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

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August 18, 2020

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







Waiver of Attorney-Client Privilege and Work-Product Protection Issues Return to Ninth Circuit in Sanmina

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February 10, 2020

We previously reported on the Ninth Circuit’s earlier consideration of attorney-client privilege and waiver issues in the Sanmina case here. That first appeal ended with a whimper of an unpublished opinion when the court of appeals decided that it could better assess the issues after the trial court had reviewed the relevant documents in camera. As explained in more detail in our previous reports, the taxpayer sought to protect the contents of two memoranda prepared by in-house counsel concerning the tax consequences of certain transactions. Those memoranda were furnished to DLA Piper for its use in preparing a stock valuation report. That 102-page report, which was turned over to the IRS in discovery, mentioned in a footnote that the authors had reviewed and relied upon these memoranda, but said nothing about their contents. In its remand order, the Ninth Circuit directed the trial court to determine whether (1) the memoranda were privileged and (2) whether the privilege was waived.

The case is now before the Ninth Circuit for a second time. After in camera review, the district court concluded that the memoranda were privileged, but it also held that both the attorney-client privilege and work-product protection were waived. The court stated that the attorney-client privilege was waived “when Sanmina voluntarily disclosed the memoranda to DLA Piper, not for the purpose of receiving legal advice, but for the purpose of determining the value” of the stock. That disclosure standing alone would not waive work-product protection because only a disclosure to an “adversary” waives that protection. But the district court concluded that work-product protection was also waived because it was contemplated that the DLA Piper report would be disclosed to the IRS, and the report “explicitly stated that DLA Piper based its conclusions on ‘the related documents provided by management’ and then referenced the memoranda by name.” The trial court found this analysis “dispositive,” but then stressed that, because the report explicitly stated that it relied on the memoranda, those memoranda also became discoverable because “it would be fundamentally unfair for Sanmina to disclose the valuation report while withholding its foundation” (citing Federal Rule of Evidence 502(a)). “Otherwise, the IRS or any other reader would be forced to simply accept the opinion without access to the foundational material.”

The taxpayer has appealed again from the ruling on remand. With respect to the attorney-client privilege, the taxpayer argues that it sought “tax advice” from DLA Piper, which it claims is a form of “legal advice” even if furnished by an accountant. It also argues that, even if the DLA Piper report were treated like expert testimony, the discovery rules would require disclosure only of “facts and data” considered by the expert, not the opinions of lawyers. The taxpayer’s appeal stresses that the content of the memoranda was not disclosed to the IRS and hence there was no waiver of work-product protection. And it rejects the court’s citation of Rule 502(a), maintaining that the rule addresses only the scope of a waiver, but cannot provide a basis for finding a waiver in the first place.

The government defends the trial court’s opinion, arguing that the taxpayer waived the privilege on two separate occasions. First, it states that the attorney-client privilege “was waived with respect to both memoranda when Sanmina voluntarily gave the IRS the valuation report that explicitly relied on them.” Second, it states that the taxpayer also waived the privilege as to both memoranda “when it gave them to DLA Piper for use in preparing the valuation report.” That latter disclosure, when combined with the subsequent disclosure of the valuation report to the IRS, “also resulted in the waiver of any work-product privilege” that attached to the memoranda. The government rejects the taxpayer’s focus on the fact that the “contents” of the memoranda were never disclosed to the IRS, contending that the taxpayer’s position misstates the law. (The government, however, abandons its previous position that the memoranda were not privileged in the first place, deferring to the adverse district court ruling on that point.)

This case should provide the court of appeals an opportunity to provide additional clarity regarding its precedents in this area. The government’s brief relies heavily on Weil v. Inv./Indicators, Research & Mgmt., Inc., 647 F.2d 18 (9th Cir. 1981), a case in which the court held that an investment fund’s disclosure that it had received certain advice from its Blue Sky counsel waived its ability to claim attorney-client privilege to withhold other portions of that advice. The taxpayer, for its part, relies heavily on a more recent decision, United States v. Richey, 623 F.3d 559 (9th Cir. 2011), which did not find a complete waiver where an appraiser had referred in his report to the contents of a file that contained privileged material. The taxpayer argues that Richey is the more analogous precedent, and in fact is “simply irreconcilable with the Government’s position here.” The government, by contrast, emphasizes that the Richey court remanded for further proceedings and followed Weil, and the government treats the case as having little bearing on the outcome here.

