Are Discussions with Lawyer Colleagues Waivers of the Work Product Privilege? (4/30/20)

Today, I discuss a facet of the work-product doctrine, often called the work product privilege.  I address waiver for opinion work product in the setting for discussions among lawyers (or others for whom the privilege might apply) who have not been retained in the engagement to develop and refine legal issues and theories.

The specific context that this came up was for a legal email discussion group maintain by an attorney organization to discuss particular tax contexts and issues.  The discussion group contains a large number of lawyers (I think it is limited to lawyers), and so far as I am aware, the list of lawyers (as it may change from time to time) is not made available to the members of the group.  So participants invariably do not know some or even many in the group.  There is a prohibition on Government attorneys being members.  Of course, members may from time to time become Government attorneys and have the prior discussions available to them, but that’s a rabbit trail I won’t go down right now.  Suffice it to say that there is the expectation that the discussions in the group are not available to the IRS or DOJ.

The clients' identities are not disclosed in the discussions. I have no way of knowing, but assume that the attorneys anonymize any facts that are disclosed in order to set up and move the discussion forward.  For purposes of this discussion, let’s assume that the facts are so anonymized.

The issue I present is whether the discussions that, from each participating attorney’s perspective disclose anonymized facts and seek only legal discussion, thereby constitute a waiver of the work product privilege.  Yesterday, there was a discussion on an attorney mail group regarding whether the discussions in emails to the group constituted a waiver of the work-product privilege.

The issue is whether the IRS or DOJ could in a tax investigation (including grand jury investigation) or tax litigation discover the group email discussions on the basis of waiver of the work product privilege and thereby prejudice the client (taxpayer).  For example, the first interrogatory and/or request for production in tax litigation from the Government would be to identify all discussions by the attorney relating to the client’s facts and produce all documents relating to those discussions.  Similarly, the Government could use its investigative compulsory process to demand access to the discussions and documents related to the discussions.

I had never thought about the issue before (that I can recall).  In a more general sense, I had never thought that discussing anonymized facts with fellow practitioners was a waiver of the work product privilege as to the anonymized facts and the legal and practice discussions that the anonymized facts generate.  The settings presenting the issues can be myriad, including a lunch with a fellow practitioner, a small discussion group of practitioners (many larger cities have such groups), or larger groups (such as at CLE events or, in the present case, an email discussion group.  (I should note that perhaps, if the “waiver” were viable in this context, it might also apply to Government attorney discussions with fellow Government attorneys who are not involved in the particular litigation.)

Having now thought about the issue and done some poking around on the issue, I am just going to offer some non-definitive thoughts on the issue.

I first offer the generic discussion from the current working draft of my Federal Tax Procedure Book (for publication in August 2020) (footnotes omitted, but those wanting footnotes can get the pdf with footnotes here):

f. Work Product Doctrine.

Microsoft Summons Enforcement on Transfer Pricing "Planning" - Mixed on Privilege Claims (1/22/20)

After publishing this blog entry, a new article was published about Microsoft's transfer pricing planning and the audit.  I discuss that article in my comments below (Comment #4.)

In United States v. Microsoft, 2020 U.S. Dist. LEXIS 8781 (W.D. Wash. 1/17/20), here, the district court resolved a contentious summons enforcement proceeding started in December 2014.  (See the CourtListener docket entries, here.)  Summons enforcement proceedings are supposed to be “summary in nature.”  United States v. Clarke, 573 U.S. 248, 254 (2014) (citing United States v. Stuart, 489 U.S. 353, 369 (1989)).

So, why was this summons enforcement proceeding not so summary, taking just over 5 years to resolve?  A hint at the answer is the amount of the tax savings involved (perhaps $5 billion over 10 years, achieved at a cost of $10 million (I don't think that planning included tax professional fees)), the promoter tax shelter context (involving one of the prominent bullshit promoter tax shelter players, KPMG, in the early 2000s), and the sheer number of attorneys appearing in the case (many of whom are amici).  (For the attorneys, see the CourtListener list which may be reviewed by clicking on the “Parties and Attorneys on the CourtListener docket list above; the Government lists 4 attorneys, Microsoft lists 14 (included terminated attorneys), and the amici attorneys are more than I want to count; the relative imbalance between the attorneys for Government and attorneys for the parties opposing the Government reminds me of the old saying about Texas rangers–one mob, one Ranger; in this case one mob, 4 Government attorneys.)

Well, there is not much in the case.  It is, after all, a summons enforcement proceeding where, once the minimal Powell standards are met, the summons is enforced.  United States v. Powell, 379 U.S. 48 (1964).  The Court thus early on ordered the summons enforced.  United States v. Microsoft Corp., 154 F. Supp. 3d 1134 (2015).  But that left the privilege assertions to be thrashed over, hence the delay.

