1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 BAIO WANG, et al., Case No. 21-cv-06028-PCP (SVK)
8 Plaintiffs, ORDER RE DUE DILIGENCE 9 v. DEFENSE AND ATTORNEY-CLIENT PRIVILEGE AS TO THE 10 ZYMERGEN INC., et al., UNDERWRITER DEFENDANTS 11 Defendants. Re: Dkt. No. 466
12 13 Before the Court is a dispute regarding to what extent, if any, asserting the affirmative 14 defense of “due diligence” leads to a waiver of the attorney-client communication privilege. 15 Plaintiffs raise this issue in challenging certain entries on the privilege logs of both the Zymergen 16 Defendants (Dkt. 452) and the Underwriter Defendants (Dkt. 466). Because of pertinent factual 17 differences between the various groups of Defendants, this Order resolves the dispute only as to 18 the Underwriter Defendants.1 The Court received joint submissions and supplemental briefing,2 19 held a hearing (Dkt. 484) and reviewed in-camera a substantial sample of the documents with 20 privileged redactions by the Underwriter Defendants. For the reasons set forth below, the Court 21 determines that in light of the circumstances as between Plaintiffs and the Underwriter 22 Defendants, there is no waiver of the attorney-client privilege pursuant to the Underwriter 23 Defendants’ assertion of the due diligence defense. 24 //// 25 1 The Court does provide general guidance to the Zymergen defendants based upon its reasoning 26 herein. See Section III, infra.
27 2 Although the supplemental briefing was ordered in the dispute between Plaintiffs and the 1 I. THE DUE DILIGENCE DEFENSE 2 Pursuant to the due diligence defense, defendants must prove that they had “after 3 reasonable investigation, reasonable ground to believe and did believe” that statements in the 4 registration statement were not materially misleading. 15 U.S.C. § 77k(b)(3); In re Software 5 Toolworks, Inc., Securities Litigation, 50 F.3d 615, 621 (9th Cir. 1994). This defense is evaluated 6 under a negligence standard. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 208 (1976). The statute 7 specifically, and archaically, provides, “what constitutes reasonable investigation and reasonable 8 ground for belief . . . shall be that required of a prudent man in the management of his own 9 property.” 15 U.S.C. § 77k(c). As for underwriters in particular, “they must show that their 10 actions, not those of counsel, demonstrate the reasonableness of their investigation.” United Food 11 and Commercial Workers Union v. Chesapeake Energy Corp., No. CIV-09-1114-D, 2012 WL 12 2370637, at *9 (W.D. Ok. June 22, 2012) (citing In re WorldCom, Inc. Securities Litig., 346 13 F.Supp.2d 628, 662 (S.D.N.Y. 2004)). 14 II. ANALYSIS 15 Reliance on the due diligence defense (as opposed to the advice of counsel defense) and 16 whether it impacts attorney-client privilege has surprisingly sparse treatment in the courts. 17 In some cases, defendants’ lawyers participate in the due diligence investigation, but defendants 18 carefully assert, and the court accepts, that they are not relying on any privileged communications 19 with counsel in support of the defense. See United Food and Commercial Workers Union, 20 2012 WL 2370637, at * 9 (“There is no indication that the Chesapeake Defendants intended to 21 introduce evidence reflecting otherwise privileged attorney-client communications to support their 22 contention that they acted with due diligence”). 23 In other instances, including in this District, the court may focus on the “belief” component 24 of the statutory defense and, where counsel was involved in the due diligence investigation, find a 25 basis for a limited, implicit waiver of the privilege. See In re Charles Schwab Corp. Securities 26 Litig., Case No. 3:08-cv-1510-WHA, Dkt. 424 (N.D. Cal. Feb. 23, 2010); see also In re Lending 27 Club Securities Litig., No. C 16-02627 WHA, 2018 WL 977558, at *3 ((N.D. Cal. ). In Lending 1 reliance on any role of counsel in the due diligence process. Id. (“[T]he underwriter defendants 2 stress that . . . they rely only on non-attorney professionals, including accountants, auditors, 3 financial experts, and investigative firms, to prove their Section 11(b)(3) defense”).3 4 The Underwriter Defendants adopt the United Food approach, fully embracing their 5 counsel’s dual role as confidential advisor on matters related to the IPO and as a key actor in the 6 due diligence investigation. “[O]n the one hand, in its capacity as the Underwriters’ outside 7 counsel, WSGR provided legal