Plaintiffs filed an action against Telxon on December 11, 1998 for alleged violations of §§ 10(b) & 20(a) of the Securities and Exchange Act of 1934. That same day Telxon restated its accounting treatment of Its largest transaction of the prior quarter. Telxon further announced on February 23, 1999 that it would restate its audited financial statements for fiscal years 1996, 1997, and 1998 and restate the unaudited financial statements for the first two quarters of fiscal 1999.
On February 22, 1999 PwC received a subpoena from the Securities and Exchange Commission (“SEC”) requesting some documents related to its audit of Telxon. On March 10, 1999 Alan S. Fox (“Fox”), an attorney in the Office of the General Counsel for PwC, issued a memorandum to Daniel Cola (“Cola”), the PwC “engagement partner” on the Telxon account, “that all materials relating to prior annual or quarterly work of Telxon, including desk files, personal files, or documents from any other source, must be preserved.” Declaration of Fox, Appendix of Exhibits IA (Docket # 310), Exh. E, p. 2. On August 19, 1999 the SEC served a second subpoena on PwC requesting Telxon-related documents. Together the two subpoenas from the SEC requested the audit and review papers related to Telxon's financial statements for fiscal years 1996, 1997, 1998, and 1999 and all papers related to Telxon's restatements. PwC gave the job of assembling documents to comply with the SEC subpoena to Cola, who in turn delegated the task to Grant Hellwarth (“Hellwarth”), the manager of the Telxon account. On March 10, 1999 staff legal counsel for PwC issued a memorandum to preserve Telxon-related documents.
Plaintiffs amended their complaint against Telxon on September 30, 1999. Telxon moved to dismiss the complaint, and the court denied this motion. On November 16, 1999 plaintiffs moved to lift the stay on discovery in the Telxon action as to non-party PwC. The court denied this motion on February 10, 2000. Discovery began in the Telxon action in late October 2000.
On November 10, 2000 plaintiffs served a subpoena on PwC requesting production of all audit and review workpapers for the years ending March 31, 1996; March 31, 1997; March 31, 1998; and March 31, 1999. In response to this subpoena and by agreement with Telxon and plaintiffs, PwC produced on January 2, 2001 the hardcopy documents it had already produced to the SEC in response to the SEC's subpoena.
*2 On February 20, 2001 Telxon filed a third-party complaint against PwC. Telxon alleged that PwC had consciously disregarded the risk that Telxon's financial statements might contain material errors, had failed to conduct audits and interim reviews in accordance with generally accepted accounting principles, and fraudulently forced Telxon unnecessarily to restate its financial statements for 1996, 1997, 1998, and the first two quarters of 1999. Telxon sought damages pursuant to theories of contribution, accountant malpractice, fraud, constructive fraud, fraudulent concealment, fraudulent misrepresentation, negligent misrepresentation, breach of contract, and breach of fiduciary duty. On May 3, 2001 plaintiffs filed a separate action against PwC, alleging PwC's participation in Telxon's alleged fraudulent conduct. These two actions and another action against Telxon were subsequently consolidated on April 23, 2003. See
Memorandum and Order, April 23, 2003 (Docket # 166 (5:98CV2876)).
On February 20, 2002 Telxon served on PwC its first request for the production of documents. This request sought, inter alia,
all communications and documents related to Telxon's restatements of earnings. On March 25, 2002 PwC responded as follows:
PwC previously produced all of its workpapers for its audits of Telxon's financial statements for the fiscal years ended March 31, 1996, March 31, 1997, March 31, 1998, and March 31, 1999. Among other things, these documents include PwC's workpapers for the MRK restatement, the February restatement, and Telxon's other three restatements of its financial statements. The documents were produced by PwC in response to Plaintiffs' subpoena duces tecum dated November 8, 2000 (served November 10, 2000). In addition, PwC also has produced numerous other documents relating to its work for Telxon in response to that subpoena.
Although these documents were produced in response to Plaintiffs' subpoena, and before PwC became a party to this proceeding, all
of the documents also were produced to Telxon. Reproducing these documents now would be completely duplicative and unduly burdensome to PwC. Accordingly, PwC will not provide the same documents that were produced to Telxon.
Third–Party Defendant PricewaterhouseCoopers LLP's Response to Third–Party Plaintiff Telxon Corporation's First Request for Production of Documents, Appendix to Affidavit of Jon J. Pinney, Vol. 1 (“Pinney app. 1”; Docket # 293); Exh. 5, p. 1. The response claimed that PwC had already produced all relevant documents or that Telxon was seeking documents protected by attorney-client privilege or the work product doctrine. The response was not accompanied by any new documents.
Telxon again requested all responsive documents from PwC on April 18, 2002. Telxon specifically requested internal guidance documents outlining audit and interim review policies and procedures, the work history and experience of PwC's engagement staff, internal communications, the working files of all members of the engagement team, and all computer software used by PwC in its audits and reviews. Telxon also claimed that some workpapers and e-mails appeared to be missing from PwC's previous production. PwC responded to this request by letter on April 26, 2002, asserting that all of these documents had been produced as PwC maintained them in the ordinary course of business. The letter added, “This production completely satisfies PwC's obligations under the Federal Rules and we do not intend to produce these documents for a second time nor comply with the onerous obligations that [Telxon] seeks to impose in [its] letter.” Letter of Nicholas I. Porritt (“Porritt”) to Drew Carson (“Carson”), April 26, 2002; Pinney app. 1; Exh. 8, p. 1. PwC's letter did say, however, that “[t]here is a relatively small amount of additional documents that we shall be producing shortly. When that supplemental production has been made, PwC's production will be complete.” Id.
The letter specifically refused to provide internal guidance documents, electronic databases, or audit software. PwC denied that any non-privileged workpapers or e-mails were missing from its previous production.
*3 On May 10, 2002 Telxon wrote PwC asking that PwC provide workpapers related to PwC's quarterly reviews during the relevant years as well as the year-end audits, workpapers related to the fiscal year 2000 financial statement insofar as those papers concerned the previous years' audits, and documents regarding PwC's internal audits of Telxon. Telxon again requested PwC's electronic databases and programs.
On May 17, 2002 PwC served on Telxon its initial disclosures. Pinney app. 1, Exh. 10. PwC again assured Telxon that it had produced all of its workpapers for the fiscal years at issue, including the workpapers related to Telxon's restatements, in response to plaintiffs' subpoena of Novemeber 2000. PwC added, “In addition, PwC has also produced numerous other documents relating to its work for Telxon in response to the Subpoena. Finally, PwC is in the process of producing relevant documents, to the extent they were not produced previously in response to the Subpoena, in response to Plaintiffs' Request for Production of Documents dated February 27, 2002....” Id.
Counsel for Telxon and PwC met on May 30, 2002 to discuss Telxon's dissatisfaction with PwC's production of discovery items. On June 7, 2002 PwC sent Telxon a letter stating, “Following PwC's modest supplemental production today, PwC will have produced all documents responsive to [Telxon's] requests.” Letter of Porritt to Carson and Karla L. Bell (“Bell”), June 7, 2002; Pinney app. 1; Exh 13, p. 1.
On June 11, 2002 Telxon submitted to the court a description of its perceived failures by PwC properly to comply with Telxon's discovery requests and requested a conference to resolve discovery disputes between it and PwC. Pinney app. 1, Exh. 14. PwC's letter to the court in response declared, “The documents produced to Telxon in February 2001 include all of PwC's audit workpapers for the audits of Telxon that are in issue in this litigation, the personal desk files of the PwC auditors, the workpapers for additional projects for Telxon, and other communications between PwC and Telxon.” Letter from Pete C. Elliott (“Elliott”) to Patricia A. Hemann, June 24, 2002 (“June 24, 2002 letter”); Appendix to the Affidavit of Pinney, Vol. 2 (“Pinney app. 2”; Docket # 294 (5:98CV2876)); Exh 15, p. 1. PwC assured the court that it “has now produced all documents it believes are responsive to Telxon's requests.” Id.
at 2. PwC claimed that it “has produced all non-privileged documents ... showing procedures that were actually performed with regard to Telxon's financial statements and Telxon's restatements....” Id.
at 3. In a hearing before the court, Magistrate Judge Hemann found that the materials requested by Telxon related to internal guidance were discoverable materials, although not necessarily materials which could be used at trial. Transcript of Proceedings, June 26, 2002; Pinney app. 2; Exh 17, p. 5. The court also found:
*4 [T]o the extent there are references to work papers, to policies, then indeed you will produce those manuals. And in addition to that, I want you to prepare a list that would satisfy this production. I want ... [Telxon and plaintiffs] to be able to look at it and the three of you negotiate and work on what should be turned over.
at 14. The court cautioned against a fishing expedition but added that parties “are certainly allowed to have material that may lead to relevant material.” Id.
