UNITED STATES COURT OF APPEALS
UNITED STATES OF AMERICA,
CHARLES W. McCALL; JAY M. LAPINE,
On Appeal from an Order of the United States District Court for the Northern District of California
BRIEF OF THE SECURITIES AND EXCHANGE COMMISSION, AMICUS CURIAE, IN SUPPORT OF MCKESSON CORPORATION AND SUPPORTING REVERSAL
Deputy General Counsel
RICHARD M. HUMES
Associate General Counsel
Assistant General Counsel
EDWARD C. SCHWEITZER, JR.
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549-0207
Telephone: (202) 942-0823 (Schweitzer)
Brady v. Maryland,
373 U.S. 83 (1963)
Dellwood Farms, Inc. v. Cargill, Inc.,
128 F.3d 1122 (7th Cir.1997)
Diversified Indus., Inc. v. Meredith,
572 F.2d 596 (8th Cir. 1977) (en banc)
Florida State Board of Administration v. Waste Management, Inc.,
No. 98 L 6034 (Ill. Cir. Ct. April 2, 1999)
Green v. McKesson Corp., No. 2002 CV 48407
(Fulton County, Georgia, April 10, 2003), interlocutory appeal
granted, No. A03A2428 (Ga. Ct. App. May 21, 2003)
Hickman v. Taylor,
329 U.S. 495 (1947)
Hunydee v. United States,
355 F.2d 183 (9th Cir.1965)
In re Columbia/HCA Healthcare Corporation Billing Practices Litigation,
293 F.3d 289 (6th Cir. 2002)
In re Grand Jury Subpoena Duces Tecum Dated November 16, 1974,
406 F. Supp. 381 (S.D.N.Y. 1975)
In re Leslie Fay Cos. Sec. Litigation,
161 F.R.D. 274 (S.D.N.Y. 1995)
In re Sealed Case,
676 F.2d 793 (D.C. Cir. 1982)
In re Six Grand Jury Witnesses,
979 F.2d 939 (2d Cir. 1992), cert. denied, 509 U.S. 905 (1993)
In re Steinhardt Partners, L.P.,
9 F.3d 230 (2d Cir. 1993)
In re Subpoenas Duces Tecum,
738 F.2d 1367 (D.C. Cir. 1984)
McKesson HBOC, Inc. v. Adler,
No. A01A1836 (Ga. Ct. App. March 27, 2002)
McMorgan & Co. v. 1st California Mortgage Co.,
931 F. Supp. 703 (N.D. Cal. 1996)
Merrill Lynch Fundamental Growth Fund, Inc. v. McKesson HBOC, Inc.,
No. CGC 02 405792 (San Francisco County, Cal. June 16, 2003),
petition for review granted, No. S117911 (Cal. Oct. 15, 2003)
(transferred to Cal. Ct. App.)
Pentawave, Inc. v. Homestore.com, Inc.,
No. SC 031526 (Cal. Super. Ct. Nov. 22, 2002)
Permian Corp. v. United States,
665 F.2d 1214 (D.C. Cir. 1981)
Saito v. McKesson HBOC, Inc.,
No. Civ. A. 18553,
2002 WL 31657622 (Del. Ch. Nov. 13, 2002)
SEC v. Jerry T. O'Brien, Inc.,
467 U.S. 735 (1984)
Shirvanian v. Waste Management, Inc.,
No. 2000 00211 (Tex. Dist. Ct. March 1, 2002)
Trammel v. United States,
445 U.S. 40 (1980)
United States v. Massachusetts Institute of Technology,
129 F.3d 681 (1st Cir. 1997)
United States v. Schwimmer,
892 F.2d 237 (2d Cir. 1989)
Upjohn Co. v. United States,
449 U.S. 383 (1981)
Westinghouse Elec. Corp. v. Republic of the Philippines,
951 F.2d 1414 (3d Cir. 1991)
15 U.S.C. 78b
15 U.S.C. 78j
Federal Rule of Civil Procedure 26(b)(3)
Federal Rule of Civil Procedure 26(b)(4)(B)
Final Rule: Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. 6296 (Feb. 6, 2003)
SEC Administrative Proceedings Release 33-8172 (Dec. 23, 2002)
SEC Administrative Proceedings Release 34-45586 (March 18, 2002)
SEC Administrative Proceedings Release 34-45587 (March 18, 2002)
SEC Administrative Proceedings Releases 34-45588 (March 18, 2002)
SEC Litigation Release LR-16743 (Oct. 2, 2000)
SEC Litigation Release LR-17189 (Oct. 15, 2001)
SEC Report of Investigations Release 34-44969 (Oct. 23, 2001)
Production of work-product materials to a government agency under a confidentiality agreement should not result in waiver of work-product protection because preserving work-product protection in such circumstances is in the public interest and is consistent with the policies underpinning the work-product doctrine.1 If companies cannot produce documents to the Securities and Exchange Commission ("Commission") under a confidentiality agreement without waiving work-product protection, the likely result is that companies will refuse to share written work product with the Commission, as many companies now refuse to do. Consequently, a holding by this Court that McKesson waived its work-product protection would hinder the Commission's future investigations into possible violations of the securities laws, thereby impairing its ability to provide relief to victims of securities fraud as soon as possible. Accordingly, the Commission respectfully requests that this Court hold that McKesson's disclosure of work product to the Commission under a confidentiality agreement did not waive work-product protection.
