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Corporation Argues Work Product Privilege Applies to Tax Accrual Workpapers

SEP. 30, 2008

Regions Financial Corp. et al. v. United States

DATED SEP. 30, 2008
DOCUMENT ATTRIBUTES
  • Case Name
    REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES, Petitioner/Cross-Respondent-Appellees ERNST & YOUNG LLP, Cross-Respondent-Appellee v. UNITED STATES OF AMERICA Respondent/Cross-Petitioner-Appellant
  • Court
    United States Court of Appeals for the Eleventh Circuit
  • Docket
    No. 08-13866
  • Authors
    Gideon, Kenneth W.
    Turkus, Albert B.
    Phillips, Daniel P.
  • Institutional Authors
    Skadden Arps Slate Meagher & Flom LLP
  • Cross-Reference
    For the district court opinion in Regions Financial Corp. et al. v.

    United States, No. 2:06-cv-00895 (N.D. Ala. May 8, 2008), see

    Doc 2008-10349 or 2008 TNT 92-64 2008 TNT 92-64: Court Opinions.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2008-22638
  • Tax Analysts Electronic Citation
    2008 TNT 210-12

Regions Financial Corp. et al. v. United States

 

IN THE UNITED STATES COURT OF APPEALS FOR

 

THE ELEVENTH CIRCUIT

 

 

ON APPEAL FROM THE ORDER OF

 

THE UNITED STATES DISTRICT COURT

 

FOR THE NORTHERN DISTRICT OF ALABAMA

 

 

BRIEF FOR THE APPELLEES

 

 

Kenneth W. Gideon

 

Albert B. Turkus

 

Daniel P. Phillips

 

Skadden, Arps, Slate, Meagher & Flom LLP

 

1440 New York Avenue, N.W.

 

Washington, DC. 20005

 

(202) 371-7540

 

 

CERTIFICATE OF INTERESTED PERSONS AND

 

CORPORATE DISCLOSURE STATEMENT

 

 

Pursuant to Local Rules 26.1-1 and 28-1(b), Appellees make the following disclosure:

 

1. Regions Financial Corporation is publicly traded on the New York Stock Exchange and is not a subsidiary or affiliate of a publicly owned corporation. Regions Financial Corporation has no parent corporation and no publicly held company holds ten percent (10%) or more of its stock.

2. There is no publicly owned corporation, not party to the appeal, that has a financial interest in the outcome.

CERTIFICATE OF INTERESTED PERSONS AND

 

CORPORATE DISCLOSURE STATEMENT

 

 

Pursuant to Local Rules 26.1-1 and 28-1(b), it is hereby certified that the following persons and entities have an interest in the outcome of this case or have participated as attorneys or as judges in the adjudication of this case:

Cooper, N. Lee, Attorney, Maynard, Cooper & Gale, P.C.

Ernst & Young LLP

Frank, Michael B., Attorney, Ernst & Young LLP

Gardner, Robert T., Attorney, Baker Donelson, PC

Gideon, Kenneth W., Attorney, Skadden, Arps, Slate, Meagher & Flom LLP

Hagley, Judith A., Attorney, Appellate Section, Tax Division, Department of Justice

Hochman, Nathan J., Assistant Attorney General, Tax Division, Department of Justice

Kearns, Michael J., Chief, Civil Trial Section, Southern, Tax Division, Department of Justice

Martin, Alice H., United States Attorney for the Northern District of Alabama

Messler, Mark S., Attorney, Ernst & Young LLP

Metzler, Robert W., Reviewer, Appellate Section, Tax Division, Department of Justice

Monroe, Bonnie Branum, Attorney, Maynard, Cooper & Gale, P.C.

Murphy, Lynne M., Attorney, Civil Trial Section, Southern, Tax Division, Department of Justice

Phillips, Daniel P., Attorney, Skadden, Arps, Slate, Meagher & Flom LLP

Proctor, R. David, Judge, United States District Court for the Northern District of Alabama

Regions Asset Management Company, Inc.

Regions Financial Corporation (RF)

Regions Financial Leasing, Inc.

Rothenberg, Gilbert S., Chief, Appellate Section, and Acting Deputy Assistant Attorney General, Tax Division, Department of Justice

Simpson, Henry E., Attorney, Adams & Reese LLP

Turkus, Albert H., Attorney, Skadden, Arps, Slate, Meagher & Flom LLP

 

STATEMENT REGARDING ORAL ARGUMENT

 

 

Pursuant to Local Rule 28-1(c), counsel for Regions Financial Corporation and Subsidiaries ("Regions"), Appellees herein, respectfully inform the Court that they believe oral argument should be heard in this case because it presents an important issue as to whether review by financial auditors of opinion work product constitutes a waiver of the privilege.

                       TABLE OF CONTENTS

 

 

 Certificate of Interested Persons and Corporate Disclosure Statement

 

 

 Statement Regarding Oral Argument

 

 

 Table of Contents

 

 

 Table of Citations

 

 

 Statement of Jurisdiction

 

 

 Statement of the Issues

 

 

 Statement of the Case

 

 

      A. Proceedings Below

 

 

      B. Facts

 

 

           1. Background

 

 

           2. The Summons

 

 

           3. Disputed Documents

 

 

                (i) Core Documents the Government Concedes to be Work

 

                Product

 

 

                (ii) Derivative Documents

 

 

                (iii) The Government Drew No Distinction Between Core

 

                Documents and Derivative Documents in the District

 

                Court

 

 

           4. Facts Related to Waiver Issue

 

 

      C. Standard of Review

 

 

 Summary of Argument

 

 

 Argument

 

 

 I. The Work Product Doctrine and Rule 26(b)(3) Apply to IRS Summonses

 

 and Provide "Almost Absolute Immunity" for the Opinion Work Product

 

 At Issue in This Case

 

 

      A. The Supreme Court in Upjohn and Euge Held That

 

      The Work Product Doctrine Applies to IRS Summonses

 

 

      B. The District Court Found The Disputed Documents To Be Opinion

 

      Work Product

 

 

      C. Neither Arthur Young Nor Newton Overruled

 

      Upjohn or Euge

 

 

      D. Adlman and Roxworthy Hold That Documents Not

 

      Meaningfully Distinguishable from the Disputed Documents Are

 

      Work Product

 

 

      E. The Derivative Documents Are Rule 26 Work Product

 

 

      F. The Derivative Documents Share The Anticipation of Litigation

 

      Purpose of the Core Documents

 

 

      G. The Government Did Not Attempt to Distinguish Between Core

 

      Documents and Derivative Documents Below and May Not Do So For

 

      The First Time in This Court

 

 

 II. Review of the Disputed Documents by E&Y Financial Auditors Did

 

 Not Waive Work Product Protection

 

 

      A. The Overwhelming Weight of District Court Authority Holds

 

      That Disclosure to Financial Auditors Does Not Waive Work

 

      Product Protection

 

 

