A federal judge in Boston recently blocked efforts by plaintiff lawyers to obtain valuable audit documents created during a company’s internal investigation—a supportive but sobering reminder that in the post-Sarbanes-Oxley age of multiple investigations by audit committees, regulators and civil litigants, companies must use care to ensure sensitive information uncovered during internal probes doesn’t end up in litigious hands.
The case, In re Polymedica Corporation Securities Litigation, involves a report prepared by PricewaterhouseCoopers, which had been retained by Polymedica’s outside law firm to explore questions that had arisen in a Securities and Exchange Commission probe of possible financial irregularities.
Polymedica gave the PwC report to the SEC and to plaintiffs who had filed a civil lawsuit. But the company balked at giving the plaintiffs the report’s supporting documents, arguing that the paperwork was privileged and not subject to discovery because it was prepared by a “non-testifying expert” in anticipation of litigation.
The precise definition of a non-testifying expert is critical in federal securities cases, and any question on the issue is closely watched for any broader implications it can have on other cases. Essentially, the federal Rules of Civil Procedure treat non-testifying experts as assistants to lawyers, and therefore protected by attorneys’ work-product privileges. Testifying experts, on the other hand, have no such protections and can see much more of their work handed over to legal opponents during pretrial discovery.
In a decision rendered last month, Judge William Young ruled that PwC was acting under the auspices of Polymedica’s law firm and consequently could keep its research private. Although corporate defendants “may not shield relevant information from discovery merely by passing it off to a third party, including a non-testifying expert,” Young said, the plaintiffs failed to show any exception that might have warranted PwC giving up its work.
EXCERPT
Below is an excerpt of a February 2005 legal bulletin from the firm Heller Ehrman, “Work Product Protections For ‘Dual Purpose’ Experts.”
The concerns about improper influences on experts have created an additional very significant development—some courts have ruled that interactions between testifying experts and non-testifying consulting experts, particularly where the consulting expert serves as “staff” to the testifier, justify subjecting the non-testifying expert to deposition. Discovery from the testifying expert on data or information provided by other experts, just like information provided by attorneys, is generally allowed on the ground that the information was “considered” by the testifying expert under the 1993 Rule 26 amendment. But allowance of discovery directed at the non-testifying expert, when the interactions are deemed significant enough, is a new twist.
The limits on what subjects can appropriately be explored in such depositions are unclear, and may be highly contested. Such depositions, depending on the latitude allowed by the courts, could potentially lead to discovery not only of core attorney work product shared with the non-testifying expert, but also of independent work done by the non-testifying expert that no one ever expected to see the light of day.
It has long been the rule that a party can obtain discovery, by interrogatories or deposition, of a non-testifying expert only upon a showing of “exceptional circumstances” under Rule 26(b)(4)(B). Such discovery is sometimes allowed, for example, if the expert is the only person who can testify about relevant physical evidence that has been lost or destroyed. Because it is difficult to show such “exceptional circumstances,” attorneys have felt secure in their ability to share key attorney work product with consulting experts and seek advice about sensitive materials or issues. Those protections remain, provided that the consulting expert interacts only with the attorneys and not with testifying experts.
The new case law on discovery from “dual purpose” experts warns that these traditional protections may not be honored if the court concludes that the consulting expert had significant enough contacts with the testifying expert to warrant characterization as an “exceptional circumstance.” Some federal judges strongly disapprove of these contacts. One federal district court expressed shock at the interactions between testifying and non-testifying experts, describing it as a “thankfully unorthodox situation” and stated its view that the “proper” role of a consulting expert was to assist the attorney, not assist a testifying expert. It also warned that a litigant who used both testifying and consulting experts from the same firm was “playing with fire.” A number of federal district courts have held that substantial interactions between testifying and consulting experts were “exceptional circumstances” within the meaning of Rule 26(b)(4)(B) justifying discovery directly from the non-testifying experts about their interactions.