The Commission is the agency principally responsible for administering and enforcing the federal securities laws, which are designed to protect investors and the integrity of our capital markets. Appellant's Excerpts of Record at 89 (Affidavit of Helane L. Morrison).2 The Commission devotes much of its finite resources to investigating possible violations of those laws, prosecuting violators, obtaining disgorgement of ill-gotten funds, and distributing disgorged funds to defrauded investors. The Commission uses confidentiality agreements, like the agreements at issue here, to obtain information that is important to its investigations but that is usually not otherwise available to it because the information is protected as work product. ER 89-90. The district court's holding that a public company waives work-product protection as to private third parties when it shares its work product with the Commission under a confidentiality agreement will impair the Commission's ability to obtain such information in the future. See ER 89-90, 93.3
Whether, in view of the public interest in enhancing the ability of the Commission to conduct effective and expeditious investigations and the absence of resulting harm to private parties, courts should find that companies do not waive work product protection when they provide work product to the Commission under confidentiality agreements.
The Commission cannot ordinarily compel production of work product by subpoena or court process from companies it investigates. ER 89 90. Most companies being investigated by the Commission are reluctant to produce work product to the Commission because they fear that disclosure to the Commission may waive work product protection as to third parties. ER 89 90, 93. Therefore, to obtain access to work product, the Commission will, in appropriate cases, enter into confidentiality agreements like those at issue here, agreeing not to disclose the materials to third parties and not to argue that production constitutes a waiver as to third parties. ER 89 90. While companies being investigated by the Commission usually would not share their attorneys' work product with private parties suing them - because they would likely face greater liability or settlement demands - the Commission gives appropriate consideration to cooperation in imposing sanctions. Id.; Reports of Investigations Release 34 44969 (Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions) (Oct. 23, 2001) (explaining why the Commission took action against the individual who had caused a company's books and records to be inaccurate and its periodic reports misstated but not against the company).
The Commission enters into a confidentiality agreement only when it has reason to believe that obtaining the work product will promote the public interest by significantly expediting the successful prosecution of enforcement actions or facilitating early settlements, thereby saving Commission time and scarce resources. ER 90 92. Completing investigations more quickly also enables the Commission to obtain appropriate remedial relief more quickly, which may include compensating victims of wrongdoing and ensuring that the securities markets receive reliable information. ER 91 92.
On the day McKesson announced that it was investigating irregularities in its financial statements, Commission staff began an informal inquiry into the matter. ER 94. McKesson had retained the law firm of Skadden, Arps, Slate, Meagher & Flom LLP ("Skadden") in connection with its own internal investigation of that matter, and the staff met with representatives of Skadden. ER 94. During those meetings, Skadden explained that McKesson's Audit Committee had retained Skadden to determine the nature, extent, and magnitude of all accounting issues and the individuals responsible for any irregularities that might be uncovered. Id. Skadden also explained that the Audit Committee had directed Skadden to cooperate fully with the staff, subject to a suitable confidentiality agreement. Id. The staff accepted this offer of assistance, believing that access to the information developed by the Audit Committee's investigation would materially assist its own investigation. ER 95-96.