At the hearing PwC expressed concern that Telxon's experts would be given access to PwC's internal guidance materials and might later be hired as consultants by PwC's competitors. In response the court stated:
I certainly assume that anyone who looks at those will appropriately sign off on the confidentiality agreement. And I don't have as much concern with the consulting expert as the testifying expert. I think as you get to the point, if you get to the point, where you find the testifying expert is someone who is an active competitor of PwC, you might want to raise this issue again.
Telxon sent PwC a letter on July 24, 2002 identifying documents allegedly missing from PwC's previous production and demanding that PwC comply with the court's order. On July 29, 2002 PwC wrote:
Enclosed are the detailed tables of contents for:
1. The 1995 Coopers & Lybrand Financial Accounting and Reporting Manual;
2. The 1996 Coopers & Lybrand Assurance Services Manual;
3. Coopers & Lybrand policy updates through August 6, 1999;
4. R & Q Alerts through August 6, 1999;
5. The 1999 PricewaterhouseCoopers Accounting and Reporting Manuals, Volumes 1 and 2;
6. The 1996 Coopers & Lybrand SEC Handbook;
7. The 1997 Coopers & Lybrand SEC Handbook;
8. The 1999 PricewaterhouseCoopers SEC Manual;
9. The Coopers & Lybrand SEC Manual, Sixth Edition; and
10. The PricewaterhouseCoopers Audit Databases as of July.1998 and November, 1999 (which may include items beyond the reporting date of August 6, 1999).
Also included are the following professional literature references:
3. FARM Section 70, paragraph 38; and
Letter from Elliott to Steven J. Miller (“Miller”), Carson, and Bell, July 29, 2002; Pinney app. 2; Exh. 20.
On August 8, 2002 Telxon wrote PwC the following response:
With respect to those items specifically referenced in PwC's workpapers, your production is seriously deficient. Judge Hemann ordered that all such materials referenced in the workpapers be produced. You have produced only a few such items. Frankly, we were led to believe the PwC was compiling these materials during the month it took to respond. We expect that these items can be readily compiled, and request that they immediately be made available for inspection and copying.
Letter from Maria A. Campagna (“Campagna”) to Porritt and Elliott, August 8, 2002; Pinney app. 2; Exh. 21, p. 1. PwC's response was as follows:
*5 With regard to the PwC materials referenced in the workpapers themselves, we believe the materials produced so far are complete. Based on our review of the workpapers, we are not aware of any additional portions of internal PwC or Coopers guidance that are specifically referenced in the workpapers describing the work performed. If you believe there are other references to PwC's internal guidance that have not been produced, please provide the workpaper reference and we will look into it.
Letter from Porritt to Campagna, August 9, 2002; Pinney app. 2; Exh. 22, p. 1. The letter also stated, “I think that Judge Hemann made it clear that we are entitled to know who [your] consulting expert is before we produce any PwC internal guidance to Telxon.” Id.
Telxon continued to object to what it regarded as PwC's failure to produce all internal guidance materials referenced in PwC's workpapers. On September 19, 2002 it wrote to PwC:
With respect to [internal guidance materials specifically referenced in PwC's workpapers], Judge Hemann ordered that “to the extent there are references to ... policies, then indeed you will produce those manuals.” (Transcript of proceedings before Judge Hemann on June 26, 2002, p. 14). PwC has produced only 3–4 such materials, but has withheld other referenced materials on the basis that they are not necessary to Telxon's understanding of the workpapers. This is your position, despite the fact that you admitted that you did not actually review the workpapers before making your production. I am therefore at a loss as to how you can represent that the withheld materials need not be produced. Moreover, this contradicts your prior representation to Telxon that all materials referenced in the workpapers have been turned over. This notwithstanding, Judge Hemann ordered that all
referenced materials be produced. The conditions you seek to impose are contrary to the Court's order. At this time, Telxon agrees to table this issue until such time as it has reviewed the specific internal materials that PwC will produce on or about September 23, 2002.
Letter from Campagna to Porritt, September 19, 2002; Def. opp.; Exh. S, pp. 2–3.
On October 15, 2002 PwC again assured the court that every document responsive to Telxon's discovery requests had been produced. Transcript of Proceedings, October 15, 2002; Pinney app. 2; Exh. 28, p. 58.
Telxon again wrote PwC on the subject of internal guidance documents on October 23, 2002:
Telxon has reviewed the limited production of practice and procedure manuals provided by PwC and finds the production inadequate. Magistrate Hemann, at the June hearing, ordered PwC to produce all portions of the C & L and PwC manuals referenced in the work papers. [Porritt] has acknowledged that PwC has not produced all referenced portions and instead only produced those which, in his sole opinion, are “relevant” to understanding the work papers. This is not acceptable and not what the court ordered. All portions of the referenced manuals—which [Porritt] has conceded would be the entire manuals—must be turned over.
*6 Letter from Bell to Porritt, October 23, 2002; Pinney app. 2; Exh. 29, p. 1.
PwC responded to Telxon's concerns regarding internal guidance documents as follows:
[T]he question of further production of PwC internal guidance was discussed on a conference call with Maria Campagna and Hilary Sobel [“Sobel”; attorney for plaintiffs] on September 19, 2002. During that telephone call, PwC stated its view that it had produced the internal guidance it had identified following its review of the workpapers, where that guidance was expressly referenced in the workpapers in describing the work performed. We also discussed the fact that any other internal guidance that may be discussed in the workpapers should be included in the internal guidance for which indices were provided and from which both plaintiffs and Telxon have received the provisions they wanted. It was left that if either plaintiffs or Telxon identified some internal guidance referred to in a workpaper that had not yet been produced by PwC, then that party could request the production of that document and PwC would consider the request. See
September 19 letter from Sobel to Porritt.
Accordingly, we believe this issue has been resolved. If you have a specific workpaper in mind then, as per the agreement between the parties, please identify it and we will consider the request for production.
Letter from Porritt to Bell, November 4, 2002; Pinney app. 2; Exh. 30, p. 2. The letter also assured Telxon and plaintiffs that all documents on the electronic databases maintained by Coopers & Lybrand (“Coopers”), Telxon's previous auditors, and by PwC, Telxon's auditors after Coopers merged with Price, Waterhouse, had already been made available to Telxon and plaintiffs.
On October 23, 2002 Telxon reminded PwC that its first request for documents had asked for all relevant documents from all of PwC's databases. PwC responded on November 4, 2002, assuring Telxon that all documents on its various databases had been produced.
Telxon wrote PwC on November 15, 2002, noting that certain internal guidance appearing in the workpapers had not been provided by PwC and requesting that material. According to Pinney:
36. In late November 2002, I reviewed PwC's workpapers and identified a particular internal guidance (ARM 9612.23) that is critical to Telxon's claims against PwC. This internal guidance addressed sales arrangements with distributors, a central issue to this case because it is Telxon's position that PwC wholly failed to understand Telxon's sales to “value-added distributors,” known as “VADs.” ARM 9612.23 was specifically referenced in PwC workpapers (and cross-referenced in a separate internal guidance section), but never produced by PwC until Telxon complained of its non-production. I attempted to locate ARM 9612.23 on the indexes PwC provided Telxon and Class Plaintiffs, but could not locate it. I reviewed Class Plaintiffs' correspondence dated August 30, 2002 that set forth a list of the internal guidance Class Plaintiffs wanted produced. ARM 9612.23 was not listed and had not been produced by PwC. Once again, I carefully reviewed the indexes PwC provided Telxon and Class Plaintiffs on July 29, 2002 as ordered by Magistrate Judge Hemann on June 26, 2002.
*7 After a second careful review, I discovered that certain pages in the internal guidance index were replaced with another unrelated index. This replacement went unnoticed by Class Plaintiffs and Telxon for several months because the page numbers at the bottom of the replaced pages matched the wrong pages. See,
e.g., Exhibit 32 (PWC 66475 (page “2 of 7”) attached thereto.
