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U.S. Securities and Exchange Commission

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION 4

No. A103055


McKESSON HBOC, INC.,

Petitioner,

v.

THE SUPERIOR COURT OF SAN FRANCISCO,

Respondent.


Brief of the United States Securities and Exchange Commission as Amicus Curiae in Support of McKesson HBOC, Inc.


Appeal from the Superior Court for the County of San Francisco Case No. 307619; The Honorable Donald S. Mitchell, Judge


JAMES A. HOWELL
(Bar No. 92721)
District Trial Counsel

Securities and Exchange
Commission
44 Montgomery Street
Suite 1100
San Francisco, California 94104
Telephone: (415) 705-2356

GIOVANNI PREZIOSO
General Counsel

MEYER EISENBERG
Deputy General Counsel

RICHARD M. HUMES
Associate General Counsel

MELINDA HARDY
Assistant General Counsel

EDWARD C. SCHWEITZER, JR.
Attorney Fellow

Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549-0207
Telephone: (202) 942-0877 (Hardy)


TABLE OF CONTENTS

APPLICATION FOR LEAVE TO FILE AMICUS CURIAE BRIEF

BRIEF OF THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION AS AMICUS CURIAE IN SUPPORT OF McKESSON HBOC, INC.

STATEMENT OF FACTS

A. The Commission Seeks Work Product from Companies to Expedite its Investigations

B. The Commission Obtained Work Product from McKesson Pursuant to a Confidentiality Agreement

ARGUMENT

I. This Court Can Look to Precedent from Other Jurisdictions to Decide Whether McKesson Waived Work-Product Protection

II. Disclosure of Work Product to a Law-Enforcement Agency Pursuant to a Confidentiality Agreement Should Not Result in Waiver of Work-Product Protection

A. Courts Have Recognized that Sharing Otherwise Protected Information with Government Investigators Pursuant to a Confidentiality Agreement Does Not in Itself Waive Work-Product Protection

1. Courts Have Encouraged Reliance on Confidentiality Agreements

2. Cases Disapproving Reliance on Confidentiality Agreements Should Not Be Persuasive Here

B. Important Public Policy Considerations Weigh in Favor of Finding that the Submission of Work-Product to the Commission under a Confidentiality Agreement Should Not Waive Work-Product Protection

1. Production of Work Product to the Commission Without Waiver of Work-Product Protection Serves Important Public Interests

2. Confidentiality Agreements Assure that Preserving Work-Product Protection Serves the Public Interest

3. Production of Work Product to the Commission without Waiver of Work-Product Protection Will Not Harm the Public Interest or Disadvantage Private Litigants

CONCLUSION


TABLE OF AUTHORITIES

BP Alaska Exploration, Inc. v. Superior Court of Kern County,
  199 Cal. App.3d 1240 (1988)

In re Columbia/HCA Healthcare Corporation Billing Practices Litigation,
  293 F.3d 289 (6th Cir. 2002), petition for cert. filed, 71 U.S.L.W. 3429
  (Dec. 9, 2002)

Dellwood Farms, Inc. v. Cargill, Inc.,
  128 F.3d 1122 (7th Cir.1997)

Diversified Industrial, Inc. v. Meredith,
  572 F.2d 596 (8th Cir. 1977)

Florida State Board of Administration v. Waste Management, Inc.,
  No. 98 L 6034 (Ill. Cir. Ct. April 2, 1999)

In re Grand Jury Subpoena Duces Tecum Dated November 16, 1974,
  406 F. Supp. 381 (S.D.N.Y. 1975)

Green v. McKesson Corp.,
  No. 2002-CV-48407

Hall Family Investments, L.P. v. McKesson Corp.,
  No. 2002-CV-48612 (Fulton County, Georgia, April 10, 2003)

Hickman v. Taylor,
  329 U.S. 495 (1947)

Hunydee v. United States,
  355 F.2d 183 (9th Cir.1965)

Kirkland v. Superior Court of Los Angeles County,
  95 Cal. App. 4th 92 (2002)

McKesson HBOC, Inc. v. Adler,
  No. A01A1836 (Ga. Ct. App. May 21, 2002)

Pentawave, Inc. v. Homestore.com, Inc.,
  No. S.C. 031526 (Cal. Super. Ct. Nov. 22, 2002)

Permian Corp. v. United States,
  665 F.2d 1214 (D.C. Cir. 1981)

Raytheon Co. v. Superior Court,
  208 Cal. App.3d 683 (1989)

