PREVENTING DISCOVERY OF ACCOUNTANT'S MATERIALS AND COMMUNICATIONS

Attorneys frequently engage accountants to assist in complex business litigation and government investigation matters.  The issue of whether the accountant's materials and communications with the client are protected from disclosure is an issue that arises frequently.

The Massachusetts District Court explored the boundaries of the work product doctrine and attorney-client privilege as they relate to audits performed by accountants in Columbia Data Products, Inc. v. Autonomy Corp. Ltd., et al., No. 11-12077-NMG (D. Mass. Dec. 12, 2012).

The history of Columbia Data Products, Inc., began in 2008 when the plaintiff, Columbia Data Products, Inc. ("Columbia"), determined that the defendant, Iron Mountain, underpaid royalties to Columbia. Pursuant to the parties' License Agreement, Columbia engaged PriceWaterhouseCooper LLC ("PWC") as an independent auditor to perform an audit of Iron Mountain's records.  Columbia informed Iron Mountain of PWC's engagement and Iron Mountain and PWC executed a Non-Disclosure Agreement ("NDA"), in which PWC agreed to keep information provided by Iron Mountain confidential and use such information "solely for the purposes of exercising Columbia's audits rights under the [License Agreement]."  After PWC determined that Iron Mountain underpaid royalties by $23 million, Columbia filed a lawsuit and engaged PWC as an expert.  In response to the suit, Iron Mountain claimed that PWC's audit was incomplete and incorrect and requested Columbia to produce PWC's draft audit reports and communications relating to the audit.  Columbia refused to produce the documents, stating that they were protected by the work product doctrine and attorney-client privilege.  The District Court found that the materials were not protected under either theory.

Accountant's Materials Not Protected by the Work Product Doctrine

The work product doctrine protects from disclosure materials that a party, their attorney, or their representative prepared for use in litigation.  Materials assembled "in the ordinary course of business" are not protected by the doctrine, even if the subject matter of the materials relates to a subject that may be litigated.

The District Court determined that PWC's audit materials were not "prepared for" litigation and therefore were not protected by the work product doctrine.  In reaching this conclusion, the District Court relied primarily upon the fact that Columbia repeatedly informed Iron Mountain that PWC was an "independent auditor" retained for the purpose of auditing Iron Mountain pursuant to the License Agreement.  The Court found that Columbia's representations were significant because "Iron Mountain would not have given PWC access to its sensitive financial information or allowed it to interview its employees" if it knew that PWC's purpose was to provide expert advice in anticipation of litigation.

Accountant's Materials Not Protected by the Attorney-Client Privilege

The attorney-client privilege protects "those communications that are confidential and are made for the purpose of seeking or receiving legal advice."

The attorney-client privilege is generally waived by the disclosure of such communications to a third-party.  The privilege, however, is not waived when the disclosure is made to a third-party employed to assist a lawyer in rendering legal advice.  For the exception to apply, three elements must be met:

1. The "third-party communications must be necessary, or at least highly useful, for the effective consultation between the client and the lawyer;"
2. The third-party must play "an interpretive role," meaning that the third-party "translate[s] information between the client and the attorney;" and
3. The "third-party's communication must be made for the purpose of rendering legal advice, rather than business advice."  

The District Court determined that PWC's materials were not protected by the attorney-client privilege because there was no evidence that PWC's engagement was necessary for obtaining legal advice or that Columbia's counsel relied on PWC to translate or interpret information.  Again, relying upon Columbia's representations to Iron Mountain that PWC was engaged as an independent auditor, the Court found that PWC's role was simply to collect information not obtainable by Columbia and provide accounting services.

Conclusion

The decision in Columbia Data Products, Inc., clarifies the issue of when an accountant's materials are protected from disclosure.  In order to protect an accountant's materials from discovery in litigation, clients and their accountants must plan the engagement carefully and work with legal counsel to properly structure the communications and reporting relationships.