Oral argument in the case is scheduled for tomorrow, February 11, before a three-judge panel consisting of: Circuit Judge Johnnie Rawlinson (appointed in 2000 by Clinton), Circuit Judge Consuelo Callahan (appointed in 2003 by Bush), and Senior District Judge Susan Bolton (appointed in 2000 by Clinton). It is perhaps revealing that the court has allocated only 10 minutes per side for the argument, while the other three cases on the docket are scheduled for 15 minutes per side. That allocation may indicate that the taxpayer faces long odds in getting the district court decision reversed.

Sanmina II – District Court Decision on Remand

Sanmina II – Taxpayer Opening Brief

Sanmina II – Government Response Brief

Sanmina II – Taxpayer Reply Brief

Ninth Circuit Remands For In Camera Review in Sanmina

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December 22, 2017

The Ninth Circuit has remanded the Sanmina case back to the U.S. District Court for the Northern District of California to conduct an in camera review of two in-house tax attorney memoranda to determine if the contents of those memos were disclosed in a DLA Piper valuation report provided to the IRS to support Sanmina’s $503 million worthless stock deduction. The IRS had previously asked the district court to conduct an in camera review, and the district court had declined to do so.

As noted in our previous coverage, the DLA Piper valuation report cited the in-house memos in a footnote  The district court concluded that there was no waiver, holding that “DLA Piper’s mere mention of the existence of the memoranda did not summarize or disclose the contents of the memoranda.” On appeal, the IRS argued that the valuation report went beyond simply mentioning the in-house memos and, in fact, expressly relied on the memos. According to the IRS, the reliance resulted in a waiver even if the substance of the advice was not disclosed. Alternatively, the IRS argued that at least some of the substance appeared to have been disclosed.

In contrast, Sanmina argued that there is no waiver absent a disclosure of the substance of the advice, which had not occurred. At oral argument, the presiding judge pressed Sanmina’s attorney to identify particular cases supporting that legal position. The panel also struggled with how to resolve the waiver issue without knowing the contents of the in-house memos.

In its brief unpublished memorandum opinion, the court of appeals (Ninth Circuit Judges O’Scannlain and Rawlinson and district court Judge Watters from Montana sitting by designation) stated: “Our resolution of this case would be greatly facilitated by a more informed analysis from the district court. More specifically, we prefer the district court review the documents in camera and reconsider its ruling on the asserted privileges following its review of the pertinent documents.” The court of appeals cited United States v. Richey, 632 F.3d 559 (9th Cir. 2011), an IRS summons enforcement case, which both sides highlighted in briefs and at oral argument, in which a similar remand for in camera review occurred. The remand is framed as a directive that the district court “determine whether the documents requested by the government are privileged to any degree,” but the focus of oral argument was the waiver issue, and the IRS has conceded that one of the two memos is privileged. The in camera review therefore likely will focus on the extent to which the substance of the memos was ultimately disclosed or expressly relied on in the DLA Piper valuation report.

As an unpublished opinion, the decision is not binding circuit precedent.  Even so, one practical takeaway from the decision is that both sides should consider encouraging the trial court to conduct an in camera review where an appeal of the privilege issue is likely and the resolution of the appeal turns on the content of the documents. The parties did not agree to do that here and now, 2-1/2 years after the district court issued its decision in favor of Sanmina, the parties are back to square one.

Sanmina Ninth Circuit opinion

Sanmina – Reply Brief for Appellant


IRS Takes an Aggressive Position on Scope of Privilege and Waiver in Sanmina

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February 12, 2016

Opening briefs have been filed in the Ninth Circuit in United States v. Sanmina, where the IRS is appealing a decision by the U.S. District Court for the Northern District of California holding that the attorney-client privilege and work product doctrine protect two memoranda prepared by Sanmina’s in-house tax attorneys. In its opening brief, the IRS is advancing a narrow view of attorney-client privilege and an expansive view of waiver.