Saito v. McKesson HBOC, Inc.,
  No. Civ. A. 18553, 2002 WL 31657622
  (Del. Ch. Nov. 13, 2002)

SEC v. Gilbertson, Bergonzi, and DeRosa,
  No. C-00-3570 (N.D. Cal. 2000)

SEC v. Lapine,
  No. 01-3650 (N.D. Cal. 2000)

SEC v. Jerry T. O'Brien, Inc.,
  467 U.S. 735 (1984)

SEC v. Smeraski, et al.,
  No. 01-3651 (N.D. Cal. 2000)

In re Sealed Case,
  676 F.2d 793 (D.C. Cir. 1982)

Shirvanian v. Waste Management, Inc.,
  No. 2000-00211 (Tex. Dist. Ct. March 1, 2002)

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)

United States v. Bergonzi & Gilbertson,
  No. CR-00-0505 (N.D. Cal. Jan. 10, 2003),
  appeal docketed, No. 03-10024 (9th Cir. Jan. 21, 2003)

United States v. Schwimmer,
  892 F.2d 237 (2d Cir. 1989)

Westinghouse Electric Corp. v. Republic of the Philippines,
  951 F.2d 1414 (3d Cir. 1991)

STATUTES AND REGULATIONS

Securities Exchange Act of 1934

15 U.S.C. 78b

15 U.S.C. 78j

Federal Rules of Civil Procedure
  26(b)(3)

Regulations
  17 C.F.R. 205.3(a)

OTHER AUTHORITIES

Final Rule: Implementation of Standards of Professional Conduct for Attorneys
  68 Fed. Reg. 6296.p

Report of the American Bar Association Task Force on Corporate Responsibility (March 31, 2003)

California Civil Procedure
   2018

California Rules of Evidence
   911


APPLICATION FOR LEAVE TO FILE AMICUS CURIAE BRIEF

The United States Securities and Exchange Commission ("Commission") respectfully requests that this Court grant the Commission leave to submit its Brief as Amicus Curiae in this appeal. The Commission submits this brief in support of McKesson, explaining the Commission's position that a company being investigated by the Commission does not waive work-product protection as to third parties when the company provides to the Commission, pursuant to a confidentiality agreement between the Commission and the company, work product that the Commission has reason to believe will assist it in carrying out its statutory responsibilities under the federal securities laws. Allowing persons to provide work product to the Commission without waiving work-product protection serves the public interest by enhancing the Commission's ability to conduct effective and expeditious investigations but does not harm private parties.

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. Morrison Aff. ¶ 3.1 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. Id. ¶ 5. A holding that a company waives work-product protection as to private third parties when it shares its work product with the Commission under a confidentiality agreement is likely to impair significantly the Commission's ability to obtain such information in the future. Id. ¶¶ 4-5, 11.2

Work-product protection is not absolute. In deciding whether that protection has been waived when a company being investigated shares work product with the Commission, under a confidentiality agreement, the Court should consider the significant benefits to the Commission's investigations - and to investors - that result from that sharing of otherwise protected information, which does not disadvantage private plaintiffs. By explaining those benefits, the Commission's brief will assist the Court.

BRIEF OF THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION AS AMICUS CURIAE IN SUPPORT OF McKESSON HBOC, INC.

Production of work-product materials to the Commission, under a confidentiality agreement, when the Commission is engaged in a statutorily authorized investigation, should not result in waiver of work-product protection, because upholding such confidentiality agreements against private parties serves the public interest. It does so by enhancing the Commission's ability to conduct effective and expeditious investigations without harming private parties.3 If companies cannot produce documents to the Commission pursuant to a confidentiality agreement without waiving work-product protection as to third parties, the likely result is that companies will refuse to share written work product with the Commission, thereby impeding the Commission's ability to conduct its investigations most effectively and expeditiously.

STATEMENT OF FACTS

A. The Commission Seeks Work Product from Companies to Expedite its Investigations.

The Commission is ordinarily unable to compel production of work product by subpoena or court process from the companies it investigates. Morrison Aff. ¶ 5. Most companies investigated by the Commission are reluctant to produce work product to the Commission because they are concerned that disclosure to the Commission may be deemed a waiver of work-product protection for the documents as to third parties. Id. ¶¶ 4-5, 11. Therefore, to obtain access to such materials, the Commission will, in appropriate cases, enter into confidentiality agreements such as 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. Id. ¶ 5. 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, in contrast, gives appropriate consideration to cooperation in imposing sanctions. Id. ¶¶ 5, 11; Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, Reports of Investigations Rel. 34-44969 (Oct. 23, 2001).4

The Commission enters into a confidentiality agreement only when it has reason to believe that obtaining the work product is in the public interest because obtaining it could significantly expedite the successful prosecution of enforcement actions or facilitate early settlements, thereby saving Commission time and scarce resources. Morrison Aff. ¶¶ 6, 8. 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. Id. ¶ 8.

