November 2012 Vol. 9, No. 3

9.3.11

Attorney-Client Privilege, Attorney Work Product

Case:

California Earthquake Authority v. Metropolitan West Securities, LLC (E.D. Cal. 2012) __ F.R.D. ___, 2012 WL 3150263

Issue:

A publicly-run, privately-funded insurer retained an auditing firm to conduct an investigation, under the supervision of plaintiff’s general counsel, of a failed investment in anticipation of litigation and also to advise plaintiff how to modify its investment policies to reduce the risk of similar investment losses in the future.  The auditing firm conducted an extensive investigation, but never completed a report.  In a case against an investment bank arising out of investment losses, did the federal attorney work product doctrine bar the bank from discovery of investigation-related documents from the auditing firm such as its work papers and draft reports?

Holding:

Yes.    The Court held that plaintiff’s litigation purpose for conducting the investigation was inextricably intertwined with the non-litigation purpose of seeking review of, and guidance on revisions to, plaintiff’s investment policies and procedures.  Under the federal work product doctrine, that shielded from discovery among other things correspondence between the auditing firm and plaintiff’s general counsel, notes from the auditing firm’s interviews with individuals affiliated with plaintiff, and drafts of the never-completed audit report.

The litigation purpose of the investigation was demonstrated by plaintiff’s general counsel initiating a litigation hold on documents related to plaintiff’s investments and investment policies at the same time he contacted plaintiff’s outside counsel to discuss the possibility of litigation over the loss and shortly before contacting the auditing firm about conducting the investigation under the supervision of plaintiff’s general counsel.  “Certainly the timing of the negotiations and ultimate retention of [the auditing firm], contemporaneous with [plaintiff’s] discussions with outside counsel and the institution of a litigation hold, plausibly suggests that [the auditing firm] was retained in anticipation of litigation.”  (2012 WL 3150263 at *5, citation omitted.)  In addition, the auditing firm’s engagement letter referred to its services being used to assist the general counsel in giving legal advice to plaintiff.  (Ibid.)

The Court rejected defendant-bank’s contention that the business purpose of the investigation precluded application of the attorney-client privilege to the auditing firm’s investigation-related documents.  For example, the bank contended that it had cooperated in the audit based on representations that the audit was being conducted to improve plaintiff’s investment practices and further pointed out that the bank continued to serve as plaintiff’s investment advisor throughout the audit.  The bank contended that plaintiff never advised the bank that one of the purposes of the audit was to prepare for litigation against the bank and, had the plaintiff done so, the bank would not have cooperated in the audit.  The Court did not doubt that plaintiff had “cajoled [the bank] into cooperation with vague and generalized statements about the audit.”  (Id. at *9.).  But the bank provided no emails or other documentation suggesting that plaintiff had misrepresented the purpose of the audit.  The bank had independent incentives to cooperate in the investigation; failing to cooperate threatened the loss of plaintiff as a client and heightened the risk plaintiff would sue.  There also was no evidence the bank requested a hold-harmless agreement in exchange for its cooperation.  (Ibid.)

The Court acknowledged that an assertion of work product protection may be overcome where the requesting party shows a substantial need for the materials and that the party would suffer undue hardship were the documents not produced.  The bank made no such argument and the Court declined to consider it on its own.  (Ibid.)

Notes:

The Court declined to consider whether California’s attorney-client privilege, which was applicable in this diversity action, also protected those categories of documents it found covered by the federal work product doctrine.  The Court did hold that the attorney-client privilege protected correspondence between plaintiff’s staff and its general counsel or outside counsel that plaintiff provided to the auditing firm as background documents potentially relevant to the investigation.  The Court rejected bank’s contention that plaintiff had waived the privilege over these documents because providing the documents was not reasonably necessary to conduct the investigation into the investment losses.  Plaintiff’s general counsel and general counsel’s staff culled these privileged documents from plaintiff’s files based on their relevance to the investigation.   (Id. at *11.)

The Court ordered plaintiff to submit a privilege log to the bank with “foundational details for asserting the privilege as to the documentation in this category,” but declined to order plaintiff to explain why each communication was given to the auditing firm.  To require such detail “would essentially compel [plaintiff’s] General Counsel to reveal his analysis and strategy, and would unduly interfere with the attorney-client relationship.”  (Ibid.) 

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