## Facts

- Allegheny Energy acquired Merrill Lynch’s energy-commodities trading business, Global Energy Markets, leading to contract and fraud litigation.
- Allegheny sought leave to file Second Amended Counterclaims after the scheduling-order deadline, adding (among other items) punitive damages allegations and a jury demand.
- Separately, Allegheny moved to compel production of two internal investigative reports prepared for Merrill Lynch after notice of a U.S. Attorney investigation into employee Daniel Gordon’s theft of about $43 million connected to a trade.
- Merrill Lynch produced the reports to its independent auditor, Deloitte & Touche, for audit-related purposes, but withheld them from Allegheny as protected work product.
- Allegheny argued that disclosure to Deloitte waived any work-product protection.

## Issues

1. Whether, after the scheduling-order deadline, Allegheny showed “good cause” under Rule 16(b) (and satisfied Rule 15(a)) to amend its counterclaims, including adding punitive damages allegations and a jury demand.
2. Whether the two investigative reports were protected work product and, if so, whether disclosure to an independent auditor waived that protection.

## Decision

- The court granted Allegheny leave to amend in substantial part, applying Rule 16(b)’s “good cause” standard due to the missed deadline.
- The court denied or limited the proposed additions seeking punitive damages and addressed the requested jury demand based on timing and governing standards.
- The court denied Allegheny’s motion to compel, holding the investigative reports were protected work product.
- The court held that providing the reports to Deloitte did not waive work-product protection.

## Legal Principles

- When amendment is sought after a scheduling-order deadline, Rule 16(b)’s “good cause” requirement applies, with emphasis on the movant’s diligence; Rule 15(a)’s liberal amendment policy remains relevant once good cause is shown.
- Work-product protection covers materials prepared in anticipation of litigation or government investigation.
- Work-product protection is not automatically waived by disclosure to a non-adversarial third party; waiver turns on whether disclosure is inconsistent with the doctrine’s adversarial purpose, including whether it materially increases the likelihood an adversary will obtain the materials.
- Disclosure of work product to an independent auditor for audit purposes, without evidence of adversary alignment or increased adversary access, does not waive work-product protection.

## Conclusion

The court permitted late counterclaim amendments only in part under Rules 16(b) and 15(a), and it protected internal investigation reports from discovery by holding that sharing them with an independent auditor did not waive work-product protection.


Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc., 229 F.R.D. 441 (S.D.N.Y. 2004)