Amended Rule 1.15 RPC, and the Need for S.C. Law Firms to Implement File Retention Policies

On March 1, 2012, the South Carolina Supreme Court issued an Order amending Rule 1.15, "Safekeeping Property," of the South Carolina Rules of Professional Conduct.

Minimum File Retention Requirement and Adoption of a File Retention Policy

Rule 1.15(i) establishes for the first time in South Carolina the requirement for an attorney or law firm to maintain client files after they are closed for a minimum of 6 years (unless the file is delivered to the client or the client has authorized destruction of the file and no pending or threatened legal proceedings are known to the lawyer).  If the client does not request the file within 6 years following the end of the representation, the lawyer may destroy the file unless pending or threatened legal proceedings are known to the lawyer.

The last sentence of Comment 13 to Rule 1.15(i) will be of particular interest to the Bar:  "Attorneys and firms should create file retention policies and clearly communicate these policies to clients." 

Benefits of a File Retention Policy for Law Firms

The development of a file retention and destruction policy, while daunting, is also a real opportunity for a firm.

First, a properly implemented policy will be more efficient, as fewer resources need be devoted to storage of closed files.  (Other efficiencies may result from choosing electronic storage over paper storage for closed files.  As the amended rule recognizes, electronic storage of documents is also an option, subject to the requirement that the client's file be "securely" stored and capable of being retrieved-- more on that in a future post).

Second, implementing a file retention policy allows an attorney or firm to "harvest" precedent, briefs and forms, to make those resources available for future use.  (Thanks to Jim Calloway for this observation).  A consistent set of Knowledge Management principles is crucial for a law firm, and  should be woven into a firm's file retention policy.

Some Basic Elements of a File Retention Policy

Consistent with Rule 1.15(i) and the clear mandate in Rule 1.4 regarding communication with clients, the firm's written retention/destruction policy should be communicated and followed from the outset of the representation, considered continuously throughout that representation, and implemented upon file closing and after:

The Policy Should be Included in the Client Engagement Letter.  Communicate with the client and obtain agreement at the outset regarding what will happen to the file upon the close of the matter.

The Policy Should Be Implemented Throughout the Representation.   Make sure that to the extent possible, no original documents provided by the client are contained in the file.  If maintenance of original documents is necessary, label and segregate them accordingly.

The Policy Should Be Implemented at File Closing.  All originals should be returned to the client.  An attorney should determine whether an exception (e.g. pending or threatened legal proceedings) might prevent some or all of the file from being destroyed pursuant to the policy.  As mentioned above, valuable drafts or cases that may have utility in other matters should be removed (and appropriately named for easy retrieval.  (As a substantive matter, attorneys should consider a File Autopsy at the time the file is closed to figure out how to get better on the next one).  Strip out unnecessary materials and duplicates.  The client should be contacted with a closing letter containing a reminder of the file retention and destruction policy and asking the client to determine what should be done with the file.  Once a thorough review and culling takes place, the file can closed and its future destruction date logged.  The idea is to have the file closing process be the last time the file needs review.

The Policy Should be Followed.  Once the firm has established a policy, it should follow it, by communicating with clients over the life of a file, and undertaking to "destroy files in a way that protects client confidentiality" (that means shredding, not tossing).

As with many processes, there will be some time and effort on the front end, but law firms will experience long-term benefits, financial and otherwise, from effective use of a file retention and destruction policy.

Asserting the Right to Compel Arbitration

By Shaun Blake

As last month’s decision by the Central District of California in the Toyota Hybrid Brake Class Action case demonstrates, simply raising a contractual right to arbitrate as an affirmative defense may not be enough to protect a party's right to compel arbitration.  

In its Answer, Toyota raised as an affirmative defense an arbitration clause contained in certain dealer agreements excuted by the Class Plaintiffs (purchasers of hybrid vehicles with allegedly defective anti-lock braking systems).  Thereafter, in support of its subsequent Motion to Compel Arbitration, Toyota contended that it had preserved the right to compel arbitration as it awaited the United States Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). Toyota argued that, prior to Concepcion, any motion to compel arbitration would have been futile because class action waivers were generally unenforceable under California law.

