In a significant decision, the United States District Court for the Middle District of Pennsylvania refused to apply the self-critical analysis privilege to documents that an employer created as part of a voluntary internal assessment intended to determine, among other things, whether its practices complied with the Fair Labor Standards Act, 29 U.S.C. § 201, et seq. (the "FLSA"). In Craig v. Rite Aid Corp., 2010 U.S. Dist. LEXIS 137773 (M.D. Pa. Dec. 29, 2010), the court concluded that unless the documents were subject to another privilege, they were discoverable by plaintiffs in a class action wage and hour lawsuit.

The Self-Critical Analysis Privilege

Some courts have recognized a self-critical analysis privilege that prevents the disclosure of critical, evaluative, and deliberative material contained in an organization's internal documents and communications. The purpose of the privilege is to encourage candor and frankness in internal assessments in order to help organizations discover the reasons for past problems and prevent future problems, particularly with respect to their legal obligations. The rationale underlying the privilege is that facilitating an organization's efforts to ensure that it is complying with the law serves the public interest.

The Facts

In 2008 and early 2009, defendant Rite Aid Corporation ("Rite Aid"), a national pharmacy retailer, voluntarily conducted an internal audit of its operations as part of a restructuring of its stores. During the audit, Rite Aid assessed its compliance with the FLSA and other labor laws, and its collective bargaining agreements. The company's Vice President of Field Human Resources, working under the direction of in-house counsel, led the "human resources aspect" of the "store structure project team." The project "included participation by numerous high-level corporate employees from Rite Aid's operations, compensation, and human resources departments."

The audit "included information-gathering, assessments, drafts, and recommended changes to store operations, and all of this information and material was shared with Rite Aid's counsel for the purpose of obtaining legal advice, and in anticipation of future FLSA litigation." According to Rite Aid, the store structure team conducted a "candid internal evaluation of Rite Aid's current and future compliance with the FLSA" and considered "whether changes to store structures were appropriate and would also be in compliance."

Plaintiff Shirley Craig ("Craig") was an assistant store manager at an Eckerd retail drug store. In 2009, she sued Rite Aid (which had acquired Eckerd) in a class action lawsuit on behalf of herself and other assistant store managers, claiming that the company had violated the FLSA by failing to pay them overtime.

Under the FLSA, an employer is generally required to pay non-exempt employees overtime pay at the rate of one and a half times their regular rate of pay for any time worked in excess of forty hours in a workweek. The FLSA's overtime requirements do not apply to certain managerial employees. Plaintiffs claimed that they were due overtime pay because Rite Aid had improperly misclassified them as managerial employees exempt from the FLSA's overtime requirements.

The District Court

During discovery, Rite Aid filed a motion for a protective order seeking to prevent Plaintiffs from obtaining documents relating to its internal audit on the ground that they were protected from disclosure by the self-critical analysis privilege. In opposing the motion, Plaintiffs argued that courts within the Third Circuit do not recognize the privilege. Plaintiffs further argued that, even if the privilege exists, it does not apply to Rite Aid's voluntary internal assessment because it only applies to documents that the government requires an organization to prepare.

The court began its analysis by observing that "[t]here does not appear to be any real dispute that the materials that were created and compiled as part of Rite Aid's self-assessment may be relevant to Plaintiffs' claims in this case, or that it may be reasonably calculated to lead to the discovery of admissible evidence." The court then noted that some courts have applied the self-critical analysis privilege to protect certain information from disclosure, such as "in cases where a compelling public interest is found to outweigh the needs of private litigants and the judicial system for access to information relevant to the litigation." The court further noted, however, that the "privilege was not recognized at common law."

Citing a footnote from a 2009 decision of the U.S. Court of Appeals for the Third Circuit, the district court also asserted that the privilege "appears not to have been recognized by the Third Circuit." In the footnote, the Third Circuit had stated that the privilege "has never been recognized by this Court and we see no reason to recognize it now."

The district court acknowledged that the Eighth and District of Columbia Circuits have applied the privilege, but explained that the Fourth, Fifth, Seventh and Ninth Circuits have "declined to recognize or apply" it. Moreover, the district court observed, "Congress has not created a self-critical analysis privilege." The district court indicated that, although the Federal Rules of Evidence authorize federal courts to define new privileges, doing so here was contrary to the intention of the Federal Rules of Civil Procedure to promote "full disclosure of facts" in discovery. The court stated that the decision to adopt the self-critical analysis privilege was better left to the legislature, which, according to the court, is better equipped to balance competing interests to determine whether the recognition of a privilege is in the best interests of society. The district court observed that other courts within the Third Circuit "have recently, with few exceptions, declined to recognize or apply a self-critical analysis privilege." Moreover, when courts in the circuit have applied the privilege, the district court explained, they have done so only under very narrow circumstances. In particular, the court asserted, courts have applied the privilege to documents prepared for a mandatory governmental report where the need to exclude the materials clearly outweighed the need for disclosure.

The district court acknowledged that defendants had "pointed to some case law from within this circuit where courts have either recognized the existence of the privilege, or applied it to the case under consideration." Nonetheless, the court expressed doubt as to the "privilege's validity in the Third Circuit" and declined to follow those cases.

The district court thus concluded that defendants could not rely upon a "broad assertion of the self-critical analysis privilege" to withhold documents relating to an "internal assessment of their compliance with the FLSA, labor laws, and existing bargaining agreements, generated as part of Defendants' store restructuring program." The court declined to apply the privilege and denied the motion for a protective order. In an important footnote, the district court indicated that its ruling, "of course, does not strip the Defendants of the ability to legitimately protect materials that are embraced by other, universally recognized legal privileges."  

Bottom Line

Conducting internal audits is an extremely useful way for employers to identify and correct compliance problems, such as wage and hour issues, before they become the subject of government action or private lawsuits that could result in huge litigation costs and potentially devastating civil liability. As the Craig case makes clear, however, employers cannot count on the self-critical analysis privilege to protect documents relating to these internal audits from disclosure. Instead, employers should work with counsel to develop protocols for ensuring that audit-related materials are protected by the attorney-client privilege and work product doctrine. Among the most important steps are having counsel lead the audit and maintaining strict control and secrecy over all communications and materials relating to it. Click here for a link to the Craig decision.