Commercial Litigation and Arbitration

Scope of Statutory Privilege for Documents Created “Specifically for [PCAOB ]” — Issue of First Impression — Log Required — Categorical Log Rejected

From Silverman vs. Motorola, Inc., 2010 U.S. Dist. LEXIS 81671 (N.D. Ill. June 29, 2010):

In its motion, KPMG seeks to quash the subpoenas issued to it by Plaintiffs and to preclude Plaintiffs from questioning KPMG, through Mr. Pratt and Mr. Parrott, regarding the PCAOB inspection process. Resolution of KPMG's motion turns on the statutory language of a provision of the Sarbanes-Oxley Act of 2002 (the "Act") which, in part, created the PCAOB. ***

At issue here, Section 10(b)(5)(A) of the Act provides:

(A) Confidentiality. Except as provided in subparagraph (B), all documents and information prepared or received by or specifically for the Board, and deliberations of the Board and its employees and agents, in connection with an inspection under section 104 [15 U.S.C. § 7214] or with an investigation under this section, shall be confidential and privileged as an evidentiary matter (and shall not be subject to civil discovery or other legal process) in any proceeding in any Federal or State court or administrative agency, and shall be exempt from disclosure, in the hands of an agency or establishment of the Federal Government, under the Freedom of Information Act (5 U.S.C. 552a), or otherwise, unless and until presented in connection with a public proceeding or released in accordance with subsection (c).

15 U.S.C. § 7215(b)(5)(A). The privilege created by the Act has not been addressed by any courts and is a matter of first impression.

Plaintiffs have agreed to exclude from their request documents that KPMG "created specifically in response to a request from the PCAOB." *** KPMG objects, however, to production of documents "concerning the PCAOB inspection process" or any documents "created . . . in connection with a PCAOB inspection." ... KPMG argues that "if litigants can compel production of materials related to the PCAOB's confidential inspection process notwithstanding section 105(b)(5)(A), open and constructive engagement between the PCAOB and accounting firms could be chilled by the threat of increased civil litigation, and the statutory framework carefully crafted by Congress to improve the quality of public company audits could be frustrated." *** KPMG's arguments, however, miss the mark. While KPMG spends a significant portion of its opening brief pointing to the legislative history and purpose of the Act, KPMG fails to address the fact that the language creating the statutory privilege in Section 105(b)(5)(A) is exceedingly clear. Indeed, while KPMG attempts to narrow its privilege claim in its reply brief by asserting that, "KPMG's position is, and always has been, that documents and information that are created in response to a PCAOB inspection and that relate or reflect the substance of the inspection process — such as internal KPMG communications that discuss, but are not in themselves, communications with the Board or the inspectors, or that discuss the content of confidential questions, comments, or critiques made by Board inspectors, or that reflect the firm's development of responses to those questions, comments or critiques ultimately to be communicated to the Board's inspection team - are protected." *** Such an attenuated view of the privilege created by the statute is unsupported by its text.

It is a "cardinal principal of statutory construction" that a court must "give effect, if possible, to every clause and word of a statute." Duncan v. Walker, 533 U.S. 167, 174 (2001) (internal citations omitted). "Legislative history comes into play only when necessary to decode an ambiguous enactment; it is not a sine qua non for enforcing a straightforward text." DirecTV, Inc. v. Barczewski, 604 F.3d 1004 (7th Cir. 2010). Here, Section 105(b)(5)(A) protects from disclosure only materials that an accounting firm "prepared . . . specifically for the Board." There is no ambiguity in this statutory provision and the Court need not look any further than the text of the statute in order to resolve the pending motion. Inclusion of the phrase "specifically for the Board" makes clear that Section 105(b)(5)(A) is applicable to only a portion of any information or documents that may derive from, refer to, or relate to a PCAOB inspection. The reading of the statute proffered by KPMG, which includes any documents "related to" or "concerning" the PCAOB inspection process, extends interpretation of the provision beyond its plain language and renders meaningless the phrase "specifically for the Board." In addition, the argument set forth in the Center for Audit Quality ("CAQ")'s amicus curiae brief that "[i]nternal KPMG documents relating to the inspection process are 'prepared . . . specifically for the Board' because, absent the inspection, they would never have been created in the first place" is not persuasive. *** If Congress intended the privilege to protect all materials related to the inspection, the text of the statute would reflect that intention. Instead, the statute limits the protection to materials prepared "specifically for" the Board. Despite significant argument by KPMG and CAQ regarding the legislative history of the Act, because the plain language of the statute is clear, the Court need not look beyond its text. ***

Finally, KPMG objects to the production of a privilege log. KPMG asserts that it need not produce a privilege log because Section 105(b)(5)(A) "places the materials to which it applies beyond the reach of discovery." *** Federal Rule of Civil Procedure 45(d) (2)(A), however, expressly provides that:

A person withholding subpoenaed information under a claim that it is privileged . . . must: (i) expressly make the claim; and (ii) describe the nature of the withheld documents, communications, or tangible things in a manner that, without revealing information itself privileged or protected, will enable the parties to assess the claim.

Fed. R. Civ. P. 45. Because KPMG has asserted a statutory privilege, it must provide Plaintiffs with a privilege log identifying the nature of the documents it contends are subject to the privilege.

[Footnote 3] The Court declines to follow the holdings of the two district courts outside of Illinois cited by KPMG in its reply brief for the proposition that a log identifying the withheld documents by category is sufficient.

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