Privilege and Work Product Protection for Internal Investigations — Waiver Issues — Self-Interest and Common Interest Defenses to Defamation
From Gruss v. Zirin, 2011 U.S. Dist. LEXIS 79298 (S.D.N.Y. July 14, 2011):
Plaintiff Perry A. Gruss filed the complaint in this action on July 20, 2009, asserting claims for defamation and breach of contract by the defendants, D.B. Zwirn & Co., L.P., and D.B. Zwirn Partners, LLC (collectively, the "Zwirn Entities"), two companies controlled by individual defendant Daniel B. Zwirn ("Zwirn"). (See generally Compl.). Gruss was the Chief Financial Officer ("CFO") of D.B. Zwirn & Co., L.P. and its predecessor company from July 2002 until he resigned in late September or early October 2006, by which time he had become a partner in the company. ***
When *** financial irregularities came to light in the spring of 2006, the Zwirn Entities hired Schulte, Roth and Zabel, LLP ("SRZ") as outside counsel to perform an internal investigation intended to determine who was responsible for the financial irregularities and how best to remedy them.... SRZ's investigation included interviews of personnel of the Zwirn Entities, including both Gruss and Zwirn.... Gruss was ultimately blamed for the irregularities and resigned. ***
In October of 2006, Zwirn contacted investors in the Zwirn Funds, as well as other stakeholders in the Zwirn Entities, and informed them of Gruss's departure. In his communications with them, he used talking points prepared by SRZ.... Subsequently, defendants hired the law firm Gibson, Dunn, and Crutcher, LLP ("GDC") to conduct a second investigation into the financial irregularities and inform the SEC of its findings. GDC subsequently notified the SEC about the financial irregularities.... GDC's final presentation to the SEC regarding this matter was on March 20, 2007..., after which the SEC commenced its own investigation of the Zwirn Entities. ***
At the close of GDC's investigation, Zwirn disclosed both the irregularities and the internal investigations to his investors in a series of telephone calls. Zwirn also sent an investor memorandum detailing GDC's findings to investors in the Zwirn Funds. Over the course of these communications, Zwirn made several statements absolving himself and blaming Gruss for his companies' problems. ***
In this lawsuit, Gruss alleges that Zwirn's statements were false and defamatory. ***
Defendants ***assert counterclaims demanding reimbursement for the expenses of the internal investigations, on both breach-of-contract and breach-of-fiduciary-duty theories.... Defendants make extensive and specific allegations as to Gruss's misconduct in alleging their counterclaims, including allegations referring to the findings of the two internal investigations.***
B. Attorney-Client Privilege
Interviews of a corporation's employees by its attorneys as part of an internal investigation into wrongdoing and potentially illegal conduct have been repeatedly found to be protected by the attorney-client privilege. See, e.g., Upjohn, 449 U.S. at 394-95; In re John Doe Corp., 675 F.2d 482, 488 (2d Cir. 1982) ("The Upjohn privilege is clearly limited to communications made to attorneys solely for the purpose of the corporation seeking legal advice and its counsel rendering it."); In re Grand Jury Subpoena, 599 F.2d 504, 510-11 (2d Cir. 1979) (finding that first investigation, "conducted primarily by non-lawyer senior officials" was not privileged, but second investigation, conducted by counsel, was privileged); Robinson v. Time Warner, Inc., 187 F.R.D. 144, 146 (S.D.N.Y. 1999); Carter v. Cornell Univ., 173 F.R.D. 92, 95 (S.D.N.Y. 1997). This protection extends to the attorneys' notes of those interviews insofar as those notes reflect communications between the employee and counsel. Upjohn, 449 U.S. at 397 ("Our decision that the communications by Upjohn employees to counsel are covered by the attorney-client privilege disposes of the case so far as . . . any notes reflecting responses to interview questions are concerned."); Carter, 173 F.R.D. at 95 (notes of interviews not disclosed). ***
Footnote 3. To the extent that the attorneys' notes and summaries of the interviews "go beyond recording responses to [counsel's] questions," Upjohn, 449 U.S. at 397, and instead reach the attorneys' mental processes, we will address them in our discussion of work product. ***
Plaintiff seeks to thwart this conclusion, asserting that the interview notes and summaries are not protected by the privilege because they "were prepared for the business purpose of communicating with investors and other interested business parties, rather than legal purposes[.]" (Pl.'s Mem. of Law at 7). They support this argument by pointing out that the law firms' conclusions were communicated to the SEC and to investors in the Zwirn Entities, and asserting that from this "widespread public dissemination of the [SPR] and [GDC] investigations' conclusions, it is clear that the investigations were undertaken for a business purpose, rather than for the rendering of legal advice, since the Zwirn Entities otherwise would have kept the conclusions of those investigations confidential." (Id. at 8).
Defendants counter by stating that they retained SRZ to provide legal advice on several issues, including "whether disclosures should be made, and what should be done concerning possible [SEC] consequences," as well as
"whether the accounting irregularities were material to investors . . . whether disclosures about the irregularities were required . . . whether anyone responsible for the irregularities should remain at [the Zwirn Entities] and the possibility of related employment litigation . . . whether the accounting irregularities exposed [the Zwirn Entities] to possible regulatory issues, [and] investor lawsuits, and what should be [the Zwirn Entities'] strategy respecting possible litigation."