advice to its clients on specific issues as the need arose during the 8 offering. On the other hand, WSGR was part of the Zymergen IPO ‘working group’ and worked 9 closely with the Underwriters to conduct a factual due diligence investigation of Zymergen and 10 the subject matter of the offering documents. The latter is relevant to the Underwriters’ due 11 diligence defense, but the former is not.” Dkt. 466 at 7 (emphasis in original). This distinction 12 between an attorney’s role as legal advisor and factual investigator is well-established in the 13 context of the due diligence defense. See Escott v. BarChris Const. Corp., 283 F. Supp. 643, 697 14 (S.D.N.Y 1968) (“It is not a matter of relying upon counsel for legal advice. Here the attorneys 15 were dealing with matters of fact. Drexel delegated to them, as its agent, the business of 16 examining the corporate minutes and contracts”). 17 In further support of this distinction, the Underwriter Defendants point to their production 18 of thousands of “non-privileged” communications with WSGR, “including 1,000+ 19 communications solely between the Underwriters and WSGR that reflect pre-IPO diligence.” 20 Dkt. 466 at 9.4 Underwriter Defendants also argue that their privilege assertions are limited to 21 3 Plaintiffs also cite Sheet Metal Workers National Pension Fund v. Bayer Aktiengesellschaft, 22 No. 20-cv-04737 RS (SK), 2024 WL 74928 (N.D. Cal. Jan. 5, 2024) in support of the due diligence defense leading to an implied waiver. Dkt. 466 at 4. However, in marked contrast to the 23 Underwriter Defendants, the Sheet Metal defendants asserted a good faith reliance defense and provided an interrogatory response that identified counsel and documents upon which they had 24 relied. The court found an implied waiver as to the documents arising out of defendants’ admitted reliance thereon. Id. at 2-3. The court did not address the issue at hand, whether assertion of a due 25 diligence defense, by itself, leads to an implied waiver. Another decision in this district, Shenwick v. Twitter, No. 16-cv-0534-JST, 2021 WL 1232451 (N.D. Cal. Mar. 31, 2021), similarly 26 addresses whether the role of counsel can be argued at trial absent production of relevant documents, without any reference to or analysis of the statutory due diligence defense. 27 1 discrete redactions reflecting requests for or provision of legal advice contained within produced 2 documents. Id. at 10. 3 After careful consideration, the Court determines that the statutory language establishing 4 the defense should be applied holistically, rather than isolating the “belief” factor and finding a 5 waiver of the attorney-client privilege solely on that fragment. See generally TRW Inc. v. 6 Andrews, 534 U.S. 19, 31 (2001) (“It is ‘a cardinal principle of statutory construction’ that ‘a 7 statute ought, upon the whole, to be so construed that, if it can be prevented, no clause, sentence, 8 or word shall be superfluous, void, or insignificant.’” (quoting Duncan v.
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1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 BAIO WANG, et al., Case No. 21-cv-06028-PCP (SVK)
8 Plaintiffs, ORDER RE DUE DILIGENCE 9 v. DEFENSE AND ATTORNEY-CLIENT PRIVILEGE AS TO THE 10 ZYMERGEN INC., et al., UNDERWRITER DEFENDANTS 11 Defendants. Re: Dkt. No. 466
12 13 Before the Court is a dispute regarding to what extent, if any, asserting the affirmative 14 defense of “due diligence” leads to a waiver of the attorney-client communication privilege. 15 Plaintiffs raise this issue in challenging certain entries on the privilege logs of both the Zymergen 16 Defendants (Dkt. 452) and the Underwriter Defendants (Dkt. 466). Because of pertinent factual 17 differences between the various groups of Defendants, this Order resolves the dispute only as to 18 the Underwriter Defendants.1 The Court received joint submissions and supplemental briefing,2 19 held a hearing (Dkt. 484) and reviewed in-camera a substantial sample of the documents with 20 privileged redactions by the Underwriter Defendants. For the reasons set forth below, the Court 21 determines that in light of the circumstances as between Plaintiffs and the Underwriter 22 Defendants, there is no waiver of the attorney-client privilege pursuant to the Underwriter 23 Defendants’ assertion of the due diligence defense. 24 //// 25 1 The Court does provide general guidance to the Zymergen defendants based upon its reasoning 26 herein. See Section III, infra.
