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Cooper Hospital v. Sullivan

October 15, 1998

COOPER HOSPITAL/UNIVERSITY MEDICAL CENTER, COOPER HEALTHCARE SERVICES, INC., AND COOPER DATA SERVICES CORPORATION,
PLAINTIFFS,
V.
JOHN M. SULLIVAN, ET AL.,
DEFENDANTS.
COOPER HOSPITAL/UNIVERSITY MEDICAL CENTER, COOPER HEALTHCARE SERVICES, INC., AND COOPER DATA SERVICES CORPORATION,
PLAINTIFFS,
V.
FLEX/SYS TECHNOLOGY CORPORATION, ET AL.,
DEFENDANTS.



The opinion of the court was delivered by: Stephen M. Orlofsky United States District Judge

HON. STEPHEN M. ORLOFSKY

OPINION

ORLOFSKY, District Judge

Plaintiffs/Appellants, Cooper Hospital/University Medical Center, Cooper Healthcare Services, Inc., and Cooper Data Services Corporation (collectively "Cooper"), have appealed to this Court from Magistrate Judge Robert B. Kugler's order granting the application of Defendant/Appellee, KPMG Peat Marwick, LLP ("Peat Marwick"), and Defendant/Appellee, Alan B. Reed, to compel Cooper to produce a document entitled "Report of the Ad Hoc Internal Control Committee of the Board of Trustees: The Cooper Health System" ("Report"). *fn1 In particular, Cooper appeals that portion of Magistrate Judge Kugler's opinion in which he found that Cooper had waived the protections of the work- product doctrine by voluntarily disclosing the Report to the United States Attorney for this District and the Attorney General of the State of New Jersey. *fn2 The issue presented by this appeal is whether Magistrate Judge Kugler correctly held that the United States Attorney and the Attorney General of the State of New Jersey were "adversaries" of Cooper within the context of the law of the work-product privilege. This determination is critical to the resolution of this appeal because the disclosure of a document to an "adversary" waives the work-product privilege. For the reasons set forth below, I shall affirm the decision of the magistrate judge because I conclude that his finding, that the United States Government and the State of New Jersey were adversaries of Cooper, is not clearly erroneous or contrary to law. Alternatively, I hold that the Report was not prepared in anticipation of litigation, and therefore, is not protected from disclosure by the work-product privilege.

I. FACTUAL BACKGROUND

For a period of years, prior to July, 1994, Cooper was the victim of a fraudulent scheme to embezzle millions of dollars, perpetrated by former employees who ultimately were prosecuted and convicted of the fraud. See Cooper Hospital/University Medical Center, et al. v. Sullivan, et al., Nos. 96-3182, 96-5416, unpublished slip op. at 3 (D.N.J. May 7, 1998) (Kugler, Mag. J.,) (hereinafter "Mag. Op."). The scheme was carried out by John M. Sullivan, Cooper's former Executive Vice President for Finance and Treasurer, and P. John Lashkevich, Cooper's former Assistant Vice President and Controller, both defendants in this case. See Mag. Op. at 3.

In 1993, the United States Attorney for this District began an investigation into allegations of fraud and embezzlement at Cooper. See Mag. Op. at 4. At that time, a federal grand jury empaneled in this District subpoenaed many of Cooper's financial and business records. See id. On July 20, 1994, Sullivan, Lashkevich, and John H. Crispo entered guilty pleas to federal criminal charges brought in connection with the defalcations uncovered by the federal investigation. See id. Even after the entry of these guilty pleas, the federal grand jury continued to subpoena documents from Cooper. See id.

In July, 1994, in response to the federal investigation and growing public concern over the arrests and guilty pleas of high ranking Cooper executives, Cooper's Board of Trustees appointed an Ad Hoc Committee ("Committee") to review Cooper's internal financial procedures and controls. See Declaration of David J. Novack, Esq., Exhibit B (filed May 22, 1998) (Peat Marwick's Brief in Support of its Application to Discover the Report ("Defs. Original Brief"), Exhibit C (Cooper Press Release dated Julu 26, 1994)), and Exhibit E (Peat Marwick's Reply Brief in Support of its Application to Discover the Report ("Defs. Original Reply Brief"), Exhibit A (Committee Mission Statement)). The Committee's chairman was the Honorable Warren C. Douglas, a retired New Jersey Superior Court Judge. The other members of the Committee included Rabbi Fred J. Neulander, a member of Cooper's Board of Trustees; Peter E. Driscoll, Chairman of Cooper's Board of Trustees; and Kevin Halpern, Cooper's Chief Executive Officer. See Novack Decl., Exh. B (Defs. Original Brief, Exh. C). Two additional positions on the Committee were reserved for representatives from the community. See id. The Committee met on forty or more occasions, culminating with the preparation of the Report which is the subject of this appeal. See Mag. Op. at 4.