*** As the Second Circuit recently observed, the distinction between legal advice and business advice "is not demarcated by a bright line," In re County of Erie, 473 F.3d 413, 420 (2d Cir. 2007), and hence "[w]e consider whether the predominant purpose of the communication is to render or solicit legal advice." Id. at 420 & n.7 (citing cases); accord Allied Irish Banks, 240 F.R.D. at 103; Spectrum Sys. Int'l v. Chem. Bank, 78 N.Y.2d 371, 379-80, 575 N.Y.S.2d 809, 815 (1991). "So long as the communication is primarily or predominantly of a legal character, the privilege is not lost merely by reason of the fact that it also refers to certain nonlegal matters." Rossi, 73 N.Y.2d at 594, 542 N.Y.S.2d at 511; accord, Stenovich v. Wachtell, Lipton, Rosen & Katz, 195 Misc.2d 99, 106, 756 N.Y.S.2d 367, 376 (N.Y. Sup. Ct. 2003) ("The fact that business advice is sought or even given does not automatically waive the [attorney-client] privilege, 'where the advice given is predominantly legal, as opposed to business, in nature[.]'") (quoting United States v. Davis, 131 F.R.D. 391, 401 (S.D.N.Y. 1990)). "The predominant purpose of a communication cannot be ascertained by quantification or classification of one passage or another; it should be assessed dynamically and in light of the advice being sought or rendered, as well as the relationship between advice that can be rendered only by consulting the legal authorities and advice that can be given by a non-lawyer." Erie, 473 F.3d at 420-21.
With this standard in mind, it is irrelevant that both firms' reports "were prepared in part, for the business purpose of gaining advice on what to communicate to investors and other interested business parties, rather than legal purposes." ... There can be little question that both firms were engaged to investigate the accounting irregularities at the Zwirn Entities and advise management how to resolve those irregularities.... Their advice included instructions not only on how to communicate with investors, but also on the legal ramifications of the accounting irregularities within the heavily-regulated world of investment contracts, the decision as to which employees should be held responsible and how those employees should be disciplined — advice with clear legal implications when the employee in question was party to a partnership agreement, as was Gruss *** — and both the possibility of, and strategies for, future litigation. *** Based on our review of the portions of the law firms' findings that have already been produced, it is clear that their communications with the Zwirn Entities were predominantly made with the purpose of giving legal advice. The fact that some of this advice resides in the gray area where legal advice shades into business advice does not change that conclusion. ***
C. Work Product
***"Three conditions must be met to earn work product protection [as embodied in Fed. R. Civ. P. 26(b) (3)]. The material must (1) be a document or a tangible thing, (2) that was prepared in anticipation of litigation, and (3) was prepared by or for a party, or by his representative." Allied Irish Banks, 240 F.R.D. at 105 (quoting A.I.A. Holdings, S.A. v. Lehman Bros., Inc., 2002 WL 31556382, at *4 (S.D.N.Y. Nov. 15, 2002) and citing cases) (internal quotation marks omitted). Only the second condition is in dispute here, and so we consider whether the interview notes and summaries were prepared in anticipation of litigation. A document was prepared in anticipation of litigation for purposes of Rule 26 when, "in light of the nature of the document and the factual situation in the particular case, the document can fairly be said to have been prepared or obtained because of the prospect of litigation." Adlman, 134 F.3d at 1202 (emphasis in original) (quoting 8 Charles Alan Wright, Arthur R. Miller, and Richard L. Marcus, Federal Practice and Procedure, § 2024, at 343 (1994)). Under this rubric, "[w]here a document is created because of the prospect of litigation, analyzing the likely outcome of that litigation, it does not lose protection . . . merely because it is created in order to assist with a business decision." Id. On the other hand, "the 'because of' formulation . . . withholds protection from documents that are prepared in the ordinary course of business or that would have been created in essentially similar form irrespective of the litigation." Id.; accord, Allied Irish Banks, 240 F.R.D. at 106.***
Plaintiff urges us to find that the documents in this case would have been created in essentially the same form regardless of the Zwirn Entities' concern about litigation, and hence that they are unprotected by work-product immunity. In doing so, he relies heavily on Allied Irish Banks, a case that dealt extensively with the "essentially similar form" inquiry.
In Allied Irish Banks, a rogue trader at Allfirst Bank, a subsidiary of Allied Irish Banks ("AIB"), created false records of transactions in order to disguise losses that he had incurred on legitimate trades. *** Once the trader's fraud was discovered, both the Central Bank of Ireland and the Federal Reserve announced that they were investigating it, and the FBI began a criminal investigation. Id. at 100. AIB also began an internal investigation headed by Eugene Ludwig, a former Comptroller of the United States Currency, and the bank announced publicly that it would release the results in thirty days. Id. Ludwig's consulting firm was assisted in its investigation by the law firm Wachtell, Lipton, Rosen & Katz. Id. Over the course of the investigation, approximately fifty-five present and former employees of AIB and Allfirst were interviewed; while AIB stated that Wachtell personnel attended the interviews, it did not claim that Wachtell personnel conducted any of the questioning. Id.
