California Appeals Court Decision

In a case of first impression in California, the First District Court of Appeal ruled on Friday that a when a corporation voluntarily discloses to the SEC and the U.S. Attorney's Office the contents of an internal investigation by outside counsel, it waives the attorney-client privilege and attorney work product protection, and those materials are discoverable by plaintiffs in subsequent securities litigation. The case, McKesson HBOC v. Superior Court, is not yet reported.

McKesson retained Skadden, Arps to perform an internal review of improperly recorded revenues at its subsidiary, HBOC. The company disclosed the results of the review, in the form of written interview memoranda and a written report, to the SEC and U.S. Attorney by means of agreements designed to prevent disclosure of the information to any other parties, including subsequent civil plaintiffs. When plaintiffs sought discovery, McKesson argued that the privileges had not been waived by disclosure, since the company and the government had a common interest in investigating and rooting out any improprieties. The court was unpersuaded, stating that the government was adverse to the corporation and that McKesson could not share the materials with one plaintiff while withholding them from another.

This same issue has resulted in a similar outcome in federal court: U.S. v. Bergonzi, 216 F.R.D. 487, 496-97 (N.D.Cal. 2003). McKesson has appealed that case to the Ninth Circuit.

As securities litigators, we have advised our clients that any sharing of written investigative materials with the government presents a substantial risk that those materials will be subject to discovery in subsequent civil litigation. This ruling confirms that to be the case. While there may still be compelling reasons to share information with the government, it is clear that sharing written documents will open that information up to discovery.

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