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rejecting interrogatory that asked defendant to identify individuals who had been interviewed concerning the relevant allegations in the case
Summary of this case from In re Initial Public Offering Securities LitigationOpinion
CASE NO. 4:02 CV 225
July 9, 2003
Weston C. Loegering of Hughes Luce, Dallas, TX, Stephen C. Sutton of Duvin, Cahn Hutton, Cleveland, OH, For Plaintiffs.
Clyde Moody Siebman, of Siebman, Reynolds Burg, LLP, Sherman, TX, Martin T. Wymer, of Duvin, Cahn Hutton, Cleveland, OH, For Defendants.
MEMORANDUM OPINION AND ORDER
On March 17, 2003, Defendant Fred G. Steingraber ("Steingraber") filed a Motion to Compel Production of Documents Claimed to be Privileged (Docket No. 30). On April 14, the Court entered an Order denying Defendant's Motion to Compel as moot without prejudice to its re-filing (Docket No. 37). On May 27, 2003, Defendant filed an Agreed Motion to Reinstate His Motion to Compel (Docket No. 45). On June 7, 2003, the Court granted Defendant's Agreed Motion to Reinstate His Motion to Compel (Docket No. 48). The Court has reviewed the claimed privilege documents that EDS submitted for in camera review. For the reasons articulated below, the Court finds that Defendant's Motion to Compel Production of Documents Claimed to be Privileged should be GRANTED IN PART and DENIED IN PART.
BACKGROUND
In early 2002, EDS conducted an investigation into possible expense account fraud by one of its employees. This investigation showed that the individual stole thousands of dollars from the company. During an interview with this individual, EDS discovered that she learned many of her fraud techniques from Steingraber. Subsequently, on March 18, 2002, EDS' in-house counsel specifically directed that an investigation begin into the alleged fraud by Steingraber. In May 2002, EDS retained outside counsel, Hughes Luce L.L.P., to assist with the investigation. On May 24, 2002, Hughes and Luce hired FTI Consulting, Inc., a national consulting firm, to perform an independent analysis of Steingraber's alleged misconduct and to prepare a report on it. Wrongdoing was allegedly found. Thereafter, EDS terminated Steingraber's employment for cause. On August 5, 2002, EDS filed an Original Complaint in this Court alleging that Steingraber misappropriated funds from ATK/EDS and seeking a declaratory judgment that (1) Steingraber's misuse and misappropriation of corporate assets constitutes "cause" for termination under his employment agreement; (2) Steingraber owes EDS the value of the misappropriated corporate assets along with interest; (3) Steingraber owes EDS all consideration paid by EDS to Steingraber under the employment agreement from March 1, 2001 to present; (4) Steingraber owes EDS it attorney's fees and costs; and, alternatively, (5) Steingraber was unjustly enriched. EDS also seeks damages for breach of contract, unjust enrichment, and fees and costs. Steingraber has filed a counterclaim alleging breach of contract and declaratory relief regarding breach of contract and consideration relating to the sale of ATK.
EDS is the parent company of and wholly owns A.T. Kearney, Inc. ("ATK"). Steingraber was employed as an employee, principal, partner, executive, and/or officer of ATK from 1984 through 2001. On March 1, 2001, Steingraber assumed a special semi-retried status.
On January 21, 2003, EDS produced a privilege log. The privilege log was amended on February 7, 2003, and contains over 200 entries. Steingraber seeks to compel the documents that EDS claims to be protected by the attorney-client privilege and/or work product doctrine.
DISCUSSION
Ordinarily, the work-product doctrine should only be applied after it is decided that the attorney-client privilege does not apply. See, e.g., Upjohn Co. v. U.S., 449 U.S. 383, 397 (1981). ("To the extent that the material subject to the summons is not protected by the attorney-client privilege as disclosing communications between an employee and counsel, we must reach the ruling by the Court of Appeals that the work-product doctrine does not apply. . . ."). This is because the work-product doctrine expressly applies only to "documents and tangible things otherwise discoverable." Fed.R.Civ.P. 26(b)(3). If the attorney-client privilege applies to a particular item, it is absolutely undiscoverable and the work-product rule does not apply.
The work-product doctrine is narrower than the attorney-client privilege in that it only protects materials prepared "in anticipation of litigation," Fed.R.Civ.P. 26(b)(3), whereas the attorney-client privilege protects confidential legal communications between an attorney and client regardless of whether they involve possible litigation.
