September 4, 2009
First Circuit Decision May Narrow Work-Product Protection
~ written by David F. Axelrod
Attorneys who deal with litigation directly or indirectly should be concerned by the First Circuit’s August 13, 2009 en banc decision in United States v. Textron, Case No. 07-2631, notable because it may significantly narrow the category of material protected as attorney work-product.
The case concerns an IRS summons for Textron’s tax accrual work papers, which assessed its exposure in litigation over certain transactions whose tax treatment was debatable. The spreadsheets listed each debatable item, along with the amount subject to dispute and a percentage estimate of the IRS’s chances of success (in some instances, 100%). Lawyers in Textron’s Tax Department and outside counsel were centrally involved in their preparation. Textron had, however, also shown the spreadsheets to outside accountants, waiving the attorney-client and tax practitioner privileges.
When the IRS sought to obtain the work papers, Textron objected on grounds including the work-product doctrine, which protects things prepared by or for parties or their attorneys “in anticipation of litigation.” Fed. R. Civ. P. 26(b)(3) and Hickman v. Taylor, 329 U.S. 495 (1947).
The district court upheld Textron’s claim, finding that the work papers would not have been prepared “but for” Textron’s anticipation of litigation with the IRS, which is the prevailing test nationwide, and is generally referred to as the “because of” test. A divided panel affirmed and the court granted the government’s petition for rehearing en banc.
Divided 3 – 2, the en banc court rejected Textron’s claim. The majority paid lip service to the “because of” test, but conflated it with a rule that materials are unprotected unless prepared "for use in” litigation. The dissenters described this as "a dangerous aberration in the law of a well-established and important evidentiary doctrine," which has "thrown the law of work-product protection into disarray.”
Textron’s potential reach is unknowable. Its effect may be limited to tax accrual work papers, especially since the majority was so obviously concerned about “[t]he practical problems confronting the IRS in discovering under-reporting of corporate taxes,” evidenced by Textron’s 4000 page tax return. Nevertheless, financial statements include reserves for many kinds of loss contingencies, and nearly every major business decision has a dimension that requires legal analysis. Textron may expose such estimates to discovery because its “for use in” test may be impossible to satisfy in this context. At the very least, as the dissenters pointed out, this may make attorneys reluctant to put good faith questions and litigation uncertainties in writing, thus diminishing the quality of representation.