      B. E&Y Was Neither Regions' Adversary Nor a Conduit to Such an

 

      Adversary

 

 

 Conclusion

 

 

 Certificate of Compliance

 

 

 Certificate of Service

 

 

                          TABLE OF CITATIONS

 

 

 Cases

 

 

 * Am. S.S. Owners Int. Prot. & Indem. Ass'n v. Alcoa S.S. Co.,

 

 No. 04 Civ 4309 LAKJCF, 2006 WL 270131 (S.D.N.Y. Feb. 2, 2006)

 

 

 * Betz v. Jim Walter Homes, Inc., 226 F.R.D. 533 (D.S.C. 2005)

 

 

 Bonner v. City of Prichard, 66 F.2d 1206 (11th Cir. 1981)

 

 

 Castle v. Sangamo Weston, Inc., 744 F.2d 1464 (11th Cir. 1984)

 

 

 Cavallaro v. United States, 284 F.3d 236 (1st Cir. 2002)

 

 

 Coastal States Gas Corp. v. Dep't of Energy, 617 F.2d 854

 

 (D.C. Cir. 1980)

 

 

 Commercial Union Ins. Co. v. Westrope, 730 F.2d 729 (11th Cir. 1984)

 

 

 Couch v. United States, 409 U.S. 322 (1973)

 

 

 Cox v. Adm'r United States Steel & Carnegie, 17 F.3d 1386

 

 (11th Cir. 1994)

 

 

 Delaney Migdall & Young, Chartered v. IRS, 826 F.2d 124 (D.C.

 

 Cir. 1987)

 

 

 Diversified Indus., Inc. v. Meredith, 572 F.2d 596 (8th Cir. 1977)

 

 

 Ford v. United States, 989 F.2d 450 (11th Cir. 1993)

 

 

 * Gramm v. Horsehead Indus., Inc., No. 87 CIV. 5122 (MJL),

 

 1990 WL 142404 (S.D.N.Y. Jan. 25, 1990)

 

 

 * Gutter v. E.I. Dupont de Nemours & Co., 95-CV-2152, 1998

 

 W.S. 2017926 (S.D. Fla. May 18, 1998)

 

 

 Hickman v. Taylor, 329 U.S. 495 (1947)

 

 

 Hodges, Grant & Kaufman v. United States, 768 F.2d 719 (5th

 

 Cir. 1985)

 

 

 Hoover v. United States Dep't of the Interior, 611 F.2d 1132

 

 (5th Cir. 1980)

 

 

 In re Diasonics Sec. Litig., No. C-83-4584-RFP (FW), 1986 WL

 

 53 402 (N.D. Cal. June 15, 1986)

 

 

 In re Ford Motor Co., 110 F.3d 954 (3d Cir. 1997)

 

 

 In re Grand Jury Subpoena (Torf), 357 F.3d 900 (9th Cir. 2004)

 

 

 * In re Honeywell Int'l, Inc. Sec. Litig., 230 F.R.D. 293

 

 (S.D.N.Y. 2003)

 

 

 In re Int'l Horizons, Inc., 689 F.2d 996 (11th Cir. 1982)

 

 

 * In re JDS Uniphase Corp. Sec. Litig., No. C-02-1486 CE (EDL),

 

 2006 WL 2850049 (N.D. Cal. 2006)

 

 

 In re Newton, 718 F.2d 1015 (11th Cir. 1983)

 

 

 * In re Pfizer, Inc. Sec. Litig., No. 90 Civ. 1260 (ss), 1993

 

 WL 561125 (S.D.N.Y. Dec. 23, 1993)

 

 

 In re Raytheon, 281 F.R.D. 354 (D. Mass. 2003)

 

 

 In re RDM Sports Group, Inc., 277 B.R. 415 (N.D. Ga. 2002)

 

 

 In re Sealed Case, 146 F.3d 881 (D.C. Cir. 1998)

 

 

 * Int'l Design Concepts v. Saks, Inc., No. 05 CIV. 4754 (PKC),

 

 2006 WL 1564684 (S.D.N.Y June 6, 2006)

 

 

 Laughner v. United States, 373 F.2d 326 (5th Cir. 1967)

 

 

 * Lawrence E. Jaffe Pension Plan v. Household Int'l, Inc., 237

 

 F.R.D. 176 (N.D. Ill. 2006)

 

 

 Logan v. Commercial Union Ins. Co., 96 F.3d 971 (7th Cir. 1996)

 

 

 Maine v. United States Dep't of Interior, 298 F.3d 60 (1st

 

 Cir. 2002)

 

 

 Martin v. Bally's Park Place Hotel & Casino, 983 F.2d 1252 (3d

 

 Cir. 1993)

 

 

 Medinol, Ltd. v. Boston Scientific Corp., 214 F.R.D. 113

 

 (S.D.N.Y. 2002)

 

 

 * Merrill Lynch & Co. v. Allegheny Energy, Inc., 229 F.R.D.

 

 441 (S.D.N.Y. 2004)

 

 

 Narey v. Dean, 32 F.3d 1521 (11th Cir. 1994)

 

 

 Nat'l Med. Transp. Network v. Deloitte & Touche, 72 Cal. Rptr.

 

 2d 720 (Cal. App. 1998)

 

 

 Nat'l Union Fire Ins. Co. v. Murray Sheet Metal Co., 967 F.2d

 

 980 (4th Cir. 1992)

 

 

 Natta v. Zletz, 418 F.2d 633 (7th Cir. 1969)

 

 

 Oleck v. Fischer, 623 F.2d 791 (2d Cir. 1980)

 

 

 Pegasus Fund, Inc. v. Lareneta, 617 F.2d 1335 (9th Cir. 1980)

 

 

 Ricoh Co. v. Aeroflex Inc., 219 F.R.D. 66 (S.D.N.Y. 2003)

 

 

 SEC v. Price Waterhouse, 797 F.Supp. 1217 (S.D.N.Y. 1992)

 

 

 SEC v. R.J. Reynolds Tobacco Holdings, Inc., No. MISC.A.03-1651

 

 (JDB), 2004 WL 3168281 (D.D.C. June 29, 2004)

 

 

 * SEC v. Roberts, No. C-07-04580 MHP, 2008 WL 3925451 (N.D.

 

 Cal. 2008)

 

 

 United Kingdom v. United States, 238 F.3d 1312 (11th Cir. 2001)

 

 

 United States v. AT&T Co., 642 F.2d 1285 (D.C. Cir. 1980)

 

 

 * United States v. Adlman, 134 F.3d 1194 (2d Cir. 1998)

 

 

 United States v. Arthur Young & Co., 465 U.S. 805 (1984)

 

 

 United States v. El Paso Co., 682 F.2d 530 (5th Cir. 1982)

 

 

 * United States v. Euge, 444 US 707 (1980)

 

 

 United States v. Gulf Oil Corp., 760 F.2d 292 (Temp. Emer. Ct.

