Valuation Report Prepared by Non-Testifying Expert Found to Be DiscoverablePrint Article
- Posted on: Nov 19 2018
In business divorce cases, it is often necessary for the parties’ experts to prepare valuation reports – that is, reports that value an owner’s interest in a business or venture. Sometimes, however, valuation reports are prepared by non-testifying consultants. When valuation reports are prepared by consultants, disputes often arise over whether those reports are discoverable. The answer depends on when they are prepared (i.e., in the ordinary course or in anticipation of litigation).
In New York, CPLR 3101(c) governs whether documents or information are protected work product. CPLR 3101(c) provides that the “work product of an attorney shall not be obtainable.” The work product protection also “extends to experts retained as consultants to assist in analyzing or preparing the case, as an adjunct to the lawyer’s strategic thought processes ….” Hudson Ins. Co. v. Oppenheim, 72 A.D.3d 489, 490 (1st Dept. 2010) (citation and internal quotation omitted). See also 3A Weinstein-Korn-Miller, N.Y. Civ. Prac. ¶ 3101.52a, at 31-214 (“Accordingly, an expert who is retained as a consultant to assist in analyzing or preparing the case is beyond the scope of this provision; in fact, such experts are generally seen as an adjunct to the lawyer’s strategic thought processes, thus qualifying for complete exemption from disclosure under [CPLR 3101] subdivision (c) [attorney’s work product] and, now, the mental impressions … exclusion of CPLR 3101 (d) (2) as well.”).
By contrast, testifying experts do not necessarily enjoy such protection. CPLR 3101(d)(1) provides that “(i) [u]pon request, each party shall identify each person whom the party expects to call as an expert witness at trial and shall disclose in reasonable detail the subject matter on which each expert is expected to testify, the substance of the facts and opinions on which each expert is expected to testify, the qualifications of each expert witness and a summary of the grounds for each expert’s opinion.” Breslauer v. Dan, 150 A.D.2d 324 (2d Dept. 1989). Clause (iii) permits a court to order further disclosure of a report prepared by an expert expected to testify upon a showing of special circumstances. E.g., Beauchamp v Riverbay Corp., 156 A.D.2d 172 (1st Dept. 1989).
Over the years, courts have identified a number of consultants entitled to work-product protection, including, but not limited to, forensic accountants, engineering firms, appraisers, and, business valuation firms. See, e.g., 915 2nd Pub Inc. v. QBE Ins. Corp., 107 A.D.3d 601, 601 (1st Dept. 2013) (appraisal report); Hudson, 72 A.D.3d at 490 (forensic accounting analysis); Oakwood Realty Corp. v. HRH Constr. Corp., 51 A.D.3d 747, 749 (2d Dept. 2008) (engineering report); Delta Fin. Corp. v. Morrison, 14 Misc. 3d 428, 432 (Sup. Ct., Nassau County 2006) (valuation of excess cash flow certificates).
Even if a document or communication is not entitled to full protection, it may be entitled to qualified protection from discovery when it is prepared in anticipation of litigation. CPLR 3101(d)(2) restricts discovery of “materials prepared in contemplation of litigation even if by non-lawyers or lawyers acting in a non-legal capacity.” Kandel v. Tocher, 22 A.D.2d 513, 516-17 (1st Dept. 1965). This rule includes materials prepared by “a consultant to assist in analyzing or preparing the case.” Santariga v. McCann, 161 A.D.2d 320, 321 (1st Dept. 1990); see also Oakwood Realty, 51 A.D.3d at 749.
On November 9, 2018, Justice Jennifer G. Schecter of the Supreme Court, New York County, Commercial Division, addressed the foregoing issues in Noven Pharms., Inc. v. Novartis Pharms. Corp., 2018 N.Y. Slip Op. 32851(U) (here), and held that a valuation report prepared in connection with the break up of a joint venture was not protected work product under CPLR 3101(c) and 3101(d)(2).
Noven Pharmaceuticals, Inc. v. Novartis Pharmaceuticals Corp.
