Southern District Court Holds That Disclosing Work Product to an Auditor Does not Waive the Work Product Protection

December 15, 2004

Every court holds that a company disclosing attorney-client privileged communications to an outside auditor waives that protection, but over the years courts have taken different positions on whether disclosing work product material with an auditor waives that protection. Two years ago, a well-respected Southern District of New York judge held that such a disclosure did waive the work product protection. Medinol, Ltd. v. Boston Scientific Corp., 214 F.R.D. 113 (S.D.N.Y. 2002).

Another Southern District judge recently reached exactly the opposite conclusion. Merrill Lynch & Co. v. Allegheny Energy, Inc., No. 02 Civ. 7689 (HB), 2004 U.S. Dist. LEXIS 21543 (S.D.N.Y. Oct. 22, 2004). In this case, Merrill Lynch had disclosed an internal investigation report to its outside auditor Deloitte & Touche. A third party later sought access to the report, claiming that Merrill Lynch had waived the work product protection. Judge Baer acknowledged the earlier Medinol decision, but said that “[t]hese cases turn on their facts.” Id. at *17. He noted that Merrill Lynch’s investigation report “did not impact” Deloitte’s audit work or its conclusions about Merrill Lynch’s financial statements. Id. at *9. The Judge pointed to Deloitte’s “ethical and professional obligation” to maintain the confidentiality of documents it receives from its clients. Id. at *24. He concluded that Merrill Lynch did not have a “tangible adversarial relationship” with Deloitte & Touche, so that disclosure of the report did not cause a waiver of the work product protection. Id. at *20. Finally, Judge Baer explained that finding a waiver in such circumstances “could very well discourage corporations from conducting a critical self-analysis and sharing the fruits of such an inquiry with the appropriate actors.” Id. at *25.

Merrill Lynch represents a helpful development, but this stark disagreement between two Southern District decisions highlights the risk that any company takes by sharing work product with its outside auditor.

Subscribe