B. The Commission Obtained Work Product from McKesson Pursuant to a Confidentiality Agreement.

On April 28, 1999, McKesson announced that it was investigating irregularities in its financial statements. The same day, Commission staff began an informal inquiry into the matter. Morrison Aff. ¶ 14. 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. Id. During those meetings, Skadden informed the staff 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. ¶ 15. Skadden also informed the staff that the Audit Committee had directed Skadden to cooperate fully with the staff, provided that a suitable confidentiality agreement was in place. 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. Id. ¶¶ 17, 20.

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 interview summaries and Skadden's selection of contemporaneous documents that were exhibits to the report (collectively, the "Report"). Morrison Aff. ¶¶ 17-21; Pet. App. at 0389-92, 0653-56. 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. Pet. App. at 0390, 0654. 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." Id. at 0391, 0655.

The Commission staff agreed that "[t]he Staff will not 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." Pet. App. at 0391, 0655. The staff further agreed that "the Staff will maintain the confidentiality of the [Report] pursuant to this agreement, and the Staff hereby agrees 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." Id. at 0390, 0654.5

The materials that Skadden produced to the Commission pursuant to the confidentiality agreements significantly expedited the staff's investigation. Morrison Aff. ¶ 22. Access to the materials allowed the Commission to use roughly half the number of persons that would otherwise have been needed to staff the investigation and saved the Commission at least several hundred hours of time reviewing documents and interviewing witnesses because the materials identified the primary wrongdoers and provided evidence of intentional fraudulent conduct. Id.

The materials thus enabled the Commission to file several enforcement actions against individuals considered principal wrongdoers sooner than it otherwise could have. Morrison Aff. ¶ 22. On September 28, 2000, the Commission filed a civil injunctive action for fraud and other securities law violations against three defendants. SEC v. Gilbertson, Bergonzi, and DeRosa, No. C-00-3570 (N.D. Cal. 2000), Litig. Rel. LR-16743 (Oct. 2, 2000). At the time the Commission filed that action, one defendant 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 defendants. SEC v. Lapine, No. 01-3650 (N.D. Cal.), and SEC v. Smeraski, et al., No. 01-3651 (N.D. Cal.); Litig. Rel. LR-17189 (Oct. 15, 2001). At the time 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. Litig. Rel. LR-17189 (Oct. 15, 2001). Subsequently, on March 18, 2002, the Commission instituted and settled administrative proceedings against three accountants, suspending them from appearing or practicing before the Commission. Admin. Proc. Rel. 34-45586 (In re Timothy S. Heyerdahl), 34-45587 (In re David Held), and 34-45588 (In re Elaine A. Decker) (all March 18, 2002). In December 2002, the Commission brought an administrative proceeding against an outside auditor to suspend him from appearing or practicing before the Commission. In re Robert A. Putnam, Admin. Proc. Rel. 33-8172 (Dec. 23, 2002).

ARGUMENT

I. This Court Can Look to Precedent from Other Jurisdictions to Decide Whether McKesson Waived Work-Product Protection.

The issue before this Court - whether the protection of the attorney work-product doctrine is waived when documents are produced subject to a confidentiality agreement to a federal law enforcement agency - has not, to our knowledge, been previously addressed by the California courts. California courts have previously looked to federal case law to decide when the attorney-work product doctrine applies.6 Accordingly, this Court should consider the precedent discussed below.

II. Disclosure of Work Product to a Law-Enforcement Agency Pursuant to a Confidentiality Agreement Should Not Result in Waiver of Work Product Protection.

Determining whether a confidentiality agreement with the government prevents waiver of work-product protection requires a court to balance the public interest in facilitating investigations of securities fraud, which may affect many thousands of public shareholders, against any justification for providing to third-party litigants work product that has been disclosed to the government. The Commission submits that the Court should resolve this issue in the interest of maintaining the integrity of the securities markets and in the interest of the shareholders who depend on prompt and effective government action in dealing with securities fraud.

A. Courts Have Recognized that Sharing Otherwise Protected Information with Government Investigators Pursuant to a Confidentiality Agreement Does Not in Itself Waive Work-Product Protection.