Noven concerned the break-up of the parties’ joint venture, which did business as Novogyne Pharmaceuticals (“Novogyne”) and sold different types of estrogen-patch products. The parties entered into a Termination Agreement on December 1, 2012, that provided for the disposition of Novogyne’s cash and non-cash assets including its products. Years after the joint venture ended, the parties disagreed on how the members’ capital contributions would be distributed.
Plaintiff, Noven Pharmaceuticals, Inc. (“Noven”), maintained that, upon termination of the joint venture, a third-party expert valuation would determine the fair market value of the estrogen-patch products that were being allocated to the parties. Defendant, Novartis Pharmaceuticals Corp. (“Novartis”), maintained that a valuation report was not necessary or required, though it later believed that such a report would be internally useful. Consequently, Novartis requested a valuation report from Noven.
Noven retained Houlihan Lokey (“HL”) to perform the valuation. On June 19, 2015, Noven sent HL’s draft valuation to Novartis and asked for feedback. On June 29, 2015, Novartis determined that it disagreed with HL’s valuation.
Consequently, Novartis decided to procure its own valuation. On July 14, 2015, Novartis informed Noven that its team “thought it would be most prudent for Novartis to obtain its own 3rd party valuation” and committed to keeping Noven “updated on the status of completion of this valuation” with an eye toward meeting “sooner rather than later.” According to the Court, Novartis did not say that its initial decision to pursue a valuation was motivated in any way by anticipated litigation.
On August 11, 2015, Noven asked Novartis for an update. Novartis responded the following day that it was still in the process of engaging a valuator and that it would provide an update in mid-September. By the end of August 2015, without the involvement of counsel, Novartis identified five potential valuation firms and ultimately selected Deloitte Transactions and Business Analytics (“Deloitte”) to perform a fair market value assessment of the Novogyne assets. Correspondence cited by the Court showed that Novartis intended to use and discuss Deloitte’s findings with Noven in the course of their business negotiations.
On September 3, 2015, Novartis’ in-house counsel became involved in the matter for the first time. Based on his earlier participation in the winding down of the joint venture, counsel “recognized that Noven’s position [that a valuation was necessary] was antithetical to the Termination Agreement” and “anticipated that the dispute could lead to litigation.” That day, Novartis engaged a law firm, White & Case, to represent it “in the dispute over the distribution of the Member’s Capital Contributions balance.” Novartis took steps to preserve documents for litigation and began contemplating basic litigation issues.
On September 24, 2015, the parties held a conference call in which in-house counsel participated. Novartis informed Noven “that the joint venture did not need to account for the value of the distributed products . . . and that those products should not impact the joint venture’s distribution [of the capital accounts balances] and that it was not necessary for either party to estimate the value of the distributed products.” According to the Court, there was no indication on the call (or at any time thereafter) that Novartis mentioned the valuation report it had commissioned.
In October 2015, White & Case formally hired Deloitte to value the joint venture’s products even “though Novartis did not believe that the Termination Agreement required the parties” to do so. White & Case and Novartis purportedly took this step because they believed that “to assess the case, they should obtain their own estimates of [the] products.” The engagement letter stated that Deloitte would be a “nontestifying consultant” and that because it was White & Case’s intention and position that the work for it would be covered by “the attorney work-product and other applicable privileges,” all working papers received or prepared by Deloitte would be maintained as confidential.
On November 17, 2015, Deloitte provided White & Case with a first draft of its valuation. On February 25, 2016, Deloitte provided White & Case and Novartis with an updated draft, which was Deloitte’s last report. The valuation itself stated that it was “privileged and confidential” and that Deloitte “was pleased to assist White & Case … in connection with its representation of Novartis … with the provision of services for corporate planning purposes.” It also set forth that Deloitte was assisting “in connection with . . . litigation due diligence activities” and that its services were solely for internal “use to assist with … litigation due diligence activities.” The report included a fair market valuation and basic facts related to Novogyne and its termination. According to the Court, the valuation did not reflect any legal assumptions or opinions (other than the fact that a valuation was performed at Novartis’ request, which had not been a secret in the case). Nor did it reveal “Novartis’ reaction to Noven’s position.” Ten days later, on March 5, 2016, White & Case sent Novartis’ counsel a legal memorandum that discussed the valuation.