1. Attorney-Client Privilege
Texas law governs the disposition of attorney-client privilege issues in this diversity case. Fed.R.Evid. 501. In Texas, the attorney-client privilege is defined by Tex.R.Evid. 503. Rule 503(b)(1) states:
A client has a privilege to refuse to disclose and to prevent any other person from disclosing confidential communications made for the purpose of facilitating the rendition of professional legal services to the client:
(A) between the client or a representative of the client and the client's lawyer or a representative of the lawyer;
(B) between the lawyer and the lawyer's representative;
(C) by the client or a representative of the client, or the client's lawyer or a representative of the lawyer, to a lawyer or a representative of a lawyer representing another party in a pending action and concerning a matter of common interest therein;
(D) between representatives of the client or between the client and a representative of the client; or
(E) among lawyers and their representatives representing the same client.
The elements of the attorney-client privilege in Texas are "(1) a confidential communication; (2) made for the purpose of facilitating the rendition of professional legal services; (3) between or amongst the client, lawyer and their representatives; and (4) the privilege has not been waived." Huie v. DeShazo, 922 S.W.2d 920, 923 (Tex. 1996). The party asserting the privilege bears the burden of proving the privilege. Id. The inquiry into whether the documents are protected by the attorney-client privilege is a highly fact-specific one. Because privileges lead to the shielding of relevant evidence, they are recognized "only to the very limited extent that permitting a refusal to testify or excluding relevant evidence has a public good transcending the normally predominant principle of utilizing all rational means for ascertaining the truth." Trammel v. United States, 445 U.S. 40, 50 (1980) (citation omitted). It is clear that the attorney-client privilege "only protects disclosure of confidential communications between the client and attorney; it does not protect the disclosure of underlying facts." Upjohn Co., 449 U.S. at 395-96. "Pre-existing facts that underlie the client's confidential communications, whether oral or written, are not privileged simply because the client disclosed them to an attorney for the purpose of obtaining legal services." Weinstein's Fed. Evid. § 503.14[4][a] (2d ed. 1998) (citing Upjohn Co., 449 U.S. at 395).
Steingraber argues that the communications relating to EDS' investigation are not privileged because they were made to facilitate a business decision rather than the rendition of professional legal services. The Court disagrees. Steingraber's interpretation of the attorney-client privilege is unduly narrow. Unlike Seibu Corp. v. KPMG L.L.P., 2002 WL 87461 (N.D.Tex. Jan. 18, 2002), a case that Steingraber heavily relies on, the communication between EDS' in-house counsel, EDS investigators, and Hughes and Luce sufficiently involved the rendition of legal services to implicate the attorney-client privilege. To the extend that Seibu holds otherwise, this Court disagrees with that decision and finds In re LTV Sec. Litig., 89 F.R.D. 595 (N.D.Tex. 1981) more persuasive. The fact that the attorneys may have been hired to facilitate a business decision does not mean that such a decision was devoid of legal consequences.
Rule 503 provides that a privileged communication is one "made for the purpose of facilitating the rendition of professional legal services to the client." Tex.R.Evid. 503(b) (emphasis added). When an attorney is not providing legal advice and acting in some other capacity, accountant, investigator, or business advisor, there is no privilege. Huie, 922 S.W.2d at 927. In Upjohn, the Supreme Court declared:
the privilege exists to protect not only the giving of professional advice . . . but also the giving of information to the lawyer to enable him to give sound and informed advice. . . . The first step in the resolution of any legal problem is ascertaining the factual background and sifting through the facts with an eye to the legally relevant.Upjohn Co., 449 U.S. at 390-91 (citation omitted).
Hughes Luce was hired by EDS to contribute its legal expertise to the investigation of Steingraber including: contract interpretation, evaluating the risk of possible litigation, conducting witness interviews, and evaluating the weight of the evidence. Thus, the communications from lawyer to client and vice versa were for the rendition of legal services. As detailed in the attached appendix, the Court finds that the majority of the documents claimed to be protected by the attorney-client privilege are protected. The Court finds that the protection for some of the documents has been waived as indicated in the appendix, i.e., any communication involving Steingraber as the sender or recipient. Further, a number of the documents are correspondence with attachments containing underlying facts as indicated in the appendix. These attachments are not protected because they contain underlying facts.