On November 26, 2002, I sent PwC a letter requesting PwC to produce ARM 9612.23 and pointed out that certain critical index pages were not produced, but were substituted with unrelated but similar pages in certain instances. See
Exhibit 32. I asked PwC to confirm that it “has produced the appropriate tables of contents for each ‘Internal Guidance’ manual.” After discovering this, I was concerned that the pages were intentionally switched and replaced. Up until this time, our consultants were advising me that the production was incomplete.
37. On December 18, 2002, I sent PwC a letter demanding PwC to respond to Telxon's outstanding inquiries concerning the internal guidance indexes (including an inquiry by my paralegal), as well as other outstanding discovery issues.
38. For six weeks, PwC refused to respond to Telxon's inquiry about the missing internal guidance indexes. Finally, on January 14, 2003, PwC produced several sections of internal guidance that I requested, including the correct pages of the indexes that I called into question. See,
Exhibit 34. PwC attributed its mistake to a “clerical error” (without further explanation) and for the first time since Magistrate Judge Hemann's June 26, 2002 Order produced ARM 9612. See,
Exhibit 34, pg. 1, 3. Section 23 of ARM 9612, titled “Rights of Returns,” turned out to be a critical document in Telxon's case against PwC. This document was used as Exhibit 1277 during the Daniel Cola deposition. See,
Exhibit 35. In addition, it is referenced in Telxon's Expert Report by Professor Ray Stevens. See,
Exhibit 73, pg. 46.
In summary, Telxon first requested production of PwC's internal guidance on April 18, 2002, and Magistrate Judge Hemann ordered its production on June 26, 2002, yet PwC refused to make accurate production of internal guidance until January 14, 2003 (which, as we now know, was still an incomplete production).
Affidavit of Pinney (“Pinney aff.”), Tel. mot., Exh. B, pp. 9–10. PwC offers no further explanation of the switched index pages, nor does it contest Telxon's description of ARM 9612.23 as a “critical document.”
On January 24, 2003, during the deposition of Hellwarth, Telxon drew PwC's attention to missing sections of deposition exhibit 835. PwC's counsel produced a corrected version of the document on January 29, 2003, attributing the missing sections to a “printing error.” According to Pinney, “The ‘corrected’ version of Exhibit 835 memorialized critical discussions that occurred during a meeting with Telxon's Audit Committee. The ‘corrected’ version demonstrates that PwC did not raise any revenue recognition Issues regarding sales to Telxon's distributors ... during the first quarter of fiscal year 1999.” Pinney aff. at 10. PwC does not respond to Telxon's assertions regarding Exhibit 835 from the Hellwarth deposition.
*8 On February 6, 2003 Telxon and plaintiffs served a joint request on PwC for full production of its electronic databases. On February 25 and 26 Telxon sent letters to PwC asking that PwC produce additional internal guidance materials referenced in the workpapers but not provided by PwC. On March 14, 2003 PwC denied Telxon's and plaintiffs' request for the entire electronic databases. The letter observed:
The workpapers from the electronic databases, together with the external binders, have already been produced in hard copy in the same order and format as they are maintained in the electronic database. This production took place over two years ago. Nonetheless, Telxon and plaintiffs now request production of the electronic database in electronic form supposedly due to some issues regarding your purported inability to comprehend the workpapers as they have been introduced.
Letter of Porritt to Pinney and Sobel, March 14, 2003; Appendix to Pinney aff., Vol. 3 (“Pinney app. 3”; Docket # 295 (5:98CV2876)); Exh. 40, p. 1. PwC maintained that it had produced these materials in full in hardcopy and in the order and format as they appeared in the databases. Moreover, in response to Pinney's complaint that produced documents contained incorrect cross-references and missing tickmarks
and attachments, PwC asserted, “I am not aware of a single missing tickmark, incorrect cross reference, or electronic attachment to a workpaper that has not been printed out[,] and the examples provided in your letter also do not support your assertions.” Id.
On March 26, 2003 PwC produced 457 pages of documents from fiscal year 1997. PwC explained:
In further response to your letter of February 26, 2003 ... we have undertaken a review of the electronic database and a comparison of our document production. As a result of that review, I am enclosing certain additional documents from the database from the fiscal year 1997 audit of Telxon. These documents were contained in the database under views entitled “review comments” and “items marked for deletion,” and are referenced in the index of the electronic database that PwC produced to you. While you have not inquired about the documents in these views, we have concluded that they may not have been copied and produced as part of PwC's earlier document production in this matter.
Letter from Jeffrey L. Handwerker (“Handwerker”)
to Pinney and Sobel, March 26, 2003; Pinney app. 3; Exh. 41, p. 1. The letter concluded, “PwC has now provided Telxon and Class Plaintiffs with all pertinent documents that are contained on PwC's electronic database.” Id.
Telxon and plaintiffs renewed their request for production of the electronic databases on March 28, 2003. Their letter noted, “To suggest that continued piecemeal production of documents in hard copy format, coupled with periodic explanations by witnesses when problems arise is sufficient ... Ignores PwC's discovery obligations.” Letter from Sobel and Pinney to Handwerker, March 28, 2003; Pinney app. 3; Exh. 42, p. 1. Telxon and plaintiffs told PwC that “[t]he absence of complete and accurate work papers from the PwC databases” might have affected five recent depositions, and they again reminded PwC of its discovery obligations. The letter further noted that the recent production of documents consisted mostly of documents which had never before been introduced, that the recent production itself was incomplete, that the production indicated gaps in previous document production for other fiscal years, and that PwC's objections to providing certain documents on the grounds of relevancy were not justified. For these reasons, the letter concluded, PwC should make its electronic databases available to Telxon and plaintiffs.
*9 On March 31, 2003 PwC produced copies of documents which included missing tickmarks and promised a future production which would include all missing attachments. PwC asserted, “We have carefully reviewed the electronic database and will represent again, as I stated in my March 26, 2003 letter, that Class Plaintiffs and Telxon now have all of the documents on the PwC database that are responsive to your document requests.” Letter from Handwerker to Sobel and Pinney, March 31, 2003; Pinney app. 3; Exh. 43, p. 2. PwC's letter also asserted,
While Rule 34 does authorize and contemplate electronic discovery under certain circumstances ... it does not permit the cumulative, burdensome, and unnecessary discovery of a confidential electronic database after all of the documents included on that database already have been produced in hardcopy format.... Here, paper copies of all responsive documents on PwC's database have been produced to all parties. Therefore, PwC has comported fully with its discovery obligations....
at 2–3. PwC also reasserted its claim that to give Telxon and plaintiffs access to the electronic databases and the software needed to access them would be to reveal trade secrets.
On April 1, 2003 PwC produced additional documents from the audit of Telxon's 1997 fiscal year.
Telxon and plaintiffs wrote to the court on April 16, 2003, detailing the problems they were having in obtaining complete, accurate, and prompt discovery from PwC. PwC responded by a letter to the court on April 18, 2003. Citing “certain alleged ‘issues' with PwC's production of its working papers,” PwC told the court that “[t]he Class Plaintiffs
ask the Court to believe that PwC's production of work papers in this proceeding has suffered from some major flaw that should be remedied at this late date in the discovery schedule.” Letter from Elliott to J. Hemann, April 18, 2003; Pinney app. 3; Exh. 45, p. 1. PwC termed plaintiffs' request “an unfounded attempt to impose unnecessary and cumulative discovery burdens on PwC and to require PwC to reveal confidential trade secrets....” Id.
The letter described the problems cited by Telxon and class plaintiffs as “insignificant” and assured the court that the parties had not been prejudiced by any errors in the production of PwC's documents. The letter also declared, “PwC has produced its substantial documentation to all parties in this case in hard-copy format, and already has complied fully with its discovery obligations.” Id.
at 3. PwC reminded the court of its contention that to give Telxon and plaintiffs access to the electronic databases and the software needed to access them would be to reveal trade secrets. PwC concluded by stating, “Only now, at the very close of the fact discovery period, have Class Plaintiffs chosen to press this issue with the Court and insist that they need possession of the database itself. In light of the prejudice to PwC that production of the database would entail, the Court should not permit Class Plaintiffs or their experts ... to have access to this proprietary software and supporting materials.” Id.