So, what’s the context for this battle?  Not surprisingly, high-dollar transfer pricing cost sharing arrangements that has drawn similar high dollar litigation with loads of attorneys.  E.g., Altera Corp. v. Commissioner, 926 F.3d 1061 17143 (9th Cir. 2019), reh. en banc den. 941 F.3d 1200 (9th Cir. 2019) (with an analogous melange of attorneys, including amici).  As the Microsoft Court said in the most recent opinion (the one linked in the opening paragraph):

Ultimately Microsoft did enter into cost sharing arrangements through technology licensing agreements. Because those cost sharing arrangements were required by law to be arm's length transactions, the design and implementation details are a central focus of the government's examination. The government expresses skepticism that a third party would be likely to enter into the agreements, thereby satisfying the arm's length standard, because the agreements contained several unique provisions. Dkt. #146 at ¶¶ 18-20. While many of the terms changed before and afterward the agreements were to have been formed, they remained favorable for Microsoft's income tax liability. Id. at ¶¶ 9-11. The government believes that the transactions were "designed and implemented for the purpose of avoiding tax." Id. at ¶ 20. n1
   n1 The government expresses further skepticism on the basis that the agreements effectively netted the Puerto Rican entity $30 billion for the "routine" reproduction of CDs containing software and did not otherwise have a significant impact on Microsoft's operations. Dkt. #146 at ¶¶ 15-20. 

Microsoft maintains that nothing was abnormal about its actions. [*7]  Microsoft argues that transfer pricing disputes with the government were prevalent and, "[r]ecognizing the inevitability of an [Internal Revenue Service ("IRS")] challenge, Microsoft was determined to be adequately prepared to defend these cost sharing arrangements." Dkt. #140 at 6; see also Dkt. #143 at ¶ 23. To this end, and because of the complexity of facts relevant to corporate international tax, Microsoft employed KPMG "to help the lawyers provide legal advice" and to give its own tax advice. Dkt. #140 at 1; Dkt. #143 at ¶¶ 7, 10. Mr. Boyle, then Microsoft's Corporate Vice President and Tax Counsel, maintains that the materials at issue were prepared for his use and that they were "prepared in anticipation of an administrative dispute or litigation with the IRS over the Puerto Rican cost sharing arrangement, the pricing of the software sales to Microsoft, and other issues expected to be in dispute relating to those transactions." Dkt. #143 at ¶ 23.

Significant 2d Circuit Opinion on Lack of Waiver of Attorney-Client and Work Product Privileges in Common Interest Situation (11/14/16)

Note, this presentation was substantially revised on 11/15/16.

In Schaeffler v. United States, ___ F.3d ___, 2015 U.S. App. LEXIS 19617 (2d Cir. 2015), here, the Second Circuit rendered a major decision on the issue of waiver of the attorney client privilege, through § 7525, here, in a common legal interest context.  The Court's opening paragraph is:

Georg F.W. Schaeffler ("Mr. Schaeffler" or "Schaeffler") and associated entities ("Schaeffler Group") (collectively "appellants") appeal from Magistrate Judge Gorenstein's order denying a petition to quash an IRS summons. n1 We conclude that: (i) the attorney-client privilege was not waived by appellants' provision of documents to a consortium of banks ("Consortium") sharing a common legal interest in the tax treatment of a refinancing and corporate restructuring resulting from an ill-fated acquisition originally financed by the Consortium; and (ii) the work-product doctrine protects documents analyzing the tax treatment of the refinancing and restructuring prepared in anticipation of litigation with the IRS. We therefore vacate and remand.

So, how did the 2d Circuit justify that holding?  The opinion is relatively short, so that is the best source for its reasoning.  At the risk of oversimplification, I offer my short analysis of the points I think appropriate.

Schaeffler, a U.S. resident (perhaps not citizen), was 80% owner of a German corporation which attempted to acquire a minority interest in another German corporation by a tender offer.  German law requires such tender offers to at least offer to acquire all shares.  The offer, unfortunately, was made just before the 2008 financial crisis, hence "far more shareholders than expected or desired accepted [4]  the offer, leaving the Schaeffler Group the owner of nearly 89.9% of outstanding Continental AG shares."  The net result was that the Schaeffler Group had to re-group, so to speak, or refinance with its committed lenders.  That created a potential bust in the financing as a result of the decline in the market and German law.  That required coordination among all parties, including Schaeffler and the coordination in order to respond to the crisis.

From that re-grouping and refinancing and sharing among the parties of information, documents and legal analysis, this dispute arose.  Did that sharing among parties with a common legal interest waive the privileges -- attorney-client and work product?

The issue presented a subtlety in the application of the attorney-client privilege in a common-interest situation.  What exactly does it mean that sharing of otherwise attorney-client or work product privileged information among persons with a common interest preserves the privileges from waiver?  The opinion does not provide any black letter law on that issue, but does address the issue in the specific context before it.