On July 26, 1994, Cooper issued a press release stating that the Committee was formed in an effort "to regain public confidence in the financial operations of [Cooper] . . . ." See Novack Decl., Exh. B (Defs. Original Brief, Exh. C). In addition, the press release "assured" the public that the defalcations had not "affected the quality and comprehensiveness of the care offered by [Cooper]." Id. Furthermore, around this time, Cooper's Executive Vice President, Michael Dolfman, announced at a news conference that the Committee's Report would be released to the public upon completion. See Mag. Op. at 5.

The Mission Statement/Charge of the Committee charges the Committee with the following duties: to review existing procedures and controls; to recommend changes if needed; to assess the "institutional culture" with an eye toward re-educating employees relative to Cooper's mission; "to strengthen internal and external confidence . . .[;] to recommend the commencement of appropriate legal activity to seek full restitution . . . [;]" and to prepare a report recounting the Committee's conclusions and recommendations. See Novack Decl., Exh. E (Defs. Original Reply Brief, Exh. A).

To assist the Committee in performing its mission, Cooper retained the forensic accounting firm of Nihill & Reidley, and the law firm of Saul, Ewing, Remick & Saul, LLP, as its special counsel, to prepare the actual Report. *fn3 See Mag. Op. at 5. Nihill & Reidley scoured Cooper's financial and business records, reviewing over 100,000 pages of documents and conducting numerous interviews. See id. The attorneys reviewed Nihill & Reidley's findings, briefed the Committee, wrote the Report and compiled the supporting exhibits. See id. In April, 1995, Cooper released a two-page interim report outlining the proposed changes to its financial procedures and controls. See Novack Decl., Exh. D (Certification of Peter E. Driscoll ("Driscoll Cert."), Exh. A (Committee Interim Report); see also Mag. Op. at 5. The full Report was completed in November, 1996, and submitted to Cooper's Board of Trustees in January, 1997. See Mag. Op. at 5. The completed document consisted of over 260 pages of text, three volumes of exhibits, and an executive summary. See id.

On February 24, 1997, Cooper distributed a prospectus in connection with a $69.4 million sale of bonds issued by the Camden County Improvement Authority. See Novack Decl., Exh. B (Defs. Original Brief, Exh. G (Jim Walsh, FBI Reviews Cooper Data, Courier-Post, March 7, 1997, at 1A)). The prospectus, which incorporated some of the same financial data used in the Report, disclosed that Cooper had sustained $3.8 million in losses resulting from the fraud and embezzlement scheme, and had recovered $3.6 million from insurance and other sources. See id.; see also Mag. Op. at 5. In addition, the prospectus stated that $21.8 million in expenditures were "made or controlled by and/or to" Sullivan and Lashkevich. See Mag. Op. at 6; see also Novack Decl., Exh. B (Defs. Original Brief, Exh. N (Jim Walsh, Civil Lawsuits Seek Recovery of Millions in Cooper Fraud, Courier-Post, Feb. 28, 1997, at 1A)).

On March 6, 1997, FBI agents obtained a copy of the prospectus from the Camden County Improvement Authority, based upon allegations that Cooper had failed to disclose the magnitude of its financial losses in violation of federal securities laws. See Novack Decl., Exh. B (Defs. Original Brief, Exh. G). Cooper officials assured the public that the bond sale was conducted properly. See id. The United States Attorney's Office for this District requested that Cooper produce a copy of the Report. See Mag. Op. at 7. Cooper complied, surrendering the Report on March 12, 1997. See id. Cooper supplied the Report under a cover letter stating that it asserted and preserved all applicable privileges regarding the Report. See Driscoll Cert., Exh. B (Letter from Nicholas C. Harbist, Esq., of Archer & Greiner, P.C., to the Honorable Faith S. Hochberg, United States Attorney for the District of New Jersey, dated March 12, 1997)).

Shortly thereafter, on March 24, 1997, both the New Jersey Department of Human Services and the New Jersey Department of Health and Senior Services requested a copy of the Report. See Driscoll Cert., Exh. C (Letter from Gary J. Lesneski, Esq., of Archer & Greiner, P.C., to Janice Mitchell Mintz, Esq., First Assistant Attorney General, dated May 14, 1997). The State agencies sought the Report to ensure that public funds paid to Cooper had been used properly. See Driscoll Cert., Exh. E (Maureen Graham, Hospital Gives State Its Audit, Phila. Inq., May 14, 1997, at B1). Governor Christine Todd Whitman cautioned Cooper that State Medicaid funding could be jeopardized by a failure to turn over the Report. See id.