*10 On April 29, 2003 PwC produced documents which Telxon had determined on April 8, 2003 were missing from PwC's previous document productions. On that same day the court held a hearing by telephone on the question of whether PwC should be required to produce its electronic databases for Telxon and plaintiffs. When Pinney asked Handwerker at the hearing whether the documents produced that day had previously been produced, Handwerker said, “Frankly, they may well be in our production already, but I received a call from Mr. Pinney on Friday asking for these documents again, so out of an abundance of caution we produced them again.”
Transcript of Proceedings, April 29, 2003; Pinney app. 3; Exh. 46, p. 5.
During the hearing, counsel for plaintiffs described the shortcomings of PwC's hardcopy production of PwC's electronic documents, including a failure to reproduce color-coded commentary and attachments. In responding to this description, Handwerker noted that because PwC's electronic databases contained trade secrets, they were not discoverable. Handwerker told the court that “the plaintiffs have not identified, to my knowledge, a single work paper or a single important or operative document that they would expect to see in our [electronic] production that isn't there. That's not the issue in this case, I don't believe.” Id.
at 11. PwC also contended that plaintiffs had asked that PwC produce documents in the same manner in which they had been provided to the SEC and that PwC had complied with that request. In ruling against production of the electronic databases the court noted that PwC had represented that the design of the database was a trade secret. The court concluded,
Nor does there appear to be any dispute that defendant has produced documents in chronological order by audit year and has produced indexes of the documents produced. To the extent that PwC has produced some documents late due to mistake or produced documents a second time out of an abundance of caution, neither of those scenarios justifies requiring it to produce, at this late date, its proprietary software.
Order, May 5, 2003 (Docket # 175 (5:98CV2876)), pp. 3–4.
Plaintiffs appealed the magistrate judge's order to Judge O'Malley. In PwC's memorandum in opposition, PwC asserted:
Class Plaintiffs try to create a basis for their position solely by repeating a number of inaccurate allegations that they also tried with the Magistrate about the quality of PwC's hard-copy document production. Those allegations, which consist mostly of unfounded assertions about PwC's veracity, are without substance and should be discredited. PwC's hard-copy production is complete and entirely adequate. PwC has produced more than 55,000 documents in this matter, along with indexes for the documents from the electronic database. The documents from the database are organized by audit year. Within each audit year, PwC has produced the workpapers by audit area, and attachments to the workpapers were inserted into the production behind the workpapers to which the attachments relate. While Class Plaintiffs identified a handful of printing errors or other glitches relating to a few documents during the course of discovery, PwC promptly remedied those errors without any prejudice to the Class Plaintiffs-as the Magistrate correctly found. Those few production issues out of tens of thousands of pages of documents, issues that were quickly resolved, simply do not provide the necessary basis to order the production of PwC's proprietary database.
*11 Memorandum in Opposition to Plaintiffs' Objections to May 5, 2003 Order (Docket # 182 (5:98CV2876)), p. 4 (emphasis added). The court upheld the magistrate judge's order.
Additional developments in 2003 indicated that PwC's production of documents in fact had been incomplete. According to Pinney:
52. On July 9, 2003, I took the deposition of Tammy Hulshof [“Hulshof”] (nee Overmier), a PwC staff auditor. During the course of the deposition, Mrs. Hulshof testified in response to my questions that she maintained what she referred to as a “CYA file” or “cover your audit file” (aka “desk file”). Mrs. Hulshof testified that she put in her CYA file “[a]nything that is not put into the work papers, any backup that I have, any documentation from inquiries.” Prior to taking Ms. Hulshof's deposition, I conducted a review of the documents produced by PwC. PwC had never produced Mrs. Hulshof's CYA file. As noted above, PwC previously represented to Telxon that it produced all desk files maintained by members of the engagement team (See
Paragraph 20 of this Affidavit.) Mrs. Hulshof testified that she provided Dan Cola her CYA file prior to her departure in May 2000. Following Mrs. Hulshof's deposition, I served a Request for the Production of Documents calling for the production of Mrs. Hulshof's CYA file or desk file, as well as any similar files maintained by the engagement team. See,
Telxon Motion for Leave to File an Amended Complaint to add a count for spoliation of evidence, docket number 253 (Mrs. Hulshof's testimony and Telxon's Request for the Production of Documents are contained in Telxon's Appendix filed herewith.) Before PwC's response date, the case went into mediation and discovery was stayed.
Pinney aff. at 13; see also
Deposition of Tammy Hulshof (“Hulshoff”) (“Hulshoff depo.”; Docket#321 (5:98CV2876), 177 (01:CV1078)), pp 54–60.
On December 19, 2003 the court entered an order preliminarily approving a settlement reached between Telxon and plaintiffs for $37 million. Fact discovery in the case closed on that date.
On February 3, 2004 the parties held a conference call to discuss various matters at issue in the litigation. Telxon pointed out that a number of documents remained missing from PwC's production and that other documents had apparently been altered since PwC had been put on notice to preserve them. Plaintiffs were particularly concerned about a document referenced in PwC's recent interrogatory responses, a document which was part of the fiscal year 1998 review but which PwC auditor Andrew Ennis (“Ennis”) marked as reviewed in January 1999, well after the 1998 fiscal year review had concluded. PwC promised that it would look into the matter.
Following mediation, PwC responded as follows to the request for Hulshof's CYA file:
Subject to and without waiver of its General Objections set forth above, PwC objects that this Request is vague, ambiguous, overly broad and duplicative of previous Requests.
Subject to and without waiver of its General Objections set forth above, PwC responds that, following Ms. Hulshof's deposition, it conducted a further review of its files for any Tammy Hulshof (nee Overmier) files and documents that had not previously been produced in this matter. Based upon this review, PwC states that it does not have any documents within its possession, custody or control that are responsive to this request.
Third–Party Defendant PricewaterhouseCoopers LLP's Response to Third–Party Plaintiff Telxon Corporation's Request for Production of Documents; Pinney app. 3, Exh. 51, p. 6. Despite having previously asserted that PwC had produced the personal desk files of the PwC auditors, see
June 24, 2002 letter at 1, PwC wrote to plaintiffs:
Your letter also requests that PwC advise Class Plaintiffs of the circumstances of the “disappearance” of Tammy Hulshof's file. This inquiry assumes, of course, that this file existed, and that if it did exist it should have been retained. Neither GAAS nor PwC's audit documentation policies require that back-up materials relating to information included in work papers be retained. Indeed, once the workpaper is completed, it is not necessary under GAAS or PwC's procedures to retain a separate piece of paper that contains the same information.
Letter from Handwerker to Sobel, February 23, 2004 (“Feb. 23, 2004 letter”); Pinney app. 3; Exh 52, p. 7.
The Feb. 23, 2004 letter also responded to some of the shortcomings plaintiffs had found in PwC's document production. Accompanying the letter was yet another document, a workpaper with reference number 9000–1. This had been one of the missing documents requested by Telxon on February 3, 2004. PwC's letter characterized the document and accompanying attachments produced on February 23, 2004 as “substantively identical to the previously produced documents labeled PwC 0017407–11.” Id.
On February 24, 2004 plaintiffs prepared a supplemental submission in support of their objections to the magistrate judge's May 5, 2003 order. Plaintiffs argued that PwC's document production had been so unsatisfactory as to raise serious doubt that plaintiffs could have any assurance that they had access to all relevant documents without production of PwC's complete electronic databases. The supplement complained specifically about the recent production of the workpaper with reference number 9000–1. Objecting vigorously to PwC's contention that the document was “substantively identical to the previously produced documents labeled PwC 0017407–11,” id.
at 6, plaintiffs contended:
PwC seeks to justify its failure to produce this workpaper, despite its continued representations to the Court that all
work papers have been previously produced
by claiming that the omitted documents “are substantively identical to the previously produced documents labeled PwC 0017407–11.” That explanation does not address the fact that PwC never
document. Moreover, PwC's attempted justification of its belated production belies the fact that the originally produced document apparently was created contemporaneously with the 1998 audit engagement, while the newly produced document purports to relate to the 1998 audit engagement but was created well after the fact, on January 28, 1999–after the commencement of these actions and well after the conclusion of the 1998 audit on June 26, 1998.
*13 Supplemental Submission in Support of Class Plaintiffs' Objections to the May 5, 2003 Order of Magistrate Judge Hemann Regarding Plaintiffs' Motion to Compel Production of PwC's Electronic Workpaper Databases, Pinney app. 3; Exh. 53, p. 2 n. 1.