27 2 Although the supplemental briefing was ordered in the dispute between Plaintiffs and the 1 I. THE DUE DILIGENCE DEFENSE 2 Pursuant to the due diligence defense, defendants must prove that they had “after 3 reasonable investigation, reasonable ground to believe and did believe” that statements in the 4 registration statement were not materially misleading. 15 U.S.C. § 77k(b)(3); In re Software 5 Toolworks, Inc., Securities Litigation, 50 F.3d 615, 621 (9th Cir. 1994). This defense is evaluated 6 under a negligence standard. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 208 (1976). The statute 7 specifically, and archaically, provides, “what constitutes reasonable investigation and reasonable 8 ground for belief . . . shall be that required of a prudent man in the management of his own 9 property.” 15 U.S.C. § 77k(c). As for underwriters in particular, “they must show that their 10 actions, not those of counsel, demonstrate the reasonableness of their investigation.” United Food 11 and Commercial Workers Union v. Chesapeake Energy Corp., No. CIV-09-1114-D, 2012 WL 12 2370637, at *9 (W.D. Ok. June 22, 2012) (citing In re WorldCom, Inc. Securities Litig., 346 13 F.Supp.2d 628, 662 (S.D.N.Y. 2004)). 14 II. ANALYSIS 15 Reliance on the due diligence defense (as opposed to the advice of counsel defense) and 16 whether it impacts attorney-client privilege has surprisingly sparse treatment in the courts. 17 In some cases, defendants’ lawyers participate in the due diligence investigation, but defendants 18 carefully assert, and the court accepts, that they are not relying on any privileged communications 19 with counsel in support of the defense. See United Food and Commercial Workers Union, 20 2012 WL 2370637, at * 9 (“There is no indication that the Chesapeake Defendants intended to 21 introduce evidence reflecting otherwise privileged attorney-client communications to support their 22 contention that they acted with due diligence”). 23 In other instances, including in this District, the court may focus on the “belief” component 24 of the statutory defense and, where counsel was involved in the due diligence investigation, find a 25 basis for a limited, implicit waiver of the privilege. See In re Charles Schwab Corp. Securities 26 Litig., Case No. 3:08-cv-1510-WHA, Dkt. 424 (N.D. Cal. Feb. 23, 2010); see also In re Lending 27 Club Securities Litig., No. C 16-02627 WHA, 2018 WL 977558, at *3 ((N.D. Cal. ). In Lending 1 reliance on any role of counsel in the due diligence process. Id. (“[T]he underwriter defendants 2 stress that . . . they rely only on non-attorney professionals, including accountants, auditors, 3 financial experts, and investigative firms, to prove their Section 11(b)(3) defense”).3 4 The Underwriter Defendants adopt the United Food approach, fully embracing their 5 counsel’s dual role as confidential advisor on matters related to the IPO and as a key actor in the 6 due diligence investigation. “[O]n the one hand, in its capacity as the Underwriters’ outside 7 counsel, WSGR provided legal advice to its clients on specific issues as the need arose during the 8 offering. On the other hand, WSGR was part of the Zymergen IPO ‘working group’ and worked 9 closely with the Underwriters to conduct a factual due diligence investigation of Zymergen and 10 the subject matter of the offering documents. The latter is relevant to the Underwriters’ due 11 diligence defense, but the former is not.” Dkt. 466 at 7 (emphasis in original). This distinction 12 between an attorney’s role as legal advisor and factual investigator is well-established in the 13 context of the due diligence defense. See Escott v. BarChris Const. Corp., 283 F. Supp. 643, 697 14 (S.D.N.Y 1968) (“It is not a matter of relying upon counsel for legal advice. Here the attorneys 15 were dealing with matters of fact. Drexel delegated to them, as its agent, the business of 16 examining the corporate minutes and contracts”). 17 In further support of this distinction, the Underwriter Defendants point to their production 18 of thousands of “non-privileged” communications with WSGR, “including 1,000+ 19 communications solely between the Underwriters and WSGR that reflect pre-IPO diligence.” 