Court Issues a Troubling Decision Dealing with Work Product Shared with an Outside Auditor

February 24, 2010

Because the attorney-client privilege provides only a fragile protection, courts have always agreed that disclosing privileged communications to an outside auditor waives that protection. See, e.g., New York City Employees’ Ret. Sys. v. Berry (In re Juniper Networks, Inc. Sec. Litig.), Case Nos. C 06-4327 & 08-00246 JW (PVT), 2009 U.S. Dist. LEXIS 118859 (N.D. Cal. Dec. 9, 2009). In contrast, courts traditionally took the opposite approach in analyzing the waiver effect of a company sharing work product with its outside auditor. The immediate post-Enron decision in Medinol, Ltd. v. Boston Scientific Corp., 214 F.R.D. 113, 116 (S.D.N.Y. 2002) found a waiver in that situation — but an unbroken string of decisions since 2002 took the traditional approach.

Unfortunately, another decision has now followed Medinol. In United States v. Hatfield, No. 06-CR-0550 (NS), 2010 U.S. Dist. LEXIS 4026, at *11-12 (E.D.N.Y. Jan. 8, 2010), Judge Joanna Seybert held that an individual defendant waived his work product protection by allowing disclosure of work product prepared on his behalf to be shared with the company’s outside auditor — which the court found “had both (1) concerns regarding [the company’s] management; and (2) a responsibility to publicly reveal the truth.” Fortunately, the issue came up in a context very different from the normal situation, in which a company reports to its outside auditor about pending litigation.

Although companies can distinguish the context in which this recent case arose, it is definitely bad news that another court has taken the same approach as Medinol — which until now stood alone as an aberrational decision on this important issue.