 

 App. 1985)

 

 

 United States v. Mass. Inst., of Tech., 129 F.3d 681 (1st Cir. 1997)

 

 

 United States v. Noall, 587 F.2d 123 (2d Cir. 1978)

 

 

 * United States v. Roxworthy, 457 F.3d 590 (6th Cir. 2006)

 

 

 United States v. Stewart, 287 F.Supp.2d 461 (S.D.N.Y. 2003)

 

 

 * United States v. Textron, Inc., 501 F.Supp.2d 138 (D.R.I. 2007),

 

 appeal pending, No. 07-2631 (1st Cir. argued Sept. 5, 2008)

 

 

 * Upjohn Co. v. United States, 449 U.S. 383 (1981)

 

 

 Williamson v. Moore, 221 F.3d 1177 (11th Cir. 2000)

 

 

 Statutes

 

 

 26 U.S.C. § 565(e)

 

 

 26 U.S.C. § 7602

 

 

 28 U.S.C. § 1291

 

 

 Miscellaneous

 

 

 American Institute of Certified Public Accountants Code of Prf'l Conduct

 

 R. 301 (1990) (amended 1992)

 

 

 Ala. Admin. Code Ch. 30-X-6-.04(1)

 

 

 Fed. R. Civ. P. 26(b)(3)

 

 

 Fed. R. Evid. 802

 

 

 http://www.ebrd.com/about/structure/govern.htm

 

 

 Internal Revenue Manual, § 4.10.20.2(3)

 

 

 Notice 2004-67, 2004-41 C.B. 600

 

 

 Notice 2005-13, 2005-9 C.B. 630

 

 

 Notice 2006-16, 2006-9 C.B. 538

 

 

 Notice 2007-57, 2007-29 C.B. 87

 

 

 Notice 2007-83, 2007-45 C.B. 960

 

 

 Notice 2008-34, 2008-12 C.B. 645

 

STATEMENT OF JURISDICTION

 

 

Appellees Regions Financial Corporation and Subsidiaries ("Regions") agree that this Court has jurisdiction of this appeal by the United States (the "Government") under 28 U.S.C. § 1291 of a decision by the United States District Court for the Northern District of Alabama (the "District Court"). (Brief xv.)1 The District Court, after in camera review, held that all documents withheld and redacted by Regions constituted work product protected by Fed. R. Civ. P. 26(b)(3), and were thus properly withheld from production under a summons issued on April 18, 2006, by a revenue agent of the Internal Revenue Service ("IRS") (the "Summons"), to Ernst & Young LLP ("E&Y"). (Doc. 18, Hawkins Decl., Ex. 1.)

 

STATEMENT OF THE ISSUES

 

 

Given the Government's concession that it is "not challenging the District Court's work product determination as it relates to the four tax-advice documents" referred to by the District Court as "Core Documents" (Brief 45, 46; Op. 2, 16) the issues before this Court are:

 

(1) Whether the District Court properly found, after in camera review, that the 16 Derivative Documents consisting of "emails, memoranda, and other less formal documents" which "discuss, quote, or explain" the Core Documents also constitute protected work product (Op. 3, 13); and

(2) Whether Regions waived work product protection of the four Core Documents and the 16 Derivative Documents because financial auditors at E&Y reviewed them.2

STATEMENT OF THE CASE

 

 

A. Proceedings Below

While the Government's description of proceedings below is generally accurate (Brief 2-3), it fails to note in that section that E&Y performed both financial auditing and tax advisory services for Regions. The Government acknowledges E&Y's dual capacity elsewhere. (Brief 12 n.3, 45.) Indeed, the Government acknowledges that E&Y, in its tax advisory capacity, created one of the four Core Documents which it now concedes are Rule 26(b)(3) work product. (Brief 21 n.5, 45.).

B. Facts

However, the Government's statement of facts (Brief 3-27) contains numerous errors, misstatements, and assertions without record support and attempts to raise, for the first time in this Court, arguments that were not presented to the District Court. The dispute in this case does not concern "tax accrual workpapers" or "financial audit documents" -- it concerns opinion work product.

 

1. Background

 

On December 15, 2000, a Regions subsidiary entered into a transaction with the European Bank for Reconstruction and Development ("EBRD") in which EBRD made a $150,000,000 preferred stock investment in the Regions subsidiary (the "Transaction" or the "EBRD Transaction").3 (Doc. 21, Phillips Decl., Ex. P-2, 4-5, 15-18.) In addition to providing Regions with significant regulatory capital through EBRD's cash contribution for its stock, the Transaction contemplated declaration of substantial consent dividends to EBRD in future years as authorized by Code section 565. Code section 565(e) specifically authorizes consent dividends to foreign entities. These consent dividends and their deemed recontribution to the Regions subsidiary as provided by the Code were expected to provide and have provided significant additional increases in Regions' regulatory capital.4Id.

Given the substantial Federal income tax benefits that Regions expected to result from the EBRD Transaction, Regions' then General Counsel, Samuel Upchurch, and its then Chief Financial Officer, Bryan Jordan, were concerned that the magnitude of the Transaction, the significant tax benefit to Regions, and the lack of direct precedent would lead to an IRS challenge of Regions' tax reporting of the Transaction and possibly to tax litigation with the IRS.5 (Doc. 21, Upchurch Decl. ¶¶ 7, 10, 14; Jordan Decl. ¶¶ 5-7.) The District Court found that Regions' general counsel only becomes involved in analyzing Regions' tax liabilities if litigation is likely to result from a tax position. (Op. 2; Doc. 21, Upchurch Decl. ¶ 14; Jordan Decl. ¶ 11.) The District Court further found that because General Counsel Upchurch suspected that the IRS would audit the Transaction, he elicited a formal opinion regarding the tax consequences of the Transaction from Alston & Bird LLP, Regions' outside legal counsel ("A&B"), and an additional tax opinion from E&Y (the "E&Y Memo"). (Op. 2-3; Doc. 21, Upchurch Decl. ¶¶ 7, 9-10; Wheeler Decl. ¶¶ 2-4; Garlock Decl. ¶ 2.)

The District Court found that the four Core Documents described below were created at the behest of General Counsel Upchurch. (Op. 2.) General Counsel Upchurch testified that he requested the A&B Opinion and the E&Y Memo (referred to by the District Court as "Core Documents") to assist him in (i) understanding the tax consequences of the Transaction, (ii) assessing the arguments that the IRS could make in the event that the IRS disputed Regions' tax treatment of the Transaction, and (iii) weighing the potential hazards that Regions would face if the tax consequences of the Transaction were litigated. (Doc. 21, Upchurch Decl. ¶ 16.) Two later A&B updates of its opinion were also found by the District Court to be "Core Documents." (Op. 2; Doc. 21, Wheeler Decl. ¶ 7.) The District Court found that the 16 Derivative Documents "discuss, quote, or explain" the four Core Documents and were created in anticipation of litigation. (Op. 3, 13.)