For nearly two months, Cooper refused to surrender the Report to the State of New Jersey. See Driscoll Cert., Exh. C. Cooper attempted to block the State of New Jersey's request by asserting that the Report was protected by the attorney-client privilege. See Mag. Op. at 7. In response to Cooper's refusal to turn over the Report, on April 23, 1997, the New Jersey Attorney General's Office demanded a copy of the Report. See Driscoll Cert., Exh. E; see also Mag. Op. at 7. Only then did Cooper acquiesce. See Mag. Op. at 7. Although on April 24, 1997, Cooper agreed to surrender the Report, Cooper continued to delay. See id. Finally, Cooper sent the Attorney General a copy of the Report on May 14, 1997. See id.; see also Driscoll Cert., Exh. C.

Even then Cooper attempted to limit how the State of New Jersey could use the Report in its criminal and civil enforcement investigations. See Driscoll Cert., Exh. C and Exh. D (Letter from Assistant Attorney General, Jaynee LaVecchia, Esq., to Gary J. Lesneski, Esq., dated May 14, 1997). First, Cooper submitted the Report with a cover letter asserting the document's confidentiality, and noting its privileged status. See Driscoll Cert., Exh. C. Second, Cooper obtained an agreement from the State of New Jersey setting forth procedures to safeguard the Report from public disclosure. See id.; See also Driscoll Cert., Exh. D.

The New Jersey Attorney General's Office referred the Report to the Division of Criminal Justice. See Driscoll Cert., Exh E. After completing an initial review for criminal violations, the Division of Criminal Justice forwarded the Report to the Department of Human Services, the Department of Health and Senior Services, and the Civil Law Division of the Attorney General's Office for further review and possible regulatory or statutory enforcement proceedings. See id.; see also Mag. Op. at 8. After nearly two months of investigation, the New Jersey Attorney General's Office ultimately determined that there was no evidence of criminal conduct on the part of Cooper. See Novack Decl., Exh. B (Defs. Original Brief, Exh. H (Maureen Graham, N.J. Finds Nothing Amiss at Cooper, Phila. Inq., July 11, 1997, at A1)).

II. PROCEDURAL HISTORY

On June 12, 1996, Cooper filed a civil complaint in this Court against defendants, Flex/sys Corporation, Flex/sys Technology Corporation, Flex/sys (New Jersey) Corporation, Flex/sys Data Corporation-Cherry Hill, Donald G. Fellner, and Walter I. Tanenbaum, and defendant, Allan B. Reed, alleging RICO violations arising out of conduct that was part of a joint venture between Cooper and these defendants. See Cooper Hospital/University Medical Center, et al. v. Flex/sys Corp., et al., Civil Action 96-3182 (SMO) (Complaint filed June 12, 1996) ("Flex/sys action").

Subsequently, on November 6, 1996, Cooper filed a civil complaint against Sullivan, Lashkevich, and the estate of Crispo, alleging claims arising out of the fraud and embezzlement scheme. See Cooper Hospital/University Medical Center, et al. v. Sullivan, et al., Civil Action 96-5416 (JEI) (Complaint filed November 6, 1996) ("Sullivan action"). The Sullivan action was originally assigned to the Honorable Joseph E. Irenas. Cooper later amended the complaint in the Sullivan action to include defendants, Elarba Pagan, Helene Weinstein, and Thomas J. Damadio. See Cooper Hospital/University Medical Center, et al. v. Sullivan, et al., Civil Action 96-5416 (JEI) (First Amended Complaint filed June 6, 1997). On December 7, 1997, Cooper filed a second amended complaint naming Peat Marwick as a defendant. See Cooper Hospital/University Medical Center, et al. v. Sullivan, et al., Civil Action 96-5416 (JEI) (Second Amended Complaint filed December 7, 1997).

Cooper had originally filed a state court complaint against Peat Marwick on March 13, 1997, in the Superior Court of New Jersey, Camden County, Law Division, alleging that Peat Marwick was negligent in failing to discover the defalcations of Sullivan, Lashkevich, and Crispo. See Mag. Op. at 6. On August 14, 1997, the Honorable Samuel L. Supnick, Judge of the Superior Court, stayed the state court action and ordered Cooper to join Peat Marwick in the pending federal action. See id. at 8. Subsequently, Cooper sought leave to file its second amended complaint. See id. at 6-7.

