Clawback Agreement

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Clawback Agreement

In business contracts or agreements, Clawback provision is used when someone is asked to give back something depending on various conditions and circumstances. Imagine a scenario where the employee of an organization is asked to give back the bonus paid to him with a penalty because some promises made by him are not fulfilled on time. In such a case, the company takes advantage of clawback provision.

A Clawback Agreement, however, goes beyond clawback provisions used in business agreements. In a case where one party inadvertently or mistakenly produces some privileged information or crucial documents that it shouldn’t have, an agreement is needed to protect against waiver of privilege or work product protection. Such an agreement is known as the Clawback Agreement. Simply put, as per Federal Rule of Evidence 502, parties can claw back inadvertently produced attorney work product or attorney-client privileged information. It is highly common for parties to expose certain information due to ESI or electronically stored information. A Clawback Agreement is a safety net for such inadvertent disclosures.

Clawback Agreements are also known as Non-Waiver Agreements.

Who Takes the Clawback Agreement – People Involved

The Clawback Agreement can be taken by any corporation, business or party that feels that sensitive documents showing attorney-client communication or in-house counsel’s own work product may have been produced by mistake, because of the volume of email and electronic documents reviewed. The idea here is to make sure that such documents will not be deemed a waiver of privilege/protection.

Clawback Agreements can also be used in situations such as state court litigation, arbitrations or investigations, etc.

Purpose of the Clawback Agreement – Why Do You Need It

Imagine a scenario where the litigation demands production of a lot of documents and information both in electronic and hard copy formats. Even with proper review in place, there is a possibility that some documents or material slip over to an opposing party.  Such a case involves the risk of waiving of privilege. But with the help of Clawback Agreement, the party inadvertently producing such documents can claw back the crucial documents and can stop the waiver of privilege/protection in a federal or state proceeding.

The agreement makes sure that holder of the privilege claw back avoids the costs of pre-production review for privileged documents or information. It also makes sure that the party receiving such documents is legally bound to return it and the producing party doesn’t have to take any steps as long as the disclosure was inadvertent.

Purpose of the Clawback Agreement in pointers –

  • To stop the waiver of a privileged and protected document
  • To make sure the inadvertent disclosure is not used against the producer
  • To make sure that the receiving party either returns or destroys the information, otherwise doesn’t use the information
  • To avoid the cost of pre-production review of privileged information
  • Allows both the parties to separate privileged document

Contents of the Clawback Agreement – Inclusions

Clawback Agreement is an extremely important and complex piece of document, especially when the litigation involves big corporate and internal counsel. Before seeing the key inclusions and provisions, one must know that as per Federal Rule of Evidence 502(b) “disclosure does not operate as a waiver in a federal or state proceeding if (1) the disclosure is inadvertent; (2) the holder of the privilege or protection took reasonable steps to prevent disclosure; and (3) the holder promptly took reasonable steps to rectify the error, including (if applicable) following Federal Rule of Civil Procedure 26 (b)(5)(B) [concerning inadvertent production of trial preparation materials].”

Further, it should be noted that with the help of some other provisions in the agreement any production of protected information can be clawed back irrespective of inadvertence and reasonable steps taken to prevent disclosure. Thus, it is extremely important for both parties to decide whether they want to add such provisions in the agreement or not.

The agreement will also adequately specify the steps taken in the case of any disclosure. It will have the basic details of both parties. It will also include the details of the time period that is required to invoke the agreement. Dispute resolution is another extremely critical inclusion in the Clawback Agreement.

It is imperative to notice that under Rule 502(e) if a clawback agreement is not incorporated into a court order, it doesn’t bind third parties. Thus, clawback provisions should be included in protective court orders.

How to Draft the Clawback Agreement

To stop the waiver of privileged and protected information, any production involving electronically stored information (ESI) consider Clawback Agreement a strong weapon.  However, there are certain things that both the parties should keep in mind to rectify any inadvertent disclosure. For instance, both parties should be extremely clear about what constitutes “inadvertent” and “reasonable steps” since Federal Rule doesn’t specify these details.  Both the parties must define what these steps are, in order to avoid future conflict and legal fight.

Further, the parties should specify that inadvertent production is not a waiver. The goal of the agreement should be clear to both parties and then, it should be drafted in the agreement. Next, since the Clawback Agreement doesn’t involve or bind third parties, it should be incorporated in a protective order. In the absence of a protective order, third parties may obtain protected materials inadvertently produced during the litigation.

Parties should get a full understanding of other two extremely important provisions namely “no-fault” or “irrespective of care” provisions. These provisions eliminate the requirement of “reasonable steps” entirely. It is for the involved parties to decide. Evidently, much of it still depends on the mutual understanding of the involved parties.

It should be noted that sometimes witnesses can also reveal privileged or protected information during the course of their deposition testimony. To resolve this, parties must add provisions in the Clawback Agreement that can strike such testimonies from the record.

Negotiation Strategy

To negotiate the Clawback Agreement, involved parties must first understand the Federal Rule of Evidence 502 fully. Further, they should understand and figure out the ways in which they would rectify any inadvertent disclosure and what will be considered “reasonable actions”.  Negotiations should not happen at the cost of some crucial information that could waiver protected information.

Benefits & Drawbacks of the Clawback Agreement

It goes without saying that the Clawback Agreement is hugely beneficial for both the parties involved and especially, for any litigation. While the parties involved are busy producing documents and communications during discovery, it is important for someone to safeguard protected documents or information. If the privileged material slips over to an opposing party, it creates the risk of waiving attorney-client privilege or attorney work product privilege.

Here are some point wise benefits of the Clawback Agreement –

  • Protects the protected or privileged material or document from the waiver
  • Protection against the disclosure or inadvertent production of information
  • Protects the producing body from spoiling the attorney-client relationship
  • Allows both the parties to separate privileged document from regular document
  • Ensures that the parties don’t have to invest a lot in reviewing the privileged information
  • Ensures that the opposing party return, destroy, or otherwise do not use the protected or privileged information in any way
  • Makes sure that the other party doesn’t benefit from the privileges information

One huge drawback of the agreement is that it doesn’t bide any third party however, incorporating the clawback agreement into a protective order is one good option for the parties involved. Another big concern is witnesses revealing privileged information during the course of their deposition testimony. To overcome this challenge, there must be a provision in the agreement to strike off their testimony.

What Happens in Case of Violation

Like most other agreements, Clawback Agreement too needs a very clear dispute resolution terms mentioned in the agreement itself to save the involved parties from any potential confusion or conflict. In most cases, the agreement would specify who bears the burden of disclosure, yet in case of any violation by either of the parties, the other one can take help of the courts.

If one party has fewer documents and another one has more, it is possible that the former completely denies getting into a Clawback Agreement. In such a case, the second party should still go to the court. They are well within their rights to do so.

Clawback is a process with the help of which anything can be clawed back if required as per certain conditions and situations. Clawback provisions are fairly common in corporate, government contracts, life insurance, dividends, pensions, etc. Clawback Agreements, however, get into more specifics and allows clawing back of protected information in attorney-client communication where a review of ESI or electronically stored information or emails is involved and the information has gone out mistakenly.  The agreement stops waiving of any privilege or protection over those materials. Thus, it is one of the most crucial agreement.