1. Courts Have Encouraged Reliance on Confidentiality Agreements.

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 has been codified in Section 2018 of the California Civil Procedure Code and 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 pursuant to 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. The Second Circuit held that the company had waived protection for the work product it submitted to the Commission. Id. at 235. Nevertheless, the Second Circuit

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.

9 F.3d 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 an explicit 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 although a confidentiality agreement did not prevent waiver of attorney-client privilege, work-product protection was not waived).7

State courts have also recognized that disclosure of work product to a law-enforcement agency in the course of an investigation and pursuant to a confidentiality agreement may not waive work-product protection. Delaware's Chancery Court (Chandler, J.), a court with special experience with corporations and shareholder suits, has recognized the importance of protecting work product provided to government investigators, holding that McKesson did not waive work product protection when it disclosed the Report at issue here to the Commission and the United States Attorney's Office ("USAO") pursuant to 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." 2002 WL 31657622, at *11.8

Adopting the Commission's position here does not amount to endorsing what has been called the selective-waiver theory. 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 pursuant to 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) (explaining that courts reject 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"). They 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.9 Because the Commission's position turns on the existence of a confidentiality agreement, cases that reject the selective waiver theory but that do not concern confidentiality agreements should not affect the Court's view of the Commission's position.

Although California courts have not discussed the impact of a confidentiality agreement, they have recognized that work-product protection is waived only by "a disclosure wholly inconsistent with the purpose of the privilege, which is to safeguard the attorney's work product and trial preparation." Raytheon Co. v. Superior Court, 208 Cal. App. 3d 683, 689 (1989). Disclosure pursuant to a confidentiality agreement is consistent with the purpose of work-product protection: the Commission has agreed to protect McKesson's work protect and has not disclosed the work product to persons litigating against McKesson. Although disclosure to an adversary is often deemed inconsistent with the purpose of the work-product doctrine, the Raytheon court rejected the argument that waiver always occurs "when adversaries voluntarily share otherwise privileged information." Id. at 686-89 (noting that "there is no statutory provision governing waiver of work product protection" and citing authority suggesting that work-product protection is waived by "disclosure to one with no interest in maintaining its confidentiality"). Disclosure to the Commission is different from disclosure to most adversaries because, while most adversaries have no reason to maintain confidentiality of the Report, the Commission has signed a confidentiality agreement, and has in fact safeguarded McKesson's work product.10

The trial court, citing Raytheon, rejected the claim that McKesson did not waive work-product protection and stated that the Commission and the USAO "did not have an interest in preserving the confidentiality of the documents." Pet. App., Exh. 1 at 003. In fact, the Commission has a significant interest in preserving the confidentiality of McKesson's Report, which the USAO presumably shares, because, as discussed below, preserving the confidentiality of the Report allows the Commission, without disadvantaging private plaintiffs, to persuade other corporations subject to other investigations to provide similar work product. Moreover, the Commission can provide meaningful assurances of confidentiality because it normally can conduct its investigations without disclosing work product, and it is only in the relatively rare cases where an investigation leads to active, contested litigation that any disclosure may be required.

2. Cases Disapproving Reliance on Confidentiality Agreements Should Not Be Persuasive Here.

The only federal court of appeals to hold that production of work product to the government pursuant to a confidentiality agreement waives the protection has been the Sixth Circuit, over a vigorous dissent. In re Columbia/HCA Healthcare Corporation Billing Practices Litigation, 293 F.3d 289 (6th Cir. 2002), petition for cert. filed, 71 U.S.L.W. 3429 (Dec. 9, 2002). There, the Commission respectfully submits, the dissent correctly addressed the public-policy considerations that support the Commission's position that no waiver of work-product protection should be found 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 can result in "[c]onsiderable savings . . . in time and fiscal expenditure" and can encourage 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. 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 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 emphasized the policy choice that is at stake here: whether the public's interest in prompt and effective action against securities fraud, which often affects the interests of thousands of shareholders, justifies allowing companies to provide reports to the government without waiving work-product protection. He explained that, contrary to the majority's view, 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 310.11

Accordingly, the dissent emphasized that courts must look to public policy in developing rules relating to common-law privileges and, we submit, 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.12 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 Third Circuit, in Westinghouse, has also addressed whether producing work product to the government waives work-product protection even if the parties had entered into a confidentiality agreement. Its discussion of that issue, however, is dicta because there was no confidentiality agreement with the Commission and the discussion of the impact of confidentiality agreements was not necessary to the court's holding. See Westinghouse, 951 F.2d at 1430.

