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Legal OnRamp Blog - United States v. Deloitte LLP: The D.C. Circuit Loosens the Textron Straitjacket

August 2010
Practice: Professional Liability
People: Richard M. Zielinski

One may forgive the IRS for acting boldly.  In United States v. Deloitte LLP (D.C. Cir. No. 09-5171), the IRS took another pull at the straitjacket placed on the work product doctrine by the First Circuit in United States v. Textron, Inc.  The IRS asked the D.C. Circuit to endorse its right to a memorandum prepared by Deloitte on behalf of Dow Chemical Company that contained the thoughts and opinions of Dow’s outside counsel about the possibility of litigation over a tax matter.  Having already secured a company’s “tax accrual work papers” in the First Circuit, the IRS hardly thought the work product doctrine should stand in its way here.

But on June 29, 2010, the D.C. Circuit rejected the IRS’s request for the Deloitte memorandum and, in doing so, perhaps revitalized the work product doctrine with something more refreshing than the D.C. summer air.  The D.C. Court rejected two arguments made by the IRS for why the Deloitte memorandum should be discoverable: (1) it was prepared by Deloitte and not by Dow’s counsel and (2) it was prepared as part of Dow’s routine audit process and not in anticipation of litigation.  As for the first argument, the D.C. Court affirmed that it’s not who prepares the document, but what the document contains, that entitles the document to work product protection.  If the Deloitte memorandum contained the intangible legal thoughts and impressions of Dow’s outside counsel, then it contained protected work product despite the actual author of the document.  The focus on what over who supports a robust work product doctrine because it recognizes that Fed. R. Civ. P. 26(b)(3) only partially codifies the doctrine – the intangible work product of lawyers can be beamed across the universe and retain its protection when it lands in a document prepared by someone else. 

As for the second argument, the D.C. Court stated that the content of the document and not its function is the primary determinant of work product protection.  If the Deloitte memorandum contained counsel’s mental impressions, opinions, or conclusions concerning litigation, it did not forfeit its work product protection merely because one of its functions was to assist a financial audit.  Here the D.C. Circuit refused the more functional based and restrictive analysis of the First Circuit in Textron.  The D.C. Court applied the majority “because of litigation” test and held that a document passes this test as long as it is prepared in response to the “prospect of litigation.”  This articulation of the test differed slightly but significantly from the First Circuit’s “prepared for use in possible litigation” articulation.  Whereas the First Circuit’s articulation would again place primary emphasis on the function of a document, the D.C. Circuit recognized the possibility -- and business reality -- that business decisions can be driven by the prospect of litigation even when litigation is not actual or threatened.  Thus, while Textron strongly suggested that “dual purpose” corporate documents might not have work product protection in the First Circuit, the D.C. Court declared that “a document can contain protected work-product material even though it serves multiple purposes, so long as the protected material was prepared because of the prospect of litigation.”

Importantly, the D.C. Circuit also rejected the IRS’s argument that outside auditors such as Deloitte are “adverse parties” such that the disclosure of documents containing work product to them would waive the protection. 

The Deloitte decision should comfort company lawyers for several reasons.  One, it may be a sign that the work product doctrine pendulum may have already begun to swing the other way.  Two, while the D.C. Circuit did not come out and say that it was distinguishing Textron, it did cite Textron’s dissenting opinion with approval and contains enough persuasive reasoning to stand Deloitte up as the broad rule and confine Textron to the exact type of document at issue there.   Three, the Tax Court, the forum for many tax disputes, applies the decisions of the D.C. Circuit on evidentiary issues. 

This blog entry was originally posted on Legal OnRamp.  Goulston & Storrs attorneys provide blogs, discussion forums, collaboration, and pertinent news and related key cases regarding attorney-client privilege and work product protection information for Legal OnRamp.

This information should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.

Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.

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