United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 02-2168
___________
PepsiCo, Inc., *
*
Appellant, *
* Appeal from the United States
v. * District Court for the
* Eastern District of Missouri.
Baird, Kurtz & Dobson LLP; Marion *
Pepsi-Cola Bottling Co., a Missouri *
corporation, *
*
Appellees. *
___________
Submitted: June 13, 2002
Filed: September 19, 2002
___________
Before RILEY, BEAM and MELLOY, Circuit Judges.
___________
RILEY, Circuit Judge.
In this expedited appeal, PepsiCo, Inc. (PepsiCo) appeals the district court’s
order vacating the magistrate judge’s order which denied claims of accountant-client
privilege and work product protection and compelled production of quality control
documents. We reverse the district court’s order in part, remanding for reinstatement
of the magistrate judge’s order as to the accountant-client privilege, and we affirm the
district court as to the work product doctrine.
I. BACKGROUND
In April 2001, PepsiCo instituted an action in Illinois federal court against
Marion Pepsi-Cola Bottling Corporation (Marion), alleging, inter alia, that PepsiCo
had a right to terminate its bottling agreement with Marion due to Marion’s failure
to meet product, performance, and customer service standards. The current dispute
arises from PepsiCo’s attempt to obtain documents from Marion’s accounting firm,
Baird, Kurtz & Dobson (BKD), in Missouri. BKD is a Missouri firm that has
performed financial accounting work for Marion for many years.
Until 1998, Marion’s internal auditor performed quality control assessments
for the Marion plant, evaluating such things as inventory control, sanitation, product
quality, and equipment operation. When Marion’s internal auditor was promoted in
1998, the internal auditor position was left vacant. Marion assigned some of the
internal auditor responsibilities to different departments at Marion. BKD took over
some of the internal auditor duties, such as auditing Marion’s plant records to
determine if Marion was doing a good job on production documentation and records
retention. BKD provided Marion officers with reports every three to six months.
In June 2000, PepsiCo served Marion with a document request for all
documents relating to quality control. Marion responded by producing quality control
assessments generated by its internal auditor, but did not include any quality control
documents BKD had generated. Marion owner and CEO, Harry Crisp, explained in
a deposition that he had probably destroyed the BKD assessment reports after
reviewing them, and that he did not know if the company kept copies. PepsiCo
served Marion with a second set of document requests, and Marion again failed to
produce the BKD assessments. PepsiCo then commenced an ancillary proceeding
against BKD in Missouri, serving document and deposition subpoenas on BKD in
January 2002.
-2-
After BKD and Marion objected to the subpoenas, PepsiCo filed an emergency
motion to compel. Marion and BKD moved jointly to quash the subpoenas, arguing,
in part, that (1) all the documents were protected by the accountant-client privilege;
and (2) the documents BKD generated after PepsiCo’s filing of the underlying lawsuit
on August 20, 2001, were protected work product.
A hearing on the motions was held before a magistrate judge. BKD and
Marion reiterated their claims that the BKD quality control assessments were
privileged. With regard to the work product doctrine, BKD and Marion argued that
any assessments conducted after August 20, 2001, when Marion retained BKD to
assist in the pending litigation, constituted protected work product. At the conclusion
of the hearing, the magistrate judge requested sample copies of the assessments being
withheld. BKD submitted for in camera inspection its engagement letter with Marion,
a BKD report regarding Marion’s manufacturing processes and a sample BKD
attestation report, which reports, BKD maintained, were generally representative of
the documents subject to privilege.
The magistrate judge ordered Marion and BKD to produce the requested
assessments. BKD and Marion objected to the order under Federal Rule of Civil
Procedure 72(a).1 The district court vacated the magistrate judge’s order, finding the
quality control documents were protected by accountant-client privilege and BKD’s
assessments after August 20, 2001, constituted protected work product.
1
Rule 72(a) states: "Within 10 days after being served with a copy of the
magistrate judge’s order, a party may serve and file objections to the order . . . . The
district judge to whom the case is assigned shall consider such objections and shall
modify or set aside any portion of the magistrate judge’s order found to be clearly
erroneous or contrary to law."
-3-
II. JURISDICTION
We have jurisdiction to hear this appeal under the collateral order doctrine
because this ancillary proceeding involves a nonparty to the underlying action, and
the underlying action is pending in a district court outside this Circuit. See
Miscellaneous Docket Matter No. 1 v. Miscellaneous Docket Matter No. 2, 197 F.3d
922, 925 (8th Cir. 1999) (where ancillary proceeding involves nonparty and main
action is pending outside circuit, appellants would have no means outside immediate
appeal to obtain review).
III. DISCUSSION
A. Accountant-Client Privilege
Illinois law declares that “[a] public accountant shall not be required by any
court to divulge information or evidence which has been obtained by him in his
confidential capacity as a public accountant.” 225 Ill. Comp. Stat. § 450/27. The
magistrate judge found that BKD's quality control assessments were not protected
because they were not within the scope of services provided in BKD's capacity as a
public accountant. Illinois defines a public accountant as a person in the profession
or business of giving “any report expressing or disclaiming an opinion on a financial
statement based on an audit or examination of that statement, or expressing assurance
on a financial statement.” 225 Ill. Comp. Stat. § 450/8. The magistrate judge
concluded that BKD's assessments were not opinions on financial statements and
were nonfinancial consulting services unprotected by the accountant-client privilege.