 

2. The Summons

 

The IRS Summons specifically sought "analyses" and "opinions" that were "created and/or assembled" by E&Y or others "relating to . . . contingent tax liabilities" with respect to Regions' 2002 and 2003 fiscal years. (Brief 8; Doc. 18, Ex. 1.) The Summons referred to all the documents it sought (including "analyses" and "opinions") as "Tax Accrual Workpapers." (Doc. 18, Ex. 1, Attachment 2, ¶ 8.) The Summons by its defined term was thus far broader than a request for documents commonly referred to as "tax accrual workpapers."6 In seeking "analyses" and "opinions," the Summons thus explicitly sought "disclosure of the mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party," the most highly protected form of work product under Rule 26(b)(3) of the Federal Rules of Civil Procedure. The District Court found that "the documents sought by the IRS contain the mental impressions and opinions of Regions' lawyers." (Op. 13.) E&Y produced more than 260,000 pages of documents to the IRS in response to the Summons, including all documents that are "tax accrual workpapers" in the normal usage of that term.7 (Doc. 18, Hawkins Decl. ¶¶ 22-23.)

 

3. Disputed Documents

 

In the District Court proceedings, the Government improperly sought to label all 20 disputed documents as "tax accrual workpapers." On appeal, it again improperly seeks to label the 16 Derivative Documents as either "tax accrual workpapers" or "financial audit documents." Simply by reason of those labels, it now claims that the Derivative Documents cannot be opinion work product. The labels are unsupported by the record and ignore the District Court's contrary findings (made after review of the documents themselves) that all withheld documents and redactions of documents contain the protected opinion work product of the Core Documents. (Op. 2-3.)

"Tax accrual workpapers," as that term has been used in prior case law refers to listings of items for which tax reserves have been established and analyses of the amount of the reserve for each such item prepared by financial auditors.8 Revenue Agent Hawkins attached one example of the multiple tax accrual workpapers already produced to the IRS in her declaration in the District Court. (Doc. 18, Hawkins Decl., Ex. 15.) The Internal Revenue Manual (the IRS's internal procedural manual) provides that

 

[p]reexisting documents that a taxpayer, the taxpayer's accountant, or the taxpayer's independent auditor consults, refers to, or relies upon in making evaluations or decisions regarding the tax reserves or in performing an audit are not themselves considered accrual workpapers or audit workpapers, even though the taxpayer, the taxpayer's accountant, or independent auditor may store such documents with the tax accrual workpapers or audit workpapers.

 

(§ 4.10.20.2(3), Doc. 22 at A-4; see also Doc. 21, Lloyd Decl. ¶¶ 7-8.)

Recognizing that the overbroad definition of "Tax Accrual Workpapers" in the Summons deviated from past usage of that term as well as the IRS's own Manual, the Government has invented a new term, "financial audit documents," for this appeal. It concedes here, contrary to its argument below, that the four Core Documents are work product and not "tax accrual workpapers" or "financial audit documents." (Brief 45.) But there is also no support in the record for the Government's often-repeated assertion that either the five fully-withheld Derivative Documents ("Withheld Derivative Documents") or redacted passages from the 11 other Derivative Documents ("Redactions") reflect independent analyses prepared by financial auditors. The Government admits that E&Y had a dual role -- both as tax advisor and later as auditor -- but argues that all Derivative Documents prepared by E&Y were both created by "auditors" and reflected GAAP or financial statement analysis by those auditors. To the contrary, the District Court found the Derivative Documents to be quotations, discussions, or explanations of the tax advice in the Core Documents. (Op. 3.)

The District Court found that the documents sought by the IRS contained opinion work product created at the behest of Regions' General Counsel in anticipation of litigation as required by Rule 26(b)(3):

 

It is undisputed that the documents sought by the IRS contain the mental impressions and opinions of Regions' lawyers.
* * *

 

 

Based on the in camera review of the documents, the court finds that the contested documents contain precisely the kind of legal analysis that the work product doctrine exists to protect, not facts that bear on Regions' tax liability.

 

(Op. 13.) The District Court also found that all the documents in dispute were created "in anticipation of litigation" as Rule 26 requires. Id.
(i) Core Documents the Government Concedes to Be Work Product
The District Court found:

 

There are four Core Documents that express opinions, evaluate legal theories, and analyze possible IRS attacks on Regions' tax reporting of the Transaction.9

 

(Op. 2.) The District Court found that three of the Core Documents were created by Regions' outside law firm, while a fourth (the E&Y Memo) was created by "partners at E&Y who are not involved in auditing Regions." Id. The Government now concedes that all four Core Documents were work product entitled to protection under Rule 26(b)(3) when created, but contends that such protection was lost because the Core Documents were later provided to E&Y financial auditors. (Brief 45-46.) Regions disagrees. See Part II.
(ii) Derivative Documents
The District Court found that all the Derivative Documents "discuss, quote, or explain the Core Documents" and consisted of "emails, memoranda, and other less formal documents." (Op. 3.) There are five Withheld Derivative Documents that were withheld completely and 11 other Derivative Documents that were produced to the IRS with Redactions. Id. The District Court found, after in camera review, that "the redacted portions of the documents relate only to discussions of the Core Documents."10Id.

The Government asserts (Brief 17), contrary to the record and the District Court's factual findings, that the Derivative Documents and the Redactions "were generated by E&Y as part of its independent audit of Regions' financial statements" and consist of analyses of "whether Regions' tax reserve as it relates to the EBRD transaction complies with GAAP."11 These assertions are directly contrary to the District Court's finding, made after in camera review of the disputed documents themselves, that "Regions is only seeking to withhold the mental impressions and legal theories of its counsel" (Op. 14) and that the "Derivative Documents discuss, quote, or explain the Core Documents." (Op. 3.) Indeed, the Government effectively concedes the correctness of both the District Court's fact findings (as well as the accuracy of the District Court's description of such documents as "derivative") when it acknowledges that each of the Derivative Documents "refers in some way to the tax advice described above [i.e., the opinion work contained in the Core Documents.]" (Brief 17.)

Withheld Derivative Documents. First, two of the Withheld Derivative Documents that the Government asserts "were authored by E&Y auditors" and contain auditor analysis of "whether Regions' tax reserve as it relates to the EBRD transaction complies with GAAP" (Brief 17) were prepared by David Garlock and Jerred Blanchard (Privilege Log Doc ##5 and 6). Mr. Garlock and Mr. Blanchard are the authors of the E&Y Memo (Privilege Log #4), a document that the Government now concedes was work product when created. (Brief 45.) Moreover, the undisputed and unrebutted testimony is that neither Mr. Garlock nor Mr. Blanchard were auditors and that neither performed audit services. (Doc. 21, Garlock Decl. ¶ 3; Lloyd Decl. ¶ 12) These two documents were thus not prepared by "auditors" and could not contain "auditor" analyses of GAAP compliance.

