Ninth Circuit Addresses Rules Governing Waiver of Work-Product Protection in Sanmina

In the Sanmina case, the Ninth Circuit dealt the government a defeat on appeal in its efforts to obtain the legal analysis contained in memoranda prepared by a taxpayer’s in-house counsel.  As we have described in our prior coverage of the case, the dispute involves in-house analysis of the tax consequences of a transaction.  DLA Piper later relied upon those memoranda in preparing a valuation report that was disclosed to the IRS.  The district court ruled that the memoranda were privileged to begin with, but the taxpayer’s actions waived both the attorney-client privilege and the work-product protection.

The Ninth Circuit affirmed in part and reversed in part.  It affirmed that Sanmina waived attorney-client privilege when it furnished the memoranda to DLA Piper for preparation of the valuation report.  But the Ninth Circuit held that there was no waiver of the work-product protection that required disclosure of Sanmina’s opinion work product.  As a result, Sanmina will not have to produce the legal analysis of its in-house counsel in response to the government’s summons.  (The court’s opinion does require production of the factual content contained in the memoranda.  Importantly, it also observes that its decision applies only now at the summons enforcement stage, but the waiver analysis might be different if the dispute were before a court.)

The court first made clear that the Ninth Circuit aligned with the law in other circuits that “work-product protection is not as easily waived as the attorney-client privilege” because of “the distinct purposes of the two privileges.”  It pointed specifically to United States v. Deloitte LLP, 610 F.3d 129, 140 (D.C. Cir. 2010), which explained that voluntary disclosure waives attorney-client privilege “because it is inconsistent with the confidential attorney-client relationship” but it does not necessarily waive work-product protection “because it does not necessarily undercut the adversary process.”  Rather, the Ninth Circuit held that work-product protection is waived only when voluntary “disclosure is made to an adversary in litigation or ‘has substantially increased the opportunities for potential adversaries to obtain the information'” (quoting the Wright and Miller treatise).  Quoting from Deloitte, the court emphasized that “fundamental fairness” is the touchstone for examining whether a waiver of work-product protection should be implied from a disclosure, observing that “self-interested selective disclosure” can be unfair to adversaries to whom the information is not disclosed.  The Ninth Circuit added, however, that “a court must be careful to impose a waiver no broader than needed to ensure the fairness of the proceedings before it.”

The court then applied these principles to Sanmina’s case.  It determined that there was clearly no waiver when Sanmina provided the attorney memos to DLA Piper because Sanmina had a reasonable expectation that DLA Piper would keep those memos confidential in the process of producing its valuation analysis.  But Sanmina’s disclosure of the valuation report to the IRS presented a more difficult question.  In the court’s view, Sanmina’s reasonable expectation that the attorney memos would remain confidential “became far less reasonable once Sanmina decided to disclose to the IRS a valuation report that explicitly cited the memoranda as a basis for its conclusions.”  That disclosure “increased the possibility that the IRS, its adversary in this matter, might obtain its protected work product” and thus Sanmina “engaged in conduct inconsistent with the purposes of the privilege.”

That conclusion by the court, however, did not end its analysis because the scope of any waiver must be “limited to what is necessary to rectify any unfair advantage gained by Sanmina from its conduct.”  And, the court observed, it was unclear “how the IRS has been unfairly disadvantaged” by Sanmina’s conduct while the case remains in the investigation stage.  In particular, the court expressly disagreed with the district court’s statement that, absent disclosure, the IRS would be required to accept the DLA Piper opinion without access to the foundational material.  “At this audit stage, the IRS is not required to accept the conclusions in the DLA Piper Report at all.”  Rather, it “could still proceed with its examination of Sanmina’s returns, conclude that Sanmina has failed to adequately support its claimed deduction with the DLA Piper Report and other documents provided, and disallow the deduction.”  The court concluded that Sanmina had implicitly waived its protection over the factual work product contained in the memos but that the scope of the implied waiver should not encompass the opinion work product found in the memos, which should not be “critical to [the IRS’s] assessment of the deduction’s legal validity.”  Therefore, that latter work product need not be disclosed to the IRS “at this stage of prelitigation.”

A petition for rehearing would be due on September 21.  A petition for certiorari would be due on November 5.  It does not seem likely, however, that either party will seek further review.

Sanmina – Ninth Circuit opinion