MEMORANDUM AND ORDER
I. INTRODUCTION
Lead Plaintiff, the New York State Common Retirement Fund, moves to compel defendant Raytheon Corporation to produce audit opinion letters and other documents prepared by its attorneys, which were submitted to the independent auditor, co-defendant PriceWaterhouse Coopers (PwC), for use in the audit. The Magistrate Judge agreed with Raytheon that these audit opinion letters wеre protected as attorney work product, held that the work product privilege was not waived, and found that Lead Plaintiff had not demonstrated a substantial need for the documents in question.
II. FACTUAL BACKGROUND
The Court assumes familiarity with its pri- or opinion in this litigation, available at
Plaintiff asserts that Raytheon improperly avoided recognizing $93 million in losses on ten inactive completed contracts with Raytheon. The $93 million was booked as revеnues in excess of actual client payments to cover cost overruns previously incurred. According to an August 1998 Actionable Asset Memo, these contracts were subject to litigation or alternative dispute resolutions, and plaintiff contends there was no reasonable expectation of a recovery in that amount. For example, Raytheon failed to write off the Saudi Arаmeo Seawater Project until October 1999 although it was a closed project, it was in arbitration, and the historic relationship with the customer, as well as the contract terms, made recovery improbable.
Plaintiff also alleges that prior to the issuance of its “clean” audit opinion for 1998, PwC was aware that several of Raytheon’s contracts, reported as income, were already
III. DISCUSSION
A. Burden of Proof
The party invoking a recognized privilege has the burden of establishing not only the existence of that privilege, but also that the privilege was not waived. See United States v. Wilson,
B. Work Product Doctrine
The work product doctrine protects “the files and mental impressions of an attorney ... reflected, of course, in interviews, statements, memoranda, correspondence, briefs, mental impressions, personal beliefs, and countless other tangible and intangible ways” prepared in anticipation of litigation. United States v. Randall,
Rule 26(b)(3) codifies the principles articulated in Hickman. The Rule states that doсuments “prepared in anticipation of litigation or for trial” are discoverable only upon a showing of substantial need of the materials and inability, without undue hardship, to obtain their substantial equivalent elsewhere. Even where this showing has been made, however, the Rule provides that the court “shall protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation.” Adlman,
The threshold determination, then, is whether the documents were prepared in “anticipation of litigation.” Courts have differed somewhat in construing this term. Under one approach, this determination requires an inquiry into “the primary motivational purpose behind the creation of the document.” United States v. Gulf Oil Corp.,
Under a second approach, the work product doctrine protects a broader category of documents. In Adlman,
[A] document created because of anticipated litigation, which tends to reveal mental impressions, conclusions, opinions, or theories concerning the litigation, does not lose work-product protection merely because it is intended to assist in the making of a business decision influenced by the likely outcome of the anticipated litigation. Where a document was created because of anticipated litigation, and would not have been prepared in substantially similar form but for the prospect of that litigation, it falls within Rule 26(b)(3).
Courts following the more restrictive “primary purpose” approach have held that documents prepared for an independent auditor in connection with a publicly held corporation’s efforts to comply with the federal securities laws do not constitute attorney work product because they are created primarily for thе business purpose of preparing financial reports that would satisfy the requirements of the federal securities laws. Gulf Oil Corp.,
Other courts have taken a сontrary point of view on the ground that the documents were prepared because of litigation. See Adlman,
However, even when documents were created “because of’ litigation, documents that are required to be prepared to comply with the law may not be protected. “In limiting work product to materials prepared ‘in anticipation of litigation,’ the drafters of Rule 26(b)(3) excluded from the rule’s protection ‘Materials assembled in the ordinary course of business, or pursuant to public requirements unrelated to litigation, or for other non-litigation purposes.’” Fed.R.Civ.P. 26(b)(3) Advisory Committee Note (emphasis added), cited in Martin,
At issue here are audit opinion letters prepared by an attorney for an independent auditor about pending lawsuits involving the audited company. To the extent the information in these letters must be disclosed in the public financial statements of the company being audited, it is not entitled to work product protection even under the broader “because of litigation” definition of the privilege. However, the Court cannot make this evaluation without a better record. The audit opinion letters should be produced for in camera review. In addition, Raytheon, and PwC, shall produce affidavits setting forth the accounting and legal stаndards governing the treatment of pending or anticipated litigation in financial statements, and supporting any claim of privilege document by document.