Second, the author of the remaining three Withheld Derivative Documents (Privilege Log ##7-9) is Jeffrey Travis. The record demonstrates that Mr. Travis's responsibilities included both tax advisory services and review of the tax provision as part of the audit engagement. (Doc. 18, Hawkins Decl., Ex. 6, item e.) The initial date of Privilege Log #8 (an e-mail string) is the same as the date of the E&Y Memo (Privilege Log #4) that the Government concedes is work product and is a date well before the financial audit of Regions' 2002 and 2003 years began. The dates of the two other Withheld Derivative Documents authored by Mr. Travis (Privilege Log ##7, 9), March 10, 2004, and March 9, 2004, fall shortly after A&B issued one of its update opinions (Privilege Log #3 dated February 25, 2004) included in the Core Documents. Nothing in this evidence supports the Government's assertion that the three Withheld Derivative Documents authored by Mr. Travis were prepared by an "auditor" (much less that they present auditor analysis of Regions' tax reserves). To the contrary, the District Court found, after reviewing the documents, that they were discussions of the Core Documents, now conceded to be opinion work product. (Op. 3.)

Redactions from 11 Derivative Documents. The remaining Derivative Documents (Privilege Log ## 10-20) were produced with Redactions to delete references to the substantive content of the Core Documents. With respect to the Redactions, the District Court specifically found that "the redacted portions of the [Derivative] documents relate only to discussions of the Core Documents." (Op. 3.) Six documents with Redactions were prepared by either Karole Lloyd or Jeffrey Travis. Both had tax advisory as well as audit roles in E&Y's work for Regions (Doc. 21, Lloyd Decl. ¶ 2, 6; Hawkins Decl., Ex. 6; item e). The Government is correct that the authorship of five informal documents that were redacted could not be established (Privilege Log ## 10, 11, 12, 14, 20). The lack of author attribution, however, does not justify the Government's unsupported leap to the assumption that these five Redactions contained "assessments" by "auditors" of tax reserves rather than what the District Court found them to be: reports of the opinion work product in the Core Documents.

Thus, the Government's assertions that the Derivative Documents are "tax accrual workpapers" or "financial audit documents" created by "auditors" independently of the Core Documents, that they are "auditor analyses" of Regions' tax reserves, and/or that they are "GAAP" analyses (Brief 15-17) are contrary to the District Court's findings and lack support in the record. Moreover, the Withheld Derivative Documents and Redactions in the other Derivative Documents are in fact "derivative" as the District Court described them -- writings that "discuss, quote, or explain" the concededly privileged Core Documents.

(iii) The Government Drew No Distinction Between Core Documents and Derivative Documents in the District Court
The Government also misstates its position in the proceedings below when it asserts that it "drew a distinction between Regions' tax advice [Core] documents and E&Y's financial-audit [Derivative] documents." (Brief 21.) That assertion finds no support in either the Government's Opposition and Counter-Petition or its Brief in Support of that Opposition filed with the District Court. Inspection of paragraphs 14-17 of the Counter-Petition (Doc. 18, first document), the only paragraphs in that document that address the disputed documents, demonstrates that the Government made no distinction before the District Court between Core Documents and Derivative Documents. The Government's District Court Brief (Doc. 18, second document) likewise makes no distinction between Core Documents and Derivative Documents.

The Government's sole record citations for its new "distinction" argument are to two paragraphs of Agent Hawkins' declaration. (Doc. 18, Hawkins Decl. ¶¶ 46-47.) But the only distinction that Agent Hawkins drew was between documents prepared by Alston & Bird LLP (Doc. 18, Hawkins Decl. ¶ 46), Regions' outside law firm (Privilege Log ##1, 2, 3), and all the other documents on the Privilege Log prepared by E&Y personnel (Doc. 18, Hawkins Decl. ¶ 47).12 As to documents prepared by E&Y personnel, Agent Hawkins alleged that Regions had "failed to show that any of the documents were prepared under the direction of an attorney in anticipation of litigation,"13 that they "were authored and/or received by E&Y personnel that were handling, involved with or participated in the audit of Regions financial statements" (emphasis added), and that they were "generated in the ordinary course of business of a publicly traded corporation for financial reporting purposes under the requirements of federal securities laws unrelated to litigation."14Id.

It bears repeating that, unlike the District Court which did review the documents, Agent Hawkins never saw the Withheld Derivative Documents or the text of the Redactions and thus could not offer competent testimony about what they contained.15 The generation of the Core Documents was not, as the Government contends, an ordinary-course-of-business, annual event for Regions. (Brief 48-49.) To the contrary, it was unusual for Regions' general counsel to become involved in tax matters, and he did so only when there was a concern that litigation would ensue. (Op. 2; Doc. 21, Upchurch Decl., ¶ 14; Jordan Decl. ¶ 11.) The District Court specifically found that the Redactions related only to the Core Documents. (Op. 3.) Thus, the inaccuracy of the third of Agent Hawkins' assertions -- that all E&Y-generated documents were audit workpapers reflecting auditor analyses rather than discussions of opinion work product -- was apparent to the District Court after reviewing the record (which established E&Y's dual capacity) and the disputed documents.

Paragraph 47 of the Hawkins declaration does not even allege that any particular disputed document was prepared by an auditor as part of the financial audit; Agent Hawkins simply avers that E&Y financial auditors "authored and/or received" the Core Documents and Derivative Documents. Regions agrees that E&Y financial auditors did receive those documents.16 The Government's assertion that the Withheld Derivative Documents or the Redactions are "auditor analyses" is simply contrary to the District Court's finding that they discussed only the Core Documents. (Op. 3.)

No Government argument premised on a distinction being drawn between Core Documents and Derivative Documents was presented to the District Court, nor did Agent Hawkins or anyone else associated with the Government present evidence to the District Court that any of the documents at issue were "financial-audit documents." That term does not appear in any submission by the Government to the District Court. The District Court specifically found that it was not being asked to distinguish among the disputed documents and that neither party had "advanced a theory that would allow some but not all of the documents to be privileged." (Op. 3 n.1; 11 n.10.) Indeed, most of the Government's Brief can be fairly characterized as an effort to substitute a hypothetical set of facts based on vague generalizations unsupported by the record in this case for the actual facts found by the District Court.

 

4. Facts Relating to Waiver Issue

 

The District Court found, after review of the evidence, that "E&Y was an independent auditor . . . but it was not a potential adversary of Regions." (Op. 15.) The District Court further found that "[t]here is simply no conceivable scenario in which E&Y would file a lawsuit against Regions because of something E&Y learned from Regions' disclosures." (Op. 16.) The District Court found that given Regions' confidentiality agreement with E&Y, "the privileged documents neither left nor were ever intended to leave the 'Cone of Silence.'"17 (Op. 16 n.13.) The District Court accordingly found as a matter of fact that "when Regions confidentially disclosed the documents to E&Y, it disclosed them to neither an adversary nor a conduit to an adversary." (Op. 16.) The District Court then concluded that no waiver of work product protection occurred by reason of the disclosures to E&Y financial auditors. Id.

