filing a new civil action that
was substantively similar to the “original action” but which
accurately invoked diversity jurisdiction. Emerald’s “new
action” is currently pending before the same district court
and the same magistrate judge.
Additionally, there is another related case pending before
the same district court and magistrate judge. Early in the
original action, Equitable attempted to file a counterclaim
against Emerald; however, the filing was untimely, and the
district court denied Equitable leave to file an untimely
counterclaim. Equitable then filed a separate civil action
Nos. 04-2992 & 04-3120 11
against Emerald, alleging that Emerald fraudulently in-
duced Equitable to enter into the contract in question. We
will refer to Equitable’s action as the “counter action.”
Turning back to the original action (which is the only
action on appeal), the district court dismissed it, without
prejudice, for lack of subject matter jurisdiction two weeks
after Emerald instituted the new action. The district court’s
order of dismissal and accompanying judgment explicitly
stated that “the complaint and suit are dismissed, without
prejudice.” R.471.
At the time of dismissal, the district court also terminated
all pending motions in the original action, including one
that will be of import below: Emerald’s “motion for rea-
sonable expenses regarding the privilege log motions and
related events.” That motion sought an additional discovery
sanction against Equitable and claimed more than
$235,000.00 in attorneys’ fees and costs incurred during the
privilege log proceedings. Emerald filed the motion nearly
seventeen months after the magistrate judge had struck
Equitable’s privilege log, which is why the motion was still
pending in 2004 when the action was dismissed.
Viewing the dismissal as a final decision from which it
could appeal the magistrate judge’s sanction and the cor-
responding denial of its objections to the sanction under 28
U.S.C. § 1291, Equitable filed this appeal. In response,
Emerald, in addition to defending the sanction, argues that
we lack jurisdiction to hear the appeal. In the event we reject
its jurisdictional attack, Emerald has cross-appealed the
denial of its motion for reasonable expenses. We will first
address jurisdiction and then turn to the substance of the
appeal and cross-appeal.
12 Nos. 04-2992 & 04-3120
II. Jurisdiction
Before turning to Emerald’s specific challenges, we ini-
tially note that, although subject matter jurisdiction turned
out to be lacking for this particular action, we still have the
authority to adjudicate matters regarding sanctions. See
Willy v. Coastal Corp., 503 U.S. 131, 139 (1992); Matos v.
Richard A. Nellis, Inc., 101 F.3d 1193, 1196 (7th Cir. 1996).
Emerald advances three jurisdictional arguments. It con-
tends that the dismissal was not a final decision for § 1291
purposes because, first, the district court dismissed the
original action without prejudice and, second, the new and
counter actions remain pending before the district court.
Third, Emerald raises a broader case-or-controversy con-
cern, arguing that the dismissal did not aggrieve Equitable.
We will address each issue in turn.
First, Emerald’s focus on the “without prejudice” lan-
guage in the district court’s order of dismissal and judgment
is misplaced. “The inquiry is not, as [Emerald] suggests,
whether a dismissal is with prejudice or not.” Trippe Mfg.
Co. v. Am. Power Conservation Corp., 46 F.3d 624, 626 (7th Cir.
1995). Rather, “[t]he jurisdictional question in this case . . .
turns on whether the district court dismissed . . . [Emerald’s]
action” as opposed to just its complaint. Benjamin v. United
States, 833 F.2d 669, 671 (7th Cir. 1987). Because, unlike the
dismissal of a complaint, which can ordinarily be amended,
the “dismissal of the entire action ends the litigation” and,
2
therefore, permits an appeal under § 1291. Paganis v.
Blonstein, 3 F.3d 1067, 1070 (7th Cir. 1993); see also Hoskins v.
Poelstra, 320 F.3d 761, 763-64 (7th Cir. 2003). “The test for
2
28 U.S.C. § 1291: “The courts of appeals . . . shall have jurisdic-
tion of appeals from all final decisions of the district courts of the
United States.”