C. Waiver
Raytheon points out that some of the documents were prepared in anticipation of litigation, and were then shared with the audit team to assist PwC in its work. Under any definition, these documents are covered by the work product doctrine. Thеrefore, the Court must determine whether the protection has been waived and whether plaintiff has demonstrated substantial need for the materials.
The work product privilege may be waived through disclosure. In United States v. Amer. Tel. & Tel. Co.,
[T]he work product privilege does not exist to protect a confidential rеlationship, but rather to promote the adversary system by safeguarding the fruits of an attorney’s trial preparations from the discovery attempts of the opponent. The purpose of the work product privilege is to protect information against opposing parties, rather than against all others outside a particular confidential relationship, in order to encourage effective trial preparation.... A disclosurе made in the pursuit of such trial preparation, and not inconsistent with maintaining secrecy against opponents*360 should be allowed without waiver of the privilege.
Id. at 1299 (emphasis added). In determining whether a disclosure is fatally inconsistent with maintaining the'privilege, the existence of “common interests” between the transferor and transferee should be considered. Id. Most courts have held that disclosure of a document to third persons does nоt waive the protection unless it has substantially increased the opportunities for potential adversaries to obtain the information. See 8 Wright, Miller & Marcus, Federal Practice and Procedure, § 2024 (collecting cases); see also Gutter v. E.I. DuPont de Nemours & Co.,
The pivotal question is whether disclosure of documents protected by the work product doctrine to an independent auditor substantially increases the opportunities for potential adversaries to obtain the information. The analysis begins with understanding the role of the independent auditor, which the Supreme Court has described:
By certifying the public reports that collectively depict a corporation’s financial status, the independent auditor assumes a public responsibility transcending any employment relationship with the client. The independent public accountant performing this special function owes ultimate allegiance to the corporation’s creditors and stockholders, as well as to investing public. This “public watchdog” function demands that the accountant maintain total independence from the client at all times and requires comрlete fidelity to the public trust.
United States v. Arthur Young & Co.,
Plaintiff argues that any disclosure of work product to a public auditor constitutes a waiver because the information was likely to be used in the preparation of public financial reports. However, as the Magistrate Judge points out, there is no evidence that materials disclosed to an independent auditor are likely to be turned over to the company’s adversaries except to the extent that the securities laws and/or accounting standards mandate public disclosure.
Again, the record is inadequate for this Court to determine the scope of litigation information an independent auditor or audited company can reasonably be expected to disclose in public financial reports. As Raytheon has the burden of establishing the applicability of the doctrine, the Court orders Raytheon and PwC to produce the documents in camera with an affidavit explaining
D. Substantial Need
The Magistrate Judge found that Lead Plaintiff had not made a showing of substantial need for the documents protected by the work product doctrine. At this point, the Court declines to address this “substantial need” finding. I agree with the Magistrate Judge that Lead Plaintiff has not met its burden оf demonstrating that core work product should be turned over. Once Lead Plaintiff has taken PwC’s depositions, it may renew an attempt to show substantial need for the documents, by explaining the specific contract at issue, the alleged fraud in the write-down, and the substantial need for the document. Once I receive this explanation, I will conduct the substantial need analysis during the in camera review.
IV. CONCLUSION
Accordingly, I overrulе plaintiffs objections to the Magistrate Judge’s order except with respect to the claim of work product protection for certain documents. Raytheon and PwC shall produce these documents for in camera review with supporting affidavits within 30 days.
Notes
. In his Order denying Lead Plaintiff's motion to compel, Magistrate Judge Cohen made several other rulings. First, he rejected Lead Plaintiff’s argument that the right to withhold documents on privilege grounds was waived by defendant’s intent to rely on an advice of counsel defense, finding that defendant did not intend to rely on such a defense. Second, he denied Lead Plaintiff's claim that Garner v. Wolfinbarger,