Company gave up attorney-client privilege, Ninth Circuit rules.

"When a company handed over confidential documents to government investigators, it gave up its attorney-client and work-product privileges and must give the same documents to plaintiffs in a civil case, even though the government signed a confidentiality agreement, the Ninth Circuit has ruled. (McKesson HBOC, Inc. v. S. F. Super. Ct., 9 Cal. Rptr. 3d 812 (2004).)

The case goes back to 1999, when the medical-supply firm McKesson Corp. found out that its subsidiary HBO & Co. (HBOC) was recording revenues improperly. The same day it announced this discovery, McKesson was hit by several shareholder lawsuits.

Shortly after, the Securities and Exchange Commission (SEC) launched an investigation. McKesson hired the law firm Skadden, Arps, Slate, Meagher & Flom to conduct the company's own internal investigation and defend it in the lawsuits.

McKesson then contacted the SEC and the U. S. Attorney General's Office and said it would share the results of the internal investigation. In return, McKesson requested an agreement stating that the materials would be kept confidential and that the company did not intend to waive its attorney-client privilege. The government agreed.

In January 2002, the SEC informed McKesson that it had ended its own investigation and would not take any enforcement action against the company. The attorney general later filed criminal charges against former executives of HBOC.

The plaintiffs in the shareholder suits--about 90 cases in all, both state and federal--demanded access to the documents McKesson had turned over to the government, on the grounds that the company had, by its action, waived its attorney-client privilege.

At trial, McKesson argued that it had "a common interest with the government in obtaining information" about possible criminal behavior by HBOC. It also noted that the confidentiality agreement allowed for disclosure to others "under certain circumstances, including 1he prosecution of McKesson," but that since no criminal charges were filed, the agreement should be honored.

The trial court found that it had not been "reasonably necessary" for McKesson to hand over the documents and that the company had "waived [its] protection by disclosing the documents to third parties who did not have an interest in preserving the confidentiality of the documents."

The appeals court, finding that the case "presents a mixed question of fact and law," said it would rely on the state's evidence code, which holds that attorney-client privilege is waived when "any holder of the privilege, without coercion, has disclosed a significant part of the communication or has consented to disclosure made by anyone."

McKesson countered that a subdivision of the code preserves the privilege when disclosure of information is necessary to accomplish what counsel was hired to do (for example, when a lawyer discloses confidential information to a client's doctor). But the Ninth Circuit said McKesson's lawyers did not have to share documents with the government to accomplish their work. Privileged information should be shared, the court said, only "when it furthers the attorney-client relationship; not simply when two or more parties might have overlapping interests."

The court rejected the argument that McKesson and the government had a shared in retest, stating that the two were better defined as adversaries. Of the SEC and the attorney general, the court said "Their interest was not confidentiality blot instead to obtain the documents and thereby make their investigations and possible enforcement actions easier and more productive. In contrast, an interest in maintaining confidentiality exists when the parties are aligned on the same side in the litigation and have a similar stake in the outcome.... McKesson and the government are not aligned in any litigation, and they do not share the same slake or have the same goal."

The court added, "Even if we credit McKesson's claim that it was interested in rooting out the source of the accounting improprieties, we still find the situation here is not qualitatively different [from] a defendant sharing privileged material with one plaintiff but not another."

The court also agreed with the plaintiffs' argument that "McKesson's adversaries are not taking undue advantage of Skadden's efforts because the documents would have been protected had not McKesson disclosed them to third parties."