The Second Circuit described the common interest rule as follows (omitting all citations and most quotation marks for easier readability):

While the privilege is generally waived by voluntary disclosure of the communication to another party, the privilege is not waived by disclosure of communications to a party that is engaged in a “common legal enterprise” with the holder of the privilege. Such disclosures remain privileged where a joint defense effort or strategy has been decided upon and undertaken by the parties and their respective counsel in the course of an ongoing common enterprise and multiple clients share a common interest about a legal matter. The need to protect the free flow of information from client to attorney logically exists whenever multiple clients share a common interest about a legal matter. 

Parties may share a “common legal interest” even if they are not parties in ongoing litigation. The common-interest-rule serves to protect the confidentiality of communications passing from one party to the attorney for another party where a  joint defense effort or strategy has been decided upon and undertaken by the parties and their respective counsel. It is therefore unnecessary that there be actual litigation in progress for the common interest rule of the attorney-client privilege to apply. However, only those communications made in the course of an ongoing common enterprise and intended to further the enterprise are protected. The dispositive issue is, therefore, whether the Consortium's common interest with appellants was of a sufficient legal character to prevent a waiver by the sharing of those communications.

The Saltzman Tax Procedure treatise, here, has a good discussion of the common interest rule.  Saltzman and Book, Tax Practice and Procedure, ¶ 13.04[3][a][viii][A] Express waiver [of the attorney-client privilege].

IRS Won Some / Lost Some on Privilege Assertions in Summons Enforcement (8/20/12)

In United States v. Eaton, 2012 U.S. Dist. LEXIS 115003 (ND OH 2012), here, the IRS was not pleased with the taxpayer's assertion of privilege in a contentious audit.  In an earlier blog today on the sister blog site, Federal Tax Crimes blog, in discussing the John Doe Summons, I discussed the administrative summons and the minimal showing the IRS must make to obtain a court enforcement order.  See The IRS Administrative Summons as Pretext to Avoid the Need for a John Doe Summons (8/20/12), here.  I won't repeat that discussion here, for it overlaps with what I do discuss.

I should just stick to the opinion, but I do link to an earlier article that suggests that the ongoing to and fro between Eaton and the IRS has been quite adversarial (adversarial on steroids).  See Patrick Temple-West, Eaton, IRS tangle over cross-border pricing pacts (Reuters 6/17/12), here.  The IRS had, for the first time in four years, canceled APAs, Advanced Pricing Agreements between the IRS and the taxpayer as to transfer pricing mothologies, and then, after extensive investigation, issued a notice of deficiency.  The article discusses the filing of a Tax Court petition in response to the notice of deficiency.  But, apparently toward the end of the audit rancor, the IRS issued those summonses which it sought to enforce.  Hence the case I discuss in this blog.

In the summons dispute, the Court's statement of the Background for the case consists almost entirely of Eaton's complaints, in effect, that the the IRS had abused its information gathering tools in a vendetta against Eaton:

The examination of Eaton's 2005 and 2006 tax returns has lasted more than four years, and Eaton asserts that the examination has been extensive in scope. In particular, Eaton asserts that its employees and outside advisors have spent more than 30,000 hours addressing various information requests issued  to Eaton by the IRS in connection with the examination. Eaton asserts that it has responded to more than 240 Information Document Requests (the IRS's standard means of communicating written requests for information) by providing written, narrative answers to the IRS's information document requests and producing more than 10,000 pages of documents and "massive amounts of electronic information." In addition, in connection with its investigation, the IRS has conducted a total of 12 site visits to Eaton facilities in the United States, Puerto Rico, and the Dominican Republic, two full days of transcribed interviews each with Eaton's Senior Vice President-Taxes and its Vice President-Federal Tax Strategy, interviews of "multiple third parties engaged in business with Eaton's relevant operations, and eight days of transcribed interviews with a former employee of Eaton's Tax Department, John Semanchik (and in addition is currently seeking an unspecified number of additional interview days with Mr. Semanchik in a separate enforcement proceeding recently filed in the Western District of Pennsylvania). n1
   n1 Eaton also asserts that, "in practical terms," the 2005 and 2006 examination ended on December 19, 2011 (just four business days after the summons response date in Case Nos. 24, 26, and 27), when the IRS issued Eaton a Notice of Deficiency asserting tax deficiencies related to Eaton's 2005 and 2006 tax years. Eaton contends the IRS was aware when it served its summonses that Eaton intended to challenge in court any adjustments made by the IRS to its transfer pricing. In fact, on February 29, 2012, Eaton filed a petition with the United States Tax Court challenging the IRS's Notice of Deficiency, Eaton Corp.  v. Commissioner, Case No. 5576-12 (T.C. filed February 29, 2012).