Ludwig's investigation ultimately produced a report (the "Ludwig Report") to the AIB Board of Directors. The Board released the Ludwig Report the following day, and filed it with the SEC as part of Allfirst's Form 8-K. Id. at 101. AIB ultimately sued Bank of America for claims arising out of the trading scheme, id. at 99, and Bank of America sought production of the documents created or reviewed in the course of preparing the Ludwig Report, including notes of witness interviews. Id. at 102. Bank of America limited its request to "the 'factual documents generated during the investigation,' and thus exclude[d] 'any legal analysis undertaken by Promontory [Ludwig's consulting firm] or Wachtell.'" Id.***
In discussing whether the documents sought by Bank of America were protected by the work-product doctrine, the Court in Allied Irish Banks assumed that AIB had a reasonable belief that litigation would ensue, but stated that "the question under Adlman . . . is not merely whether AIB contemplated litigation when it generated the materials at issue, but rather whether these materials 'would have been prepared in essentially similar form irrespective of litigation.'" Id. at 106 (quoting Adlman, 134 F.3d at 1204). It then found that "the circumstances surrounding the creation of the [Ludwig] Report point to the ineluctable conclusion that AIB would have prepared the [Ludwig] Report, along with the materials used to generate it, simply because of its 'business-related purposes' — that is, regardless of the potential for litigation." Id. at 107. The business-related purposes underlying the report included (1) the need to reassure the public, as evidenced by AIB's desire to have the Ludwig Report completed and disseminated as quickly as possible, (2) the need to improve AIB's internal policies and controls to ensure that similar frauds would not recur, and (3) AIB's need to determine who was responsible for allowing the fraud to go unnoticed, and hold them accountable. Id. at 107-08. The actions AIB took in furtherance of these purposes —including announcing the investigation in advance and publicizing the Ludwig Report, revising its internal policies, and publicly firing six individuals identified as directly responsible for supervising the trader who had perpetrated the fraud — "evidence[d] the importance of the role of the Ludwig investigation as a corporate management tool, not as a mechanism to assist in expected litigation." Id. at 108.
There are obvious parallels between the events of this case and the events of Allied Irish Banks. Both cases involved corporations hiring outside firms to investigate financial irregularities. There are also clear differences between the two cases. For example, neither the SRZ nor GDC investigations were announced in advance — unlike the Ludwig investigation in Allied Irish Banks — nor was the dissemination of the findings of the investigations in this case as widespread or public as the dissemination of the Ludwig Report. But we believe that the dispositive distinction is between the types of documents sought in the two cases. The documents sought in Allied Irish Banks were limited to the factual matters encompassed within the interview notes compiled by the Ludwig investigation, in interviews that were not conducted by attorneys. See 240 F.R.D. at 102. Moreover, Bank of America's request specifically excluded any legal analysis. Id. In fact, the court in that case noted that "if AIB could point to any particular documents authored by Wachtell that were 'specifically directed to litigation strategy or possible litigation defenses[,] under Adlman, these [documents] would fall within work product protection, because they would not have been produced in the same form irrespective of the threat of litigation.'" 240 F.R.D. at 109 (quoting United States Fidelity & Guaranty Co. v. Braspetro Oil Servs. Co., 2000 WL 744369, at *9 (S.D.N.Y. June 4, 2000)). Here, plaintiff seeks the notes and summaries of witness interviews conducted by attorneys at two law firms, each of which was certainly aware of the possibility of litigation when asked to investigate accounting irregularities in the securities arena. This distinction is a crucial one.
The cases dealing with the "essentially similar form" inquiry deal primarily with documents containing factual statements. See Allied Irish Banks, 240 F.R.D. at 106-07 (listing cases). The "essentially similar form" inquiry is less useful — and, we believe, inappropriate — when applied to the notes and summaries of interviews created by attorneys during their investigation, which we believe are likely to reflect the attorney's thought processes as to which statements by a witness were particularly relevant. See In re Grand Jury Subpoenas Dated Mar. 19, 2002 and Aug. 2, 2002, 318 F.3d 379, 384-85 (2d Cir. 2003) (discussing an exception to the "essentially similar form" rule that "applies when an attorney has so specifically selected and compiled such documents in anticipation of litigation that production would necessarily reveal the attorney's developing strategy."). Applying the "essentially similar form" rubric to an attorney's notes and summaries of witness interviews would, we believe, directly conflict with the Federal Rules' admonition that we "must protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of a party's attorney or other representative concerning the litigation." Fed. R. Civ. Pro. 26(b) (3) (B). The Supreme Court has cautioned that "[f]orcing an attorney to disclose notes and memoranda of witnesses' oral statements is particularly disfavored because it tends to reveal the attorney's mental processes." Upjohn, 449 U.S. at 399 (citing Hickman, 329 U.S. at 513).
In fact, it seems that the only way to draw a distinction between interview notes created in anticipation of litigation and interview notes created for a business purpose would be to examine whether the attorney's notes reveal some focus on litigation strategy, and an attorney's mental processes on that score are precisely what the Supreme Court in Upjohn and Hickman sought to protect from discovery. Hence we find that, insofar as the interview notes and summaries contain opinion work product, they are protected by the work-product privilege.