The Court disregarded Toyota’s argument, noting that Concepcion only speaks to the enforceability of class action arbitration waivers in adhesion contracts involving disputes over small sums of money.  The Court observed that Toyota had “vigorously” litigated the class action for two years by conducting discovery, filing motions, and seeking a protective order. Finding prejudice to the Class Plaintiffs in the form of considerable resources spent pursuing a litigation strategy in federal court, the Court held that Toyota had waived its right to compel arbitration. 

In South Carolina, “There is no set rule as to what constitutes a waiver of the right to arbitrate; the question depends on the facts of each case.”  Hyload, Inc. v. Pre-Engineered Prods., Inc., 417 S.E.2d 622, 624 (S.C. Ct. App. 1992).  Significant litigation conduct can waive a contractual right to arbitrate. See, e.g. Liberty Builders, Inc. v.Horton, 521 S.E.2d 749, 753 (S.C. Ct. App. 1999) 

Therefore, parties and their counsel need to be vigilant regarding these rights and move to compel arbitration at the outset of their cases.

Changes to Federal Jurisdiction and Venue Statutes

As described by Greenberg Traurig, the Federal Courts Jurisdiction and Clarification Act of 2011 goes into effect on January 6, 2012, making several significant changes to federal law related to removal and venue.

One important addition to 28 U.S.C. Section 1446 is a provision explaining how removal is accomplished when an action has multiple defendants.  The change resolves some inter-circuit variation on that point in favor of a rule allowing each defendant 30 days from its date of service to file a notice of removal, and then further allowing earlier-served defendants to join in or consent to any previous removal.  (For a 4th Circuit discussion of this topic, see Barbour v. International Union).  Similarly, the law codifies the the "rule of unanimity" requiring all defendants to consent to removal.

The law also makes significant changes to the "amount in controversy" provisions applicable to removal, and revises the general federal venue statute.

The Community-of-Interest Privilege

The ABA's Litigation News recently described an opinion from the U.S. District Court for the Eastern District of Pennsylvania refusing to apply the community-of-interest privilege, and provided an overview of the history of the privilege and its application by various federal circuits and courts.

The community-of-interest privilege (in the 3rd Circuit) allows attorneys "representing different clients with similar legal interests to share information without having to disclose it to others."  In re Teleglobe Communc'ns Corp.,  493 F.3d 345, 364 (3d Cir. 2007).  "Alleged members of the community of interest must at least share a 'substantially similar legal interest,' that is not solely commercial.  Id. at 365. 

In King Drug Co. of Florence, Inc. v. Cephalon, Inc., Plaintiffs in a putative class action alleging violations of the Sherman Antitrust Act sought to compel discovery of certain communications between Defendant Barr Laboratories, Inc. ("Barr") and its supplier Chemagis.  (By way of background, Barr and other generic drug manufacturers entered into "reverse payment settlements" with pharmaceutical company Cephalon, Inc. in connection with the purchase of Provigil, and the King Drug Plaintiffs are challenging the reverse payment settlements).

Barr claimed that the 18 documents in question, which related to the settlement between Barr and Cephalon and how the settlement terms would affect Chemagis financially, were protected by the community-of-interest privilege.   Barr argued that the community-of-interest privilege applied because 1) Barr and Chemagis shared a substantially similar legal interest.(their joint development of a generic form of Provigil put them both at risk for an infringement suit by Cephalon); 2) Barr and Chemagis had entered into a "Joint Defense Agreement."

The Court disagreed, concluding that the communications between Barr and Chemagis were not "part of an ongoing, coordinated, legal defense strategy."  Therefore, even though it was not necessary for Chemagis to have been sued (it had not), and even though Barr and Chemagis had executed a "Joint Defense Agreement" that required Chemagis to share Barr's legal costs,  the two companies did not actually "establish an ongoing and coordinated legal defense."  Interestingly, the Court did not reach the issue of whether the joint interests of Barr and Chemagis were "legal" or "commercial," because even assuming those interests were "legal," "there never was a joint, coordinated and ongoing legal strategy."

