The Eastern District of Texas reminded practitioners that it is
an uphill battle to use a state law privilege as a shield in
qui tam False Claims Act cases. The court held that West
Virginia's statutory bank examiner privilege did not apply to
documents related to West Virginia's investigation of Ocwen
Loan Servicing LLC's lending practices, meaning that documents
inadvertently produced by Ocwen in the federal proceeding arising
from the state investigation were not privileged and could be used
at trial. United States ex rel. Fisher v. Ocwen Loan
Servicing, LLC, No. 4:12-CV-543, 2016 WL 3172774, at
*5 (E.D. Tex. June 7, 2016).
Background—FRE 501 and the West Virginia Bank
Examiner Privilege
Under Federal Rule of Evidence 501, federal common law governs a
claim of privilege in federal question cases. However, when a case
involves a privilege "not existent in the [federal] common law
but enacted by the (state) legislature based upon unique
considerations of government policy," the state law privilege
may be applied in a federal question case after "balancing the
policies behind the privilege against the policies favoring
disclosure." Am. Civil Liberties Union v. Finch, 638
F.2d 1336, 1343 (5th Cir. Unit A 1981).
The balancing test involves two questions: "(1) whether the
fact that the [state] courts would recognize the privilege itself
creates good reason for respecting privilege in federal court,
regardless of our independent judgment of its intrinsic
desirability; and (2) whether the privilege is intrinsically
meritorious in our independent judgment." Id.
The answer to the first question is almost always no because
"[t]hat the courts of a particular state would recognize a
given privilege will not often itself justify a federal court in
applying that privilege." Fairchild v. Liberty Indep. Sch.
Dist., 466 F. Supp. 2d 817, 821 (E.D. Tex. 2006). As to the
second question, the court applies four factors:
"(1) whether the communications originated in a
confidence that they will not be disclosed; (2) whether
confidentiality is essential to the full and satisfactory
maintenance of the relation between the parties; (3) whether
the relation is one in which the opinion of the community ought to
be sedulously fostered; and (4) whether the injury that would
inure to the relation by the disclosure of the communications is
greater than the benefit gained for the correct disposal of the
litigation." Ocwen, 2015 WL 3172774, at *4.
Here, West Virginia provides for a statutory bank examiner
privilege: "[T]he records relating to the financial condition
of any financial institution and any information contained in the
records shall be confidential.... No person shall divulge any
information contained in any records except as authorized in this
subdivision in response to a valid subpoena or subpoena duces tecum
issued pursuant to law in a criminal proceeding or in a civil
enforcement action brought by the state or federal regulatory
authorities." West Virginia Code § 31A-2-4(b)(1). The
general purpose is to encourage cooperation and compliance with the
regulatory process and facilitate the open exchange of information
between financial institutions and their regulators. See
Ocwen, 2015 WL 3172774, at *2.
Facts of the Case
Relators alleged that Ocwen's loan servicing, modifications,
and loss mitigation practices failed to comply with state and
federal law, contrary to Ocwen's certifications that they did
comply. Id. at *1. Relators specifically claimed that the
West Virginia Division of Financial Institutions'
("WVDFI") findings were relevant to the alleged false
representations made by Ocwen. Id.
WVDFI is a state regulatory agency responsible for the oversight of
West Virginia's financial services industry, which communicated
with and investigated Ocwen. WVDFI issued reports identifying
Ocwen's violations of West Virginia law and assessed nearly $2
million in civil penalties against Ocwen. Id. In addition
to the direct communications between WVDFI and Ocwen, Ocwen also
had internal communications and generated internal documents
related to those discussions. Id. at *2.
Ocwen produced a WVDFI report, which the relators then used as an
exhibit to their motion for summary judgment in December 2015. One
month later, Ocwen informed the relators that it had completed its
privilege analysis and that it had intended to withhold all reports
and communications with the WVDFI pending WVDFI's response to
Ocwen's consent for disclosure. Simultaneously, Ocwen requested
such consent from WVDFI. Id.
In May 2016, WVDFI informed Ocwen that it did not consent
to the disclosure and stated that it considered protecting such
information to be an important public policy of the state.
Id. (WVFI specifically stated "[the statute] provides
clear and unequivocal codification of an important multifaceted
public policy, as confidentiality of the subject information ...
encourages cooperation and compliance with the regulatory process
and facilitates the open and unfettered exchange of
information"). Accordingly, Ocwen requested that the relators
destroy the inadvertently produced WVDFI documents under the Agreed
Clawback Order, which mirrored Federal Rule of Civil Procedure
26(b)(5)(B). The relators then filed their Emergency Motion for
Privilege Determination, arguing that Ocwen's attempt to claw
back the documents had no basis in case law or statute and that the
documents were discoverable. Id. at *2-3.
Court's Analysis
The court applied the Finch balancing test to determine
whether the privilege applied. Id. at *3-5.
With regard to the first question—whether the fact that the
state court would recognize the privilege creates a good reason for
respecting the privilege in federal court—the court found it
did not because of the "strong federal interest in FCA cases
for seeking the truth" and because federal law plays a
predominant role in the litigation. Id. at *4.
With regard to the four factors pertinent to determining whether
the privilege is intrinsically meritorious, the court focused on
the first factor—whether the communications originated in a
confidence that they would not be disclosed. While the court found
that the communications between WVDFI and Ocwen indicated that they
expected confidentiality and that the communications would not be
disclosed under state law, the court nevertheless concluded that
this factor weighed in favor of disclosure. Id. at *4-5.
This is because the statute provides an exception allowing
disclosure in civil enforcement actions brought by state or federal
authorities. While this case was not brought by federal authorities
and the government declined to intervene, the relators stood in the
shoes of the government. The court found the documents did not
originate in confidence because WVDFI should not have assumed their
documents would be protected in an FCA action. Id. at *5.
And, despite WVDFI not consenting to the agreed disclosure (and at
least implicitly maintaining the information should not be
disclosed), the court found that, on balance, the factors favored
disclosure. Id. (finding WVDFI's ability to require
cooperation would not be impaired by disclosure and, because
factors one and two weighed in favor of disclosure, the balance
weighed in favor of disclosure for the benefit gained by seeking
the truth).
The court found that neither the communications between Ocwen and
WVDFI, nor Ocwen's internal communications, were privileged and
that the relators could use them at trial.
Practical Implications
The Ocwen decision has at least two important
implications: It remains an uphill battle to have a state law
privilege recognized in federal question cases, and this is true
even where a state agency maintains that such materials should not
be disclosed and advocates for protection. Courts may sometimes
elevate a perceived need for disclosure over a state law privilege,
which can be a broad sword for relators.
On the defensive side, the case serves as another reminder of the
need to think through the implications of state investigations on
future litigation, including what may or may not remain privileged.
Planning and open discussions may help companies determine how and
in what manner materials may be used in the future. Before the
creation of documents, careful analysis should be given as to what
privileges may apply and how to preserve any privileges at that
time, and careful consideration should also be given before the
production of any such documents.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