Where the notes and summaries show only factual matters, defendants have not shown that they would have been created in essentially similar form irrespective of the litigation, and so they are not protected work product. See Abdell v. City of New York, 2006 WL 2664313, at *6-7 (S.D.N.Y. Sept. 14, 2006) ("[L]ower courts have consistently treated witness statements as factual rather than opinion work product, even where those statements have been summarized by counsel.") (citing cases). We note, however, that the factual matters within the notes and summaries are, as stated above, protected by the attorney-client privilege. ***[C]f. Upjohn, 449 U.S. at 401 ("The notes and memoranda sought . . . here . . . are work product based on oral statements. If they reveal communications, they are, in this case, protected by the attorney-client privilege. To the extent they do not reveal communications, they reveal the attorneys' mental processes in evaluating the communications.).***
Even if documents fall within the scope of the work-product doctrine, they may still be discoverable if the party seeking their production establishes "that it has substantial need for the materials to prepare its case and cannot, without undue hardship, obtain their substantial equivalent by other means." Fed. R. Civ. P. 26(b) (3) (A) (ii); see also, e.g., Securities & Exchange Comm'n v. Vitesse Semiconductor Corp., F.Supp.2d , 2011 WL 1142343, at *3 (S.D.N.Y. Mar. 25, 2011) ("To demonstrate substantial need, a party must demonstrate an inability to obtain equivalent evidence without undue hardship.") (citing Fed. R. Civ. Pro. 26(b)(3)); Kidder, 168 F.R.D. at 462. The "substantial need" standard, however, only applies to fact work-product; opinion work product "is to be protected unless a highly persuasive showing [of need] is made." In re Grand Jury Proceedings, 219 F.3d 175, 190-191 (2d Cir. 2000) (quoting, inter alia, Adlman, 134 F.3d at 1204); see also Upjohn, 449 U.S. at 401-02 ("As Rule 26 and Hickman make clear, [opinion] work product cannot be disclosed simply on a showing of substantial need and inability to obtain the equivalent without undue hardship.").
*** At least one case in this District has found substantial need based on little more than the passage of time since the events at issue. In Vitesse Semiconductor Corp., the SEC sued a corporation and several individual defendants, alleging "fraudulent revenue recognition practices and stock options backdating misconduct." 2011 WL 1142343, at *1. During the SEC's initial investigation of Vitesse, a non-party corporation conducted an internal investigation into its relationship with Vitesse, and produced the final report of that investigation to the SEC. Id. Two of the individual defendants subpoenaed the law firm and forensic accounting firm that had conducted the investigation, seeking not only the final report but also all documents connected to it. Id. at *2. Ultimately, the court found that the non-party corporation had waived any work-product protection for its report and its underlying documents by disclosing the report to the SEC, id. at *2-*3, but the court went on to state that, even in the absence of waiver, defendants had shown substantial need for the report. This substantial need was based entirely on the length of time that had passed since the witnesses' initial interviews and the court's concern that "depositions of witnesses 'cannot reveal the same detail' as interviews conducted 'when the witnesses' memories were fresh,'" potentially rendering "defendants' ability to impeach witnesses at trial . . . severely compromised, especially since the SEC may use the fruits of the report at trial . . . ." Id. at *3 (quoting, inter alia, Granite Partners v. Bear, Stearns & Co., Inc., 184 F.R.D. 49, 56 (S.D.N.Y. 1999)).
On the other hand, the Court in In re Natural Gas Commodities Litig. found that the plaintiffs had failed to show substantial need for interview memoranda from an internal investigation, "as [they] have not demonstrated why they would not be able to depose the individuals interviewed during the internal investigation." 232 F.R.D. 208, 213 (S.D.N.Y. 2005). That case dealt with allegations of manipulation of the natural gas futures market in the years 2000-2002. See In re Natural Gas Commodity Litig., 337 F.Supp.2d 498, 500-01 (S.D.N.Y. 2004). One of the defendants conducted an internal investigation of the practices allegedly showing market manipulation, basing their analysis on "data . . . reflecting monthly trade-by-trade price and volume information for each [natural gas] trading hub" and "data for all trades made by [that defendant]"; another defendant conducted a similar internal investigation using similar sets of data. In re Natural Gas Commodities Litig., 2005 WL 1457666, at *1-2 (S.D.N.Y. June 21, 2005). The analyses created in the course of these investigations were turned over to various governmental agencies, and plaintiffs sought to compel production of those analyses and the underlying documents, arguing that production to the government agencies constituted waiver and that they had substantial need for the factual material contained in the documents. Id. at *3-*4. In that case, however, "[t]he [work product] analyses . . . were not based on oral information but documents, and those underlying documents have been produced to plaintiffs." Id. at *8. Hence, the court found that "[p]laintiffs d[id] not have a substantial need for the analyses that defendants' counsel and experts provided to the government." Id. at *8.
