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

 

 

 

 

 

 

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

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