The District Court found that General Counsel Upchurch understood that E&Y would keep confidential all information that it received concerning the EBRD Transaction. (Op. 3; see also Doc. 21, Upchurch Decl. ¶ 15.) The District Court found that David Garlock, a partner at E&Y who helped perform the tax analysis reflected in the E&Y Memo, had no knowledge of E&Y disclosing any of the received Transaction documents. (Op. 3.) Karole Lloyd, the E&Y partner in charge of coordinating all her firm's business with Regions (including both tax advisory and audit work), testified that it was both E&Y's policy and duty to keep information received from Regions confidential.18Id. Ms. Lloyd also testified that E&Y had maintained the confidentiality of the disputed documents and that E&Y was obligated by both Alabama and AICPA rules to maintain such confidences.19 (Dec. 21, Lloyd Decl. ¶¶ 1, 9, 11.) The Government offered no evidence in the District Court that either Regions or E&Y had produced information about the EBRD Transaction to any third person. None of the declarations filed by the Government alleges any disclosure other than disclosure to E&Y financial auditors. In short, E&Y was obligated to and in fact did keep both the Core Documents and the Derivative Documents confidential.20

Ms. Lloyd, E&Y's coordinating partner with responsibility for all E&Y's work for Regions, testified that

 

While an independent auditor is required to maintain its independence in performing financial statement audits, an independent auditor is not the adversary of the audited entity.

 

(Doc. 21, Lloyd Decl. ¶ 11.) The Government introduced no contrary testimony or other proof. Agent Hawkins expressed only the litigating position of IRS Chief Counsel attorneys that "Regions waived any claim of work product protection by disclosing the information to E&Y's independent audit team." (Doc. 18, Hawkins Decl. ¶ 48.) No other paragraph of Agent Hawkins' initial declaration or her supplemental declaration (Doc. 25) addresses the waiver issue. Neither Agent Hawkins' declarations nor any other proof presented to the District Court provide a basis for concluding that E&Y was Regions' adversary or a conduit to an adversary.21

C. Standard of Review

The Government correctly states (Brief 27) that this Court reviews work product rulings under the abuse-of-discretion standard. United Kingdom v. United States, 238 F.3d 1312, 1321 (11th Cir. 2001); Castle v. Sangamo Weston, Inc., 744 F.2d 1464, 1466 (11th Cir. 1984); Commercial Union Ins. Co. v. Westrope, 730 F.2d 729, 731-33 (11th Cir. 1984). This Court stated in the United Kingdom case, 238 F.3d at 1324, that:

 

We will reverse for abuse of discretion only if we have a definite and firm conclusion that the [c]ourt committed a clear error of judgment in the conclusion it reached.

 

(citation omitted.)

The Government, however, ignores its acknowledgment of such binding precedent by contending that the District Court "committed legal error" in making its factual findings (based on in camera inspection) concerning the Derivative Documents. (Brief 28.) The Government also seeks to evade deferential review of the District Court's factual finding that E&Y was neither Regions' adversary nor a conduit to an adversary (Op. 16) by characterizing that finding as "an abstract issue of law" for which review is "plenary."22 (Brief 28.)

 

SUMMARY OF ARGUMENT

 

 

1. This case concerns an effort by the IRS to require production of documents that the District Court found to be opinion work product as a matter of fact after in camera inspection. The IRS's effort to compel production of such documents is contrary to the explicit command of Fed. R. Civ. P. 26(b)(3), and precedents of this Court. Supreme Court precedents, Upjohn and Euge, hold that the work product privilege set forth in Rule 26(b)(3) applies to IRS summonses. See Parts I.A. and B.

2. Neither Arthur Young nor Newton govern the disputed documents at issue here because neither case involved Rule 26(b)(3) opinion work product. In those cases, there was no contention that documents were created "in anticipation of litigation." Rather, Arthur Young and Newton declined to expand the existing law of privilege to reach tax accrual workpapers created by auditors and reflecting the auditors' conclusions. The District Court found the disputed documents to be opinion work product protected by Rule 26(b)(3). The disputed documents are legal opinions rendered by a law firm, tax advice rendered by E&Y professionals not acting as auditors, and summaries of the foregoing. The Second and Sixth Circuits have held similar documents to be work product protected under Rule 26. See Parts I.C. and D.

3. The Government's assertions that this case concerns "an independent auditor's tax-accrual workpapers" or "financial audit documents" are erroneous, unsupported by the record, and contrary to the District Court's findings made after review of the disputed documents. The Government did not argue for or seek findings on any alleged distinction between Core Documents and Derivative Documents in the District Court. Accordingly, under this Court's precedent, it may not raise such an argument for the first time on appeal. See Parts I.E., F. and G.

4. All the disputed documents were reviewed by E&Y auditors. By a twelve-to-two margin (not counting the decision by the District Court in this case), the district courts that have considered the issue have held that disclosure of work product to financial auditors does not waive the privilege. Under either the "because of" test for work product adopted by nine Circuits or the "primary purpose" test sometimes applied in the Fifth Circuit, "other use" of work product (such as use by financial auditors) does not waive the privilege. See Part II.A.

5. Work product protection is waived only if the privileged material is provided to an adversary or a conduit to an adversary. The District Court determined as a matter of fact that E&Y was not Regions' adversary and that E&Y was obligated to keep the opinion work product it received confidential and had done so. The District Court properly held that Regions did not waive work product protection in this case by its disclosures to E&Y auditors. See Part II.B.

 

ARGUMENT

 

 

I. The Work Product Doctrine and Rule 26(b)(3)

 

Apply to IRS Summonses and Provide "Almost Absolute Immunity"

 

for the Opinion Work Product At Issue in This Case

 

 

A. The Supreme Court in Upjohn and Euge Held That The Work Product Doctrine Applies to IRS Summonses

In Upjohn Co. v. United States, 449 U.S. 383, 397 (1981), the Supreme Court explicitly held that the work product doctrine applies to IRS Summonses: "The Government concedes, wisely . . . that the work-product doctrine does apply to IRS summonses." See also United States v. Euge, 444 U.S. 707, 714 (1980) (IRS summonses are "subject to the traditional privileges and limitations.")23 In the course of the Upjohn decision, the Supreme Court further held, again in the specific context of an IRS summons, that "Rule 26 accords special protection to work product revealing the attorney's mental processes." Id. at 400. Indeed Fed. R. Civ. P. 26(b)(3), provides that, even when a party seeking work product materials makes a showing of hardship:

 

the court shall protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation.

 

Nothing in Upjohn or Euge supports any limitation on the scope of Rule 26 work product protection when an IRS summons is involved. Subsequent case law refusing to recognize a separate "accountant work product privilege" did not abrogate Rule 26 or overrule Upjohn or Euge. See Part I.C. below.

