In United States v. Deloitte LLP, No. 09-5171, 2010 WL 2572965 (D.C. Cir. Jun. 29, 2010), the United States Court of Appeals for the District of Columbia Circuit held, among other things, that the provision of documents containing attorney work product to a company’s independent auditor does not waive the protection of the work product doctrine. This decision, on a matter of first impression, allows companies to deliver work product to outside accountants that might be relevant to their audit of the company’s financial statements without fear that the materials will automatically be discoverable in subsequent litigation.
In Deloitte, the government appealed a district court ruling denying its motion to compel production of documents subpoenaed from a third-party independent auditor that were withheld on the ground that they were protected by the attorney work product doctrine. This discovery dispute arose out of a civil tax matter before the United States District Court for the Middle District of Louisiana. In that underlying action, plaintiffs challenged the Internal Revenue Service’s tax treatment of two partnerships owned by Dow Chemical Company (“Dow”) and two of its wholly owned subsidiaries. During discovery, the government subpoenaed documents from Dow’s independent auditor, Deloitte & Touche USA, LLP (“Deloitte”), in Washington, DC. Deloitte withheld three documents from its production on the ground that they constituted attorney work-product and were thus protected from disclosure.
The attorney work product doctrine was established by the Supreme Court in Hickman v. Taylor, 329 U.S. 495 (1947), which held that an attorney’s notes regarding interviews with witnesses to a litigation-prompting incident were protected from discovery. The doctrine was subsequently codified, in large part, in Rule 26(b)(3)(A) of the Federal Rules of Civil Procedure, which only permits a court to order disclosure of work product when the requesting party can demonstrate a “substantial need” and an inability to procure equivalent information “without undue hardship.” Even in the limited circumstances when a court orders such a disclosure, it still must “protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of a party’s attorney or other representative concerning the litigation.”
The government filed a motion to compel production of the documents withheld by Deloitte. The documents at issue were described by Deloitte as (1) a 1993 draft memorandum prepared by Deloitte summarizing a meeting between Dow employees, Dow’s outside counsel and Deloitte employees regarding possible litigation (the “Deloitte Memorandum”); (2) a 1998 memorandum and flow chart prepared by a Dow accountant and in-house attorney; and (3) a 2005 tax opinion prepared by Dow’s outside counsel.
The district court denied the government’s motion to compel. The court held that the Deloitte Memorandum was protected work product because it was prepared in anticipation of litigation. Moreover, although Deloitte prepared the memorandum, the district court still found that it constituted work product because “its contents record the thoughts of Dow’s counsel regarding the prospect of litigation.” The documents prepared by Dow and its outside counsel (the “Dow Documents”) also constituted work product, and Dow did not waive the protection by producing them to Deloitte because the disclosure was “not inconsistent with maintaining secrecy.” Notably, the district court reached its decision without conducting an in camera review of the documents.
On appeal, the government argued that the Deloitte Memorandum was not work product and, even if it was, the protection was waived because the information in the document was disclosed by Dow to a third party. Likewise, the government contended that the work product protection for the Dow Documents was waived because they were provided to Deloitte.
The Court of Appeals rejected the government’s contention that the Deloitte Memorandum could not be work product merely because it was prepared by Deloitte. In considering whether a document is protected work-product, the “question is not who created the document or how they are related to the party asserting work-product protection, but whether the document contains work product.” Moreover, just because a document was prepared during an audit does not mean it cannot be work product. A document that serves multiple purposes can contain protected work-product material “so long as the protected material was prepared because of the prospect litigation.” Although the Court disagreed with the government’s interpretation of the law and found that the Deloitte Memorandum could be protected, it held that the record demonstrated that “the district court did not have a sufficient evidentiary foundation for its holding” and remanded the issue back to the district court to determine whether “the document was entirely work product, or whether a partial or redacted version of the document could have been disclosed.”
The government also argued that the two Dow Documents, which it conceded were properly classified as attorney work product, were not protected because they had been disclosed to Deloitte. Although this issue had previously been addressed by several district courts, it was an issue of first impression before any Court of Appeals. The Court noted that while a voluntary disclosure waives the attorney-client privilege because such an act is inconsistent with the attorney-client relationship, it is possible that a disclosure of attorney work product is not a waiver because it does not necessarily undercut the adversary process. The Court also noted, however, that a waiver of the work product protection would occur in the event that “such disclosure, under the circumstances, is inconsistent with the maintenance of secrecy from the disclosing party’s adversary.”
To support its waiver argument, the government argued that Deloitte was a potential adversary of Dow and a conduit to other adversaries. The Court rejected the argument. First, as an independent auditor, the Court reasoned, Deloitte cannot be an adversary of Dow. The mere threat of litigation would compromise an auditor’s independence. Nor could Deloitte be considered a potential “adversary in the sort of litigation the Dow Documents address” because those documents involved an anticipated dispute with the IRS, not with Deloitte.
Second, Deloitte also could not be classified as a conduit to Dow’s adversaries. There was no evidence suggesting that it was unreasonable for Dow to expect Deloitte to maintain confidentiality. Indeed, as an independent auditor, Deloitte has an express obligation under Rule 301 of the American Institute of Certified Public Accountants Code of Professional Conduct to maintain and not disclose confidential client information. Accordingly, the Court of Appeals affirmed the district court’s decision denying the motion to compel the two Dow Documents.
The Deloitte decision importantly provides companies with further assurances that providing documents containing the mental impressions of attorneys developed in anticipation of litigation to independent auditors does not automatically waive the protections afforded by the work product doctrine. A holding that Dow had waived the work product doctrine would have had a profound chilling effect on communications between companies and their outside auditors. As noted by the Court, such a ruling “might discourage companies from seeking legal advice and candidly disclosing that information to independent auditors.” It remains to be seen if other Circuits follow the D.C. Circuit on this important issue.