Two cases from the United States District Court for the District of South Carolina have addressed the community of interest privilege and applied the 4th Circuit's understanding of the privilege:  Duplan Corp. v. Deering Milliken Inc., 497 F.Supp. 1146 (D.S.C. 1974) (cited in King Drug), and Fort v. Leonard, 2006 WL 2708321 (D.S.C. 2006).  Fort emphasizes the flip side of the King Drug rationale, emphasizing that the demonstration of "a common interest" suffcient for the privilege to attach does not require a written or oral joint defense agreement. Duplan expresses the law of the 4th Circuit (a different test from that applied in the 3rd Circuit) that the persons seeking to demonstrate the privilege must have an "identical legal interest with respect to the subject matter of a communication between an attorney and a client concerning legal advice."  497 F.Supp. at 1172.  (Emphasis added).

If You're Not Paying For It, You're the Product.

I heard the above on a Wired Storybook Podcast interview with Ryan Singel, who is returning as an editor of Wired's Threat Level blog.  One origin for that insight into the price of online services is found here.

The knowledge that Facebook and Google and other companies gather and share information about individuals in exchange for their "free" services raises the question again of what kind of privacy we can expect or demand in the information age.

In the United States there is no general constitutional right to privacy for personal information. The federal (and to a lesser extent, state) statutory frameworks designed to protect personal information are largely industry-based. For example, HIPAA covers protected health information, Gramm-Leach-Bliley protects consumer financial information, and the Fair Credit Reporting Act and FACTA protect personal credit information.

The South Carolina General Assembly recently recognized the value of personal information by enacting the South Carolina Financial Identity Fraud and Identity Theft Protection Act.

So, although you may be able to prevent a business from sharing your information with others or disclosing that personal information without your consent, or exercise the right to correct inaccurate information about you, you don't have the right to demand that a company delete information about you.

By contrast, as Natasha Singer points out in a New York Times article "Just Give Me the Right to Be Forgotten" the European Union has a Data Protection Directive giving consumers the right to withdraw their permission for a company to store their data. 

Data breaches and our knowledge of the myriad ways in which information is being collected may push the U.S. in the direction of the E.U. notions of privacy.  The Federal Trade Commission, very active already in enforcing privacy rights, security obligations, and prohibitions against misleading advertising and marketing, has issued its initial staff report:  Protecting Consumer Privacy in an Era of Rapid Change.  The FTC proposes a "keep as needed and only for as long as necessary" approach, one that would minimize collection of personal information on the front end and give it a limited shelf life.

In the meantime the FTC counsels consumers to read the privacy policies of the sites they visit and the companies with whom they do business. However, privacy policies are not always straightforward, plain, or exciting reading, and most beome aware of the settings they've consented to well after sharing information. One recent example is the revelation that LinkedIn's default privacy settings authorized that company to use a subscriber's photos and other information for "social advertising."

Ultimately I tend to agree with Clive Thompson, who believes that the privacy nightmares (and a host of other problems with the online world) would be solved if these companies charged us a fair price for the things we want.

At the very least, under that model we would be customers and not products.

La Compagnie C'est Moi: 4% Ratio Available to Single-Member LLC

The South Carolina Supreme Court recently considered the limited liability company (LLC) as a "disregarded entity" for tax purposes. In CRFE v. Greenville County Assessor issued on August 29th, the Court determined that S.C. Code Ann. Section 12-43-220(c) does not prevent a single-member limited liability company (LLC) owning residential property from obtaining the 4% legal residence property tax ratio.

Sherry Ray bought residential property in Greenville County in her name and lived there, and as a result the property was taxed at the 4% legal residence ratio. She formed CFRE as a single-member LLC with herself as the sole member. (She did not have the LLC taxed as a corporation, and CFRE did no business and was formed only for asset protection/estate planning purposes). In 2006 Ray transferred title to her residence into the LLC. Because that transfer is considered an "assessable transfer of interest" per S.C. Code Ann. Section 12-37-3150, the Assessor reassessed the Property and applied the default 6% ratio.