B. The District Court Found The Disputed Documents To Be Opinion Work Product

Under this Circuit's precedents, "opinion" work product -- which the District Court found all the disputed documents to be after in camera review -- is "almost always protected from disclosure." United Kingdom v. United States, 238 F.3d at 1322. This Circuit has also stated that "opinion" work product cannot be discovered even with a showing of substantial need and undue hardship and "enjoys almost absolute immunity" from discovery. Williamson v. Moore, 221 F.3d 1177, 1182 (11th Cir. 2000); Cox v. Adm'r United States Steel & Carnegie, 17 F.3d 1386, 1422 (11th Cir. 1994). The Government made no showing of substantial need in this case.24

Here, the District Court found the Core Documents "express opinions, evaluate legal theories, and analyze possible IRS attacks on Regions' tax reporting of the Transaction" and that all the withheld text "contain precisely the kind of legal analysis that the work product doctrine exists to protect, not facts that bear on Regions' tax liability." (Op. 2, 13.) Accordingly, the District Court declined to order production of such opinion work product to the Government. (Op. 16.)

C. Neither Arthur Young Nor Newton Overruled Upjohn or Euge

The Government opens its brief by stating that United States v. Arthur Young & Co., 465 U.S. 805 (1984) held that the IRS was "entitled to obtain an independent auditor's analysis of the questionable positions taken on a public company's federal tax return." (Brief 1) (emphasis added). The Government later notes that this Circuit reached the same conclusion in In re Newton, 718 F.2d 1015 (11th Cir. 1983), decided shortly before the Supreme Court's decision in Arthur Young. (Brief 49.) In Arthur Young and Newton, the Supreme Court and this Circuit, respectively, declined to recognize a new "accountant work product" privilege (i.e., distinct from the traditional work product privilege in Rule 26(b)(3)), 465 U.S. at 817 and 718 F.2d at 1021, for workpapers created in the course of a routine financial audit by accountants acting in their capacity as financial auditors and reflecting the auditors' analysis.25 But this Circuit in Newton, citing Upjohn, explicitly recognized that the "attorney work product doctrine limit[s] the scope of the IRS summons power," 718 F.2d at 1021. The Supreme Court in Arthur Young recognized the same limitation stating that IRS summonses under Code Section 7602 are "subject to the traditional privileges and limitations." 465 U.S. at 816 (citing Euge.)

Arthur Young is also not authority for the proposition that the explicit directive of Rule 26(b)(3) to safeguard opinion work product is to be "narrowly construed" in an IRS summons context. (Brief 32.) Arthur Young acknowledged that the IRS's summons power was subject to the work product privilege as one of the traditional privileges. The Supreme Court declined to broaden that privilege to recognize a free-standing privilege for financial auditors, but said nothing about "narrow construction" of existing privileges.26 465 U.S. at 816.

The Government concedes that the Arthur Young case did not address "whether Rule 26(b)(3) work-product protection applies to pre-existing tax advice that independent auditors may review but did not create."27 (Brief 58-59.) Thus, the Government effectively concedes that Arthur Young does not address the issue in this case -- whether financial auditors may review opinion work product protected by Rule 26(b)(3) without loss of work product protection.28 That issue was also not addressed in Newton.

Contrary to the Government's contention (Brief 29) neither Arthur Young nor Newton "defined" all papers inspected by auditors and held in their files as falling outside Rule 26(b)(3). Even the Internal Revenue Manual recognizes that assertion is erroneous. See pages 8-9 above. Neither Arthur Young nor Newton discuss opinion work product created in anticipation of litigation because no Rule 26 work product issue was presented by the facts of those cases.29See Part I.D. below.

The District Court, in rendering its decision, explicitly discussed and distinguished Newton from this case:

 

The Eleventh Circuit did not make the sweeping finding in Newton that an accountant's work cannot be protected by the work product privilege. To the contrary, the court in Newton stated that the accountant work product created in the Second Circuit's Arthur Young opinion should have been called an "accountant-client privilege" because it was based on the policy of "encouraging corporate officers to reveal openly to their independent accountants the corporation's tax vulnerabilities." Newton, 718 F.2d at 1021 n.8. The court in Newton refused to recognize a new privilege, not to abrogate the existing work product doctrine. Newton cannot be read to prevent the protection of trial preparation materials simply because they were created by an accountant. See FED. R. CIV. P. 26(b)(3)(A) (extending work product protection to materials created by a "party or its representative"). The accountant work product privilege [rejected] in Newton bears only a semantic relationship to the traditional work product privilege; the two are legally distinct.30

 

(Op. 7 n.5) (emphasis in original).

D. Adlman and Roxworthy Hold That Documents Not Meaningfully Distinguishable from the Disputed Documents Are Work Product

Both the Second Circuit and the Sixth Circuit have held that Rule 26 work product protection applies to documents created by accounting firms that are not meaningfully distinguishable from the documents at issue in this case. United States v. Roxworthy, 457 F.3d 590 (6th Cir. 2006); United States v. Adlman, 134 F.3d 1194 (2d Cir. 1998).31 In Roxworthy, the taxpayer sought work product protection for accounting firm memoranda prepared for corporate counsel analyzing the tax consequences of the transactions with captive insurance companies.32 The taxpayer produced affidavit testimony that it anticipated litigation on the issue. The Sixth Circuit held that the documents themselves (reviewed in camera) were the best evidence that they were created in "anticipation of litigation" and cited phrases in those documents indistinguishable from those used in the Core Documents and quoted in the Derivative Documents. 457 F.3d at 594 (Doc. 21, Garlock Decl. ¶ 7; Wheeler Decl. ¶ 4.)

In Adlman, the taxpayer's attorney (Mr. Adlman) requested an accounting firm to evaluate the tax consequences of a proposed restructuring. The resulting 58-page memorandum detailed legal analysis of likely IRS challenges, discussed tax law theories, proposed legal theories and strategies, and made predictions about the likely outcome of litigation. 134 F.3d at 1195. The Second Circuit rejected the IRS's argument that a document must be prepared "primarily or exclusively" to aid litigation to be work product.33 The Second Circuit explained its holding as follows:

 

In addition to the plain language of the Rule [26], the policies underlying the work-product doctrine suggest strongly that the work-product protection should not be denied to a document that analyzes expected litigation merely because it is prepared to assist in a business decision. Framing the inquiry as whether the primary or exclusive purpose of the document was to assist in litigation threatens to deny protection to documents that implicate key concerns underlying the work-product doctrine.

 

134 F.3d at 1199. The Second Circuit then illustrated its analysis with an example of protected work product that closely parallels the facts of this case:

 

A business entity prepares financial statements to assist its executives, stockholders, prospective investors, business partners and others in evaluating future courses of action. Financial statements include reserves for projected litigation. The company's independent auditor requests a memorandum prepared by the company's attorneys estimating the likelihood of success in litigation and an accompanying analysis of the company's legal strategies and options assist it in estimating what should be reserved for litigation losses.