Because Cooper's earlier suit against Flex/sys Corporation, et al., had been assigned to this Court prior to the filing of the related suit against Sullivan, et al., the two actions were consolidated in this Court on May 27, 1998. See Cooper Hospital/University Medical Center, et al. v. Sullivan, et al., Civil Action 96-5416 (JEI) (Consolidation Order entered May 27, 1998).

On December 12, 1997, parties to the Sullivan action exchanged initial disclosures pursuant to Rule 26 of the Federal Rules of Civil Procedure. See Mag. Op. at 8. In its initial disclosures, Cooper identified the Report as a privileged document. See id. Cooper claimed that the Report was protected by both the attorney-client privilege and the work-product doctrine. Shortly thereafter, Peat Marwick made an application to compel the production of the Report. See id. Alan B. Reed, a defendant in the Flex/sys action, made a similar application. See id. In response, Cooper opposed the joint application to compel production of the Report, arguing that the Report was protected by the work-product doctrine and the attorney-client privilege. See id. at 9. In addition, Cooper filed a cross-application seeking a protective order on the grounds that the Report contained commercially sensitive material which was the product of self-critical analysis. *fn4 See id.

Magistrate Judge Kugler granted the application of defendants, Peat Marwick and Alan B. Reed, to compel Cooper to produce the Report. See Mag. Op. and Order (entered May 7, 1998). In addition, Magistrate Judge Kugler denied Cooper's cross-application for a protective order. See id. Specifically, Magistrate Judge Kugler found that Cooper had waived the work-product privilege by disclosing the Report to its adversaries, the United States Attorney and the Attorney General of the State of New Jersey. See Mag. Op. at 10-16. Magistrate Judge Kugler further found that Cooper had also waived the attorney-client privilege by the same disclosure of the Report. See id. at 16-20. Magistrate Judge Kugler denied the cross-application for a protective order because he found that Cooper had failed to demonstrate good cause as required by Rule 26(c)(7) of the Federal Rules of Civil Procedure and Smith v. BIC Corp., 869 F.2d 194, 199 (3d Cir. 1989). *fn5 Magistrate Judge Kugler concluded that Cooper had failed to show what information in the Report was commercially sensitive or how a competitor could misappropriate that information. See Mag. Op. at 22. In addition, Magistrate Judge Kugler found that Cooper was not entitled to a protective order on the basis of the self-critical analysis privilege, because Cooper had failed to demonstrate "that the information in the Report [was] the type whose flow would be curtailed if discovery were allowed[,] . . . [and failed to show] that the information was prepared with the expectation that it would remain confidential." Mag. Op. at 24. Magistrate Judge Kugler stayed his order pending this appeal. See Mag. Op and Order (entered May 7, 1998).

On May 22, 1998, Cooper filed a Notice of Appeal to this Court pursuant to 28 U.S.C. § 636(c)(4), Rule 72(a) of the Federal Rules of Civil Procedure, and Rule 72.1(c)(2) of the Local Civil Rules. See Plaintiffs' Notice of Appeal (filed May 22, 1998). Specifically, Cooper appeals from that portion of Magistrate Judge Kugler's order "which holds in pertinent part that `Cooper and the [United States and the State of New Jersey] were adversaries and thus the disclosure to the government resulted in the waiver of any work-product privilege which might have been asserted.'" Id. Cooper contends on appeal, as it did before Magistrate Judge Kugler, that it did not waive the protections of the work product doctrine by disclosing the Report to the United States and the State of New Jersey. See Plaintiffs' Brief in Support of Appeal of Magistrate's Order ("Pls. Brief") at 20-24. Cooper argues that, in spite of the ongoing federal investigation and its confrontations with state officials over the disclosure of the Report, the United States and the State of New Jersey were Cooper's allies, sharing a common, unarticulated interest. See id.

Cooper has not appealed from Magistrate Judge Kugler's finding that Cooper waived any attorney-client privilege it may have had in the Report. Nor has Cooper appealed from the denial of its cross- application for a protective order based on the grounds that the Report contained commercially sensitive material, or the denial of its cross- application for a protective order based upon the assertion of the self- critical analysis privilege.

In support of its appeal, Cooper argues that Magistrate Judge Kugler's finding that Cooper and the United States and the State of New Jersey were adversaries is clearly erroneous because Magistrate Judge Kugler impermissibly relied upon newspaper articles in making his factual finding. See id.; see also Pls. Brief at 13-24. In opposition, Peat Marwick, joined by defendant, Alan B. Reed, argues that Judge Kugler's finding is not clearly erroneous or contrary to law. See Defendant, Peat Marwick's Brief in Opposition to Plaintiffs' Appeal ("Def. Brief") at 10-30. Peat Marwick also urges this Court to affirm the magistrate judge's order on the ...


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