Steingraber also argues that the attorney-client privilege has been waived because EDS has placed the advise of its counsel "at issue." The Court disagrees. Texas law disfavors "at issue" waiver: "Privileges . . . represent society's desire to protect certain relationships, and an offensive use waiver of privilege should not lightly be found." Republic Ins. Co. v. Davis, 856 S.W.2d 158, 163 (Tex. 1993). Texas law requires that "the privilege information sought must be such that, if believed by the fact finder, in all probability it would be outcome determinative of the cause of action asserted. Mere relevance is insufficient. The confidential communication must go to the very heart of the affirmative relief sought." Id. Also, "disclosure of the evidence must be the only means by which the party may obtain the evidence." Id. If any one of these elements is lacking, the court must uphold the privilege. Id. The Court finds that there at least two elements missing. First, the information sought is not outcome determinative. Second, Steingraber can obtain the information by other means — the investigation and reports are available, the documents reviewed by FTI have been produced, witness statements have been provided, and Steingraber can use depositions to discover further information.
2. Work Product Doctrine
EDS claims that over 140 documents on its privilege log are protected by the work product doctrine. Rule 26(b)(3) of the Federal Rules of Civil Procedure governs the disclosure of documents prepared in anticipation of litigation and provides:
. . . . a party may obtain discovery of documents and tangible things otherwise discoverable under subdivision (b)(1) of this rule and prepared in anticipation of litigation or for trial by or for another party or by or for that other party's representative (including the other party's attorney, consultant, surety, indemnitor, insurer, or agent) only upon a showing that the party seeking discovery has substantial need of the materials in the preparation of the party's case and that the party is unable without undue hardship to obtain the substantial equivalent of the materials by other means. In ordering discovery of such materials when the required showing has been made, the court shall protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation.
Fed.R.Civ.P. 26(b)(3). The work-product doctrine shields from discovery the materials prepared by or for an attorney in preparation of litigation. Hickman v. Taylor, 329 U.S. 495 (1947); Robinson v. Texas Auto. Dealers Ass'n, 214 F.R.D. 432 (E.D.Tex. 2003). It protects two categories of materials: ordinary work-product and opinion work product . See generally Upjohn Co., 449 U.S. at 400-02.
The doctrine is not an umbrella that shades all materials prepared by a lawyer, or agent of the client. The doctrine focuses solely on materials assembled and brought into being in anticipation of litigation. Piatkowski v. Abdon Callais Offshore, L.L.C., 2000 WL 1145825, at *2 (E.D.La. Aug. 11, 2000). Excluded from the doctrine are materials assembled in the ordinary course of business. United States v. El Paso Co., 682 F.2d 530 (5th Cir. 1982), cert. denied, 466 U.S. 944 (1984). Further, it does not extend to the underlying facts relevant to the litigation. See generally Upjohn, 449 U.S. at 395-96.
The threshold determination is whether the documents sought to be protected were prepared in anticipation of litigation or for trial. See Upjohn, 449 U.S. at 400. The Fifth Circuit has described the standard for determining whether a document has been prepared in anticipation of litigation as follows:
It is admittedly difficult to reduce to a neat general formula the relationship between preparation of a document and possible litigation necessary to trigger the protection of the work product doctrine. We conclude that litigation need not necessarily be imminent, as some courts have suggested, as long as the primary motivating purpose behind the creation of the document was to aid in possible future litigation.United States v. Davis, 636 F.2d 1028, 1039 (1981) (citations omitted) (emphasis added); accord In re Kaiser Alum. Chem. Co., 214 F.3d 586, 593 (5th Cir. 2000). It is not dispositive that the documents were prepared by plaintiffs and not by attorneys. Rule 26(b)(3) protects documents prepared by or for a party, as long as they are prepared in anticipation of litigation. United States v. Nobles, 422 U.S. 225, 238-39 (1975).
Factors that courts rely on to determine the primary motivation for the creation of a document include the retention of counsel and his involvement in the generation of the document and whether it was a routine practice to prepare that type of document or whether the document was instead prepared in response to a particular circumstance. Piatkowski, 2000 WL 1145825, at *2. If the document would have been created regardless of whether litigation was expected to ensue, the document is deemed to have been created in the ordinary course of business and not in anticipation of litigation. Id.
Wright and Miller provides:
Prudent parties anticipate litigation, and begin preparation prior to the time suit is formally commenced. Thus the test should be whether, in light of the nature of the document and the factual situation in the particular case, the document can fairly be said to have been prepared or obtained because of the prospect of litigation. But the converse of this is that even though litigation is already in prospect, there is no work-product immunity for documents prepared in the regular course of business rather than for purposes of the litigation.
