Evidentiary Privilege

• Author: International Law Group

The Dutch accounting firm of Ernst & Young Accountants (E&Y) represented the Baan Company in the 1990s as an outside auditor.

E&Y ended its relationship with Baan in early 1998 when the Securities & Exchange Commission (SEC) began to investigate Baan. E&Y cooperated with the SEC through its New York counsel, Davis, Polk & Wardwell (Davis Polk), even though E&Y itself was not subject to U.S. jurisdiction. E&Y later settled with the SEC in 2002 and paid a penalty.

Several individuals filed a securities fraud action in the U.S. against Baan and three individuals that focused on a specific stock transaction between the parties. Based on the Hague Convention on the Taking of Evidence Abroad in Civil or Commercial Matters [23 U.S.T. 2555, T.I.A.S. 7444, 847 U.N.T.S. 231; in force October 7, 1972 ] (HEC), plaintiffs sought to compel Davis Polk to produce non-privileged E&Y documents it had obtained during the SEC investigation.

Davis Polk objected to the subpoena (1) because E&Y was not subject to the jurisdiction of the U.S. courts, and (2) because the subpoena was overly broad. Plaintiffs then offered to limit the document request to transcripts of testimony before the SEC, correspondence with the SEC, and documents provided to the SEC in connection with the investigation.

The district court denied plaintiffs' motion to compel production from the non-party Davis Polk based on In re Sarrio, S.A., 119 F.3d 143 (2d Cir. 1997). In essence, the district court opined that E&Y was not subject to the court's subpoena power because of its location in The Netherlands and that plaintiffs could not get hold of the documents by subpoenaing the law firm.

Upon plaintiffs appeal, the U.S. Court of Appeals for the Second Circuit reverses and remands. The Court finds, first, that the HEC does not apply to the documents sought from Davis Polk in the U.S. Secondly, E&Y had already made voluntary disclosure of these documents within the U.S. and, therefore, they do not enjoy any further protection.

The Sarrio court held that, if certain documents were unobtainable while in the hands of a client by reason of constitutional privilege or common law principle, the same holds true when the client hands the documents to its attorney to aid the latter in formulating legal advice. A similar analysis applies to documents that...