The Commission staff ultimately signed two confidentiality agreements with McKesson, and McKesson agreed to give the Commission an internal audit report and back-up materials, including Skadden's selection of contemporaneous documents that were exhibits to the report and interview summaries (collectively, the "Report"). ER 80-83, 95-96, 171-74. In both confidentiality agreements, McKesson represented that the Report contains and reflects communications and mental impressions protected by the attorney-client privilege and work-product doctrine. ER 81, 172. McKesson further represented that "[McKesson] has not waived, and does not intend to waive, the work-product, attorney-client, or any other applicable privilege as to any third-party." ER 82, 173.
The Commission staff agreed not to "assert that [McKesson's] voluntary production of the [Report] to the Commission, or that the Commission's disclosure of the [Report] to other law enforcement officials, constitutes a waiver of such privilege as to any third party." ER 82, 173. The staff further agreed to "maintain the confidentiality of the [Report] under this agreement, and . . . not to disclose the [Report] to any third party, except to the extent that the Staff determines that disclosure is otherwise required by federal law or in furtherance of the Commission's discharge of its duties and responsibilities." ER 81, 172.
The Report, produced to the Commission under confidentiality agreements, significantly expedited the staff's investigation, allowing the Commission to use roughly half the number of persons that would otherwise have been needed for the investigation and saving the Commission at least several hundred hours of time reviewing documents and interviewing witnesses, because the Report identified the primary wrongdoers and provided evidence of intentional fraudulent conduct. ER 96-97.
The Report thus enabled the Commission to file a succession of enforcement actions against individuals considered principal wrongdoers sooner than it otherwise could have. Id. On September 28, 2000, the Commission filed a civil injunctive action for fraud and other securities law violations going back to 1997 against Jay Gilbertson, Albert Bergonzi, and Dominick DeRosa. SEC v. Gilbertson, Bergonzi, and DeRosa, No. C 00 3570 (N.D. Cal. 2000); Litigation Release LR 16743 (Oct. 2, 2000); ER 96 97. At the time the Commission filed that action, DeRosa, who had been an officer at HBO & Company ("HBOC"), consented to the entry against him of a permanent injunction as to all of the alleged violations; he also agreed to be barred from serving as an officer or director of a public company for five years and to disgorge $361,528.80 in ill gotten gains (including interest) and to pay a civil penalty of $50,000. Id. On September 27, 2001, the Commission brought two additional civil actions against six former corporate officers at HBOC, including Jay Lapine, a defendant appellee here. SEC v. Lapine, No. 01 3650 (N.D. Cal.), and SEC v. Smeraski, et al. , No. 01 3651 (N.D. Cal. 2001); Litigation Release LR 17189 (Oct. 15, 2001). When the actions were brought, four of the defendants consented to entry of permanent injunctions against them and agreed to disgorge $548,930.90 in ill gotten gains and to pay $205,000 in civil penalties. Id. Subsequently, on March 18, 2002, the Commission instituted and settled administrative proceedings against three former HBOC accountants, suspending them from appearing or practicing before the Commission. Administrative Proceedings Releases 34 45586 (In re Timothy Heyerdahl), 34 45587 (In re David Held), and 34 45588 (In re Elaine Decker) (all March 18, 2002). In December 2002, the Commission brought an administrative proceeding against the chief outside auditor for HBOC during 1997 and 1998 to suspend him from appearing or practicing before the Commission. In re Robert Putnam, Administrative Proceedings Release 33 8172 (Dec. 23, 2002). On June 4, 2003, the Commission filed a civil injunctive action for fraud and other securities law violations going back to 1998 against Charles McCall, the former Chief Executive Officer of HBOC and Chairman of the Board of Directors of McKesson after its merger with HBOC and the second defendant appellee here. SEC v. McCall, No. CO3 2603 (N.D. Cal. 2003); Litigation Release LR 18170 (June 4, 2003).
In separate criminal proceedings related to this appeal, Bergonzi and Gilbertson were indicted for multiple counts of securities, wire, and mail fraud. ER 1 31. After Gilbertson pled guilty in April 2003, ER 208 16, a superseding indictment in June 2003 charged McCall and Lapine with securities fraud along with Bergonzi. ER 217 47.