On March 1, 2004 PwC responded to the supplemental submission with a letter which included the following:
As you know, the document to which Class Plaintiffs' Supplement relates is substantively identical to a document that PwC previously produced in this litigation. However, although PwC continues to believe that your Motion to Compel lacks merit, PwC is willing, in the interests of putting an end to this needlessly time-consuming sideshow as this case moves toward summary judgment, to produce its workpaper databases for FY 1997 to FY 1999 in the hope of ending this already over-prolonged “controversy,” in which form has been exalted over substance. We are prepared to begin those discussions with you promptly.
I will contact you shortly to discuss the terms of a protective order and to work out the details of this production. In the meantime, we will advise the Court that your appeal of Magistrate Judge Hemann's Order is now moot.
Letter from Handwerker to Richard A. Speirs (“Speirs”), March 1, 2004; Pinney app. 3; Exh. 54. The parties began discussions as to the terms of PwC's desired protective order.
On April 9, 2004 PwC submitted to Telxon and plaintiffs a Stipulation of Authenticity of Certain Documents for Use in Connection with Motions filed Pursuant to Federal Rule of Civil Procedure 56 (“Stipulation”), Pinney app. 3, Exh 55. PwC sought a joint stipulation from all parties that the documents the parties had produced during the litigation “shall be deemed ‘authentic’ for purposes of any motions for summary judgment, opposition to motions for summary judgment, and replies to oppositions to motions for summary judgment filed in the above actions pursuant to Rule 56 of the Federal Rules of Civil Procedure.” Stipulation at 1. Telxon and plaintiffs refused to sign the Stipulation.
PwC filed its motion for summary judgment against Telxon and plaintiffs on April 12, 2004, and on April 13, 2004 Telxon and plaintiffs executed a protective order with regard to PwC's databases. Expert discovery in the case closed on April 20, 2004.
On April 21, 2004 Telxon and plaintiffs received from PwC five CDs containing PwC's electronic workpaper databases for PwC's audits and reviews of Telxon's fiscal years 1997–1999 year end and interim financial statements
and a banker's box containing nearly 3,000 pages of documents. The accompanying letter told Telxon and plaintiffs that the CDs could be read using an off-the-shelf software, Lotus Suites. The letter also contained the following explanation for the production of the electronic databases:
PwC's Review of its Databases:
As you know, PwC responded to a series of subpoenas from the Securities and Exchange Commission (“SEC”) relating to Telxon between February and August 1999, and made a number of follow-up productions to the SEC over the course of the SEC investigation. PwC produced at that time what it believed to be a complete set of its Telxon-related working papers in hard copy. Subsequently, PwC and Class Plaintiffs agreed that PwC could replicate its SEC production in this case, and the SEC production was used as the basis for the document production in this case.
*14 In its December 19, 2003 interrogatory responses, PwC identified a document from its FY 1998 archived workpaper database that Andrew Ennis marked as reviewed in January 1999. During our “meet and confer” conference call in February 2004, Class Plaintiffs' counsel asked PwC to specify the bates number of that document, because Class Plaintiffs had not been able to locate the exact document in PwC's document production. PwC promptly reviewed its document production and learned that the particular document identified in PwC's interrogatory answer had not been produced. Instead, PwC apparently produced a document containing the same information that was maintained in a different area of the electronic workpaper database. PwC volunteered this information to the Class Plaintiffs and to Telxon (see
letter of February 23, 2004), and produced the additional document to all parties.
Subsequent to this discovery, PwC investigated its electronic databases to determine the reasons for the difference. During the course of this investigation, PwC for the first time learned the following information:
• The production to the SEC of the FY 1997 workpapers appears to have been made from the version of the FY 1997 database maintained on the PwC servers, which had been “archived.” A “local” version of this database also existed on a laptop computer and had not been copied.
• The production to the SEC of the FY 1998 workpapers appears to have been made from the “local” version of the FY 1998 database. An electronic version of this database also existed on the PwC server (an “archived” version) and had not been copied.
• The production to the SEC of the FY 1999 workpapers appears to have been made from the “server” version of the FY 1999 database. (By agreement with the SEC, the FY 1999 workpaper database was preserved, but not “archived,” because the SEC investigation was pending while the audit of Telxon's FY 1999 financial statements was taking place.)
PwC is producing today copies of both
the “archived” database and the “local” database for the FY 1997 and 1998 audits and reviews. PwC is also producing today the “server” version of the database for FY 1999. In addition, to save time for the Class Plaintiffs and Telxon and to facilitate your review, PwC is also producing today hard copies of certain documentation as noted below.
PwC was able to determine the existence of certain differences between versions of documents by comparing the documents that it produced in hard copy discovery with the electronic versions of the documents on the archived and local databases. Upon learning that there were some apparent differences between the hard copy production and the electronic databases for FY 1997 and 1998, PwC compared all of the documents on the databases with the hard copy production. As a result of this comparison, we have learned the following:
• For FY 1997, because the local version that was not copied is an earlier version of the database than the archived version, there are a number of documents on the local version that contain “reviewed by” and “completed by” dates that are different from the dates as they appear on the archived version of the same documents (see
PWC 7200–143), or that do not appear in the archived database (see
PWC 73151–59), or that contain different text than the document in the archived database (see
PWC 73175–253). In addition, there are a number of FY 1997 “audit program steps” that do not appear to have been produced in PwC's hard copy production. See
PWC 7200–72410 (from local version) and PWC 72411–817 (from archived version). However, the substance of these audit steps is reflected in the FY 1997 workpapers that were produced. These audit steps are also reflected on the index of documents previously produced to Class Plaintiffs and Telxon at Bates No. PWC 45032–45060 and previously marked as Deposition Exhibit 7. Grant Hellwarth testified about this specific index at his Rule 30(b)(6) deposition in May 2002. Hellwarth Dep. Tr. at 171:1–177:17.
*15 • For FY 1998, we have identified only a few differences between the local version (from which the hard copy production apparently occurred) and the archived version: (a) the document identified in our supplemental interrogatory response, which PwC produced to the parties, was mislabeled as a 9200–1 document in the local version but properly labeled as a 9000–1 document in the archived version; (b) working paper reference 200–2, as well as reference 200–3 (linking to an electronic copy of the “letter of arrangement” with Telxon) were not included in the local version of the database (see
PWC 72275–83); and (c) the “date modified” information on workpaper 200 (“review of effectiveness of prior year's engagement”) in the local (and production) version has a different “modification” date than the archived version. See
• For FY 1999, we have found two general differences: (a) some of the documents on the server version of the database contain a “datemark” field (see
PWC 69000–70102) that does not appear on the hard copy print outs that were produced in this case; and (b) certain of the documents (see
PWC 73350–497) have cut outs from PwC internal guidance materials. It does not appear that these datemark and guidance fields were printed in connection with the production of the FY 1999 workpapers, but we note the PwC did make an index of its internal guidance materials available to the parties during the Summer of 2002, the parties selected the portions of the guidance materials that they wanted to copy, and the specific guidance requested has been produced. In addition to these general differences, there are also a few instances where the document in the production has different information than the document on the server version of the database. See
With respect to each of the databases, our review also has revealed additional printing errors for certain documents (see
PWC 73550–658) that are apparent from the face of the hard copy documents that were produced and which have not been identified to date. In addition, we have uncovered certain instances where pop-up screens might not have been produced, as well as a few documents that were apparently not printed from the '98 or '99 databases (see
While PwC and we obviously regret those production issues, production of documents in this case was always conducted in good faith and the parties have not suffered any prejudice by their discovery at this time. PwC's counsel remains available to address any issues relating to the above with you.
Letter from Handwerker to Speirs and William P. Thornton, April 20, 2004 (“April 20, 2004 letter”); Pinney app. 3; Exh. 57, pp. 2–5 (footnote omitted). Telxon alleges, and PwC does not deny, that the origination data on the CDs shows that they were created as early as March 5, 2004, over a month before they were produced.
On April 26, 2004 Telxon and plaintiffs moved jointly to stay briefing on PwC's motion for summary judgment, and the court granted that motion on April 29, 2004 in anticipation of a motion for sanctions. Plaintiffs moved for sanctions against PwC on May 10, 2004, and Telxon moved for sanctions against PwC on May 11, 2004. The exhibits attached to these motions for sanctions reveal the following.