Nos. 04-2992 & 04-3120 13
finality is not whether the suit is dismissed with prejudice or
without prejudice, on the merits or on a jurisdictional ground
or on a procedural ground . . . . The test is whether the
district court has finished with the case.” Hill v. Potter, 352
F.3d 1142, 1144-45 (7th Cir. 2003).
Here, the district court has unquestionably finished with
the original action. The order of dismissal and the judgment
dismissed the “complaint” and the “suit.” By contrasting the
word “suit” against the word “complaint” in this context,
the district court unequivocally indicated that this civil action
was terminated in toto. This conclusion is bolstered by a
passage in the order of dismissal stating that “this case must
be dismissed in its entirety.” R.471 at 6 (emphasis added). See
Willhelm v. E. Airlines, Inc., 927 F.2d 971, 972 (7th Cir. 1991)
(“We have jurisdiction over this appeal only if the district
court has terminated the litigation in its entirety.” (emphasis
added)).
Furthermore, it was necessary for the district court to
dismiss the original action in its entirety as it was infected
with an incurable jurisdictional defect—amending the com-
plaint would not have overcome the want of complete
diversity at the commencement of the original action. See
Grupo Dataflux v. Atlas Global Group, L.P., 124 S. Ct. 1920,
1924 (2004); Johnson v. Wattenbarger, 361 F.3d 991, 992 (7th
Cir. 2004). As a result, the original action was “dead,” Hoskins,
320 F.3d at 763-64; “nothing more [was] ever [going to] hap-
pen” on the merits of Emerald’s underlying claims within
confines of the original action, TDK Elecs. Corp. v. Draiman,
321 F.3d 677, 678 (7th Cir. 2003). The district court did not
employ the words “without prejudice” to enable a contin-
uation of the original suit at some future date; rather, the
district court used those words so as not to impede
Emerald’s ability to present its underlying claims in a new
and independent action (of which the privilege log sanction
14 Nos. 04-2992 & 04-3120
would not be a constituent part). See Farrand v. Lutheran Bhd.,
993 F.2d 1253, 1254 (7th Cir. 1993). Contrary to Emerald
contention, moreover, the fact “[t]hat the dismissal was
without prejudice to filing another suit does not make the
cause unappealable, for denial of relief and dismissal of the
case ended this suit as far as the District Court was con-
cerned.” United States v. Wallace & Tiernan Co., 336 U.S. 793,
794-95 n.1 (1949); see also Hill, 352 F.3d at 1144-45. In short,
the district court “made it clear that he has washed his
hands of the case, [and] the resolution is as final as it can
be” for purposes of § 1291. TDK Elecs., 321 F.3d at 678; see
also Hill, 352 F.3d at 1144-45; Banks v. Sec’y of Ind. Family &
Soc. Servs. Admin., 997 F.2d 231, 237 (7th Cir. 1993).
Second, the fact that new and counter actions remain
pending before the district court does not alter the finality
of the judgment in the original action. Relying exclusively
on Sandwiches, Inc. v. Wendy’s International, Inc., 822 F.2d 707(7th Cir. 1987), Emerald contends that, since there are
similar legal and factual issues in each of the three actions
(i.e., the original, new, and counter actions), Equitable must
wait to appeal the privilege log sanction until the new and
counter actions are fully adjudicated by the district court.
Emerald, however, completely misreads Sandwiches.
Sandwiches stands for the principle that when a district
court ambiguously consolidates two civil actions by failing
to specify whether they are fully consolidated (i.e., consoli-
dated for every purpose) or partially consolidated (i.e.,
consolidated only for a limited purpose, such as discovery),
then this court will treat the two actions as fully consoli-
dated so long as the two are “sufficiently closely related.”