Wright Miller, Fed. Pract. Proc. § 2024 (1994) (footnotes omitted).
In the instant case, EDS argues that the documents prepared by its investigation unit were prepared in anticipation of litigation. Steingraber, on the other hand, argues that documents in question were prepared in the ordinary course of EDS' business because they relate to an investigation of Steingraber's expense reports. Not every document generated by an internal investigation is protected by the work product doctrine "simply because a company's internal investigation is coexistent with a present or anticipated lawsuit that is the same subject matter of the litigation." Caremark, Inc. v. Affiliated Computer Servs., Inc., 195 F.R.D. 610, 614 (N.D.Ill. 2000); Long v. Anderson Univ., 204 F.R.D. 129, 136 (S.D.Ind. 2001). Thus, documents that are created in the ordinary course of business and "would have been created irrespective of litigation are not under the protection of the work product doctrine." Caremark, 195 F.R.D. at 614-15; see also United States v. Adlman, 134 F.3d 1194, 1202 (2d Cir. 1998).
As aptly stated in Binks Mfg. Co. v. Nat'l Presto Indus., Inc., 709 F.2d 1109, 1119 (7th Cir. 1983):
[i]f in connection with an accident or an event, a business entity in the ordinary course of business conducts an investigation for its own purposes, the resulting investigative report is produceable in civil pre-trial discovery. . . . [T]he distinction between whether defendant's `in house' report was prepared in anticipation of litigation is an important one. The fact that a defendant anticipates the contingency of litigation resulting from an accident or event does not automatically qualify an `in house' report as work product. . . . A more or less routine investigation of a possibly resistible claim is not sufficient to immunize an investigative report developed in the ordinary course of business.
Id. at 1119 (citations omitted).
The Court finds that the primary purpose of the investigation was "to fairly and impartially determine whether or not an employee [was] stealing or otherwise misusing EDS assets" and, ultimately, make a business decision — whether or not to terminate Steingraber's employment. No lawsuit was pending when EDS started the investigation in March. The fact that EDS considered the prospect of litigation does not change the primary purpose of the investigation. In the realities of today, investigation of corporate wrongdoing are routine, expected and necessary for many reasons, including protecting shareholders, assessing losses, and the prevention of future corporate wrongdoing.
See Pl.'s Br., Ex. 7, Aff. of Joe Hendrix , at ¶ 5.
EDS relied heavily on the fact that "given Steingraber's senior position, the existence of his employment contract, his regular reliance on the law firm of McDermott, Will Emery, his ample financial resources, the risks inherent in taking adverse employment action, and the litigious history of upper-level ATK officers, EDS' in-house counsel was aware that if [another employee's] allegation proved true litigation was not just likely — it was virtually certain." Further, it relies on a statement by Steingraber that:
such transactions [retirement/termination] are sensitive and emotional, particularly with vice presidents. Our history suggest a high probability of litigation if the relationship between Kearney and the departing vice president/officer turns negative.
The evidence in the instant case does not support a conclusion that anticipation of litigation was the primary motivating purpose for the investigation. If a party or its attorney prepares a document in the ordinary course of business, "it will not be protected [from discovery] even if the party is aware that the document may also be useful in the event of litigation." Occidental Chem. Corp. v. OHM Remediation Servs. Corp., 175 F.R.D. 431, 435 (W.D.N.Y. 1997) (quotation and citations omitted). Based on the current record, the Court finds that EDS would have undertaken the same investigation regardless whether litigation was anticipated. See, e.g., Miller v. Federal Express Corp., 186 F.R.D. 376, 386, 387 (W.D.Tenn. 1999) (defendant routinely investigated all job discrimination complaints through the Personnel Department under the direction of the Legal Department; documents generated during investigation before filing of formal EEOC complaint were prepared in ordinary course of adjusting employee complaints and were not work product simply because corporate counsel directed the investigation); Occidental Chem. Corp., 175 F.R.D. at 435 ("Even if these documents were prepared with an eye toward litigation, it is indisputable that the documents also contain information which plaintiff would be expected to obtain or compile in the ordinary course of its business of overseeing the performance of environmental remediation work under its contract with defendant.") ; Guzzino v. Felterman, 174 F.R.D. 59, 63 (W.D.La. 1997) (ultimate investigation by securities regulators and filing of more than one hundred civil lawsuits "does not cloak the documents created by Dean Witter's investigation of the Morgan City office with work product immunity because the evidence does not establish that the primary motivating purpose behind the investigation and the creation of the withheld documents was to aid in possible future litigation. Instead, the evidence presented by Dean Witter indicates that the investigation was conducted in the ordinary course of business and/or to prepare for potential investigations by [securities regulators]."). The fact that the activities of Steingraber ultimately resulted in extensive investigation by EDS and the filing of a lawsuit in federal court does not cloak the documents created by EDS' investigation of Steingraber with work product immunity because the evidence does not establish that the primary motivating purpose behind the investigation and the creation of the withheld documents was to aid in possible future litigation. Instead, the evidence presented by EDS indicates that the investigation was conducted in the ordinary course of business. In fact EDS, admits that it normally undertakes investigation when there is alleged potential wrongdoing and it would have done so regardless of whether litigation would have resulted in this case.
