Tax Controversy Update for Week of 12/1/97

Waiver of Attorney Client Privilege and Work Product Privilege

     In United States v. Massuchusetts Institute of Technology, ___ F.3d ___ (2d Cir. 11/25/97), unofficially at 97 TNT 231-13, the Second Circuit held in an IRS summons enforcement proceeding that MIT had waived its attorney-client and work product privileges as to documents disclosed to the Defense Contract Audit Agency ("DCAA"), an audit agency that helps entities in the Department of Defense review contract performance to be sure that the government is not overcharged for services. Recognizing the strictures of standard waiver analysis which focuses upon voluntary disclosure outside a narrowly prescribed group, MIT's primary defense was essentially one of policy -- that disclosing documents to another Government agency such as the DCAA should not constitute a waiver of the privilege. The Court rejected MIT's attempt to expand the scope of protection, following the trend in the circuits (6 to 1). Disclosure was disclosure and the disclosure to DCAA constituted a waiver. In addition, the Court rejected MIT's attempt to recast the disclosure to DCAA as a "common defense" disclosure. Where parties with common interests have a "common defense" in potential litigation, Courts will frequently hold that disclosures among counsel for the parties will not waive the privilege. (See discussion of United Technologies.) Here, DCAA was auditing MIT and was thus a potential opponent rather than a party with common interests as to the subject matter. Finally, the Court rejected MIT's assertion that the waiver of the attorney-client privilege was not voluntary, reasoning that MIT had voluntarily entered the activity (defense contracting) requiring the audit and had chosen to disclose in furtherance of that activity. That was a voluntary choice that led to the disclosure.

     The Court treated the attorney-client privilege separate from the work product privilege, holding that the former is more easily waived than the latter. Disclosure of attorney-client privilege documents outside the protected group is an absolute waiver. Disclosoure of work product privileged documents is only a waiver if the disclosure was in a way inconsistent with keeping the information or documents from the adversary. The difference may be because the attorney-client privilege is absolute, whereas the work-product privilege can be avoided upon showing of need, an escape valve that justifies being somewhat looser with the work-product privilege. Here, MIT's disclosure to DCAA was to a potential adversary, thus making it a disclosure inconsistent with the work-product privilege.

     In reaching these holdings, the Court was careful to limit its holding to just the documents that had been disclosed. The Court said: "Nothing in this opinion is intended to be directed to the different and difficult question when disclosure of one document warrants forfeiture of protection for a different but related document."

     T&J Comment: As the Court noted, MIT can avoid some or perhaps all of this problem as to the future by limiting the scope and nature of its disclosures to government agencies. Like the recent IBM case in the Court of Federal Claims, this is a reminder that critical thinking with respect to privileged matters must precede disclosure. And, in making disclosures, we must think about all of the potential ramifications, even those not apparent at the time of disclosure. We dare say that, at the time of the disclosures in question, MIT probably did not have a major concern that the IRS would later attempt an aggressive audit of the issue of whether it continued to qualify for tax-exempt status.

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