Id. at 709-10. The consequence of full consolidation is that
the two “become a single judicial unit for purposes of
[Federal Rule of Civil Procedure] 54(b), and accordingly a
judgment that does not dispose of all claims of all parties is
Nos. 04-2992 & 04-3120 15
not appealable unless the district court makes the findings
3
required by Rule 54(b).” Brown v. United States, 976 F.2d
1104, 1107 (7th Cir. 1991).
Here, however, there was no ambiguous consolidation as
there was in Sandwiches. Rather, there was no consolidation—
at all—not even for a limited purpose. Although there are over-
lapping factual and legal issues among the three actions and
while there has been some informal merger of proceedings,
e.g., joint hearings held, there has been no formal consolida-
tion. In fact, the district court, in the order dismissing the
original action, explicitly rejected the possibility of consoli-
4
dation. Absent any consolidation, the original action is thus
a wholly independent, free-standing civil action. Sandwiches
expressly addressed the distinction between the situation in
that case from the situation here: the court explained that
when two related cases have not been consolidated for any
purpose, a party could appeal the judgment in one of the
cases “notwithstanding the link between” the two related
3
Fed. R. Civ. P. 54(b): “When more than one claim for relief is
presented in an action . . . or when multiple parties are involved,
the court may direct the entry of a final judgment as to one or
more but fewer than all of the claims or parties only upon an
express determination that there is no just reason for delay and
upon an express direction for the entry of judgment. In the
absence of such determination and direction, any order or other
form of decision, however designated, which adjudicates fewer
than all the claims or the rights and liabilities of fewer than all the
parties shall not terminate the action as to any of the claims or
parties, and the order or other form of decision is subject to
revision at any time before the entry of judgment adjudicating all
the claims and the rights and liabilities of all the parties.”
4
The order of dismissal stated: “As this case must be dismissed
in its entirety, clearly it cannot be consolidated with another case.”
R.471 at 6 (emphasis added).
16 Nos. 04-2992 & 04-3120
cases and the fact that the other related case remains pend-
ing before the district court. 822 F.2d at 710. Consequently,
the rule from Sandwiches for handling ambiguous consolida-
tions is thoroughly inapplicable here. Equitable does not
have to wait to appeal the privilege log sanction until the
district court is finished with the new and counter actions.
Since the sanction is a component of no other action but the
original action, the time to appeal the sanction was when
the original action became final.
Third, Emerald’s argument about Equitable not being
aggrieved is also meritless. Assuredly, a defendant, such
as Equitable, is not aggrieved by the dismissal of a suit
against it. The dismissal, however, is not the subject of this
appeal. Rather, the dismissal is the final-decision vehicle
that enables Equitable to appeal the global-disclosure sanc-
tion, which certainly did aggrieve Equitable and continues
to do so. An appeal of a final decision “brings up” for
review all interlocutory decisions of the district court that
were adverse to the appellant and that have not become
moot. Chicago Bd. of Educ. v. Substance, Inc., 354 F.3d 624, 626
(7th Cir. 2003); Alejo v. Heller, 328 F.3d 930, 935 (7th Cir.
2003); Cleveland Hair Clinic, Inc. v. Puig, 104 F.3d 123, 126
(7th Cir. 1997) (sanction at issue). “Otherwise there would
be no way to obtain appellate review of those rulings, save
for the exceptional few that were appealable regardless of
finality.” Bastian v. Petren Res. Corp., 892 F.2d 680, 682-83
(7th Cir. 1990).
Moreover, appellate review of a sanction does not depend
on which party ultimately prevailed in the final decision of
the lawsuit. One could win a huge triumph on the merits
and still appeal an adverse sanction suffered along the way.
That is because “when [one is] sanctioned in the course of
litigation, immediate [satisfaction] of the sanction is the cost
[one] must bear for the privilege of continuing to litigate.
Nos. 04-2992 & 04-3120 17
The propriety of the sanction may then be challenged on
appeal once there is a final decision in the case, even if that
is long after the sanction was [satisfied].” Corley v. Rosewood
Care Ctr., Inc. of Peoria, 142 F.3d 1041, 1057 (7th Cir. 1998).
