Week of 9/29/97
Privileges Again - Common Interest and Inadvertent Disclosures
In U.S. v. United Technologies Corp., ___ F.Supp. ___ (D. Conn. 8/3/97), unofficially 97 TNT 187-21 (9/26/97), the Court rejected an IRS attempt by summons to obtain records related to the tax structuring of a multinational business joint venture. The Court noted that "The goal of these consultations and negotiations was to develop a corporate structure that would minimize the U.S. tax liability of all consortium members." The documents in question had been shared among certain key employees of the consortium members. The question was whether the sharing of the documents waived the privileged status that might otherwise apply. The two potentially applicable privileges were the attorney client privilege and the work product privilege.
It is black-letter law that the attorney client privilege is waived by disclosure beyond the attorney and the client. As in the earlier Chevron case, the Court had to differentiate between documents reflecting business considerations (not privileged) and documents reflecting legal advice (privileged). Once that drill is performed, the legal advice even though shared among consortium members could be protected by the "common interest" rule that says that such advice shared among different persons or entities have a clear common interest can avoid waiver of the privilege. As to the latter issue, the Court held:
Although, in the area of taxation, it is often difficult to determine where business ends and the law begins, the court finds that nearly all the documents pertain to the development of a common legal strategy regarding the tax structure of IAE. In formulating this strategy, the members acted not as adversaries negotiating at arms length but as collaborators, legally committed to a cooperative venture and seeking to make that venture maximally profitable. The process revealed in the documents was not without hostility, but it appears to have been closer to the "joint analysis and cooperative study" of Xerox's patent committee than to the price negotiation of the Rank-Xerox transaction. Moreover, unlike the lawyers in Bank Brussels Lambert, the attorneys for each of the IAE collaborators advised the other members and coordinated their legal efforts. Finally, UTC has provided affidavits attesting to the fact that the documents were disclosed only to persons "who share[d] responsibility for the subject matter underlying the consultation."
Turning to the work-product privilege, the Court rejected its application because such planning did not have sufficient immediate nexus to litigation that it was done in contemplation of litigation. In so holding, relied upon U.S. v. El Paso Co., 682 F.2d 530 (5th Cir. 1982) (tax pool analysis for financial reporting was performed for purposes other than litigation) and U.S. v. Adlman, U.S. v. Adlman, 68 F.3d 1495, 1501 (2d Cir. 1995) (accountant's memorandum on structuring not protected).
Finally, the Court addressed the issue of whether the taxpayer had waived privilege as to a privileged document that the taxpayer had inadvertently disclosed to the IRS in a mass of materials responding to a document request. The Court held, in this case, that the taxpayer had instituted measures to avoid the disclosure and should not be faulted because, despite those measures, one document was inadvertently disclosed. This holding should be contrasted with the Court of Federal Claims' recent decision in IBM holding that a similar inadvertent disclosure had waived the privilege. That holding seems to have been based upon the taxpayer's failure to prove that, in making the inadvertent disclosures, its counsel had adopted and implemented measures reasonably designed to identify and withhold privileged materials from mass document disclosures. Accordingly, United Technologies assures us that Courts will respond reasonably upon a proper showing of taxpayer adoption of reasonable measures.