by Dale C. Campbell, David Muradyan* and Sara Davidson*

Is the work product of an attorney always protected? No, according to the First Circuit in a decision which may draw the attention of the U. S. Supreme Court. The First Circuit, sitting en banc (the “Court”) ruled that the attorney work product doctrine did not protect tax accrual work papers prepared by in-house attorneys to support defendant Textron Inc.’s (“Textron”) calculation of tax reserves. United States v. Textron Inc., 577 F.3d 21 (1st Cir. 2009). Practitioners, especially in-house counsel, need to be aware of this decision and determine whether it influences how they practice.


The work product doctrine, initially pronounced by the Supreme Court in Hickman v. Taylor, 329 U.S. 495 (1947), and later codified in Rule 26(b)(3) of the Federal Rules of Civil Procedure, provides, in pertinent part:

“[A] party may obtain discovery of documents and tangible things otherwise discoverable under [Rule 26(b)(1) of the Federal Rules of Civil Procedure] and prepared in anticipation of litigation or for trial by or for another party or by or for that other party’s representative . . . only upon a showing that the party seeking discovery has substantial need of the materials in the preparation of the party’s case and that the party is unable without undue hardship to obtain the substantial equivalent of the materials by other means.”

Fed. R. Civ. P. 26(b)(3)(emphasis added). Among other things, the purpose of this doctrine is “to preserve a zone of privacy in which a lawyer can prepare and develop legal theories and strategy ‘with an eye toward litigation’ free from unnecessary intrusion by his adversaries.” United States v. Adlman, 134 F.3d 1194, 1196 (2d Cir. 1998) (citing Hickman v. Taylor, 329 U.S. 295, 510-11 (1947)). Unlike the attorney-client privilege, which protects all confidential communication between a client and his or her attorney in connection with legal advice sought by the client, the attorney work product doctrine’s protections are far narrower. The latter’s protections apply only to documents prepared by attorneys for their clients in anticipation of litigation or for trial. Textron, 577 F.3d at 30-31. 

In determining whether a document was prepared “in anticipation of litigation,” courts have utilized two different tests: (1) the Fifth Circuit’s “primary purpose” test, under which documents are deemed to be prepared in anticipation of litigation when the “primary motivating purpose behind the creation of the document was to aid in possible future litigation.”  United States v. El Paso Co., 682 F.2d 530, 542 (5th Cir. 1982); and (2) the “because of” test, where the “relevant inquiry is whether the document was prepared or obtained ‘because of’ the prospect of litigation.”  United States v. Textron Inc. and Subsidiaries, 507 F.Supp.2d 138, 149 (D.R.I. 2009) (citing Adlman, 134 F.3d at 1205). The First Circuit has adopted the “because of” test. Maine v. Dept. of the Interior, 298 F.3d 60, 68 (1st Cir. 2002).  

Other circuits, including the Ninth, have also adopted the “because of“ standard, which, rather than considering “whether litigation was a primary or secondary motive behind the creation of a document,” considers “the totality of the circumstances and affords protection when it can fairly be said that the ‘document was created because of anticipated litigation, and would not have been created in substantially similar form but for the prospect of that litigation.’”  In re Grand Jury Subpoena, 357 F.3d 900, 907-08 (9th Cir. 2004) (citations omitted); see, also, Logan v. Commercial Union Ins. Co., 96 F.3d 971, 976-77 (7th Cir. 1996) (adopting “because of” test); PepsiCo, Inc. v. Baird, Kurtz & Dobson LLP, 305 F.3d 813, 817 (8th Cir. 2002) (adopting the “because of” test). Given that the “because of” standard does not consider whether the primary motive behind the document creation was litigation, it is arguably a more protective standard than the “primary purpose” one, especially with respect to dual purpose documents.

Publicly traded companies like Textron must prepare audited financial statements to comply with federal securities laws.  Textron, 577 F.3d at 22 (citing 15 U.S.C. §§ 78l, 78m (2006)). In doing so, the company “must calculate reserves to be entered on the company books to account for contingent tax liabilities.” The possibility and amount of the company’s potential future tax liabilities is often the subject of both legal and financial analysis.  Textron, 577 F.3d at 22-23. After the Enron debacle, the IRS began obtaining companies’ tax accrual work papers if the IRS suspected the company had engaged in transactions that the IRS considered to be tax avoidance transactions.  Id., citing 26 C.F.R. § 1.6011-4(b)(2)(2009)). In Textron, the IRS determined that Textron had engaged in a number of sale-in, lease-out (“SILO”) transactions – transactions deemed by the IRS to be tax avoidance transactions.  Textron, 577 F.3d at 23-24.