Furthermore, satisfaction “of the sanction does not moot the
appeal because the appellate court can fashion effective relief
”
to undo the sanction or at least mitigate the lasting adverse
effects of the sanction; for instance, in this case, we could
order that the documents be returned. Id.Here, the sanction was (and is) adverse to Equitable: the
sanction forced Equitable to turn over privileged informa-
5
tion to its litigation adversary. Further, that decision is not
moot: as the result of the sanction, Equitable labors under a
“lingering disability” from the judgment in the original
action in that its adversary continues to possess sensitive
and indisputably privileged information. D.S.A. v. Circuit Ct.
Branch 1, 942 F.2d 1143, 1146 (7th Cir. 1991). For instance, at
oral argument, Equitable informed us that one document
released to Emerald under the sanction is an in-house
counsel’s legal memorandum advising Equitable on the
merits of Emerald’s underlying contract and tort claims that
are now at issue in the new action. Sufficient adversity is
present when a litigant’s scouting report is in the hands of
its opponent. Moreover, Equitable indicated that Emerald has
used such sensitive information against Equitable. Ac-
cording to Equitable, it sees its documents every time
Emerald files a substantive motion: Emerald uses Equitable’s
5
Equitable’s involuntary disclosure of privileged information to
Emerald does not constitute a waiver of the privilege. See Paul R.
Rice, 2 Attorney-Client Privilege in the United States § 9:25 (2d ed.
2004) (“courts generally hold that when production of privileged
communications is judicially compelled, compliance with the
order does not waive the attorney-client privilege”).
18 Nos. 04-2992 & 04-3120
in-house counsels’ evaluation of the lawsuit as support for
Emerald prevailing on the underlying claims. Therefore,
because the sanction continues to adversely affect Equitable,
the sanction presents a live controversy to be resolved in
this appeal.
Satisfied that we have jurisdiction to hear this appeal, we
now review the global-disclosure sanction imposed against
Equitable.
III. Analysis of Equitable’s Appeal
In challenging the sanction, Equitable has not asked us to
rule on the magistrate judge’s privilege decisions on the five
documents that immediately resulted in the global-disclo-
sure sanction or any other privilege decisions that led to the
sanction proceedings. Rather, Equitable’s attack on the
sanction is foundational. Equitable challenges the magistrate
judge’s procedure from which he inferred bad faith and
then imposed the sanction.
Discovery “sanctions may only be imposed where a party
displays wilfulness, bad faith, or fault.” Langley v. Union
Elec. Co., 107 F.3d 510, 514 (7th Cir. 1997). Here, the
magistrate judge was silent on wilfulness and fault, addres-
sing only bad faith.”Discovery sanctions are reviewed for an
abuse of discretion.” Maynard v. Nygren, 372 F.3d 890, 892
(7th Cir. 2004). While deferential, “this standard is not with-
out teeth.” Salgado v. Gen. Motors Corp., 150 F.3d 735, 737
(7th Cir. 1998). A district “court [does not] possess[ ]
unfettered discretion to impose sanctions upon a recalcitrant
party.” In re Golant, 239 F.3d 931, 937 (7th Cir. 2001).
Accordingly, the method for arriving at the sanction must
be fair. See Salgado, 150 F.3d at 740 (“[W]e must . . . scruti-
nize the district court’s methodology. Although the district
Nos. 04-2992 & 04-3120 19
courts have significant flexibility in the application of the
[discovery] rules in question, that latitude is clearly con-
strained by the principles of due process of law.”). The
upshot is that, under the abuse of discretion standard, we
will reverse a discovery sanction if its imposition “strikes us
as ‘fundamentally wrong,’ or is ‘clearly unreasonable,
arbitrary, or fanciful.’ ” Maynard, 372 F.3d at 893 (quoting
Anderson v. United Parcel Serv., 915 F.2d 313, 315 (7th Cir.
