Armour Intern. Co. v. Worldwide Cosmetics, Inc., 81-2849

• Decision Date: 28 September 1982
• Docket Number: No. 81-2849,81-2849
• Parties: 11 Fed. R. Evid. Serv. 1107 ARMOUR INTERNATIONAL CO. and Armour & Company, Plaintiffs, v. WORLDWIDE COSMETICS, INC., Defendant-Appellee. Appeal of TOUCHE ROSS & CO., Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 134

689 F.2d 134

11 Fed. R. Evid. Serv. 1107

ARMOUR INTERNATIONAL CO. and Armour & Company, Plaintiffs, v. WORLDWIDE COSMETICS, INC., Defendant-Appellee.

Appeal of TOUCHE ROSS & CO., Appellant.

No. 81-2849.

United States Court of Appeals, Seventh Circuit.

Argued May 13, 1982.

Decided Sept. 28, 1982.

John J. Verscaj, Bell, Boyd & Lloyd, Chicago, Ill., for respondent.

John C. Sibrava, Williams, Manos, Rutstein, Goldfarb & Sharp, Chicago, Ill., for defendant-appellee.

Before WOOD, Circuit Judge, and DAVIS ^*, Judge.

DAVIS, Judge.

This portion of a diversity case comes to us on interlocutory appeal from the orders of the district court granting appellee's motion to compel compliance with a subpoena duces tecum and denying the motion of appellant, Touche Ross & Co., to reconsider. The main case pending below pits plaintiffs, Armour International Company and Armour & Company, against defendant, Worldwide Cosmetics, Inc., in a battle over a contract obligating defendant to buy from plaintiff all the outstanding shares of Burley Dial Japan, Ltd. Defendant seeks rescission of the contract alleging plaintiff misrepresented the financial condition of Burley Dial Japan. Presumably to substantiate the charge of misrepresentation, Worldwide subpoenaed the accounting firm of Touche Ross (not a party to the underlying suit) to appear for deposition and to produce certain papers in connection with several audits of Burley Dial Japan done in Japan by Touche Ross. Asserting that the information was obtained and kept in confidence pursuant to an accountant-client relationship, Touche Ross objected to the subpoena on the ground that the materials sought were privileged. Worldwide then moved to compel compliance with the subpoena duces tecum and the district court granted the motion. The same day, Touche Ross timely filed a reply memorandum in opposition to the motion to compel and moved the court to reconsider the order in light of the memorandum. After reconsidering the motion to compel compliance, the district court denied the motion for reconsideration and again granted the motion to compel, on the condition that Worldwide advance the reasonable cost of producing the items sought. Touche Ross appeals. ¹ Its sole ground is that the Illinois accountants' privilege immunizes appellant from having to respond to the subpoena.

The Federal Rules of Evidence provide that on issues governed by state law arising in civil actions privileges of witnesses are determined by state law. Fed. R. Evid. 501. See Commercial Union Insurance Company of America v. Talisman, Inc., 69 F.R.D. 490 (E.D. Mo. 1975). This rule applies as well to discovery proceedings. Fed. R. Ev. Rule 1101(c); Fed. R. Civ. P. 26(b)(1). Because the contract, rescission and misrepresentation issues are covered by state law, and no party asserts federal involvement, the Illinois law of privilege controls the outcome of Touche Ross' claim of an accounting privilege. The argument before us centers on the scope and impact of the Illinois law of accountants' privilege.

Appellant Touche Ross is an international accounting firm with its home office in New York, and branch offices in Chicago, Tokyo, Japan, and elsewhere, including the one in Chicago. Its client, Burley Dial Japan, Ltd., is a Japanese corporation. All of the audits were performed in Japan by employees of Touche Ross not registered as accountants in Illinois (although the firm itself is so registered). The subpoena duces tecum was served on the Chicago office of Touche Ross, but, aside from that, no Illinois accountants are connected with the case. None of the requested materials was in Illinois at the time of the subpoena.

Illinois has recognized by statute an accountant privilege. Ill. Ann. Stat., ch. 111, § 5533 (Smith-Hurd 1978). ² The question is whether that Illinois privilege applies to the facts we have just set forth-does it govern the work of accountants, not registered in Illinois, when that work was not done in Illinois and was unrelated to an Illinois client? ³ We conclude that the statute does not apply.

The setting of § 5533, fn. 2, supra, is important. That statutory privilege was created in the Illinois Public Accountants Act. 1943 Ill. Laws 999, § 27. That is the statute that mandates registration, provides for examinations, and authorizes rules of conduct for public accountants practicing in Illinois. The law thus protects citizens and businesses from unqualified accountants and questionable accounting practices. It would seem that, along with this protection of the public, and to aid Illinois accountants in their service to the public, Illinois grants confidential information given to accountants an immunity from the inquiries of the judicial process. But accountants not subject to and in compliance with Illinois protective regulation can be considered not similarly deserving of that special privileged status. The same assumptions about the qualifications and methods of those accountants cannot be made and, consequently, the conclusion that those accountants have the same need for privileged information is unfounded. The balance between the search for truth and the attempt to improve the audit accuracy of Illinois accountants swings to the former and, therefore, to the side of full disclosure. The Illinois courts need not be impeded in their attempts to gather information...