Sanmina claimed a $503 million worthless stock deduction on its return. To support its return position, Sanmina provided the IRS a valuation report prepared by outside counsel DLA Piper. The valuation report included a footnote stating that the authors reviewed the two in-house tax attorney memos. The district court held that both memos were protected by the attorney-client privilege and work product doctrine and that no waiver occurred when Sanmina gave the memos to DLA Piper or when DLA Piper referenced them in the valuation report.

On appeal, the IRS contests the threshold applicability of the attorney-client privilege and work product doctrine as to only one of the memos and argues waiver as to both. The IRS argues that the memo was not privileged because it was “to file” and there is no evidence that (1) the memo was reviewed by anyone else in the company, (2) the company sought legal advice from the in-house attorney; or (3) it contained confidential client communications. According to the IRS: “The attorney-client privilege does not extend to an unsolicited memorandum prepared by Sanmina’s in-house tax counsel for their own records.” The IRS also argues that the work product doctrine does not apply because there was insufficient evidence that the memo was prepared because of anticipated litigation. On the issue of waiver, the IRS claims there was a subject matter waiver when Sanmina disclosed the valuation report to the IRS. The IRS also takes the position that Sanmina waived the privilege earlier when it disclosed the memos to outside counsel. “Because DLA Piper was not acting as a lawyer in preparing the valuation report, Sanmina’s disclosures to DLA Piper were not protected by the attorney-client privilege.” As to work product, the IRS argues Sanmina waived that protection when it produced the memos to outside counsel, knowing they would provide the valuation report to the IRS.

In its answering brief, Sanmina asserts that the IRS waived its arguments about the privileged status of the memo by not raising them at the district court. Below, the IRS argued the memo constituted business not legal advice, but abandoned that argument on appeal. Sanmina also challenges the IRS’s factual characterization of the memo, as well as the IRS’s contention that the tax attorney was not anticipating litigation. On the waiver point, Sanmina argues that the valuation report did not disclose the contents of the privileged memos, nor was disclosure of the memos to outside counsel inconsistent with maintaining their confidentiality as to the IRS.

The IRS’s reply brief is due March 9.

Sanmina – District Court Decision

Sanmina – Appellant Brief in CA9

Sanmina – Appellee Brief in CA9

No Supreme Court Review in Deloitte

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September 27, 2010

The government has decided not to seek certiorari in the Deloitte case, thus leaving the law in some disarray with respect to the assertion of work-product privilege for tax accrual workpapers.  Taxpayers in the First Circuit and the Fifth Circuit will have difficulty asserting the privilege; taxpayers in the D.C. Circuit will be on solid ground.  If the IRS contests an assertion of privilege by a taxpayer located in another circuit, the parties will be left to duke it out and try to persuade the court of the relative merits of the Textron and Deloitte approaches.

As noted in our previous post, a government certiorari petition in Deloitte would have had to walk a fine line to avoid contradicting what the government had told the Court only a few months ago in opposing certiorari in Textron.  A concern about undermining his credibility with the Court could have played a role in the Solicitor General’s decision not to seek certiorari in Deloitte.  More likely, however, the decision was driven by a judgment that, in view of the ongoing initiative to require taxpayers to report their uncertain tax positions on their tax returns, resolving the Deloitte/Textron issue in the discovery context was not sufficiently important to the government to warrant asking the Court to step in.  As discussed in this Miller & Chevalier Tax Alert, the IRS has just released its final schedule for reporting UTPs, along with other related announcements.  The UTP initiative may well generate its own set of privilege disputes that could implicate the principles of Textron and Deloitte in another context.

No Rehearing in Deloitte

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August 20, 2010

Confounding the expectations of this observer (and others), the government has allowed the deadline to pass without seeking rehearing of the Deloitte case in the D.C. Circuit.  That development does not mean, however, that the government has decided to live with the Deloitte decision.  To the contrary, the most likely explanation for the government’s inaction is that it plans to seek Supreme Court review and does not want to delay that process.  A petition for certiorari is currently due on September 27.  If the government files by that time, the Court will act on the petition in enough time for it to schedule oral argument in the spring and decide the case by June 2011 (assuming that the Court decides to grant certiorari).  If the government had sought rehearing, it would have lost control of the schedule.  Depending on how long the D.C. Circuit took to rule on the rehearing petition, it is possible that Supreme Court consideration then could have been pushed off until the 2011-12 Term.