Once they were indicted, McCall and Lapine sought access to the Report by joining in Bergonzi's and Gilbertson's motion to compel its production, which the district court had granted months before, staying its order pending a decision on McKesson's appeal (No. 03 10024). ER 32 79, 182-203, 248 54. The district court granted McCall's and Lapine's motions to compel for the same reasons it had granted Bergonzi's and Gilbertson's, again staying its order pending a decision on McKesson's appeal. ER 345 49 (referencing and incorporating ER 255 76). After Bergonzi pled guilty in October 2003, ER 357-66, McKesson's original appeal (No. 03 10024) was voluntarily dismissed. ER 380.
In the order on appeal, the district court held that the attorney client privilege never applied to the Report, and that McKesson had waived work product protection by sharing the Report with the Commission and the United States Attorney's Office ("USAO"). ER 255 69, 345 49. Despite acknowledging the Commission's amicus brief, however, the district court did not address the Commission's public-policy arguments that support a finding that McKesson did not waive work-product protection. The district court also did not recognize that courts rejecting the selective waiver theory do not reject reliance on confidentiality agreements and that selective waiver is not necessarily at issue where a corporation enters into a confidentiality agreement with the government.
Determining whether sharing work product with the government under a confidentiality agreement waives work-product protection requires balancing the public interest in facilitating investigations of securities fraud, which may affect many thousands of public shareholders, against any justification for providing work product disclosed to the government to third-party litigants. The Commission submits that the Court should resolve this issue in the interest of prompt and effective government action in dealing with securities fraud.
The work-product doctrine protects the confidentiality of documents prepared by or at the direction of attorneys in anticipation of litigation by preventing opposing counsel from having free access to an attorney's thought processes. Hickman v. Taylor, 329 U.S. 495, 509-12 (1947). The doctrine is codified in Rule 26(b)(3) of the Federal Rules of Civil Procedure.
Because the purpose of the work-product doctrine is to protect an attorney's thought processes from adversaries, disclosure of work product to one adversary generally waives the doctrine as to all adversaries. In re Steinhardt Partners, L.P. , 9 F.3d 230, 235 (2d Cir. 1993); Westinghouse Elec. Corp. v. Republic of the Philippines, 951 F.2d 1414, 1428-29 (3d Cir. 1991). Circuit courts of appeals, however, have repeatedly recognized that disclosure of work product to a law-enforcement agency in the course of an investigation and under a confidentiality agreement may not waive work-product protection. In Steinhardt, for example, the Commission had refused to enter into a confidentiality agreement regarding the work-product submitted to it, and in its amicus brief in that case, the Commission argued that submission of that work product without a confidentiality agreement had waived work-product protection. 9 F.3d at 232, 236. The Second Circuit agreed with the Commission and held that the company had waived protection for the work product it submitted to the Commission. Id. at 235. Nevertheless, as the Commission had also urged, the Second Circuit expressly
decline[d] to adopt a per se rule that all voluntary disclosures to the government waive work product protection. Crafting rules relating to privilege in matters of governmental investigations must be done on a case-by-case basis. Establishing a rigid rule would fail to anticipate situations in which the disclosing party and the government may share a common interest in developing legal theories and analyzing information, or situations in which the SEC and the disclosing party have entered into an explicit agreement that the SEC will maintain the confidentiality of the disclosed materials.
Id. at 236 (citations omitted; emphasis added). See also In re Subpoenas Duces Tecum, 738 F.2d 1367, 1375 (D.C. Cir. 1984) (noting that a party can avoid waiver of work-product protection by "insist[ing] on a promise of confidentiality before disclosure to the SEC"); In re Sealed Case, 676 F.2d 793, 823-824 (D.C. Cir. 1982) (recognizing that a confidentiality agreement with the SEC or other government agency may prevent waiver of work-product protection); Permian Corp. v. United States, 665 F.2d 1214, 1218-19, 1222 (D.C. Cir. 1981) (holding that a confidentiality agreement did not prevent waiver of attorney-client privilege for documents shared with the Commission but work-product protection was not waived).
