The financially ailing Eastman Kodak Company has been ordered by a federal magistrate judge to turn over communications between its attorneys and an auditing firm in connection with an ongoing dispute over digital camera royalties.

Western District Magistrate Judge Marian Payson (See Profile) rejected Kodak’s contention that the communications with its outside counsel were generated in anticipation of litigation and qualified as attorney work product. Rather, she accepted the argument of Kyocera Corp. that the documents were created in the normal course of business and do not qualify for protection under the work product doctrine.

Eastman Kodak v. Kyocera, 10-cv-6334, dates to a 2002 agreement between Kodak, which is now in bankruptcy, and Kyocera, a Japanese electronics company.

Kyocera was granted a license to use and sell Kodak’s digital camera technology in exchange for royalties. Under the agreement, Kodak had a right to bring in an independent auditor to calculate royalties in case of a dispute, and exercised that option in 2005. Kyocera agreed to open its files to Deloitte & Touche. The accounting firm then conducted audits in 2005 and 2008 and issued a final report in 2009. Kodak filed suit in 2010.

During discovery, Kodak turned over more than 500 communications, generally related to its retention of Deloitte and the instructions it provided to the accountants. But it withheld 37 documents and provided redacted versions of 40 others, invoking the work product privilege. Payson’s decision on Sept. 17 stemmed from a motion by Kyocera to compel Kodak to produce communications between the Rochester-based firm’s lawyers and Deloitte.

Payson noted that in United States v. Adlman, 134 F.3d 1194 (1998), the U.S. Court of Appeals for the Second Circuit made clear that the work product doctrine is designed to “preserve a zone of privacy in which a lawyer can prepare and develop legal theories and strategy with an eye toward litigation, free from unnecessary intrusion by his adversaries.” Later decisions explained that documents qualify for protection only when created because of litigation or impending litigation.

Here, Kodak claimed the documents at issue were created in anticipation of a lawsuit, even though the litigation was not initiated until five years after the initial audit and two years after the most recent audit. Those documents included drafts and communications related to Deloitte’s letter to Kyocera announcing the audit, communications regarding the audit plan and communications on whether Kyocera withheld documents from the accountants during the audit.

Kyocera relied on Southern District Judge Harold Baer’s decision late last year in GenOn Mid-Atlantic v. Stone & Webster, 11 CV 1299 (NYLJ, Dec. 13, 2011). Baer held that the “because of” litigation standard imposed a “heavy burden” on the party claiming work product protection.

Payson found that Kodak could not meet that standard and, as Baer held in GenOn, the disputed records would have been “created in essentially the same form irrespective” of potential litigation.

“Any suggestion that Kodak would not have questioned Deloitte about Kyocera’s cooperation in the audit and disclosure of documents had it not anticipated litigation strains credulity,” Payson wrote. “That Kodak later based a legal claim on that information cannot shield from disclosure communications that occurred during the course of the audit about that subject.”

Payson, again referencing GenOn, found no evidence that the materials reflected “input from counsel beyond that which would have been included in the ordinary course” of business.

Charles Kerr of Morrison & Foerster in Manhattan, who represents Kyocera, declined to comment.

Jennifer Unter of Wilmer Cutler Pickering Hale and Dorr in Boston argued for Kodak. She was not available for comment.

Attorneys at Harris Beach, who also represent Kodak, declined comment.

There was no immediate reaction from the Eastman Kodak Company.