Regardless of whether the passage of time alone can show need substantial enough to warrant the disclosure of fact work product — a debatable proposition — our research has not unearthed a case where the passage of time has sufficed to make the "highly persuasive showing" required to defeat work-product protection for opinion work product. ***
The party claiming either attorney-client privilege or work-product immunity also bears the burden of establishing that the privilege has not been waived. See, e.g., Allied Irish Banks, 240 F.R.D. at 103 (attorney-client privilege), 105 (work-product immunity). We begin by noting that defendants have already produced to plaintiff certain documents created in the course of the internal investigations by SRZ and GDC, including the "talking points" produced by SRZ and used by Zwirn in his October 2006 calls to investors in the Zwirn Funds, and the Powerpoint slides used by GDC attorneys to give a presentation to the SEC about the irregularities at the Zwirn Funds. (O'Brien Decl. at ¶¶ 3-4, 6-9). Defendants have, of course, waived any applicable privilege in these documents by voluntarily disclosing them to plaintiff, although they are not the subject of the current motion. Vitesse Semiconductor Corp., 2011 WL 1142343, at *2 (citing In re Steinhardt Partners, L.P., 9 F.3d 230, 235 (2d Cir. 1993)) ("[I]f a party discloses work product materials to an adversary, the privilege is deemed waived."); Crawford v. Franklin Credit Mgmt. Corp., 261 F.R.D. 34, 43 (S.D.N.Y. 2009) ("It is well-settled that the 'voluntary disclosure of confidential material to a third party waives any applicable attorney-client privilege.'") (quoting Schanfield v. Sojitz Corp. of Am., 2009 WL 577659, at *3 (S.D.N.Y. Mar. 6, 2009)). ***
2. "At Issue" Waiver
***The Second Circuit recently re-examined the principles underlying this type of waiver, and restricted the test previously adopted by many federal courts based on principles outlined in Hearn v. Rhay, 68 F.R.D 574 (E.D. Wash. 1975). See generally In re County of Erie, 546 F.3d 222, 226-29 (2d Cir. 2008). In Erie, the Second Circuit stated that it is insufficient for a party merely to "mak[e] privileged material relevant to the case" by "plead[ing] a claim or affirmative defense." 547 F.3d at 229 (quoting Hearn, 68 F.R.D. at 581) (internal quotation marks omitted). Instead, "the essential element" in finding an at-issue waiver is "reliance on privileged advice in the assertion of the claim or defense"; in other words, "a party must rely on privileged advice from his counsel to make his claim or defense" before a waiver will be found. ***
The Court in Erie explicitly "decline[d] to specify or speculate as to what degree of reliance is required" for waiver since it ultimately found that petitioners had relied entirely on a qualified immunity defense, which rendered "any legal advice . . . by [counsel] irrelevant to [petitioners'] defense." Id. Hence, the Court held, since disclosure of petitioners' communications with counsel would not prejudice respondents' case in any way, petitioners had not created any unfairness in the litigation and had not placed the privileged communications "at issue" by invoking qualified immunity, so as to create any waiver. See id. (quoting, inter alia, Doe, 350 F.3d at 305-06). The Court noted, however, that the petitioners in that case "[did] not claim a good faith or state of mind defense." Id. This distinction suggests that invocation of such a defense could potentially imply reliance on the advice of counsel, which could create an at-issue waiver. See also id. at 228-29 (citing, inter alia, Bilzerian, 926 F.2d at 1293 ("Accordingly, the assertion of a good-faith defense involves an inquiry into state of mind, which typically calls forth the possibility of implied waiver of the attorney-client privilege.").
We are mindful, however, of New York precedent stating that at-issue waiver will be found only when a defense requiring reliance on the advice of counsel is itself to be proven by the use of privileged documents. In Deutsche Bank, the First Department discussed this rule, stating that the fact "that a privileged communication contains information relevant to issues the parties are litigating does not, without more, place the contents of the privileged communication itself 'at issue' in the lawsuit; if that were the case, a privilege would have little effect." Deutsche Bank, 43 A.D.3d at 64, 836 N.Y.S.2d at 23. "Rather, 'at issue' waiver occurs 'when the party has asserted a claim or defense that he intends to prove by use of the privileged materials.'" Id. at 64, 836 N.Y.S.2d at 23 (emphasis added) (quoting North River Ins. Co. v. Columbia Cas. Co., 1995 WL 5692, at *6 (S.D.N.Y. Jan. 5, 1995)); accord, Aristocrat Leisure Limited v. Deutsche Bank Trust Co. Americas, 727 F.Supp.2d 256, 274 (S.D.N.Y. 2010) (quoting United States v. Ghailani, 751 F.Supp.2d 498, 501 (S.D.N.Y. 2010)). We will therefore apply the New York standard for at-issue waiver to defendants' claim of attorney-client privilege, and the Erie standard to their claim of work-product immunity. Here, defendants have asserted two good-faith defenses to plaintiff's defamation claim. (Answer at ¶¶ 257-58). They have also asserted counterclaims alleging breach of fiduciary duty and breach of contract stemming from plaintiff's alleged misconduct relating to the accounting irregularities at the Zwirn Entities. (Id. at ¶¶ 281-301). We examine whether any of these assertions requires reliance on the advice of counsel (or the use of privileged materials as proof) sufficient to constitute a waiver of the attorney-client privilege or work-product protection.
A. Defendants' "Good-Faith" Defenses
Defendants assert that
plaintiff's defamation claims are barred because the allegedly defamatory statements are within the sphere of legitimate public concern and, in making the alleged statements, the [Zwirn Entities] acted reasonably, in good faith, and in reliance on the conclusions reached as a result of the review conducted by outside counsel [SRZ] and the independent internal investigation conducted by [GDC].
