Opinion
Case No. 2:05-cv-00819.
August 8, 2008
OPINION AND ORDER
This matter comes before the Court on Plaintiffs' Objections (Doc. #213) to Magistrate Judge Kemp's Opinion and Order dated April 22, 2008 (Doc. #210), denying Plaintiffs' motion to compel. Plaintiffs had moved to compel production of the materials considered by and the final report of a Special Litigation Committee ("SLC") created by Defendant Abercrombie Fitch Co. to investigate the derivative plaintiffs' claims. For the reasons that follow, Plaintiffs' Objections are overruled.
I.
Under Federal Rule of Civil Procedure 72(a) and 28 U.S.C. § 636(b)(1)(A), this Court shall "modify or set aside" any portion of a Magistrate's Order only if it is "clearly erroneous or contrary to law" Ross v. Abercrombie Fitch Co., 2007 U.S. Dist. LEXIS 24903 (S.D. Ohio Mar. 22, 2007). The clearly erroneous standard "mandates that the district court affirm the magistrate's decision unless, on the entire evidence, it is left with the definite and firm conviction that a mistake has been committed. In the absence of clear error, the magistrate's order must stand." Balalovski v. Lucent Technologies, Inc., 2003 U.S. Dist. LEXIS 7296 (S.D. Ohio April 10, 2003), quoting Farley v. Farley, 952 F.Supp. 1232, 1235 (M.D.Tenn. 1997) (internal citations omitted). This Court does not find error or a mistake of law in the Magistrate Judge's Order.
II.
Defendant Abercrombie's Board of Directors created the SLC in October, 2005, to investigate the derivative plaintiffs' claims, which are separate from the claims of the securities plaintiffs. The facts relevant to the creation and work of the SLC are set out at length in the Magistrate's Opinions and Orders dated March 14, 2008 and April 22, 2008. The claims of the derivative plaintiffs are based on the same facts as those alleged in the securities class action.
While the SLC investigated the facts alleged in the derivative action, it retained the law firm of Cahill Gordon Reindel LLP to provide legal advice. With the input of Cahill Gordon, the SLC concluded that there was no evidence to support the claims asserted in the derivative case, and directed Abercrombie to seek dismissal of the derivative case. Abercrombie moved to dismiss on September 10, 2007, relying upon and attaching the SLC report. The motion was filed under seal.
The securities plaintiffs separately sought discovery of the SLC's report and related documents. Abercrombie objected on the grounds that the report and documents were covered by the attorney-client privilege and work-product doctrine. Plaintiffs moved to compel, arguing that all or some of the documents were not privileged, and that Abercrombie had waived any applicable privileges by providing the documents to the derivative plaintiffs in connection with the motion to dismiss.
Magistrate Judge Kemp denied Plaintiffs' motion, finding that the documents requested were prepared exclusively for Abercrombie's use in connection with the shareholder derivative litigation, at the request of and/or with the direct participation of Cahill Gordon. Accordingly, "it seems reasonable to conclude that they fall within the scope of the work product doctrine. Moreover, some of them are clearly attorney-client communications" (Order at 2-3). The Magistrate Judge further found that, following In re Perrigo, 128 F.3d 430 (6th Cir. 1997), Abercrombie's reliance on the SLC report in support of its motion to dismiss the derivative action did not constitute waiver of the applicable privileges.
Plaintiffs assert the following objections: 1) Magistrate Judge Kemp erred in holding that Perrigo is applicable to the current dispute; 2) Magistrate Judge Kemp erred in holding that Columbia/HCA is inapplicable, and that Abercrombie has not waived the protection of the attorney-client privilege and work product doctrine by producing the SLC report to its adversaries; 3) Magistrate Judge Kemp erred in holding that Defendants met their burden of establishing that the SLC report and related documents are protected by the attorney-client privilege and work product doctrine, and in shifting the burden to Plaintiff. Plaintiffs do not appeal the remainder of the Magistrate Judge's ruling.
III.
Plaintiffs' third objection is the logical starting place for any analysis of privilege or waiver; if the documents at issue are not privileged, no further analysis is required. The Magistrate Judge noted that Plaintiffs raised this threshold argument only briefly, and did not press the issue in their reply brief after Abercrombie established the basis of its privilege claim. Abercrombie asserted that the SLC independently retained Cahill Gordon to provide legal advice, which the SLC received and relied upon "with respect to the law that applied to facts gathered during the course of the investigation" (Mem. in Opp. to Pls' Mot. to Compel at 7). Further, the documents and materials gathered or prepared for the SLC were plainly prepared for use in connection with the derivative litigation, and the final report of the SLC was prepared with the assistance of Cahill Gordon. ( Id.; see also Order at 2-3). The Court finds no clear error in the Magistrate Judge's conclusion that the documents at issue are privileged. See Fausek v. White, 965 F.2d 126, 129 (6th Cir. 1992) (Defining the attorney-client privilege as follows: (1) where legal advice of any kind is sought, (2) from a professional legal adviser in his capacity as such, (3) the communications relating to that purpose, (4) made in confidence, (5) by the client, (6) are at his instance permanently protected, (7) from disclosure by himself or by the legal advisor, (8) except the protection may be waived.) (citing United States v. Goldfarb, 328 F.2d 280, 281 (6th Cir. 1964)); see also Moore's Federal Practice, Sec. 26.49 and 26.70 (3d ed. 2008) (defining the attorney-client privilege and work-product doctrine).
