Attorney Client Privilege - Tenth Circuit Rejects Attorney Work Product Claim

United States v. Textron, Inc. 577 F.3d 21 (August 13, 2009)

A recent case raises an important issue. United States v. Textron, Inc., 577 F.3d, 21 (Aug 13, 2009). In the Textron case, the United States filed a petition to enforce an Internal Revenue Service summons served on Textron, Inc., a public company, in connection with an IRS’s examination to determine tax liability. The United States District Court for the District of Rhode Island denied the petition and the IRS appealed. The question before the 11th Circuit was whether attorney-work product doctrine shields from an IRS summons “tax accrual work papers” prepared by lawyers and others in Textron’s tax department to support its calculation of tax reserves for its
audited corporate financial statements.

As a publicly traded corporation, Textron is required to file financial statements certified by an independent auditor. And, in doing so, it must calculate reserves. The present case began with a 2003 audit. In reviewing Textron’s 2001 returns, IRS determined that a Textron subsidiary had engaged in certain transactions which potentially could be considered abusive tax shelters. Textron had shown the work papers to its accountants, Ernst & Young, but refused to show them to the IRS. The IRS then brought an enforcement action in the Federal District Court of Rhode Island. Textron challenged the summons as lacking a legitimate purpose and it also asserted the attorney-client and taxpayer-practitioner privileges and the qualified privilege available for litigation materials under the work-product doctrine. The IRS contested the privileges claims.

After a hearing, the District Court denied the petition for enforcement on the basis that the papers were protected by the work-product privilege. 507 F.Supp. 2d 138. The District Court stated that the privilege derived from a case Hickman v. Taylor, 329 U.S. 495 (1947) and is now embodied in Rule 26(b)(3) of the Federal Rules of Civil Procedure. The District Court pointed out that there would be no need regarding the adequacy if the reserve amount of Textron had not anticipated a dispute with the IRS that was likely to result in litigation or some other adversarial proceeding.

On appeal to the 11th Circuit, a divided panel upheld the District Court’s decision. A petition for an en banc review was granted. Then the panel decision was vacated and additional briefs were submitted. The En Banc Bank panel pointed out that the U.S. Supreme Court has not ruled on the issue, namely, one in which a document is not in any way prepared for “litigation but relates to a subject that might or might not occasion litigation.” In Hickman v. Taylor, 329 U.S. 510, there was ongoing litigation in which one side filed interrogatories seeking from opposing counsel memorandum recording witness interviews the latter had conducted after receiving notice of possible claims. In Hickman the Court declared that the interrogatories conducted by opposing counsel in preparation for litigation was protected by a qualified privilege.

The En Banc panel concluded that the work-product privilege is aimed at protecting work done for litigation – not in preparing financial statements. Textron’s work papers were prepared to support financial filings and gain auditor approval; the compulsion of the securities laws and auditing requirements assure that they would be carefully prepared in their present form. And, IRS access serves the legitimate and important function of detecting and disallowing abusive tax shelters.
The En Banc Panel vacated the initial decision of the District Court and remanded the case. Thus, the IRS prevailed and will obtain access to the withheld materials.

Two of the five Circuit judges on the en banc panel dissented. The dissent made reference to Rule 26(b)(3) and stated that the text of the Rule does not limit its protection to materials prepared to assist at trial. To the contrary, the text of the Rule clearly sweeps more broadly. It expressly states that work-product privilege applies not only to documents “prepared … for trial” but also to those prepared “in anticipation of litigation.” If the drafters of the Rule intended to limit its protection to documents made to assist in preparation for litigation, this would have been adequately conveyed by the phrase “prepared … for trial.” The fact that documents prepared “in anticipation of litigation” were also included confirms that the drafters considered this to be a different, and broader category. Nothing in the Rule states or suggests that documents prepared “in anticipation of litigation” with the purpose of assisting in the making of a business decision does not fall within its scope.

The dissent made reference to United States v. Adlman, 134 F.3d 1194 (2d Cir. 1998) where Judge Leval stated a “prepared for” requirement is not consistent with the plain language of Federal Rule of Civil Procedure 26, which provides protection for documents “prepared in anticipation of litigation or for trial.” Fed.R.Civ.P.26(b)(3)(A).

In short, the dissent agreed with the District Court and took strong exception to the findings of the majority on the en banc panel.
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The case has created uncertainty. Could its rational be extended beyond work product issues? Perhaps the Supreme Court will accept the Textron case in order to put certainty into the area. It is time for SEC reporting companies and other companies to set up standards for handling work-product materials. It would be prudent to mark documents as “work-product being prepared in anticipation of litigation.” Auditors routinely request comment by corporate counsel on the issues of significant litigation and request a view as to the ultimate conclusion. No responding lawyer wants to disclose information that might enlighten a potential or actual adversary.

Edward X. Clinton, Sr.
Copyright 2009