(Answer at ¶ 257). We understand this defense to assert that the Chapadeau standard applies to (and bars) plaintiff's defamation claims. Cf. Konikoff v. Prudential Ins. Co. of Am., 234 F.3d 92, 100-02 (2d Cir. 2000) (discussing Chapadeau v. Utica Observer-Dispatch, Inc., 38 N.Y.2d 196, 379 N.Y.S.2d 61 (1975)); see also Defs.' Mem. of Law at 13). Under this standard,
where the content of the [allegedly defamatory statement] is arguably within the sphere of legitimate public concern, which is reasonably related to matters warranting public exposition, the party defamed may recover; however, to warrant such recovery he must establish, by a preponderance of the evidence, that the publisher acted in a grossly irresponsible manner without due consideration for the standards of information gathering and dissemination ordinarily followed by responsible parties.
Chapadeau, 38 N.Y.2d at 199, 379 N.Y.S.2d at 64.***
[The] defendants have a potentially viable Chapadeau defense. Moreover, we understand defendants' asserted defense that their allegedly defamatory statements were "within the sphere of legitimate public concern" and were made "reasonably, in good faith, and in reliance on the conclusions" of their counsel (Answer at ¶ 257) to allege that they did not, in the words of Chapadeau, "act in a grossly irresponsible manner." 38 N.Y.2d at 199, 379 N.Y.S.2d at 64. At bottom, this defense asserts reliance on the advice of counsel, specifically, upon the talking points prepared for Zwirn's use, the internal reports detailing Gruss's involvement in the accounting irregularities, and the investor memorandum prepared by GDC. The defense therefore places the validity of that reliance at issue, and operates as a waiver of privilege as to those materials. See Erie, 546 F.3d at 229.
Defendants have, of course, already disclosed those materials, and so the existence of an additional waiver of privilege as to them is a moot point. On this motion, plaintiff seeks the interview notes and summaries used by SRZ and GDC in preparing the documents upon which defendants rely for their Chapadeau defense. Our analysis as to the interview notes and summaries is somewhat different.
Adequate evaluation of the Chapadeau defense does not require an examination of the interview notes and summaries made in the course of outside counsel's internal investigation. As stated in Konikoff, "the question is not whether the defendant knew or was aware of the probability that some statement in [the investigator's report] was false, but whether the defendant acted responsibly in selecting and interacting with the investigator and disseminating the results as a whole." 234 F.3d at 105. ***Specifically, it appears that defendants did not rely on the notes and summaries in making their allegedly defamatory statements. Defendants have submitted sworn declarations from three former executives at the Zwirn Entities.... Each of these executives states that he has never seen the interview notes and summaries currently sought by plaintiff.... Absent any evidence that would undercut these representations, we find no reason to believe that defendants relied on the interview notes and summaries, rather than on the documents that have already been disclosed. Without that reliance, there is no waiver. See Erie, 546 F.3d at 229; accord Deutsche Bank, 43 A.D.3d at 64, 67-69, 836 N.Y.S.2d at 23, 26-27. ***
2. Qualified Privilege
Defendants also assert a second good-faith defense, that "the allegedly defamatory statements were privileged under the self-interest and common interest privileges, and the [defendants'] actions . . . were undertaken in good faith, with the absence of malicious intent to harm Gruss . . . ." (Answer at ¶ 258). We take this as an assertion of qualified privilege, and examine whether this defense asserts reliance on the advice of counsel in a way that would waive privilege as to the interview notes and summaries.
"One of the defenses to defamation under New York Law is 'qualified privilege.'" Tomasino v. Mount Sinai Med. Ctr. & Hosp., 2003 WL 1193726, at *15 (S.D.N.Y. 2003) (quoting Meloff v. New York Life Ins. Co., 240 F.3d 138, 145 (2d Cir. 2001)). Among the available qualified privileges under New York law are the self-interest and the common-interest privilege. See Konikoff, 234 F.3d at 98 (citing, inter alia, British Am. & E. Co. v. Wirth Ltd., 592 F.2d 75, 81 (2d Cir. 1979) (self-interest privilege); Stillman v. Ford, 22 N.Y.2d 48, 53, 290 N.Y.S.2d 893, 897 (1968) (common-interest privilege)).
Under the common-interest privilege, "'defamatory communications made by one person to another upon a subject in which both have an interest' are afforded qualified protection." Tomasino, 2003 WL 1193726, at *15 (citing Meloff, 240 F.3d at 146; Albert v. Loksen, 239 F.3d 256, 272 (2d Cir. 2001)). "Once this qualified privilege has been raised it 'creates a rebuttable presumption of good faith that may constitute a complete defense.'" Id. (quoting Meloff, 240 F.3d at 146). We have previously noted "the existence of a common-interest privilege between investors or shareholders and the corporations in which they invest." Konikoff, 1999 WL 688460, at *15 (quoting Glantz v. Cook United, Inc., 499 F.Supp. 710, 716 (E.D.N.Y. 1979)). Hence the common-interest privilege is at least potentially available as a defense to plaintiff's defamation claim.
