Overview
What happens when a party inadvertently produces thousands of privileged documents to the government, then tries to claw them back upon realizing its error? The answer depends, in part, on how the documents came to be produced in the first place.
In 2022, entities affiliated with Arena Investors, LP (Arena) loaned $10 million to Max McDermott to help grow two of his real estate companies. McDermott allegedly misused the funds, transferring them to his family trust account and using a portion to support another business. When Arena found out, it sued McDermott and asked the U.S. Attorney's Office to investigate. The USAO obliged, and as part of its investigation, it asked Arena for relevant information. Arena voluntarily produced over 22,000 documents in response. As it turns out, over 5,400 of them were privileged and should not have been produced.
Arena realized this about a year later, when the government notified Arena that McDermott requested permission to use some of the produced documents in parallel civil litigation. Arena apparently then re-reviewed some of the documents and realized they were privileged. It sent a clawback letter within 24 hours, and then intervened in the case against McDermott (United States v. McDermott, No. 1:25-cr-00427-AS (SDNY)) to seek a protective order.
In an August 10, 2026 order, Judge Subramanian denied Arena's motion for a protective order, holding that Arena waived privilege as to all of the approximately 5,400 inadvertently produced documents. He arrived at this conclusion even though there was no dispute that the documents would generally be protected by the attorney-client privilege.
This counterintuitive result was a product of Federal Rule of Evidence 502(b), under which disclosure to a federal agency does not operate as a privilege waiver, but only 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." Fed. R. Evid. 502(b). As Judge Subramanian was careful to note, Rule 502(b) presents an elements test, not a balancing test. Each element must be met by the movant to preclude a waiver. And Arena failed to show that it took reasonable steps to prevent inadvertent disclosure, because of two problems with Arena's document review process.
First, "counsel instructed the e-discovery vendor to mark as non-privileged all documents that contain a privilege term and include one of seven designated opposing party/counsel terms, such as the name of an Arena lawyer, 'McDermott,' or the names of McDermott's lawyers." While this may be sensible as an intermediate step to carve out for further evaluation potentially non-privileged documents from the set of documents containing privilege terms, as Judge Subramanian noted, it "should have been obvious" that this would capture privileged communications."
Second, counsel did not engage in "reasonable quality control," in the form of a manual review of a reasonably large sample of the documents to be produced, which would have brought the problem to the team's attention prior to the document production. Given that Arena faced no deadline for making the production, the lack of adequate quality control was "especially unreasonable."
Finally, the Court noted that while Arena did take other steps that were reasonable, Rule 502(b) requires not "some reasonable steps" but rather "steps that are reasonable in the aggregate." To illustrate the point, the Court offered an analogy:
Let's say that the relevant inquiry was whether someone took "reasonable steps" to ensure safe skydiving. That person wore their parachute pack, helmet, and harness, made sure the plane had gas and the weather was appropriate, and completed all the prerequisite trainings and certifications. But they had asked someone to bring them a parachute pack from the corner of a room where expended packs were strewn about. And they never checked to ensure that their parachute pack actually had a parachute inside. In that situation, even if some of the steps they took to ensure that their skydiving experience was safe were reasonable, the steps in the aggregate were not.
Before skydiving, check your parachute. And before making a document production, think carefully about categorization rules and then perform reasonable quality control. A clawback letter may not always suffice.
Judge Subramanian's order is available here.