Relying on federal precedent, Delaware's Chancery Court (Chandler, J.) has also recognized the importance of protecting work product provided to government investigators. That court held that McKesson did not waive work product protection when it disclosed the Report at issue here to the Commission and the USAO under confidentiality agreements, "because it is in the best interests of the shareholders to encourage corporate compliance, and because the law enforcement agencies are designed by our legislature as the first line of defense for such shareholders," and because such a holding "encourages cooperation with law enforcement agencies without any negative cost to society or to private plaintiffs." Saito v. McKesson HBOC, Inc. , No. Civ. A. 18553, 2002 WL 31657622, at *11 (Del. Ch. Nov. 13, 2002).4
Adopting the Commission's position here does not amount to endorsing what has been called the selective waiver theory, as the district court believed. Indeed, courts have usually recognized the importance of confidentiality agreements in the course of rejecting that theory, under which disclosing work product or other privileged documents to one party - usually the government - does not prevent the person from asserting a privilege or the work product doctrine against a different party in other litigation. See, e.g., Diversified Indus., Inc. v. Meredith, 572 F.2d 596 (8th Cir. 1977) (en banc).
In rejecting the selective waiver theory and holding that waiver of work product protection as to one adversary results in waiver as to all, courts have recognized that disclosure of work product to the government may not constitute a waiver if documents are disclosed under a confidentiality agreement with the government. See Steinhardt, 9 F.3d at 235 36; In re Subpoena Duces Tecum, 738 F.2d at 1372 75; Permian, 665 F.2d at 1218 19, 1222. See also Dellwood Farms, Inc. v. Cargill, Inc. , 128 F.3d 1122, 1126 27 (7th Cir.1997) (courts rejected claims of "selective waiver" because possessors of privileged information failed to obtain "an agreement by the person to whom they made the disclosure not to spread it further"). Courts have thus recognized that situations in which a government agency agrees to hold a company's internal report in confidence should be treated differently from situations in which the company turns the report over to the government without a confidentiality agreement.5
The only court of appeals to hold that production of work product to the government under a confidentiality agreement waives the protection has been the Sixth Circuit, over a vigorous dissent. In re Columbia/HCA Healthcare Corp. Billing Practices Litig. , 293 F.3d 289 (6th Cir. 2002). There, the Commission respectfully submits, the dissent correctly assessed the public-policy considerations that support finding that no waiver of work-product protection occurred here. The majority (Moore & Russell, JJ.) acknowledged that public policy supports holding that producing an internal report to government investigators does not result in waiver because producing the report results in "[c]onsiderable savings . . . in time and fiscal expenditure" and encourages both self-policing by companies and settlement of disputes. Id. at 303. The majority nevertheless rejected, without distinction, both the selective-waiver theory and the position the Commission supports here, for two principal reasons. First, the majority said, allowing disclosure to government investigators without waiver would be inconsistent with the rationale for both the attorney-client privilege, which "was never designed to protect conversations between a client and the Government - i.e., an adverse party" - and work-product protection. Id. at 303-04 (discussing waiver of the attorney-client privilege; citations and internal quotation marks omitted), 305 (same analysis applicable to work-product protection). Second, the majority said, government investigators can obtain the information they need without a policy that prevents waiver - "albeit at a higher cost in time and money" - and therefore do not need to "assist wrongdoers" and "prevent future litigants from obtaining the same information." Id. at 303 (discussing attorney-client privilege), 306-307 (same analysis applicable to work-product protection).
In dissent, Judge Boggs explained that, contrary to the majority's rationales, he could "find no rule narrowly constraining the considerations that courts may take into account in developing rules regarding a common law privilege or requiring that courts turn a blind eye to the practical effect of the privilege rules that they are charged to create." Id. at 310.6 The same policy choice is presented here: whether the public's interest in prompt and effective action against securities fraud, which affects the interests of thousands of shareholders, justifies allowing companies to provide reports to the government without waiving work-product protection.
Accordingly, the dissent emphasized that courts must look to public policy in developing rules relating to common-law privileges and correctly observed that the majority's rule "does nothing more than increase the cost of cooperating with the government." Id. at 311. Allowing disclosure of privileged or protected documents to the government without waiver provides significant benefits to the public, especially by providing access to "evidence provided by privileged information for which there is no non-privileged substitute or to which there is no path without the privileged evidence." Id. The government's only access to this privileged or protected information is through voluntary disclosure. Id.7 Moreover, as the dissent pointed out, the attorney-client privilege and work-product doctrine prevent private parties from obtaining companies' internal reports that have not been voluntarily disclosed. Id. at 312. The choice is thus between disclosure only to government agencies, which will increase the effectiveness and efficiency of governmental investigations, and no disclosure at all - not a choice between disclosure only to government agencies and disclosure to all parties. Id. at 307.