The self-interest privilege is "less developed" than the common interest privilege, Konikoff, 234 F.3d at 98, but applies to defamatory statements "made in circumstances inducing a 'correct or reasonable belief that (a) there is information that affects a sufficiently important interest of the publisher, and (b) the recipient's knowledge of the defamatory matter will be of service in the lawful protection of the interest.'" Konikoff, 1999 WL 688460, at *12 (quoting Goldstein v. Cogswell, 1992 WL 131723, at *22 (S.D.N.Y. June 1, 1992), and citing, inter alia, RESTATEMENT (2d) OF TORTS § 594, cmt. b (1976)). "Any lawful pecuniary interest of the publisher may suffice as a 'sufficiently important interest' . . . except an interest in competition for prospective advantage, such as a businessman competing for customers by defaming a competitor." Id. (quoting and citing RESTATEMENT at § 594, cmts. f and g) (internal citation omitted). In Konikoff, we found that "a public airing of corporate intent to discover and root out internal wrongdoing is reasonably viewed as important to long-term corporate success and even survival . . . [t]his finding suffices to justify invocation of the qualified self-interest privilege." 1999 WL 688460 at *14, aff'd on other grounds, 234 F.3d at 100. Therefore, the self-interest privilege is also, at least potentially, available as a defense to plaintiff's defamation claim.***
B. Defendants' Counterclaims
***Plaintiff asserts that "[b]y expressly relying on what the [SRZ] and [GDC] investigations concluded, the Zwirn Entities have placed the accuracy of those findings at issue, thereby waiving the privilege concerning the underlying documents," including the interview notes and summaries. (Pl.'s Mem. of Law at 18-19 (citing Granite Partners, 184 F.R.D. at 55)). ***
Defendants have expressly disavowed any intent to use the privileged notes and summaries as proof of their claim, instead stating to the Court that they "are going to rely, and must rely, on the underlying conduct, the proof of the underlying conduct, the documents, and plaintiff's own admissions in depositions already, . . . to establish both . . . the affirmative defense to defamation and [the counterclaims] for the breach of fiduciary duty and breach of contract[.]" (Tr. of Dec. 22, 2010 Conf. at 17; see also id. at 32 ("In order to make out the breach of fiduciary duty and the breach of contract claims, we are going to have to prove the underlying conduct.")). Defendants also stated at oral argument, as an example of their intention to prove their claims without relying on privileged documents, that Mr. Gruss had admitted, in his deposition, that the statements in the investigative reports were correct. (Id. at 27). ***
Plaintiff has not attempted to show — nor could he show, in our opinion — that the interview notes and summaries he seeks are necessary to defendants' counterclaims or affirmative defenses. Hence defendants' mere assertion of the counterclaims does not create a waiver of the privilege in these documents. ***
3. Waiver by Disclosure and "Selective Use"
Plaintiff asserts that defendants waived any applicable privilege in the investigative reports (and the interview notes and summaries underlying them) in several ways. First, plaintiff asserts that simply by disclosing the existence of the investigations and the substance of their findings in their answer and counterclaims, defendants have waived the attorney-client privilege and work-product protection. (Pl.'s Mem. of Law at 13). The idea that simply referring to an attorney-client communication in a pleading waives the privilege is a staggeringly broad proposition. Unsurprisingly, plaintiff cites to no legal authority for this contention, and we have been unable to find any. We therefore reject it.
Plaintiff also asserts that defendants have waived any applicable privilege through their disclosures to the SEC and to investors and other stakeholders in the Zwirn Funds. (Id.). We find no more merit in these arguments.
When asked for legal authority to support the proposition that a disclosure of SRZ and GDC's conclusions to shareholders and other stakeholders waives protection for the underlying communications, plaintiff asserted that such disclosure destroyed the confidentiality necessary to the attorney-client privilege. (Tr. of Dec. 22, 2010 Conf. at 11-13). This is not the law. As stated above, the attorney-client privilege applies to communications, not facts; even if certain facts were once the subject of a privileged attorney-client communication, disclosure of those facts does not waive the privilege in the communication.... If it did, the attorney-client privilege could be easily destroyed by the simple expedient of deposing the client about the facts of the case. The attorney-client privilege and work-product immunity may be waived by selective disclosure of only part of a protected communication or document, since a party "may not rely on the protection of the privilege regarding damaging communications while disclosing other self-serving communications." Deutsche Bank, 43 A.D.3d at 23, 837 N.Y.S.2d at 64. Plaintiff asserts, as an alternative argument for waiver, that defendants selectively revealed portions of the SRZ investigation to investors, by failing to disclose SRZ's findings about Kahn (Pl.'s Mem. of Law at 19-20) , and that GDC's disclosure of "witness statements" to the SEC constitutes selective use of the privileged communications found in those witnesses' interviews, waiving any privilege in the remainder of the communications. (Id. at 20).
With respect to defendants' alleged selective disclosure to their investors, first, we find that these disclosures dealt primarily with facts, not privileged communications, and the disclosure of facts does not waive the privilege.... Second, where defendants disclosed privileged communications, "the extrajudicial disclosure of an attorney-client communication — one not subsequently used in a judicial proceeding to his adversary's prejudice — does not waive the privilege as to the undisclosed portions of the communication." In re von Bulow, 828 F.2d at 102. "Matters actually disclosed in public lose their privileged status because they obviously are no longer confidential." Id. at 103. Even if the public disclosures are "one-sided" or "misleading," however, those disclosures "create no risk of legal prejudice until put at issue in the litigation by the privilege holder." Id. (emphasis in original); see also Kidder Peabody, 168 F.R.D. at 469. There can be little question that defendants' original disclosures to their investors occurred outside the judicial context. Moreover, defendants have disclosed to plaintiff the entirety of SRZ's findings, obviating any legal prejudice resulting from the selective disclosure. Hence we find that von Bulow controls, and defendants' selective disclosure of SRZ's findings to their investors did not result in a waiver of the undisclosed portions of those findings or the interview notes and summaries underlying them. The same is true with respect to the disclosure of some or all of GDC's findings in the March 2007 Investor Memorandum.