1990)).
The process for winnowing down the number of privi-
leged documents was tedious and protracted. But the final
test to determine whether Equitable’s claim that some 400
documents were privileged was clearly not fair. The magis-
trate judge’s sampling procedure to determine bad faith was
too arbitrary to be accurate and with a consequence that was
onerous. At the August 14 hearing, the magistrate judge set
forth his procedure in the following terms:
So here’s what we’re going to do. [Emerald] is going to
select 20 documents, any 20 documents of the existing
privilege log. They will be submitted in camera. If
20 percent or more are deemed to be non-privileged,
then the Court will therefore find that . . . the entire
Fourth Amended Privilege Log is tainted. That’s
20 percent or more, 20 percent of 20 is four. . . . I un-
derstand that there are good faith differences of opinion. . . .
[However,] considering the intense spotlight on this
privilege log issue for the last few months, there cannot
be more than three out of 20 that there is a good faith dif-
ference of opinion. If more than three are found by the
Court to be non-privileged, then the entire privilege log
will be stricken and all of the documents will be ordered
to be produced.
20 Nos. 04-2992 & 04-3120
R.202 at 31-32 (emphasis added). Further, before imposing
the sanction at the September 23 hearing, the magistrate
judge admitted that he had “no direct information [of] bad
faith.” R.228 at 7.
This process allowed Emerald to pick the twenty docu-
ments it deemed to be most vulnerable to challenge. Then,
if the court found four or more in that group that it judged
not to be privileged, the whole lot would be stricken from
the privileged list. He found five, and Equitable was sanc-
tioned for having too many good-faith differences of opinion
with the magistrate judge. That is unacceptable. Simply
having a good-faith difference of opinion is not sanctionable
conduct. That especially holds true in this situation. Because
the attorney-client privilege promotes full and frank commu-
nication between those in need of legal assistance and their
advocates, courts have long recognized the vital role the
privilege plays in the administration of justice. See Hunt v.
Blackburn, 128 U.S. 464, 470 (1888); Upjohn Co. v. United
States, 449 U.S. 383, 389 (1981); Denius v. Dunlap, 209 F.3d
944, 954 (7th Cir. 2000). As candid attorney-client communi-
cations are therefore “worthy of maximum legal protec-
tion,” it is expected that clients and their attorneys will
“zealously” protect documents believed, in good faith, to be
within the scope of the privilege. Haines v. Liggett Group, Inc.,
975 F.2d 81, 90 (3d Cir. 1992). Which, as acknowledged by
the magistrate judge in the block quotation above, is what
Equitable did here. Equitable sought to protect documents
for which a good-faith argument in support of privilege
6
could be made, and it did so while treading in an area of
6
For example, two of the five documents that triggered the sanc-
tion were handwritten notes from meetings with in-house
counsel concerning Equitable’s response to Emerald’s sub-trading
(continued...)
Nos. 04-2992 & 04-3120 21
privilege law that is generally recognized to be “especially
difficult,” namely, distinguishing in-house counsels’ legal
advice from their business advice. Rice, 1 Attorney- Client
Privilege in the United States § 5:7. Furthermore, Equitable
exhibited good faith throughout the privilege log proceed-
ings: among other acts, Equitable conceded the need to revise
its initial log; it volunteered a second-amended log; it
cooperated with Emerald to resolve outstanding disputes,
as Emerald acknowledged in January 2002; it waived the
privilege for two documents in May 2002 to help close the
matter; and, it promptly complied with the magistrate
judge’s orders for the disclosure of documents and for
amended logs. Accordingly, given the absence of bad faith,
wilfulness, or fault, Equitable should not have been sanc-
tioned. The sanction must be reversed. The magistrate judge’s
fundamental error was estimating bad faith from good-faith
assertions of the privilege.