The district court below indicates that the Third Circuit, like the Sixth, held that producing work product to the government waives work-product protection even if the parties had entered into a confidentiality agreement. ER 195, 268 (citing Id. Westinghouse, 951 F.2d at 1430). The Third Circuit's discussion of the issue in Westinghouse, however, is dicta because its discussion of the impact of confidentiality agreements was not necessary to its holding. The court held that Westinghouse waived work-product protection by disclosing its work product to the Commission before it signed a confidentiality agreement, so it did not need to address the impact of a confidentiality agreement. See 951 F.2d at 1418, 1427. Thus, the majority opinion in Columbia/HCA stands alone.
Moreover, the issue now before this Court was not squarely presented in Westinghouse. First, neither the Commission nor any party explained to the court in that case either the circumstances under which the Commission enters into confidentiality agreements or why obtaining documents under confidentiality agreements that prevent waiver is an important - often vital - investigatory practice where confidentiality agreements are the only way to obtain the documents. Id. at 1427.
Second, the reports at issue in Westinghouse had been produced under a Voluntary Disclosure Program that the Commission instituted in the mid-1970s in connection with the Commission's investigations of the political "slush fund" practices of numerous corporations.8 Reports produced under the Commission's Voluntary Disclosure Program were usually created in lieu of, not in furtherance of, a Commission investigation, and companies prepared the reports after being invited to do so by the Commission, not because they had independently uncovered and investigated violations of the securities laws and had replaced former management who were responsible for those violations. See In re Sealed Case, 676 F.2d at 800-801; In re Subpoenas Duces Tecum, 738 F.2d at 1368-69.
Third, in Westinghouse, the documents disclosed to the Commission advocated favorable treatment of Westinghouse more than they facilitated the Commission's investigation. At Westinghouse's request, its law firm "orally presented its findings to the agency," "showed the SEC investigators one of the [two] letter reports" it had prepared, did not allow the Commission to retain the report, and "did not supply the SEC with any of the documents underlying the presentation and the report." 951 F.2d at 1418.
The district court below relied on cases that rejected the selective-waiver theory to support its holding that McKesson waived work-product protection here. That reliance is misplaced to the extent that the district court did not distinguish between the selective-waiver theory and the position the Commission advocates. The cases on which the district court relied do not squarely address the issues and concerns raised by the Commission in its amicus brief below.9
In its analysis (ER 192-96, 265-69) the district court relied primarily on two cases that involve the selective-waiver theory and that do not involve confidentiality agreements or Commission investigations of corporate wrongdoing: United States v. Massachusetts Institute of Technology ("MIT"), 129 F.3d 681 (1st Cir. 1997) and McMorgan & Co. v. 1st California Mortgage Co. , 931 F. Supp. 703 (N.D. Cal. 1996).10 Those cases involved facts significantly different from those here, and both are consistent with a finding that McKesson did not waive work-product protection by sharing Skadden's Report with the Commission.
In MIT, the university, acting as a defense contractor, had turned over billing records and meeting minutes to the auditing arm of the Department of Defense, as it was contractually obliged to do as part of a routine review of its performance under its defense contracts to ensure that the government had not been "overcharged for services." 129 F.3d at 683. There was no confidentiality agreement between the audit agency and MIT, nor was there any need for one. MIT had subjected itself to the obligation to disclose those documents "by becoming a government contractor." Id. at 686. McKesson, in contrast, had no contractual obligation to share its internal Report with the Commission, and it provided the Report only after obtaining a confidentiality agreement.
McMorgan also involves facts very different from those here. The McMorgan court held that a company had waived both the attorney-client privilege and work-product protection for documents that the company had shared with the government. 931 F. Supp. at 711. The court so held because there was
nothing on the record to indicate that [the company] notified the [government agency] that it refused to produce any of the disputed material as privileged. There is no hint of any protective order or stipulation between [the company] and the [agency] regarding nonwaiver of privilege. There is no hint of evidence that [the company] did anything but simply hand over the documents to the [agency] without a second thought.