The fact that EDS' general counsel directed the EDS investigators to undertake an investigation and hired outside counsel is not dispositive and does not necessarily lead to the conclusion that the primary motivating purpose behind the creation of the documents was to aid in possible future litigation. See, e.g., In re Air Crash Disaster at Sioux City, Iowa, 133 F.R.D. 515 (1990) (N.D.Ill. 1990). For example, in In re Kidder Peabody Secs. Litig., 168 F.R.D. 459 (S.D.N.Y. 1996), the general counsel for the securities firm, Kidder Peabody ("Kidder"), hired outside counsel within days of discovering that one of Kidder's major traders had misappropriated finds, which had caused it to overstate its earnings substantially. Outside counsel immediately "undertook an intensive fact-finding investigation to determine what had occurred and why." Id. at 463. Despite affidavits by Kidder's general counsel and outside counsel that the investigation's purpose was to permit outside counsel to defend Kidder's legal interests in future legal proceedings and that outside counsel had indeed defended the firm in subsequent legal proceedings, the court found that anticipation of litigation was not the primary purpose of Kidder's retention of outside counsel and counsel's conduct of employee interviews. "On this issue, Kidder's affiants offer no meaningful evidence. Instead, Kidder simply parrots the legal standard that the interviews were conducted principally as an aid to litigation." Id. While the court believed that Kidder's investigation was conducted, in part, to prepare for anticipated litigation, the court found that Kidder also hired outside counsel in part "for the specific purpose of having him conduct an internal inquiry in order (1) to find out what [its trader] had done and why it had taken so long to discover the wrongdoing, and (2) to prepare a report summarizing his factual conclusions in detail and making recommendations for corrective action by Kidder." Id. at 465. Most important, the court concluded that "Kidder would have hired outside counsel to perform such an inquiry even if no litigation had been threatened at the time. . . . [I]t is painfully evident that the . . . scandal presented Kidder not only with a serious legal problem, but with a major business crisis," and that hiring outside counsel was designed to handle that business crisis. Id.
The Court finds that the rationale in Kidder, Miller, Occidental Chem. Corp., and Guzzino persuasive. Applying this rationale to the instant case, the Court concludes that EDS in the instant case has failed to sustain its burden to prove that the majority of the withheld documents were created primarily in anticipation of litigation. See, e.g., Logan v. Commercial Union Ins., 96 F.3d 971, 977 (7th Cir. 1996) (denying the work product protection for investigation documents, stating that "while much of the paperwork generated by insurance companies is prepared with an eye toward a possible legal dispute, it is important to distinguish between an investigative report developed in the ordinary course of business as a precaution for the remote prospect of litigation and materials prepared because some articulable claim, likely to lead to litigation has arisen.") (internal quotations omitted) (emphasis in original). While EDS may have anticipated that a legal dispute might ensue if their investigation led to Mr. Steingraber's termination, there was not, during most of the thorough investigation, any articulable claim likely to lead to litigation. The work product doctrine therefore does not protect the documents from discovery, and it is unnecessary to examine whether the movants have demonstrated substantial need for the materials and undue hardship in obtaining their substantial equivalent by other means.
With all this said, there came a point in time that litigation was a near certainty. The Court finds that this occurred around August 1, 2002 when a complaint was drafted. Thus, any document generated after August 1, 2002 is protected by the work product doctrine. However, as stated above, the work product doctrine is inapplicable to documents created before August 1, 2002.
CONCLUSION
For the foregoing reasons, plaintiff's motion to compel is GRANTED IN PART. Accordingly, all documents which the undersigned has designated as not protected in the attached appendix must be produced. In all other respects described above, the motion is DENIED.
So ORDERED