Additionally, as noted above, the magistrate judge’s sanc-
tion procedure was inherently “arbitrary.” Maynard, 372 F.3d
at 893. Selecting twenty documents from a list and then
applying a 20% (four documents) error rate has no logical
foundation. The magistrate judge left the composition of the
sample entirely up to Emerald’s unrestricted discretion. As
a result, there is no reason to believe that the twenty
documents selected were representative of the entire log. In
(...continued)
activity. Including those documents in the fourth-amended log
was a good-faith assertion of privilege because, under certain
circumstances, when legal matters are at issue, notes of meetings
with counsel have been held to be privileged. See, e.g., Coltec
Indus., Inc. v. Am. Motorists Ins. Co., 197 F.R.D. 368, 376 (N.D. Ill.
2000); Caremark, Inc. v. Affiliated Computer Servs., Inc., 192 F.R.D.
263, 270 (N.D. Ill. 2000).
22 Nos. 04-2992 & 04-3120
fact, it is likely that the sample was unrepresentative
because, given the possibility of a windfall, Emerald had
every incentive to cherry-pick the most vulnerable docu-
ments: if it could just find four documents out of more than
400, Emerald would “get everything.” R.228 at 4. Therefore,
even had Equitable engaged in sanctionable conduct, we
would still reverse the sanction as impermissibly arbitrary,
with an extremely harsh result.
This severe sanction developed from only a half box of
documents. The magistrate judge’s continued refusal of a
full, document-by-document, in camera inspection was not
helpful. By effectively taking full in camera review off the
table, the magistrate judge created a situation that got out of
hand: with that option unavailable, the magistrate judge
inevitably struggled to find a way of fairly resolving the
parties’ privilege disputes. The result was the flawed samp-
ling procedure for sanctioning Equitable. To avoid this
unfortunate situation, while still addressing Emerald’s priv-
ilege concerns, the magistrate judge should have reviewed
more documents in camera than the total of forty-four
reviewed for his March 20, June 5, and September 23 rulings.
The quantity of log documents was down to a half box by
February 8, and, on that date, when Emerald proposed the
first sampling procedure, it was evident that Emerald
lacked confidence in the log as a whole. As early as that
juncture or certainly by the time the sanction proceedings
began, the magistrate judge, given the manageable quantity
of documents at issue, should have simply instituted a
procedure by which he would review (himself or through a
special master) every document contested by Emerald—
even if that meant reviewing every document in that half box. See
In re BankAmerica Corp. Secs. Litig., 270 F.3d 639, 644 (8th Cir.
2001) (“[D]istrict courts should be highly reluctant to order
disclosure without conducting an in camera review of
Nos. 04-2992 & 04-3120 23
7
allegedly privileged materials.”). Such a process would have
struck the right balance between the parties’ competing in-
terests and would have—given the protracted log proceed-
ings that continue to this day—saved judicial resources. See
Kerr v. U.S. Dist. Ct. for N. Dist. of Cal., 426 U.S. 394, 405 (1976)
(“[A]n in camera review of the documents is a relatively
costless and eminently worthwhile method to insure that
the balance between petitioners’ claims of . . . privilege and
plaintiffs’ asserted need for the documents is correctly
struck.”). In short, rather than resorting to an ill-advised
sanction and imprudent sampling procedure, a full in camera
review of the log documents would have been “a highly
appropriate and useful means of dealing with” the sensitive
privilege issues in this case. Id. at 406.
Having determined that the magistrate judge erroneously
sanctioned Equitable, we now consider how to remedy that
error. Clearly, as Equitable conceded at oral argument, we
cannot give it total relief. Emerald has seen documents it
never should have had. We cannot wipe Emerald’s collec-
tive mind clean of the information it has acquired. Never-
7
See also In re Grand Jury Proceedings, 220 F.3d 568, 571 (7th Cir.