In vacating the magistrate judge’s order, the district court stated that the
determining factor in applying the privilege in Illinois was whether the client
reasonably expected that the information would remain confidential, and found that
Marion had held such expectations. The district court relied upon two Illinois cases
interpreting the accountant-client privilege, which addressed solely whether the
documents were confidential. See In re October 1985 Grand Jury No. 746, 530
N.E.2d 453, 454 (Ill. 1988) (seeking tax returns prepared by accountant) and FMC
-4-
Corp. v. Liberty Mut. Ins. Co., 603 N.E.2d 716, 719 (Ill. Ct. App. 1992) (seeking
accountant-provided financial audit services). We do not believe these cases are
conclusive, because both involved documents which were clearly financial. PepsiCo
raises a new issue, namely, whether the Illinois accountant-client privilege protects
documents generated by an accountant rendering nonfinancial consulting services.
We conclude it does not.
The Supreme Court has directed that courts must narrowly construe privileges,
and statutes creating them, and must avoid suppressing probative evidence. See
Univ. of Pa. v. EEOC, 493 U.S. 182, 189 (1990); Baldrige v. Shapiro, 455 U.S. 345,
360 (1982) (while privilege may be created by statute, privilege must be strictly
construed to avoid construction that would suppress otherwise competent evidence).
We conclude that a narrow construction of § 450/27, read in conjunction with
§ 450/8, mandates a distinction between protected accounting services involving
opinions on financial statements and unprotected nonfinancial consulting services.
Our decision is also guided by cases construing the attorney-client privilege, which
suggest the accountant-client privilege must likewise have a limited scope. See, e.g.,
United States v. Horvath, 731 F.2d 557, 561 (8th Cir. 1984) (attorney-client privilege
applies only to confidential communications made to facilitate legal services, and
does not apply where lawyer acts as conduit for client funds, scrivener, or business
advisor); cf. Simon v. G.D. Searle & Co., 816 F.2d 397, 403 (8th Cir. 1987) (legal
departments are not citadels where information may be placed to defeat discovery;
business documents sent to corporate officers are not automatically privileged).
Relying primarily on the client's reasonable expectations of confidentiality
would cloak far too many reports and records with the armor of privilege. Most
clients reasonably expect the accountant will keep virtually all of their business and
personal records secret. A narrow reading of the Illinois accountant-client privilege
-5-
dictates that the confidential reports must also arise from accounting services
involving opinions on financial statements.
We conclude the district court erred in finding BKD’s quality control
assessments were protected accounting services and therefore fell within the scope
of the Illinois accountant-client privilege. The assessments did not involve public
accountant opinions on any financial statements. We further recognize the same type
of assessments were previously prepared by Marion’s internal auditor. Thus, we
reverse the decision of the district court and remand for reinstatement of the
magistrate judge’s order directing BKD to produce the assessments generated before
the lawsuit was filed.
B. Work Product Doctrine
In addition to claiming the quality control assessments were protected under
the accountant-client privilege, Marion also claimed the assessments were protected
work product. The magistrate judge concluded that work product protection was
inapplicable to those assessments created before PepsiCo filed suit in 2001, because
they were not created in anticipation of litigation. The magistrate judge did not
address the status of the assessments created after August 2001, when Marion used
BKD’s services specifically in relation to the ongoing litigation. Upon Rule 72(a)
review, the district court held that the assessments created after August 2001 were
protected work product because BKD prepared them to address PepsiCo’s claims in
the underlying litigation. The district court further concluded that PepsiCo had not
shown a substantial need for these later assessments.
On appeal, PepsiCo argues that the district court erred in finding the post filing
assessments were made in anticipation of litigation, because the evidence showed the
post-August 2001 assessments were not categorically different from those BKD had
previously prepared. PepsiCo also contends that, in any case, the assessments were
-6-
discoverable under Fed. R. Civ. P. 26(b)(3) because it had shown a substantial need
for the documents.
This Court applies federal law to work product claims. See Baker v. Gen.
Motors Corp., 209 F.3d 1051, 1053 (8th Cir. 2000) (en banc). In order to protect
work product, the party seeking protection must show the materials were prepared in
anticipation of litigation, i.e., because of the prospect of litigation. See Binks Mfg.
Co. v. Nat’l Presto Indus., Inc., 709 F.2d 1109, 1118-19 (8th Cir. 1983). Work
product is not discoverable unless the party seeking discovery has a substantial need
for the materials and cannot obtain the substantial equivalent through other means.
See Fed. R. Civ. P. 26(b)(3). We conclude that the district court did not err in
determining that Marion and BKD had met their burden with regard to the post-
August 2001 assessments, and that PepsiCo had not shown a substantial need for the
records. See Gundacker v. Unisys Corp., 151 F.3d 842, 848 (8th Cir. 1998). Thus,
we affirm the district court’s decision as to the application of the work product
doctrine.2
IV. CONCLUSION
We reverse the district court’s order to the extent it held the assessments were
protected by the accountant-client privilege and remand for reinstatement of the
magistrate judge’s order denying the accountant-client privilege. We affirm the
district court’s order to the extent it held the post-August 2001 assessments were
protected work product.
2
We do not address discovery issues that may arise in the event that Marion
intends to use one of BKD’s accountants as a witness or an expert witness at trial.
See, e.g., Fed. R. Civ. P. 26(a)(2); In re Pioneer Hi-Bred Int’l, 238 F.3d 1370, 1375
(Fed. Cir. 2001) (applying Eighth Circuit law on privileges and holding that
documents and information disclosed to an expert in connection with testimony are
discoverable whether or not the expert relies on the documents and information in
preparing the expert report).
-7-
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
-8-