The IRS sought accounting work papers, but also sought copies of memoranda prepared by Textron’s in-house expressing their judgments regarding Textron’s chances, in percentage terms, of prevailing in any possible litigation and calculating a tax reserve amount in the event Textron did not prevail in such litigation.  Textron and Subsidiaries, 507 F.Supp.2d at 142-43. The IRS also sought work papers “consisting of the previous year’s spreadsheet and earlier drafts of the spreadsheet together with notes and memoranda written by Textron’s in-house tax attorneys, reflecting their opinions as to which items should be included in the spreadsheet and the hazard of litigation percentage that should apply to each item.” Id. at 143. Textron refused to produce the documents, claiming, among other things, that the documents were privileged attorney work product.  Textron, 577 F.3d at 25. The IRS brought an enforcement action in federal court to obtain the work papers.  Id. The district court denied the IRS’ petition, concluding that the papers were protected by the work product doctrine.  Id. On appeal, a divided 1st Circuit court upheld the district court’s decision.  Id.

The IRS sought, and was granted, a rehearing en banc. The Court found that, based on the evidence presented in the trial court, that the purpose of the work papers was to make financial entries, to file quarterly and annual financial statements with the SEC, and to obtain a clean audit.  Id. at 27. Textron’s director of tax reporting also testified that Textron, as a publicly traded company, was required to file its financial statements with the SEC, including any tax reserves.  Id. at 28. The Court rejected the claim of privilege finding that “only work done in anticipation of or for trial . . . is protected.”  Id. at 30. The Court even ordered the attorney memorandum evaluating the chances of prevailing in any future litigation.

The Court observed that, in adopting FRCP 26, the advisory committee noted that “materials assembled in the ordinary course of business, or pursuant to public requirements unrelated to litigation, or for other nonlitigation purposes,” even if prepared by attorneys or representing legal thinking, are not protected by the work product doctrine.  Id., quoting Fed. R. Civ. P. 26 advisory committee’s note (1970). The Court stated that Textron’s tax audit work papers were prepared in the ordinary course of business, and “would have been created in essentially similar form irrespective of the litigation.”  Textron, 577 F.3d at 30, citing Maine, 298 F.3d at 70. The Court further determined that the “only purpose of Textron’s papers was to prepare financial statements” and that there was no evidence in this case that the work papers were prepared for potential use in litigation.  Id. The Court concluded that the work product doctrine is not “designed to help the lawyer prepare corporate documents or other materials prepared in the ordinary course of business,” especially when there is “a legal obligation to prepare such papers.”  Id. at 31. In Textron’s case, the tax audit papers had to be prepared to comply with the securities laws and accounting principles for certified financial statements. Id. In short, the court concluded that the work product doctrine protects “work done for litigation, not in preparing financial statements.”  Id. at 31.

In its most liberal construction, it is possible that the ruling could make all documents created by attorneys in the normal course of business discoverable. Alternatively, the ruling can be narrowly read as limited to the tax context. The Court noted that its decision, at least in part, rested on public policy grounds – “[u]nderpaying taxes threatens the essential public interest in revenue collection.”  Id. Further, the opinion notes that “[o]ther circuits have not passed on tax audit work papers and some might take a different view.”  Id. at 30 (emphasis added).  The opinion also discusses that the “work product protection for tax audit work papers has been squarely addressed only in two circuits,” the First and the Fifth.  Id. (emphasis added).  Thus, while other circuits have ruled on the applicability of the attorney work product doctrine as it applies to dual documents in general, only the First and Fifth circuits have ruled on the doctrine’s applicability to tax audit work papers, which arguably makes the Court’s opinion more narrow. Given the First and the Fifth Circuit split, the decision could possibly be reviewed by the Supreme Court. In the interim, this ruling makes tax accrual work papers prepared by in-house attorneys potentially discoverable in litigation.  

To safeguard both attorney-client privilege and work product, in-house and outside counsel should use caution in preparing memoranda or letters to be placed within accounting records to support management positions and judgments, and should not communicate with outside auditors with respect to interpretations and judgments or conclusions. These judgments are to be made by management of a company (with or without consulting counsel).  Counsel’s written memoranda and letters to the client should always be framed in anticipation of a challenge in positions where questions on treatment or judgment may be challenged, and circulation of such guidance should be limited. Still, regardless of how the courts apply the attorney work product doctrine, it is important to note that the decision does not alter other confidential communications between clients and attorneys under the more traditional attorney client privilege.


*David Muradyan and Sara Davidson have recently joined the Weintraub firm and are awaiting their Bar results.