20 Dkt. 466 at 9.4 Underwriter Defendants also argue that their privilege assertions are limited to 21 3 Plaintiffs also cite Sheet Metal Workers National Pension Fund v. Bayer Aktiengesellschaft, 22 No. 20-cv-04737 RS (SK), 2024 WL 74928 (N.D. Cal. Jan. 5, 2024) in support of the due diligence defense leading to an implied waiver. Dkt. 466 at 4. However, in marked contrast to the 23 Underwriter Defendants, the Sheet Metal defendants asserted a good faith reliance defense and provided an interrogatory response that identified counsel and documents upon which they had 24 relied. The court found an implied waiver as to the documents arising out of defendants’ admitted reliance thereon. Id. at 2-3. The court did not address the issue at hand, whether assertion of a due 25 diligence defense, by itself, leads to an implied waiver. Another decision in this district, Shenwick v. Twitter, No. 16-cv-0534-JST, 2021 WL 1232451 (N.D. Cal. Mar. 31, 2021), similarly 26 addresses whether the role of counsel can be argued at trial absent production of relevant documents, without any reference to or analysis of the statutory due diligence defense. 27 1 discrete redactions reflecting requests for or provision of legal advice contained within produced 2 documents. Id. at 10. 3 After careful consideration, the Court determines that the statutory language establishing 4 the defense should be applied holistically, rather than isolating the “belief” factor and finding a 5 waiver of the attorney-client privilege solely on that fragment. See generally TRW Inc. v. 6 Andrews, 534 U.S. 19, 31 (2001) (“It is ‘a cardinal principle of statutory construction’ that ‘a 7 statute ought, upon the whole, to be so construed that, if it can be prevented, no clause, sentence, 8 or word shall be superfluous, void, or insignificant.’” (quoting Duncan v. Walker, 533 U.S. 167, 9 174 (2001)). The pertinent question is: Did the Underwriter Defendants conduct a reasonable 10 investigation and following that investigation come to a reasonable belief as to the accuracy of the 11 disclosure statements? From this perspective, if the defense is supported by counsel’s 12 participation in the investigation, then documents reflecting that participation, including 13 communications with Defendants as to what they were learning in the investigation, are 14 discoverable. However, this role does not necessarily give rise to a wider waiver of all attorney- 15 client communications arising out of the investigation. 16 The Court’s conclusion is bolstered by its in-camera review of the documents. As 17 described above, the redactions for privilege are discrete, specific statements reflecting an inquiry 18 or response regarding legal advice. In fact, the approximately 80 privileged documents in dispute 19 actually reflect only 12 unique redactions. Because the redactions occur within produced 20 documents, the Court is readily able to discern the Underwriter Defendants’ lines of demarcation: 21 counsel’s comments regarding the factual investigation are produced in support of the 22 reasonableness of the investigation, and only the occasional detour into a colloquy reflecting legal 23 advice is redacted. 24 III. CONCLUSION 25 For the foregoing reasons, including the record of the Underwriter Defendants’ production 26 in this action, the Court finds no waiver of the attorney-client privilege pursuant to the 27 1 Underwriter Defendants’ assertion of the due diligence defense. 2 The Zymergen Defendants also assert a due diligence defense in which outside counsel had 3 a role and claim the attorney-client privilege over communications with that counsel. 4 || Accordingly, the Zymergen Defendants will be held to the same standard: they must demonstrate 5 a rigorous review of their purportedly privileged documents, production of “non-privileged” 6 || communications with counsel regarding the investigation and discrete redactions limited to legal 7 advice. 8 SO ORDERED. 9 Dated: February 6, 2025 10 ul vet SUSAN VAN KEULEN 12 United States Magistrate Judge
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