On March 14, 2016, Noven and Novartis met to discuss settlement of their dispute. Novartis relied on Deloitte’s valuation “in preparing for that meeting.”
On September 7, 2016, Noven commenced the action, claiming that Novartis refused to disburse more than $16 million of the joint venture’s assets as required by the Termination Agreement.
The Motion and the Court’s Decision
On March 30, 2017, the Court heard argument on Novartis’ motion to dismiss. During the argument, the parties discussed Novartis’ valuation of the joint venture’s assets. Noven claimed the report was discoverable because, among other things, it evidenced the amount Novartis may owe Noven. Novartis opposed production, arguing that its valuation report was privileged. Believing that it was unlikely the report was privileged because it was prepared prior to litigation, the Court directed Novartis to produce the report. Notwithstanding, Novartis did not do so.
The parties agreed that the bona fides of the privilege claim would be fleshed out in discovery and that motion practice would ultimately be required if Novartis refused to produce the report. The parties reached an impasse on whether the valuation report was privileged. Noven moved to compel Novartis to produce Deloitte’s valuation report.
The Court granted Noven’s motion, finding that Novartis failed to meet its burden “of establishing that the valuation report [was] privileged and, therefore, exempt from the disclosure.” (Citing 148 Magnolia, LLC v. Merrimack Mut. Fire Ins. Co., 62 A.D.3d 486, 487 (1st Dept. 2009)). The Court concluded that Novartis could not demonstrate that “the report was created solely and exclusively in anticipation of litigation.” Thus, the Court could not rule out a mixed purpose for the report.
The Court noted that “[i]t [was] undisputed that a valuation by Deloitte was contemplated for business purposes before Novartis claim[ed] that it appreciated that litigation potentially lay ahead.” This fact was underscored by Novartis’ failure to demonstrate “that the nature, character or scope of the valuation” previously discussed with Deloitte had “changed in any way whatsoever or that Novartis was exclusively in litigation mode and not still desirous of arriving at a mutually agreeable business solution with Noven.” (Citing Plimpton v. Massachusetts Mut. Life Ins. Co., 50 A.D.3d 532, 533 (1st Dept. 2008)). “Indeed,” said the Court, “there is no evidence between September 2015 – when Novartis maintain[ed] that it first contemplated potential litigation – and the commencement of this action, that Novartis ever explicitly committed to Noven that, contrary to its earlier position, it was not going forward with nor would it exchange or discuss the valuation that it had earlier committed to.” In short, concluded the Court, “Novartis has not shown any proof (in camera or otherwise) that after its business people chose Deloitte to prepare the valuation for business purposes, the actual scope or nature of the retention changed in any material way.”
The Court also rejected the notion that because “both parties fully appreciated that litigation was a possibility before they officially commissioned their respective valuations” (orig’l emphasis), the Deloitte valuation was protected: “That does not alter the analysis nor does the involvement of attorneys or the parties’ own privilege designations (which were likely designed to afford the parties with maximum flexibility depending on the outcome of the valuation).”
“In the end,” said the Court, “it is hard to believe that Novartis decided, in September 2015, that potential litigation justified an uncommunicated change in course with respect to the valuation and that, despite verily believing that a valuation was irrelevant, it continued to pursue the very same valuation that it had anticipated earlier, yet it was for a completely different purpose (and that Novartis did so, at this stage and with urgency, solely for litigation that had not even been commenced and not for use in its ongoing business negotiations).” This conclusion was reinforced by the record, which the Court observed, showed that “the parties continued in the same course of negotiations for which the Deloitte valuation had been contemplated.”
The burden of establishing the right to work-product protection is on the party asserting it. 148 Magnolia, LLC v Merrimack Mut. Fire Ins. Co., 62 A.D.3d 486, 487 (1st Dept. 2009). Whether a particular document or communication deserves protection is a fact-specific determination. Rossi v. Blue Cross & Blue Shield, 73 N.Y.2d, 588, 592-93 (1989). Noven exemplifies these principles: under the facts and evidence before the Court, Novartis was unable to meet its burden of demonstrating that the Deloitte valuation report deserved work-product protection.