So the government has until September 27 to figure out how to explain to the Court why the issue that it said was so unimportant last May in Textron suddenly requires Supreme Court intervention.  As noted in our previous post, one thing that the government will likely argue is that Deloitte has created a circuit conflict that did not previously exist, because it is the first court of appeals decision to find work product protection for tax accrual workpapers prepared as a routine part of the audit process.  In Textron, the government had argued that cases approving work product protection like United States v. Roxworthy, 457 F.3d 590 (6th Cir. 2006), and United States v. Adlman, 134 F.3d 1194 (2d Cir. 1998), did not actually conflict with Textron and El Paso because the tax documents in question were prepared in anticipation of litigation and not in the ordinary course of business for use by auditors.  (A copy of  the government’s brief in opposition to the certiorari petition in Textron is attached.)

U.S. Brief in Opposition in Textron

D.C. Circuit Declines to Follow Textron

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July 6, 2010

The D.C. Circuit has now decided the Deloitte case that was previously discussed on this blog.  (See D.C. Circuit Considers Work Product Issues in Deloitte for that discussion and links to the briefs in the case.)  The decision addresses two basic issues, and on both scores it gives comfort to taxpayers who do not want to furnish the IRS with their counsel’s candid assessment of litigation prospects on potential tax disputes.

With respect to the mental impressions of taxpayer’s counsel embodied in documents that are acknowledged to be work product, the court held that a taxpayer does not waive the privilege by sharing the analysis with its auditors.   The court explained that a company’s auditor is not its adversary, and that the company has a reasonable expectation that the auditor will preserve the confidentiality of that information.  Deloitte now becomes the leading appellate decision on the waiver issue, reaching the same outcome as the since-vacated decision of the First Circuit panel in Textron.

With respect to the issue that the Supreme Court recently declined to review, the court held that the “Deloitte memo” did contain work product in the form of orally transmitted opinions of Dow’s counsel, even though the memo was prepared by accountants.  The court distinguished the two decisions from other circuits that have taken a much dimmer view of work product protection for tax accrual workpapers or similar documents.  The court distinguished the Fifth Circuit’s old decision in United States v. El Paso Co., 682 F.2d 530 (1982), because that circuit uses a more restrictive standard for the work product inquiry into whether the document was prepared “in anticipation of litigation” — the “primary purpose” test — rather than the “because of” test applied by most circuits.  With respect to the Textron decision, which comes from a circuit that has nominally adopted the “because of” test,  the court noted that Judge Torruella’s dissent from the en banc decision in Textron had questioned whether the majority had truly adhered to the First Circuit’s stated standard.  And the court suggested that there could be some difference in the content of the documents that warranted the different results.  (This Miller and Chevalier Tax Alert contains a fuller discussion of the D.C. Circuit’s opinion as well as some observations on how it might affect the IRS’s initiative in Announcement 2010-9 to require disclosure of uncertain tax positions.)

Despite the court’s efforts to avoid a direct rebuff to the First Circuit, the reasoning of Deloitte is difficult to square with the Textron decision.  And there is now a clear conflict with the Fifth Circuit’s El Paso decision, both with respect to the result in the case of tax accrual workpapers and with respect to the more general issue of the proper standard for assessing whether a document is work product.  Therefore, if presented with a petition for certiorari in Deloitte, the Supreme Court may be more inclined to step into the fray than it was in Textron.

Before considering Supreme Court review, the government is almost certain to seek rehearing en banc from the full D.C. Circuit.  That approach proved successful in Textron after the First Circuit panel had initially ruled in favor of the taxpayer.  In the likely event that the D.C. Circuit does not rehear the case, the government will have to decide whether to seek certiorari after telling the Supreme Court a few months ago in Textron that this issue did not warrant Supreme Court review.  That decision may depend in part on tactical considerations, such as whether the government believes that the Deloitte case presents a favorable factual setting in which to determine the correct test for work product, as well as the relative importance that the Solicitor General attaches to the workpapers issue.