Defendants' disclosures of certain "witness statements" to the SEC presents a more difficult question. At the outset, we discern two separate contentions within this argument by plaintiff for waiver: first, that the selective disclosure of portions of the interview notes and summaries, in the form of quotes from interviews presented to the SEC, waived any privilege in the undisclosed portions of the notes and summaries, at least insofar as that privilege might be asserted against the SEC itself; and second, that the waiver of privilege as to the SEC constitutes a waiver of the privilege as to other parties, specifically Gruss. ***
Within the context of an SEC investigation, "a company's voluntary disclosure to the SEC is[,] by implication, a waiver of privilege with respect to the specific information necessary to confirm the disclosures," insofar as the confirmatory information is sought by the SEC itself. SEC v. Beacon Hill Asset Mgmt. LLC, 231 F.R.D. 134, 143 (S.D.N.Y. 2004) (citing, inter alia, Kidder Peabody, 168 F.R.D. at 472). This type of "selective disclosure" of materials raises the possibility that the disclosing party is only revealing the portions of privileged documents or communications that are favorable to its position. Hence, where a party discloses only portions of a privileged communication — and intends to rely on those disclosures to prove its claim or defense — fairness requires a waiver of privilege in the remainder of the communication, so as to allow the disclosing party's adversary an adequate opportunity to impeach its claim. See John Doe Co., 350 F.3d at 303 ("it would be unfair to force the prosecutor to run the risk that the jury would accept the defendant's claims as to the facts the defendant put in issue while allowing the defendant, by assertion of his privileges, to deny the prosecutor access to directly pertinent material that might effectively impeach the defendant's claims.").
That leaves us with the question whether a waiver as against the SEC constitutes a waiver vis-a-vis other parties. The Second Circuit has found a waiver of privilege as to private litigants when the privilege was waived through voluntary disclosure to the SEC. See in re Steinhardt Partners, LP, 9 F.3d at 235-36. In Steinhardt, however, the Court of Appeals suggested that this rule might not apply when "the SEC and the disclosing party have entered into an explicit agreement that the SEC will maintain the confidentiality of the disclosed materials." Id. at 236. Subsequent cases have applied this dictum to preclude — or at least limit —a so-called "selective waiver" where the SEC and the disclosing party entered into a confidentiality agreement that reserves application of the privilege in subsequent proceedings. Police and Fire Retirement Sys. of City of Detroit v. SafeNet, Inc., 2010 WL 935317, at *1 (listing cases); see also United States v. Wilson, 493 F.Supp.2d 348, 362 (E.D.N.Y. 2006) ("What I draw from . . . Steinhardt . . . is that a question of selective waiver must be decided on a case-by-case analysis, and that the existence of an express non-waiver agreement is a critical element of the analysis."); In re Natural Gas Commodities Litig., 232 F.R.D. 208, 211 (S.D.N.Y. 2005) ("[V]oluntary disclosure to government agencies pursuant to an explicit non-waiver agreement does not waive the . . . work product or attorney-client privilege.") (citing, inter alia, In re Steinhardt Partners, L.P., 9 F.3d at 236).
The leading case to the contrary in this District is In re Initial Pub. Offering Sec. Litig. ("In re IPO"), 249 F.R.D. 457, 466 (S.D.N.Y. 2008). In that case, Credit Suisse had hired outside counsel to conduct an internal inquiry into "alleged misconduct related to the allocation of shares during initial public offerings." Id. at 458. In the course of that investigation, Credit Suisse's counsel interviewed employees and created memoranda summarizing the facts learned in those interviews. Id. Credit Suisse later produced those memoranda to the SEC and the United States Attorney's Office for the Southern District of New York, as well as to three former Credit Suisse employees "who had commenced an arbitration against Credit Suisse for wrongful discharge." Id. Credit Suisse also discussed the contents of some of the memoranda with officers of the National Association of Securities Dealers Regulation, Inc. ("NASDR"). Id. With the possible exception of the disclosure to NASDR, all of these disclosures were made pursuant to confidentiality agreements. Id. Nevertheless, the Court found that Credit Suisse's "repeated voluntary disclosures to adversarial parties" precluded a finding of selective waiver as to the most recent set of plaintiffs, who sought production of the memoranda. Id. at 466.
In this case, defendants' limited disclosures to the SEC were pursuant to an express confidentiality agreement, which reserved the application of the attorney-client and work-product privileges. (O'Brien Decl. at Ex. H). There is no indication that defendants have voluntarily disclosed part or all of the interview notes and summaries to any other actual or potential adversary. Nor is this a situation where — as in In re IPO — plaintiff seeks disclosure of the same materials already produced to other parties; instead, plaintiff seeks disclosure of additional documents underlying what was disclosed to the SEC. Given the existence of defendants' confidentiality agreement with the SEC and the absence of any other circumstances arguing in favor of a subsequent waiver, we do not believe that defendants' disclosures to the SEC resulted in a waiver of the privilege in the undisclosed portions of the interview notes and summaries as to plaintiff.
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