## Facts

- Aerojet-General Corporation and an affiliate sued multiple liability insurers in a complex coverage dispute arising from environmental contamination near Aerojet’s Sacramento facility.
- During a period when discovery was stayed due to a pending writ petition, Aerojet’s counsel (Scott DeVries) received a packet of documents through Aerojet’s risk manager and insurance brokers.
- The packet included privileged materials prepared by insurers’ counsel, including a defense memorandum describing counsel’s interview of an insurance adjuster (Warren Michaels) and counsel’s evaluation of his value as a witness.
- DeVries did not promptly notify opposing counsel that he had received the privileged materials.
- DeVries contacted Michaels, discussed the case, and deposed him; at the deposition, DeVries disclosed he learned of Michaels from the defense memorandum.
- Insurers moved for sanctions, asserting misuse of privileged attorney-client communications and/or work product.
- The trial court found the materials privileged, found DeVries acted unethically and in bad faith by failing to notify opposing counsel and using the information, imposed monetary sanctions against DeVries’s law firm, and barred Michaels from testifying.

## Issues

1. Whether a trial court may impose monetary sanctions on counsel (or counsel’s firm) for failing to promptly notify opposing counsel and for using inadvertently received privileged materials, where the recipient did not procure the disclosure.
2. What limits apply to a court’s authority (statutory or inherent) to issue punitive monetary sanctions for litigation conduct involving inadvertently received privileged documents.
3. Whether, and to what extent, the court may impose nonmonetary remedial measures (including witness preclusion) to neutralize any unfair advantage from the use of privileged materials.

## Decision

- The Court of Appeal reversed the monetary sanctions order against the law firm.
- The court treated DeVries as an innocent recipient of privileged documents and concluded the record did not support the level of willful misconduct or bad faith necessary to justify the monetary sanction imposed.
- The court recognized an attorney’s duty, upon realizing materials appear privileged and inadvertently received, to notify opposing counsel and refrain from using the materials until privilege is resolved.
- The court distinguished ethical obligations and State Bar discipline from the trial court’s power to punish via monetary sanctions in the civil action.
- The court indicated that trial courts may craft case-specific remedies to restore fairness after inadvertent disclosure, but punitive monetary sanctions must rest on clear authority and supported findings, and must be proportionate.

## Legal Principles

- An attorney who receives documents that reasonably appear to be an opponent’s privileged communications or work product and appear to have been inadvertently transmitted must promptly notify the opponent (or sender) and cease use pending resolution of the privilege claim.
- Trial courts may issue remedial orders aimed at eliminating unfair advantage created by inadvertent disclosure, tailored to the prejudice and the needs of the case.
- Monetary sanctions premised on a court’s inherent power require supported findings of bad faith or comparable egregious conduct; punitive sanctions must be tied to proper authority and an adequate evidentiary record.
- Ethical violations relating to handling of privileged materials may warrant professional discipline, but courts must not convert ethical standards into punitive monetary sanctions absent an appropriate legal basis.

## Conclusion

The court reversed monetary sanctions imposed on counsel’s firm for use of inadvertently received privileged materials, holding that while attorneys must promptly notify opponents and avoid exploiting such documents, punitive monetary sanctions require clear authority, proportionate tailoring, and a supported finding of bad faith; courts may instead employ targeted remedies to restore fairness.


Aerojet-General Corp. v. Transport Indem. Ins., 18 Cal. App. 4th 996 (Cal. Ct. App. 1993)