Plaintiffs' remaining objections contend that Abercrombie's use and filing of the report in connection with its motion to dismiss the derivative action, while withholding the same documents from the securities Plaintiffs, amounts to a "selective waiver" of privilege, the type of which the Sixth Circuit Court of Appeals has rejected. Plaintiffs' argument, however, disregards the context of Abercrombie's carefully controlled, involuntary disclosure of the SLC report and related documents.
Under Delaware law, a corporation whose shareholders have filed a derivative action on its behalf can seek dismissal of that action if, in the view of a disinterested director or committee of directors, pursuit of the action is not in the corporation's best interests. See Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981). The corporation's motion to dismiss should be accompanied by a report from the director or committee setting forth the basis for the conclusion that the corporate interests are not being advanced by the litigation. Id. at 788. The court must have access to the report to analyze whether the corporation is acting in good faith reliance on the recommendation of a truly independent director or committee and on sound principles of business judgment. Id. at 788-89. Derivative plaintiffs also need the report in order to respond to the motion to dismiss. Abercrombie disclosed the report to the derivative plaintiffs in the context of such a motion to dismiss. The issue before the Magistrate Judge was whether Abercrombie's disclosure of the report and related materials under these specific circumstances waived the privileges or protections attached to the report.
In In re Perrigo, 128 F.3d 430 (6th Cir. 1997), the Court of Appeals considered a similar situation. Like Abercrombie, the Perrigo Company was named as a defendant in both derivative and private securities actions. The company moved to dismiss the derivative action under a Michigan statute that operates in a similar fashion to the Zapata rule. Perrigo asserted privilege with regard to its independent committee report, and did not produce the report to the derivative plaintiffs. The district court ordered Perrigo to disclose the report to the derivative plaintiffs based on their showing of substantial need for it and hardship without it. Picard Chem. Profit Sharing Plan v. Perrigo Co., 951 F. Supp. 679, 688 (W.D. Mich. 1996). The court found that, although Perrigo was under no obligation to disclose the report to the private securities plaintiffs because they could not make a similar showing of need and hardship, once the report was filed any claim of privilege would be waived, and the report would become part of the public record. Id. at 690.
The Court of Appeals vacated that holding, finding that submission of the report in connection with the statutorily-prescribed procedure did not operate as a waiver of privilege. Perrigo, 128 F.3d at 441. To hold otherwise would discourage an independent review committee from making or relying upon written reports for fear that such documents would become public. Id.
Magistrate Judge Kemp relied on Perrigo, finding that a company's disclosure of an SLC report under these unique circumstances is essentially involuntary. In doing so, the Magistrate Judge distinguished In re Columbia/HCA Healthcare Corp. Billing Practices Litigation, 293 F.3d 289 (6th Cir. 2002), upon which Plaintiffs continue to rely despite its factual distinction from Perrigo and this case.
To the extent the cases conflict, the panel in Columbia/HCA was different from the panel of Judges who decided Perrigo, and therefore Columbia/HCA could not overrule Perrigo. Columbia/HCA also does not express any intent to overrule Perrigo, and cites the case only in passing. Both cases are therefore binding law in this Circuit.
In Columbia/HCA, the company disclosed privileged documents to the Department of Justice in connection with a fraud investigation. Columbia and the DOJ agreed that the production of the documents would not constitute a waiver of any applicable privileges. Subsequently, when private parties sued Columbia based on the same conduct investigated by the DOJ, Columbia asserted privilege as to the documents previously produced to the DOJ. The Sixth Circuit Court of Appeals held that a party who voluntarily shares information with a government agency for its own benefit waives the privileges that might otherwise protect that information. The Court rejected a line of cases that permitted "selective waiver," in favor of a bright line rule. Plaintiffs would have the Court construe Abercrombie's involuntary production of the SLC report as an attempt at "selective waiver" of the type invalidated by Columbia/HCA. Because Columbia/HCA did not involve the involuntary disclosure of privileged materials, the case is factually distinguishable.
The issue squarely before the Sixth Circuit in Perrigo was whether an SLC report filed in support of a motion to dismiss a derivative action became a public record; the Court of Appeals held that it does not. As explained by Magistrate Judge Kemp, if the act of filing the report "Waived the privileges, there would have been no need for the Perrigo court to issue a writ of mandamus the effect of which was to prevent the report from becoming a public record the instant it was filed" (Order at 9).
Plaintiffs' attempt to distinguish Perrigo was thoroughly addressed by the Magistrate Judge, and is not persuasive. The Court is not "left with the definite and firm conviction that a mistake has been committed'by Magistrate Judge Kemp in following Perrigo. Balalovski, 2003 U.S. Dist. LEXIS 7296. The Magistrate Judge's Order is not clearly erroneous or contrary to law. Fed.R.Civ.Proc. 72(a).
IV.
For the foregoing reasons, the Court OVERRULES Plaintiffs' Objections, and ADOPTS and AFFIRMS the Order dated April 22, 2008 (Doc. #210), denying Plaintiffs' Motion to Compel.