CFRE applied for the 4% ratio, and both the Assessor and the South Carolina Administrative Law Court (ALC) denied its request, reasoning that only a "natural person" could qualify for the 4% ratio under the plain language of S.C. Code Ann. Section 12-43-220(c). An LLC, like a corporation, is “not a natural person. It is an artificial entity created by law." State ex rel. Daniel v. Wells, 191 S.C. 468, 5 S.E.2d 181 (1939). The ALC concluded that the 4% ratio found in S.C. Code Ann. Section 12-43-220(c) was not available to CFRE as an artificial entity.

The South Carolina Supreme Court disagreed. Although S.C. Code Ann. Section 12-43-220(c) by itself appears to limit its reach to "natural persons," that statute is only part of the General Assembly's enacted intent. S.C Code Ann. Section 12-2-25(B)(1) also plainly provides that a single-member LLC not taxed as a corporation "is not regarded as an entity separate from its owner" for purposes of all taxes contemplated by Title 12.

In other words, CFRE is not a "natural person," but its sole member Ray is, and because Ray qualifies for the 4% ratio so too does CFRE.

Missed Deadlines and "Technology" Errors

You may recall this post in April of last year about Robinson v. Wix Filtration Corp., in which the 4th Circuit Court of Appeals determined computer problems in the Appellant's office resulting in the failure to receive notice of a motion for summary judgment did not warrant relief under either Rule 59 or Rule 60.

Recently the 4th Circuit again had the opportunity to address a missed filing deadline where computer technology played a role. Symbionics v. Ortlieb reversed a District Court determination that "a quirk in the functionality of counsel's computer calendar caused counsel to miscalculate the deadline to appeal" a judgment constituted "excusable neglect" under Rule 4(a)(5)(A) of the Federal Rules of Appellate Procedure.

Symbionics filed a notice of appeal one day after the expiration of the 30-day time limit, and then filed a motion for extension of time to extend that deadline by one day. According to the opinion, counsel calendared the incorrect appeal deadline:

"Counsel used the Microsoft Windows Calendar, a standard application of the Microsoft Windows operating system, to compute the date on which the thirty-day period to appeal would end. The alleged glitch occurred when, after counting twenty-seven days through December 31, 2009, counsel changed the month on the calendar display to January in order to continue the computation. Counsel failed to notice that the calendar did not automatically advance to January 2010 but instead reverted to January 2009. Consequently, counsel mistakenly referenced the January 2009 calendar when he completed the calculation of the thirty-day window to appeal, which resulted in counsel’s erroneous determination that the deadline was January 5."

The District Court applied the four factors for a determination of "excusable neglect" originally announced by the U.S. Supreme Court in Pioneer Inv. Servs. v. Brunswick Assoc.: 1) danger of prejudice to the opposing party; 2) the length of delay and its potential impact on judicial proceedings; 3) the reason for the delay, including whether it was within the reasonable control of the movant; and 4) whether the movant acted in good faith. Both courts weighed the 1st, 2nd and 4th factors in favor of Symbionics.

Addressing the "reason for delay" prong, the District Court concluded "excusable neglect" existed because the late filing was caused by "the less than completely understood electronic workings of a commonly used software product," "extraneous factors independent of Symbionics' negligence" and "unusual circumstances."

The Court of Appeals disagreed, citing language from the Thompson v. DuPont opinion through the 4th Circuit (in an opinion authored by Michael Luttig, who is now Vice President and General Counsel for Boeing-- special credit if you can tell me where he did his undergraduate work) adopted the Pioneer factors: "[A] district court should find excusable neglect only in the extraordinary cases where injustice would otherwise result." Accordingly, counsel's reliance on the Windows calendar and failure to discover the date reversion are the "run-of-the-mill inattentiveness by counsel" that is not excusable.

The Court did include a footnote indicating that had it reached the merits of the appeal it would have affirmed the District Court's decision.

Symbionics emphasizes the obligation of counsel to build backup and reasonable "redundancy" into a calendaring process, to protect against all forms of possible error. In fact, as discussed over at the Practice and Productivity Blog, "computer" errors are generally the byproduct of human error. Attributing an error a secure calendar system involves people and process, not reliance solely on a software product.