*16 PwC stored data on two main databases: a central archive server (“archive”) and various local servers. In addition, persons working on an audit might download portions of a database onto the hard drive of their laptop computers. Proper procedure called for periodically uploading work done on a database from a laptop to the local server to the archive, thus ensuring that all work was saved eventually to the archive. That was not always done, however. For this reason, differing versions of a database might be found in a laptop, the local server, and the archive.
The electronic database for each fiscal year used IBM Lotus Notes as the primary processing program, with links embedded in Lotus Notes documents providing access to certain functions and documents in Microsoft Word, Excel, and Powerpoint programs.
The core files in the database are arranged in directories, sub-directories, and folders in outline form. The program allows users to link documents, and the program tags each document with data about the document's history. These “metadata” include the author of the document, the dates and authors of modifications of the document, when and by whom a document was reviewed, and when the document was last accessed. A hard copy of a document might give one person as the last individual to modify a document and the date of that modification while the metadata attached to the document might give an entirely different person and date for a later modification because the later modifier did not record the later modification on the document itself.
Each document is also assigned a numerical code which, inter alia,
encodes what type of document it is (e.g., “control,” “assets,” “liabilities and capital,” etc.). Tabs above each document tell the user the fiscal year of the data, whether the server copy or the archive copy of the data is being used, and the directory and subdirectory in which the document appears. These data described above are not part of a document, and they do not appear when a hard copy of a document is produced.
Icons and shaded areas embedded in each document provide links to other documents. These links may take the user to documents in the database, background papers, or internal guidance materials. These documents may have been created by the Lotus program or by Word, Excel, or Powerpoint. If they were created by one of the latter three programs, Lotus launches an application of that program to permit a reader to view the document.
Links are also embedded in documents as “pop-ups.” These links are indicated by a colored box or by colored text.
When the text in the green box is clicked, a larger box of text appears to overlay the primary document and to provide information useful to the auditor. The green box indicating a pop-up does not appear in the hard copy of a document.
Telxon and plaintiffs assert that when they examined the electronic databases provided on April 21, 2004, they found the following:
*17 1. some documents which had never been produced in hard copy during discovery appeared on the electronic databases, including some documents not noted in PwC's April 20, 2004 letter as previously unproduced (Pinney aff. at 15–21; Sobel aff. at 35–60);
2. some documents have been produced in hard copy in a version different than the version in which it exists in the electronic databases so far produced (Sobel aff. at 68–80; Reply aff. at 4–5);
3. some documents had been modified more frequently than was noted on the hard copy of the document, including modifications after the last modification date recorded on the document (Sobel aff. at 19–29);
4. some documents had been modified by a person not identified as a modifier on the hard copy of the document (Sobel aff. at 20–29);
5. at least one document had been modified well after the close of the 1998 audit which produced the document and just before accounting firm Deloitte & Touche (“D & T”) reviewed the PwC documents as part of its due diligence for a proposed merger between Telxon and Symbol Technologies, Inc. (“Symbol”) (Sobel aff. at 21–25);
6. some documents had been altered well after the close of the 1998 audit which produced them and after PwC should have been on notice to preserve those documents, including after the documents had been produced to the SEC;
7. certain metadata for the 1998 and 1999 documents were apparently missing completely (Sobel aff. at 29–31);
8. local server and archive versions of the 1997 and 1998 audit papers exist, and those versions differ in some respects;
9. the 1999 audit database exists in local but not archived form;
10. PwC produced documents relating to the same fiscal year from both local server and archive databases as early as April 2003 (Sobel aff. at 32–34);
11. some text accessed via pop-ups on the electronic versions of documents were never made available to Telxon and plaintiffs on the hard copies of those documents produced during discovery (Sobel aff. at 35–52);
12. some icons, shading, boxes, and colored text indicating pop-ups were absent from PwC's hardcopy production (Sobel aff. at 56–60);
13. some of the unproduced text accessed via links and pop-ups included internal guidance materials (Pinney aff. at 16–19);
14. documents were produced in hard copy in discovery in an order different from the order in which they appear in the electronic databases (Sobel aff. at 82–93; Reply aff. at 20–23);
15. documents were indexed in multiple ways (by type/status, by status/type, by type/area, by area/type, by client site/type, by preparer/area, by origination date/area, by related area, and by modified date), and not all of these indices were produced during discovery (Pinney aff. at 22);
16. certain folders in each fiscal year database are empty, including “inbox,” “outbox,” and “coaching notes” folders (Pinney aff. at 23);
17. it is possible to alter any document in the database, and if the date on the computer used to alter the document is reset, the incorrect date will be incorporated in the metadata fields as the date of modification (Pinney aff. at 23);
*18 18. pop-ups from the version of the 1998 workpapers originally produced in hardcopy form have not yet been produced (Sobel aff. at 51–52);
19. documents linked to workpapers are missing (Sobel af. at 52–56);
20. no electronic versions of internal audit workpapers have been produced (Sobel aff. at 61–63);
21. only one e-mail has been provided as authored by any of five staff auditors who participated in the 1997, 1998, and 1999 audits and reviews even though PwC should have been on notice to preserve such items by December 1998 (Reply aff. at 24);
22. no desk files (aka “CYA files”) were produced from any of five staff auditors who participated in the 1997, 1998, and 1999 audits and reviews even though PwC should have been on notice to preserve such items by December 1998 and even though one staff auditor, Hulshof, testified that she provided her desk files to her superior, Cola, before leaving PwC in May 2000
(Reply aff. at 24–25); and
23. PwC continued to destroy relevant documents as part of the archiving process after it had been told by counsel to retain Telxon-related documents (Plaintiffs' Reply Memorandum (“Pl. reply”; Docket # 176 (1:01CV1078)), p. 7 (citing Deposition of Hellwarth (Notice of filing under seal, Docket # 143 (1:01CV1078)), pp. 84–100)).
Examination of the hard copy production accompanying the April 20, 2004 letter also revealed problems with PwC's production during discovery. Pinney alleges that examination of the hard copy production revealed the following:
• 963 pages of new workpapers from the fiscal year 1997 audit that were never previously produced to the SEC, Telxon, or Class Plaintiffs. Specifically, this includes 400 pages from PwC's 1997 archived database (PWC 72411–72817), 410 pages from PwC's 1997 local database (PWC 72000–72410), 143 pages with dates that are different than the local and archived versions (PWC 7300[sic]–73143).
• 1102 “datemarked”
pages of workpapers from the fiscal year 1999 audit that were never produced. See,
• 147 pages of workpapers from the 1999 archived database that contain internal guidance that PWC never produced. See,
• 3 pages of workpapers from the 1999 archived database that contain “different information.”
• 308 pages of printing errors. See,
• 312 pages of pop-up screens never before previously produced. (PwC bates labeled these to correspond to the previously produced document. These pages were hand counted).
• 7 pages of workpapers from the 1998 archived database that were never produced. See,
• 2 pages of workpapers from the 1998 audit that have different “modified by” dates. See,
Pinney aff. at 15–16.
On June 7, 2004 PwC produced another 130 pages of documents not previously produced to Telxon and plaintiffs. One of the documents was a risk summary produced on March 8, 1999, two weeks after Telxon had been forced to restate its financial statements for the previous two and a half years. Entitled “Full continuance Assessment,” the risk summary included the following two items:
a. Have annual or interim financial statements in the past three years either
disclosed an error in prior period financial statements or been restated for the
b. Was the error due to a possible intentional or deceitful manipulation?
*19 Full Continuance Assessment, Reply aff., Exh. 101 at PWC 0074047.
Plaintiffs contend that an examination of the hard copies produced on June 7, 2004 shows that “PwC failed to print inquiry documents ‘linked’ to the ‘Review Comment’ documents printed. In addition, in one instance, PwC did not open all views of the document (specifically, the ‘Editor History’) to show all of the information contained on the document.” Sobel aff. at 52 n. 15.
On June 26, 2002 Magistrate Judge Hemann held a hearing to resolve discovery disputes among the parties. Porritt represented PwC, and Brett S. Krantz (“Krantz”) represented plaintiffs. During the hearing, counsel for plaintiffs argued in favor of requiring PwC to produce all internal guidance materials which govern the conduct of audits. Counsel for PwC argued in favor of considering the production of such materials on a case-by-case basis. The following exchange occurred early in the hearing:
*27 THE COURT: All right.