Id. (emphasis added). Here, on the contrary, Skadden made clear that McKesson insisted on having a satisfactory confidentiality agreement in place before it would share its internal report with the Commission. ER 80-81, 94-96.
In addition to the case law that supports the Commission's position, significant public policy considerations make clear that submission of work product to the government, under a confidentiality agreement, should not waive work-product protection.11 The primary error in the district court's opinion is its failure to consider and address the significant benefit to the public, without any offsetting harm, that would result from a finding of non-waiver.
Allowing parties to produce work product to the Commission without waiving work-product protection serves the public interest because it significantly enhances the Commission's ability to conduct expeditious investigations and obtain prompt relief, where appropriate, for defrauded investors. ER 92-93. See also Columbia/HCA, 293 F.3d at 311-13; Saito, 2002 WL 31657622, at *6-*11.
The Commission cannot compel public companies to produce work product, and even cooperative companies generally will not produce work product for fear that production will waive work-product protection as to third parties. ER 89-90, 93-94. Companies, however, will be more likely to produce work product if they believe only the government - and not actual or potential adversaries in private litigation - will have access to the documents. ER 89-90, 93-94. McKesson was such a company. ER 94-96. The Commission entered into confidentiality agreements with McKesson because, from the initial meeting between the Commission staff and McKesson, McKesson said it was willing to provide the Commission with work product, but would do so only under a confidentiality agreement. ER 94.
Allowing a company to share work product with the Commission without waiving work-product protection where the Commission has entered into a confidentiality agreement furthers the public interest without circumventing courts' rejection of the selective-waiver theory. The Commission enters into confidentiality agreements only when it has reason to believe that obtaining the work product will serve the public interest by enabling the Commission to improve the quality and timeliness of its investigations, obtain appropriate relief earlier, and save substantial time and resources and/or better preserve its ability to provide monetary relief to investors. ER 90-92.12 Although the Commission must verify that work product is accurate and complete and must conduct its own investigation, this practice is far less time consuming and less difficult than starting and conducting investigations without the work product. ER 92.
McKesson's work product is a good example of the kinds of documents that would likely assist the Commission in an investigation. The documents prepared by Skadden (and the accountants that Skadden retained) saved the Commission at least several hundred hours of time reviewing documents and interviewing witnesses by focusing the Commission's investigation on the primary wrongdoers and providing evidence of the wrongdoers' fraudulent conduct. ER 96-97. Having the materials allowed the Commission to use approximately half the number of persons that would normally have been needed to staff the investigation. ER 96-97. As a result, McKesson's Report greatly expedited the Commission's investigation. See Id.
Work product disclosed under a confidentiality agreement in other Commission investigations has similarly proved to be extremely beneficial. ER 92-93. For example, in one investigation the Commission obtained work product that an accounting firm spent 29,000 hours preparing. Id. In another case it received the results of an investigation that cost $9 million. ER 92. Receiving that information saved the Commission from expending similar amounts of time and resources. ER 92-93. When the Commission can conduct expeditious and efficient investigations, it can then obtain appropriate remedies for investors in a more timely manner. ER 92. The public interest is clearly served when the Commission can promptly identify illegal conduct and provide compensation to victims of securities fraud. On the other hand, the public interest is not well served when the Commission can obtain the information it needs only "at a higher cost in time and money" (as the majority in Columbia/HCA simply assumed any government agency can, 293 F.3d at 303). See Saito, 2002 WL 31657622, at *8 (recognizing that "[e]ncouraging corporations to disclose their internal investigations confidentially allows the SEC to resolve its investigations expeditiously and efficiently"). Because the Commission's resources are finite, increasing the cost of investigations means that some investigations will be deferred or not undertaken at all.
In detailing benefits to the public interest of allowing companies to disclose work product without waiver of work-product protection, the Commission emphasizes the use of confidentiality agreements because confidentiality agreements help prevent companies from making unnecessary or frivolous claims that production of work product did not waive work-product protection. If a corporation discloses documents without obtaining a confidentiality agreement from the government, third-parties should be able to obtain the documents because the corporation has not provided evidence of an intent to protect the documents - and has not shown that it was unwilling to disclose the documents without protection from third-party plaintiffs. See Columbia/HCA, 293 F.3d at 313 n.3 (Boggs, J., dissenting). Moreover, absent a clear government interest in obtaining the documents confirmed by a confidentiality agreement, the benefits to the public interest are likely not strong enough to justify an exception to the general doctrines governing waiver of work-product protection.
