Another Circuit Weighs In on Impact of Work Product Privilege of Disclosure to Outside Auditor

In United States v. Deloitte, LLP, the Court of Appeals for the District of Columbia looked at the impact of disclosure of what would otherwise be protected by work product privilege to the outside auditor, and its decision, while officially avoiding holding that Textron was not decided correctly, certainly suggests this panel had severe doubts about the First Circuit’s ruling in that case.

In the case in question the government sought three documents. The first was a memorandum prepared by the auditors which documented discussions the firm had with employees of the taxpayer and the taxpayer’s outside legal counsel regarding the possibility of litigation over a partnership investment. The other two documents were documents the government conceded were generally subject to work product privilege (one prepared by the company’s employees and the other prepared by outside counsel), but which the government argued lost their protection upon disclosure to the outside auditor.

The District Court had ruled against the IRS on all three documents, holding that they were all protected by work product privilege. The Court of Appeals sustained the District Court on the two documents not prepared by the auditor, and held that the District Court need to do an in camera review of the auditor prepared document to determine if any part of it did not contain protected work product.

The Court quickly dismissed the IRS’s arguments on the latter two documents, holding that work product documents did not lose that protection merely because they were disclosed to an outside auditor. The Court noted that in the majority of Circuits, including this one, the test for work product was whether a document was prepared because of the anticipation of litigation, with only the Fifth Circuit holding to a stricter test that looked to whether a document was prepared primarily because of anticipated litigation.

Disclosure to the auditor of the two documents did not remove protection because the auditor was not possible adversary on the legal issue being analyzed and the firm was obligated to maintain confidentiality of information under AICPA standards. The Court did not consider the possibility that such information might influence the disclosures the auditors would require to issue an unqualified opinion to be of such magnitude to constitute indirect disclosure to potential adversaries.

The Court also found that the documents prepared by the auditor could be protected work product to the extend they reflected the thoughts of counsel and other protected ideas that were communicated to the auditor orally. The mere oral transmission of the information did not remove work product protection. The Court’s only concern with the District Court’s action was that it did not review the document before ruling it non-discoverable, holding that it was possible the documents contained other information that was not work product and that those parts would be subject to disclosure—so it remanded the matter back to District Court to conduct that review.

The Court also commented on the recent Textron case. Officially the decision distinguished its holding from that in Textron, as the Textron majority claimed their decision revolved around the detailed factual material in the documents in question and did not exclude the possibility that other documents prepared during audit might be protected. However, the Court in passing did imply that Second Circuit, despite its official holding to the contrary, had used the stricter Fifth Circuit “because of” test as the dissenting opinion in that case complained.

What this means is that it appears, as a practical matter, that we have a significant split of opinion in the two Circuits to consider auditor/work product disclosure issues. Obviously we can expect the issue to continue to arise, and should expect to hear from other Circuits on this matter.

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