2000) (“Only when the district court has been exposed to the
contested documents and the specific facts which support a find-
ing of privilege under the attorney-client relationship for each
document can it make a principled determination as to whether
the attorney-client privilege in fact applies.” (quoting Holifield v.
United States, 909 F.2d 201, 204 (7th Cir. 1990))); United States v.
Tratner, 511 F.2d 248, 252 (7th Cir. 1975) (“ ‘The responsibility
of determining whether the privilege exists rests upon the
District Judge and not upon the lawyer whose client claims the
privilege.’ Where this evidence may be presented only by reveal-
ing the very information sought to be protected by the privilege,
an in camera inspection of the evidence may be appropriate.”
(quoting NLRB v. Harvey, 349 F.2d 900, 907 (4th Cir. 1965))).
24 Nos. 04-2992 & 04-3120
theless, we can fashion partial relief for Equitable. Accord-
ingly, we will reverse the sanction and remand the matter
with the following instructions: first, deny Emerald’s motion
for discovery sanctions; second, order Emerald to return
to Equitable all the documents that Emerald received as
the result of the sanction, except for the five documents
specifically found to be non-privileged; and, third, order
Emerald to provide to Equitable all copies of the aforemen-
tioned documents that are in Emerald’s possession, custody,
or control. Cf. In re Bridgestone/Firestone, Inc., ATX, ATX II,
129 F. Supp. 2d 1207, 1219 (S.D. Ind. 2001) (remedy for
inadvertent disclosure). Should Emerald wish to reacquire
particular documents, Emerald may not do so within the
confines of the now-closed original action. Rather, any such
reacquisition will require additional discovery (non-sanction)
proceedings with the documents being reviewed in camera.
The new action would appear to be the most appropriate
venue for any such proceedings.
IV. Analysis of Emerald’s Cross-Appeal
Briefly, we turn to Emerald’s cross-appeal challenging the
denial of its motion for expenses incurred as a result of the
privilege log proceedings. At the closing of the original
action, the district court terminated all pending motions,
including the motion in question, apparently believing the
motions to be moot. While that may have been true for the
other motions, it was not true for this motion. That is be-
cause, even though subject matter jurisdiction was lacking,
the district court still had the authority to adjudicate matters
regarding sanctions. See Willy, 503 U.S. at 139; Matos, 101
F.3d at 1196. Therefore, to the extent that Emerald’s motion
sought additional sanctions against Equitable in the form of
attorneys’ fees and costs incurred during the log proceed-
ings, the district court erred in denying the motion as moot.
Nos. 04-2992 & 04-3120 25
Nonetheless, the district court reached the right result. As
discussed above, Equitable did not engage in any sanc-
tionable conduct during the log proceedings. Consequently,
denial was the correct disposition of the motion, and we
affirm that result. See Commonwealth Ins. Co. v. Titan Tire
Corp., 398 F.3d 879, 887 (7th Cir. 2004) (“Despite its errone-
ous rationale, . . . the district court reached the correct result,
and we affirm that result. ‘The rule is settled that if the
decision below is correct, it must be affirmed, although the
lower court relied upon a wrong ground or gave a wrong
reason.’ ” (quoting Payne v. Churchich, 161 F.3d 1030, 1038
(7th Cir. 1998))).
V. Conclusion
Sanctioning Equitable for having too many good-faith
differences of opinion was fundamentally wrong. Moreover,
the process for arriving at the sanction was arbitrary.
Therefore, the global-disclosure sanction, which forced
Equitable to disclose information protected by the attorney-
client privilege, constituted an abuse of discretion. Accord-
ingly, the sanction striking the privilege log is reversed and
the documents (save for the five specifically found to be
non-privileged) and copies thereof must be returned to
Equitable. Separately, the district court reached the correct
result in denying Emerald’s motion for additional sanctions.
AFFIRMED IN PART, REVERSED IN PART, and REMANDED
WITH INSTRUCTIONSas stated above.
26 Nos. 04-2992 & 04-3120
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—5-4-05