Moreover, the issue now before this Court was not squarely presented in Westinghouse. Neither the Commission nor any other party explained to the court in that case either the circumstances under which the Commission enters into confidentiality agreements or why obtaining documents pursuant to confidentiality agreements intended to prevent waiver is an important - often vital - investigatory practice where confidentiality agreements are the only way to obtain the documents. Id. at 1427.

Further, the reports at issue in Westinghouse were produced under a Voluntary Disclosure Program that the Commission instituted in the mid-1970s in connection with its investigations of the political "slush fund" practices of numerous corporations.13 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.

Moreover, 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.

B. Important Public Policy Considerations Weigh in Favor of Finding that the Submission of Work Product to the Commission under a Confidentiality Agreement Should Not Waive Work-Product Protection.

In addition to the case law which supports the Commission's position, significant public policy considerations make clear that submission of work product to the government, pursuant to a confidentiality agreement, should not waive work-product protection.14

1. Production of Work Product to the Commission Without Waiver of Work-Product Protection Serves Important Public Interests.

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 for defrauded investors. Morrison Aff. ¶¶ 9-11. 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. Morrison Aff. ¶¶ 4-5, 11. Companies, however, are much 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. Id. McKesson was such a company. Id. ¶¶ 15-21. The Commission entered into confidentiality agreements with McKesson because, from the initial meeting between Commission staff and McKesson, McKesson said it was willing to provide the Commission with work product, but would do so only pursuant to a confidentiality agreement. Id. ¶¶ 15.

Allowing a public 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 and does not circumvent 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. Morrison Aff. ¶¶ 7-8.15 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. Id.

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 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' intentional fraudulent conduct. Morrison Aff. ¶ 22. Having the materials allowed the Commission to use approximately half the number of persons that would normally have been needed to staff the investigation. Id.

Work product produced pursuant to confidentiality agreements in other Commission investigations has similarly proved to be extremely beneficial. Morrison Aff. ¶¶ 9-10. For example, in one investigation the Commission benefitted from obtaining work product that an accounting firm spent 29,000 hours preparing. Id. ¶ 9. In another case it received the results of an investigation that cost $9 million. Id. ¶ 10. Receiving that information saved the Commission from expending similar amounts of time and resources. Id. ¶¶ 9-10. When the Commission can conduct expeditious and efficient investigations, it can obtain appropriate remedies for investors in a more timely manner. Id. ¶ 8.

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 thought. 293 F.3d at 303. See also Saito, 2002 WL 31657622, at *11 (allowing disclosure without waiver "encourages cooperation with law enforcement agencies without any negative cost to society or to private plaintiffs").

2. Confidentiality Agreements Assure that Preserving Work-Product Protection Serves the Public Interest.

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.

3. Production of Work Product to the Commission without Waiver of Work-Product Protection Will Not Harm the Public Interest or Disadvantage Private Litigants.

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. Private litigants may well 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 the institution of an enforcement action. See Saito, 2002 WL 31657622, at *8 ("Because of the SEC's savings and efficiency, greater protection is afforded to the beneficiaries that it was designed to protect - investing shareholders . . . .").16

Allowing companies to produce work product to the government pursuant to confidentiality agreements will not prevent private plaintiffs from obtaining fact work product if they can show sufficient need and demonstrate that they cannot otherwise obtain the work product or its equivalent absent undue hardship. See, e.g. , Fed. R. Civ. P. 26(b)(3). Thus, they are 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 (refusing to adopt the rationale that "it is 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.").

CONCLUSION

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 pursuant to a confidentiality agreement with the Commission.

JAMES A. HOWELL
(Bar No. 92721)
District Trial Counsel

SECURITIES AND EXCHANGE
COMMISSION
450 5th Street, N.W.
Washington, D.C. 20549-0207
(202) 942-0877 (Hardy)
(202) 942-9537 (facsimile)





Dated: July 17, 2003

Respectfully submitted,

GIOVANNI PREZIOSO
General Counsel

MEYER EISENBERG
Deputy General Counsel

RICHARD M. HUMES
Associate General Counsel

MELINDA HARDY
Assistant General Counsel

EDWARD C. SCHWEITZER, JR.
Attorney Fellow

SECURITIES AND EXCHANGE
COMMISSION
450 5th Street, N.W.
Washington, D.C. 20549-0207
(202) 942-0877 (Hardy)
(202) 942-9537 (facsimile)


Endnotes


http://www.sec.gov/litigation/briefs/mckesson070703.htm


Modified: 03/04/2004