While these developments can be salutary in revealing situations where, for example, a consulting expert has improperly manipulated facts or data provided to a testifying expert to deliberately bias the opinion, it could also result in unintended disclosure of core attorney work product that may have been shared with the non-testifying expert which would otherwise be legitimately protected from discovery.
Source
Work Product Protections For “Dual Purpose” Experts (February 2005)
Frumento
Aegis Frumento, a partner with the law firm Duane Morris, says Young “is basically saying: ‘You [plaintiffs] can do your own investigation. You’re not entitled to piggyback onto the company’s internal investigation—to glom onto the fruits of their work.’ ”
Frumento notes that little case law exists on this question of non-testifying experts, “even though the rule has been around for a while. Most times issues like this get resolved short of [a written court ruling].”
Todd David, a partner with the law firm Alston & Bird, says the issue “has come up increasingly, in part because of the increase in situations where the SEC is investigating, perhaps informally, the same types of issues that are presented by a securities class action.”
David
The Polymedica ruling “emphasizes the complexity of modern-day corporate governance laws and regulation, where you’ve got to deal with audit committees and the SEC at the same time you might have private litigation,” David says. “If courts aren’t going to support the notion of non-testifying experts, it’s going to make it more difficult to do the right thing by way of an audit committee or the SEC. If you’ve got to live in fear that every document you produce that candidly assesses what’s going on at the company might wind up in hands of plaintiffs’ lawyers—that’s not conducive to good corporate governance.”
Consultants Vs. Testifying Experts
Stigi
Plaintiffs’ lawyers “are being a lot more aggressive in trying to get documents,” says John Stigi, a lawyer with Sheppard, Mullin, Richter & Hampton. He notes that the SEC in the Polymedica case—which arose in 2001—apparently didn’t object to the retention of a forensic accountant to do an investigation and analysis that would then be presented to the SEC. “Here, the company could shift from dealing with the SEC into a litigation mode, with the same counsel and experts and allow the whole thing to become in anticipation of litigation,” Stigi says.
Cases like Polymedica point to the need for companies to understand the difference between consulting experts and testifying experts, says Mary Mack, technology counsel for Fios, an electronic discovery services provider in Portland, Ore.
Mack
“We’re approached a lot to be testifying experts,” Mack says. “What generally I ask is, ‘Do you really want testimony or advice?’ They generally feel they want testimony.” Mack, however, often counsels clients to use Fios as consulting experts and use another outside source as a testifying expert. “The reason is to show a clear separation,” she says. “When giving advice, you’re hearing things a company may not want to hear on the stand [in court]. If you’re going to disclose all the good and the bad, it’s better to use a consultant. A testifying expert can be brought in later to look at a more narrow issue.”
Steps To Protect Information
Lehman
James Lehman, a partner with Nelson Mullins Riley & Scarborough, agrees that companies should consider using a consulting expert to explore and investigate, and having a separate expert as a testifying expert. “This creates a potential second firewall to material not specifically in any final report,” he says.
Lehman, vice-chair of the electronic discovery committee of the Defense Research Institute, notes that companies can take a number of additional steps to help protect documents created during an internal investigation from disclosure:
Make sure all documents are coded and stamped “attorney-client privilege” and “attorney work product.”
Use outside counsel to perform the investigation.
Use outside accounting experts, if necessary, to support the lawyers performing the investigation; make sure they work at the direction of outside counsel.
Carefully draft engagement letters to define who is an agent of whom. “In many cases, the outside law firm performing the investigation should hire the outside accounting/financial experts as its agent, because there is usually no accountant-client privilege,” Lehman says. “The engagement letter should also address what is the nature of the work and specifically establish the various prerequisites for any privilege.”
Tailor the information-gathering process to the particular allegation under investigation, and segregate any documents relating to collateral issues.
Make sure all interviews are conducted by investigating counsel, not company employees.
Related decisions, bulletins and coverage can be found in the box above, right.
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