These reasons for requiring a confidentiality agreement indicate that the district court's concern that the confidentiality agreements McKesson signed were not unconditional is misplaced. See ER 266 n.10. A confidentiality agreement can justify a finding that no waiver of work-product protection occurred even if the agreement allows disclosure in some future circumstance.13 A conditional confidentiality agreement in the form used by the Commission may, at some time in the future, allow disclosure to a third-party, and such a disclosure may result in waiver of work-product protection. The waiver, however, would occur when the disclosure occurs, not when the confidentiality agreement is signed. Thus, even if at the time it disclosed its work product to the USAO, a company knew that the work product contained exculpatory material that might have to be produced in a criminal case, such knowledge does not result in any waiver.14
In any event, the Commission's confidentiality agreements provide significant protection from disclosure.15 The Commission is rarely - if ever - "required" to disclose internal investigative reports produced to the Commission. The Commission staff uses contemporaneous company documents as exhibits during testimony, rather than documents prepared by a law firm after the events under investigation occurred. In fact, in this case, the Commission has not shown McKesson's Report to anyone outside the government during its investigation.16
Finding no waiver of work-product protection where work product is disclosed to government investigators subject to a confidentiality agreement will not harm the public interest. In particular, the position advocated by the Commission will not harm criminal defendants or private litigants, or put them at a strategic disadvantage.
Criminal defendants like McCall and Lapine will not be harmed by the position advocated by the Commission. Where work product disclosed to government prosecutors provides information helpful to criminal defendants beyond that developed in the course of the prosecutor's own investigation - as the district court below thought McKesson's Report did, ER 271 - disclosure of that information to the government without waiver of work-product protection makes criminal defendants better off than they would have been if the work product had never been disclosed at all. Criminal defendants, under Brady v. Maryland, 373 U.S. 83 (1963), may be entitled to that additional exculpatory information, once it has been turned over to government prosecutors, and the USAO conceded below that it had provided such exculpatory information to the criminal defendants here. See ER 270-71.
If, on the other hand, companies stop disclosing reports of their internal investigations because of a holding that disclosing work product to the government under a confidentiality agreement waives work-product protection - as seems likely - criminal defendants will not be entitled to obtain exculpatory information in such reports.
Private litigants may actually benefit from the government's ability to conduct an expeditious and thorough investigation, because many private securities actions follow the successful completion of a Commission investigation and enforcement action. See Saito, 2002 WL 31657622, at *8 (resulting "savings and efficiency" for the SEC afford investors "greater protection").17
Allowing companies to produce work product to the government under confidentiality agreements will not prevent private plaintiffs from obtaining fact work product if they can show sufficient need. See, e.g., Fed. R. Civ. P. 26(b)(3). They will be in the same position that they would have been in if the Commission had not obtained the work product. See Westinghouse, 951 F.2d at 1426 (not "inherently unfair for a party to selectively disclose privileged information in one proceeding but not another" because "when a client discloses privileged information to a government agency, the private litigant in subsequent proceedings is no worse off than it would have been had the disclosure to the agency not occurred"). Moreover, if it is clear that disclosing work product to government investigators subject to a confidentiality agreement waives work-product protection, companies will likely stop disclosing work product to the government rather than risk being required to produce it to private plaintiffs. See Columbia/HCA, 293 F.3d at 312 (Boggs, J., dissenting) ("Without the exception, much otherwise disclosed material would stay completely in the dark, under the absolute cover of privilege."); Saito, 2002 WL 31657622, at *9 ("Imposing the harsh consequence of a waiver upon disclosing parties would discourage confidential disclosures.").
For the foregoing reasons, the Commission requests that this Court determine that McKesson did not waive work-product protection in disclosing to the Commission work product under a confidentiality agreement with the Commission.
Deputy General Counsel
RICHARD M. HUMES
Associate General Counsel
Assistant General Counsel
EDWARD C. SCHWEITZER, JR.
UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
450 5th Street, N.W.
Washington, D.C. 20549-0207
(202) 942-0823 (Schweitzer)
Dated: February 6, 2004
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