The D.C. Circuit’s opinion is linked below.  A petition for rehearing is due Aug. 13.

Deloitte court of appeals opinion

D.C. Circuit Considers Work Product Issues in Deloitte

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June 22, 2010

The Supreme Court’s recent denial of certiorari left intact the First Circuit’s en banc decision in United States v. Textron, Inc., 577 F.3d 21 (1st Cir. 2009), holding that Textron’s tax accrual workpapers had not been created “in anticipation of litigation” and therefore were not entitled to work product protection.  The Supreme Court’s decision, of course, does not make Textron the law of the land, but rather leaves considerable uncertainty over whether other circuits will follow the First Circuit’s lead or instead place greater weight on a company’s interest in protecting from the IRS the company’s lawyers’ assessments of the strength of its tax positions.

The next insight into these issues could come soon from the D.C. Circuit in United States v. Deloitte & Touche USA LLP, 623 F. Supp. 2d 39 (D.D.C. 2009), appeal pending, No. 09-5171 (argued Feb. 26, 2010).  The dispute in Deloitte arises in a different context from Textron, but it touches on similar issues.  In the course of tax litigation with a partnership owned by Dow Chemical, the government sought discovery from Deloitte of three documents that contained opinions of Dow lawyers concerning the merits of the tax issues.  The government agrees that two of these documents (a tax opinion prepared by Dow’s outside counsel and a legal analysis prepared by Dow’s in-house counsel) are attorney work product, but it argues that Dow waived the work product protection when it disclosed the documents to Deloitte.  The third document is an analysis prepared by Deloitte that contains opinions of Dow attorneys that had been conveyed orally to Deloitte.  The government argues that this document, prepared by accountants, is not work product.

The district court denied the government’s motion to compel in a brief opinion.  It ruled that the Deloitte memo was work product because it recorded the thoughts of Dow’s counsel concerning the prospects in litigation.  And it ruled that Dow did not waive the privilege by sharing its legal analysis with its auditors.  The government’s appeal potentially could lead the D.C. Circuit to address several recurring issues.

The threshold issue of whether the Deloitte memo is work product presents the Textron issue, and the D.C. Circuit thus could directly address whether it agrees with the First Circuit’s view on tax accrual workpapers.  The government repeats its winning argument in Textron that work product protection does not attach to tax accrual workpapers or similar documents that are prepared for the business purpose of preparing accurate financial statements.  Dow, which has intervened as the real party in interest to oppose the government’s document request aimed at Deloitte, argues that work product protection attaches because of the documents’ content — namely, lawyers’ opinions of the prospects of litigation.

Both parties, however, have advanced arguments for distinguishing Textron that could allow the D.C. Circuit to avoid directly addressing the Textron reasoning.  Dow argues that, whatever merit the Textron analysis has in the summons context where the IRS is examining a return and seeking to identify issues, it has no merit in the discovery context where the government has identified the issue and is just looking to enhance its litigation prospects by peeking through a window into the other side’s thought processes.  The government, for its part, argues that the work product claim fails at the outset because, in contrast to Textron, the information is contained in a document prepared by accountants.

These issues concerning the definition of work product apply only to the Deloitte memo.  Because the government does not dispute that the other two documents contain work product, the D.C. Circuit can also be expected to address the important issue of whether work product protection is waived by disclosing the information to a company’s auditor.  This issue was decided in favor of Textron in the original First Circuit panel decision, but that decision was vacated and became irrelevant once the en banc court determined that the tax accrual workpapers were not work product in the first place.

The appeal was argued on February 26 before a relatively conservative panel — Judges Sentelle, Brown, and Griffith.  It will be interesting to see how deeply the D.C. Circuit decides to delve into these issues and how directly it decides to address the Textron decision.

[Disclosure:  Miller & Chevalier filed amicus briefs on behalf of Financial Executives International in support of Textron’s claim of work product protection in both the First Circuit and the Supreme Court.]

United States opening brief in Deloitte

Dow Chemical response brief as Intervenor in Deloitte

United States reply brief in Deloitte

District Court opinion in Deloitte