What strikes me with this issue of the internal materials is that they are discoverable materials, but not necessarily materials that can be used at trial. And I say that because I understand the argument that PwC makes about the issue not being whether in its review, and in its carrying out its responsibility for Telxon, its responsibility not necessarily being that it followed its own internal materials, but that indeed it followed GAAP and GAAS.
So that's why it appears to me that even though the argument that PricewaterhouseCoopers says maybe our, maybe our own internal procedures exceed GAAS and GAAP, I think Telxon could just as well say yes, but maybe they don't meet GAAS and GAAP, and maybe what you did was follow your internal materials and hence not satisfy the requirements of GAAS and GAAP.
So I take the position that the materials are discoverable materials with Judge O'Malley deciding at the appropriate time whether—what the standard is and whether those materials have any role at all in the standard, the negligence standard, when it gets to trial.
Now, that being said, I think the proposal that I saw in Mr. Krantz's letter, that you layout what materials are available and then discuss whether indeed anybody needs anything, because it sounds as though there are many materials, probably a portion of which at least would not be needed by or necessary to the case of—the case being made either by the plaintiffs or by Telxon.
So I would suggest that what you do is set out a list of the materials that would satisfy that request and then negotiate with both Mr. Krantz and with the Telxon counsel for the discovery of the most critical ones that really are the most critical. But I want it clear, and certainly to be clear In terms of the next step, or the steps down the road, that I am not in any way suggesting that those materials are appropriate for use at trial.
Transcript of proceedings, June 26, 2002 (“June 26 tr.”); Pinney app. 2; Exh. 17, pp. 5–6. The court modified its position later in the hearing:
THE COURT: Well, certainly—
(Record read as follows: THE COURT: Well, certainly—)
MR. PORRITT: [Argues in favor of requiring plaintiff to identify specific references to guidance materials and allowing PwC to consider whether to produce them.]
THE COURT: What I was about to say after my certainly was, to the extent that there are references to work papers, to policies, then indeed you will produce those manuals. And in addition to that, I want you to prepare a list that would satisfy that production. I want you to give it to Telxon. I want you to give it to Mr. Krantz. And I want them to be able to look at it and the three of you negotiate and work on what should be turned over.
But what I want everybody to understand here that when we're talking about discovery, my philosophy is the same as it was when I was practicing law, and that is discovery is what cases are all about. And people aren't allowed to go on a fishing expedition and at the same time they are certainly allowed to have material that may lead to relevant material. So to the extent that this category that we're talking about falls into information that may lead to relevant material, then I think—then I want it turned over.
*28 June 26 tr. at 14.
PwC asserts the following as its understanding of the court's position regarding the production of guidance materials:
At that hearing, Judge Hemann directed that PwC provide a list of internal guidance materials to opposing counsel and negotiate with counsel “for the discovery of the ones that really are the most critical.” Id.
at 6. Judge Hemann also noted that “I want it clear” that “I am not in any way suggesting that those are materials appropriate for use at trial.” Id.
at 5–6. In addition, to complete the excerpt from which Mr. Pinney selectively quotes in his Affidavit (See
22), Judge Hemann stated that “to the extent that there are references to work papers, to policies, then indeed you [PwC] will produce those manuals,” but she limited her ruling in an important respect: Judge Hemann admonished that guidance manuals should be produced only to the extent that they contained “information that may lead to relevant material.” Id.
She also cautioned Class Plaintiffs and Telxon not to go on a “fishing expedition.” Id.
Def. opp. at 11–12 (footnote omitted) (insertion in the quoting document).
Pinney, in his affidavit to the court, described the court's position on producing guidance materials as follows:
22. On June 26, 2002, during a hearing before Magistrate Judge Hemann, Magistrate Judge Hemann ordered, among other things, PwC to produce all internal guidance materials referenced in PwC's workpapers and make available a list of internal guidance to Telxon and Class Plaintiffs.... See,
Exhibit 17, pg. 14. Specifically, Magistrate Judge Hemann stated to PwC, “[y]ou will produce those manuals.” Id.
Pinney aff. at 7 (insertion in the original).
PwC's memorandum in opposition to the motions for sanctions described how it responded to the court's order:
Following the hearing, PwC complied with the Court's directive by providing Class Plaintiffs and Telxon with indexes of its guidance materials, and producing all of the materials that the parties selected. See
Aronow Decl. at 12. The indexes that PwC provided included all guidance materials that Telxon claims it was unaware of until PwC's April 20, 2004 production. In fact, all of the PwC internal guidance referenced in the April 20, 2004 production was also referenced in PwC's fiscal year 1998 workpapers, belying any suggestion that PwC was hiding these materials (or references to these materials) from Telxon or that Telxon was prejudiced in any way by the supplemental production of the guidance fields.
Consistent with the proceedings of June 26, 2002, PwC also produced all guidance materials cited in the text of PwC workpapers that were necessary to an understanding of the work that PwC performed in its audits of Telxon.
Both Class Plaintiffs and Telxon deemed this production to be satisfactory. See
Letter from M. Campagne to N. Porritt, dated September 19, 2002 (attached as Exhibit S) and Letter from H. Sobel to N. Porritt, dated September 19, 2002 (attached as Exhibit T). Indeed, Telxon and Mr. Pinney do not deny that they obtained every piece of guidance material that was necessary to understanding the work that PwC performed. Neither Class Plaintiffs nor Telxon ever filed a motion to compel discovery of additional guidance materials.
*29 Def. opp. at 12–13 (emphasis added).
The position set forth in the letters cited in the opposition brief directly contradicts PwC's assertion that “Class Plaintiffs and Telxon deemed [PwC's] production to be satisfactory.” The letter from Telxon reads:
With respect to the [materials specifically referenced in PwC's workpapers], Judge Hemann ordered that “to the extent that there are references to ... policies, then indeed you will produce those manuals.” (Transcript of Proceedings before Judge Hemann on June 26, 2002, p. 14). PwC has produced only 3–4 such materials, but has withheld other referenced materials on the basis that they are not necessary to Telxon's understanding of the workpapers. This is your position, despite the fact that you admitted that you did not actually review the workpapers before making your production. I am therefore at a loss as to how you can represent that the withheld materials need not be produced. Moreover, this contradicts your prior representation to Telxon that all materials referenced in the workpapers have been turned over. This notwithstanding, Judge Hemann ordered that all
referenced materials be produced. The conditions you seek to impose are contrary to the Court's order.
At this time, Telxon agrees to table this issue until such time as it has reviewed the specific internal materials that PwC will produce on or about September 23, 2002.
Letter from Campagna to Porritt, September 19, 2002 (“Campagna Sept. 19 letter”), Def. opp., Exh. S, pp. 1–2. The letter from plaintiffs also expressed dissatisfaction with PwC's production of guidance materials: “[W]hile we believe that the production of four pieces of professional literature is insufficient, in light of your belief that the selected portions of the PwC manuals will duplicate the guidance itemized in the work papers, we have agreed to table the issue for now.” Letter from Sobel to Porritt, September 19, 2002 (“Sobel Sept. 19, 2002 letter”), Def. opp., Exh. T, p. 2. These letters are sufficiently clear about Telxon's dissatisfaction with PwC's production of guidance materials that the court regards PwC's citation of the letters for the opposite proposition to be a deliberate attempt by PwC to mislead the court.
Pinney's affidavit describes Telxon's version of PwC's compliance with the court's order of June 26, 2002. Pinney's description is fully supported by the documentary citations:
23. After almost a month passed without PwC complying with Magistrate Judge Hemann's June 26, 2002 Order, on July 24, 2002, Telxon sent PwC a letter requesting PwC to comply with Magistrate Judge Hemann's June 26, 2002 Order to produce, among other things, all internal guidance referenced in PwC's workpapers and a list of PwC's guidance and training materials. See
Exhibit 18, pg. 2.
In addition, Telxon identified a series of documents that were missing from PwC's workpapers. See,
Exhibit 18, p. 2.
