In re Fontainebleau Las Vegas Contract Litig., 2011 WL 65760 (S.D. Fla. Jan 7, 2011)

24 Jan 2011

By Diane Barry

The dangers of mixed use servers.  In In re Fontainbleu Las Vegas Contract Litigation the matter concerned financing the construction of the Fontainebleau Resort and Casino in Las Vegas.  The immediate dispute was over production of ESI : the Fontainebleau moved the court for an extension of the production deadline.  Fontainebleau claimed that review of the ESI was moving very slowly, as the servers which housed the Fontainebleau’s ESI was shared space – they shared the servers with multiple other entities.  It appears that security on the servers was sloppy – no allocation of separate space for separate entities.  All of the documents were co-mingled  All in all, they were having a terrible time teasing out their own documents; conducting a privilege review; and handing the results over to the other side.  They couldn’t make the deadline.  Their suggestion: they would conduct a full on review of the email server(s) and provide a privilege log.  The other servers would be handed over wholesale, and they’d get a clawback of any privileged items the opps found.

The court simplified the matter for them: since the documents had been co-mingled on a server where everyone and his brother had access, there is no privilege to worry about.  In addition, if servers are handed over to the opposition wholesale without any prior review, there won’t be any privileged items left to hand back on those either.   It looked to the court like all privileges had been waived, and Fontainbleau could just produce the documents toute suite.

FN1. Fontainebleau did not explain in its motion to quash why the shared documents on the computer servers would still be privileged (assuming they were privileged in the first place) if they were stored together on servers presumably accessible by other entities.  Fontainebleau represented in its motion that the servers “are owned by Fontainebleau Resorts, LLC (one of The FBR Entities) but [ ] contain documents belonging to various Fontainebleau and Turnberry Construction entities, including the Debtors” (DE# 93, at 2).  Likewise, Fontainebleau did not explain in its motion why the entities would not lose privilege protection under a plan where each entity would receive “a full copy of each of the servers” (and presumably have unfettered access to all material, including information and privileged matter belonging to others).

Fontainbleau ignored the court’s order, and proceeded to produce as it proposed: wholesale production of the accounting and “documents” servers; email with a privilege log.

The court then held that Fontainbleau had waived any privileges as to the accounting and documents servers. Since the privilege log was provided as to the emails (albeit late) the court declined to rule at that time that privilege had been waived as to email.  Despite it’s finding of privilege waiver, the court provided Fontainbleau with a limited protection of their disclosed privileged items: the court ordered the Term Lenders to notify Fontainebleau of any privileged materials it identified in its review, but stated plainly that the documents were fair game.  Also, the  court stated that the plaintiffs would not suffer adverse consequences “should they inadvertently omit privilege materials” from their court-ordered notification(s).

I find three things of note in this case.

First, sloppy information management practices at the client prior to the institution of litigation almost sank the document production effort before it began.  Sharing servers without good security to segregate the servers into different areas for different users is sloppy work on the part of IT.  Good client counseling prior to litigation about best practices could have assisted the litigation effort and saved what must have been a mountain of attorneys bills.  The law firm spent time trying to tease out their own client’s documents ($$$); they spend time meeting and conferring with the opposition about the horrible situation ($$$) and they had to resort to law and motion to stall for more time ($$$).  Counseling and some IT adjustments would have been much less expensive for the client than the additional litigation costs imposed by the IT practices.

Next, the party claiming a privilege bears the burden of proving the elements of the privilege, and when attacked, the burden of proving that it has taken adequate steps under the circumstances to protect the claimed privilege.  The court in this case took a position similar to that of Chief Magistrate Grimm in Victor Stanley I  – if there was any privilege remaining here, the defending party failed it’s burden to show the facts that would establish or protect it.  If there was security on the servers to segregate areas; if there were other safeguards to prevent other groups from viewing privileged items; if there were mitigating circumstances, Fontainebleau failed to bring such facts to the attention of the court.  Prove it or lose it.

Finally, Fontainebleau should have lost its privileges in their entirety. However, for reasons not apparent in the opinion, the Judge took pity on Fontainebleau.  The court could have simply held that all privileges were waived (please produce all documents listed in your privilege log), as Fontainebleau failed to prove up sufficient facts to establish and protect the claimed privileges.  The Judge hedged at the last minute, and gave them partial protection – an undeserved gift from the bench.  How comfortable are you in relying on kindness from the bench?