24. On July 26, 2002, PwC served its Response to Telxon's Second Request (PwC's “Second Response”). See,
In response to Request No. 7, that called for the production of “[a]ll documents produced to plaintiffs in response to [Class] Plaintiffs Request for the Production of Documents Directed to [PwC]”, PwC stated: “PwC already produced to Telxon all documents responsive to this Request.” See,
Exhibit 19, pg. 9;
(Class Plaintiff's Request is attached hereto as Exhibit 16,
as Exhibit A therein).
*30 25. On July 29, 2002, PwC produced to Telxon and Class Plaintiffs, in response to Magistrate Judge Hemann's June 26, 2002 Order, documents PwC represented to be a “detailed set” of internal guidance indexes and four sets of internal guidance referenced in PwC's workpapers. PwC only produced four pieces of internal guidance. See,
As a result of Magistrate Judge Hemann's June 26, 2002 Order, Telxon expected PwC to produce a complete set of indexes and all internal guidance referenced in PwC's workpapers, but PwC continued to refuse to make such a production.
26. On August 8, 2002, Telxon sent PwC another letter demanding PwC comply with Magistrate Judge Hemann's June 26, 2002 Order that required PwC to produce, among other things, all internal guidance referenced in PwC's workpapers. See,
Telxon noted that “[f]rankly, we were led to believe that PwC was compiling these materials during the month it took to respond.” See Exhibit 21, pg. 1, 2.
27. Rather than complying with Magistrate Judge Hemann's June 26, 2002 Order, on August 9, 2002, PwC responded to Telxon, stating, “If you believe there are other references to PwC's internal guidance that have not been produced, please provide workpaper reference and we will look into it.” See,
Exhibit 22, pg. 1, 3.
28. On August 12, 2002, Telxon sent another letter to PwC, warning, “For the record, you have represented that PwC has reviewed its workpapers and has produced all materials referenced therein. If this is not an accurate statement of your representation, please advise immediately.” See,
pg. 1, 2. PwC made this representation during a preceding telephone conference that I participated in with Maria Campagna (one of Telxon's attorneys).
29. On August 30, 2002, Class Plaintiffs sent PwC a list of internal guidance sections to be produced. See,
Class Plaintiffs generated this list from the indexes PwC had provided to Telxon and Class Plaintiffs on July 29, 2002.
30. On September 19, 2002, Telxon, Class Plaintiffs, and PwC held a conference call to discuss PwC's discovery failures, particularly PwC's continuing failure to comply with Magistrate Judge Hemann's June 26, 2002 Order. I participated in this conference call. Following the call, Telxon and Class Plaintiffs sent separate letters to PwC memorializing the call and demanding the production of all internal guidance referenced in PwC's workpapers. See,
respectively. As the letters evidence, PwC produced only four pieces of internal guidance. In violation of Magistrate Judge Hemann's June 26, 2002 Order, PwC refused to produce certain of its Internal guidance manuals to Telxon and Class Plaintiffs. Telxon and Class Plaintiffs reluctantly agreed to “table” the issue of PwC's failure to produce all internal guidance referenced in its workpapers until after Telxon and Class Plaintiffs reviewed the internal guidance manuals that PwC said it would promptly produce. PwC also required that the internal guidance be restricted to “attorneys' eyes only” and attempted to require Telxon and Class Plaintiffs to advise PwC when the internal guidance would be shown to consultants or testifying experts.
*31 31. On September 23, 2002, PwC produced the internal guidance sections specifically requested by Class Plaintiffs. See,
and PWC 66174–67244. As indicated Class Plaintiffs based their selections on the indexes provided by PwC.
32. On October 15, 2002, Telxon, Class Plaintiffs, and PwC appeared before Magistrate Judge Hemann on a discovery dispute raised by PwC. The dispute between PwC and Telxon involved a single Telxon interrogatory response. In addressing the Court, PwC's counsel again represented to Magistrate Judge Hemann: “To my knowledge, every responsive document [of PwC] has been produced. I don't know of any that have not.” See,
pg. 58, lines 17–20....
33. On October 23, 2002, Telxon sent another letter to PwC requesting compliance with Magistrate Judge Hemann's July 26, 2002 Order.... See,
... Telxon ... once again demanded production of “all portions of the C & L and PwC [internal guidance] manuals referenced in the work papers.” The letter memorialized PwC's admission that it had not produced all referenced portions, but rather only those sections that were relevant in PwC's counsel's sole opinion. See,
Exhibit 29, pg. 1, 5.
34. On November 4, 2002, ... PwC acknowledged its obligation to comply with Magistrate Judge Hemann's June 26, 2002 Order in ... responding, “Sixth, [Magistrate] Judge Hemann's order regarding internal guidance related to internal policies or manuals as well as any internal guidance specifically referenced in the workpapers. PwC has fully complied with that order.” See,
Exhibit 30, pg. 2, 4.
In sum, PwC insisted for over four months that the court had ordered it to produce only those guidance materials referenced in the workpapers and
essential to understanding PwC's audit. On November 4, 2002 it conceded that the court required it to produce any internal guidance specifically referenced in the workpapers. Today, PwC has returned to its original position, and it insists, “Consistent with the proceedings of June 26, 2002, PwC ... produced all guidance materials cited in the text of PwC workpapers that were necessary to an understanding of the work that PwC performed in its audits of Telxon.”
Def. opp. at 13 (emphasis added).
In fact, PwC never complied with either
interpretation of the court's order. As Pinney noted:
35. On November 15, 2002, I sent PwC a letter requesting, among other things, PwC to produce additional internal guidance that I identified in PwC's workpapers during my review of those workpapers. See,
This internal guidance should have been produced by PwC to comply with Magistrate Judge Hemann's June 26, 2002 Order. My review of the workpapers identified dozens of references to internal guidance materials that PwC had not produced.
Pinney aff. at 9. In addition, as has already been described, in late November 2002 Pinney discovered that PwC had failed to produce ARM 9612.23, a piece of internal guidance which Pinney claims Is critical to Telxon's case against PwC. See supra
at 12–13. It was at this point that Pinney discovered the substitution of unrelated but similar pages of index with identical page numbers into the internal guidance index which would have referenced ARM 9612.23. Pinney requested this piece of internal guidance and the correct index pages in a letter dated November 26, 2002. See
Letter from Pinney to Porritt, November 26, 2002; Pinney app. 2, Exh. 32.
*32 When PwC failed to produce either the internal guidance requested on November 15, 2002 or the internal guidance requested on November 26, 2002, on December 18, 2002 Telxon wrote to demand that PwC respond to its outstanding requests for internal guidance materials. See
Letter from Pinney to Porritt, December 18, 2002, Pinney aff., Exh. 33. PwC finally responded and produced the requested internal guidance and indices on January 14, 2003, eight weeks
after the November 15, 2002 and six weeks
after the November 26, 2002 request. See
Letter from Elliott to Pinney, January 14, 2003; Pinney app. 2, Exh. 34.
As was revealed on June 21, 2003, even the much-belated January 14, 2003 production of internal guidance documents did not satisfy the court's order to produce all internal guidance referenced in the Telxon workpapers. Some of the previously-unproduced materials in the June 21, 2003 production included internal guidance accessed from workpapers view links and pop-ups. Pinney aff. at 16–19. Given PwC's behavior thus far, there is no reason whatsoever to believe that PwC has finally produced all internal guidance documents referenced in the Telxon workpapers.
The court's order on June 26, 2002, while not entirely unambiguous, was not difficult to construe. The court told the parties:
[T]o the extent that there are references to work papers, to policies, then indeed you will produce those manuals. And in addition to that, I want you to prepare a list that would satisfy that production. I want you to give it to Telxon. I want you to give it to Mr. Krantz. And I want them to be able to look at it and the three of you negotiate and work on what should be turned over.
June 26 tr. at 14. If PwC had been uncertain as to what the court was requiring it to produce, it had only to ask for clarification to resolve the problem.
Instead, PwC argued interminably regarding the meaning of the court's order, dribbled relevant documents out in productions scattered over months, delayed its responses, and had still failed to comply with any reasonable interpretation of the court's order nearly a year later.
The substitution of similar, identically-numbered index pages for the correct index pages and attributing the substitution to an unexplained “clerical error” speaks for itself. See
Letter from Elliott to Pinney, January 14, 2003; Pinney app. 2, Exh. 34, p. 1.
For these reasons the court does not accept PwC's contention that PwC did not fail to produce any guidance material and that Telxon misstates Magistrate Judge Hernann's ruling of June 26, 2002.