 

134 F.3d at 1200, example (iii).34 The Second Circuit then adopted the "because of" test for work product and stated it as follows:

 

Where a document is created because of the prospect of litigation, analyzing the likely outcome of that litigation, it does not lose protection under this formulation merely because it is created in order to assist with a business decision.35

 

134 F.3d at 1202.

The District Court concluded in this case that the Eleventh Circuit would align itself with the majority of the other courts of appeals and adopt the "because of litigation" test. (Op. 10.) However, the District Court found it was "not necessary to determine which test [i.e., either the "because of" or "primary purpose" test] applies here because the result in this case is the same regardless of which test the court applies" and that under both tests, "the critical issue is the purpose for which the documents were created." (Op. 10-11.) The District Court concluded that "Regions has carried its burden of showing that the contested documents were created in anticipation of litigation" without regard to which test it applied, (Op. 14.) This finding applied to all the disputed documents, not merely to the Core Documents.

The District Court quoted Roxworthy, 457 F.3d at 595, for the proposition that allowing the IRS access to opinion work product of a taxpayer would provide the agency with an "unfair advantage." (Op. 13.) The Government erroneously asserts that the Sixth Circuit (and the District Court) in so holding acted in conflict with Arthur Young's determination that an auditor's analysis may be highly relevant to the IRS. The Government mistakenly conflates the quite distinct concepts of (i) what is relevant and (ii) what is discoverable. A litigant's opinions, mental impressions, and case analysis would certainly be highly relevant to an opponent's development of its own case, but the work product doctrine holds that requiring disclosure of such information is unfair and inconsistent with the adversarial process of litigation. In Hickman v. Taylor, 329 U.S. 495 (1947), the origin of the work product doctrine codified in Rule 26(b)(3), the Supreme Court held:

 

This work [product] is reflected, of course, in interviews, statements, memoranda, correspondence, briefs, mental impressions . . . Were such materials open to opposing counsel on mere demand, much of what is now put down in writing would remain unwritten. An attorney's thoughts, heretofore inviolate, would not be his own. Inefficiency, unfairness and sharp practices would inevitably develop in the giving of legal advice and in the preparation of cases for trial.

 

Hickman, 329 U.S. at 511 (emphasis added). See also Adlman, 134 F.3d at 1200 (work product "cannot be turned over to litigation adversaries without serious prejudice to the company's prospects in the litigation").

E. The Derivative Documents Are Rule 26 Work Product

The Government's assertions that the Derivative Documents cannot be work product because they were not (i) generated by a party representative or (ii) created in anticipation of litigation (Brief 54-59) are factually unsupported, erroneous, and contrary to the District Court's findings.36 When E&Y provided tax advice in its tax advisory, not audit, role to aid Regions General Counsel Upchurch in assessing litigation hazard, the Government admits that E&Y acted as a party representative of Regions.37 (Brief 45.) The text of Rule 26(b)(3) specifically contemplates that work product may be created by persons who are not attorneys. The Government admits in this case that the E&Y Memo (one of the Core Documents) prepared by E&Y partners Garlock and Blanchard (neither of whom was an auditor) did constitute work product. (Brief 45.)

As the discussion at pages 13-14 above demonstrates, every Withheld Derivative Document on Regions' Privilege Log was authored either by lawyers at A&B, tax professionals at E&Y who had no audit function, or E&Y personnel who had both tax advisory and audit functions. The dates of these documents demonstrate that they correspond to generation of the Core Documents, not to an annual audit cycle. The Government, with absolutely no record support, asks this Court to overturn a factual finding of the District Court and infer that all E&Y personnel writing the Withheld Derivative Documents were performing audit functions and that they were recording their own analyses, not discussing the opinions and analyses set forth in the Core Documents. To the contrary, the District Court, after review of the Derivative Documents, found that those documents "discuss, quote, or explain" Core Documents.38 (Op. 3.)

It is possible that one or more of the unattributed Derivative Documents in which Redactions were made was created by an auditor. (The record does not establish this; it simply does not negate such authorship since actual authorship could not be determined for five of the documents in question.) But the District Court's fact finding made after inspection of the Redactions establishes that the Government's assertion that the Redactions are "auditor" or "GAAP" analyses is wrong. The District Court found that "the redacted portions of the documents relate only to discussions of the Core Documents."39

The Government also mischaracterizes the District Court's opinion in asserting (Brief 52-53) that the District Court has taken "the unsupportable position that an auditor's tax-accrual workpapers are work product as a categorical matter." The District Court took no such position (Op. 11-14) and the Government's erroneous assertion simply is one more attempt to attach erroneous labels and to ignore what the District Court found the Derivative Documents to be, i.e., discussions and quotations of Core Document opinion work product.

The same effort to construct a straw man and ignore the actual facts underlies the Government's assertions that "we [i.e., the Government] contend that the independent auditor's workpapers [presumably a reference to the Derivative Documents] were not created for litigation preparation at all" and that such documents were "created in a wholly different context." (Brief 56-57.) The District Court found that all the Withheld Documents and Redactions concern the tax advice in the Core Documents (Op. 2-3) not some other unidentified "context," and that all were prepared in anticipation of litigation. (Op. 14.)

F. The Derivative Documents Share the Anticipation of Litigation Purpose of the Core Documents

The Government's assertion that the Withheld Derivative Documents and Redactions were not created in anticipation of litigation (Brief 54) thus rests on nothing more than its factually erroneous and unsupported assertions that the Derivative Documents were created by "auditors" and reflect the auditors' independent conclusions rather than the tax advice in the Core Documents. The Government is mistaken when it suggests that the District Court failed to consider the context in which the disputed documents were created. (Brief 55.) After in camera review of the documents the District Court found:

 

Even if the documents Regions has already allowed to be produced were not made "in anticipation of litigation" (a question not before this court), the court finds that the documents in dispute here were.

 

(Op. 13.)

The Government now concedes that the four Core Documents are work product. (Brief 45-46.) Part and parcel of that concession is an admission that the District Court correctly found that the Core Documents were created in anticipation of litigation at the behest of Regions' General Counsel Upchurch. The District Court also found after reviewing the disputed documents that the Withheld Derivative Documents and Redactions solely concerned the tax advice reflected-in the Core Documents and were created in anticipation of litigation. (Op. 2-3, 13.)

Likewise, the Government's contention that the documents at issue were prepared in the ordinary course of business and would have been created in the same form irrespective of litigation (Brief 48-49) is without record support and contrary to the District Court's determination that the documents "would not have been created were Regions not primarily concerned with litigati[on]." (Op. 14.) (emphasis in original). There is also no record support for the Government's arguments that the disputed documents concern what an "auditor ascertains" (Brief 58) rather than the discussion of the work product in the Core Documents as the District Court found. Review of work product by auditors does not transform the work product into an "auditor analysis" or alter the anticipation of litigation purpose that called the work product into being. See Part II.

It is linguistically possible that the Government is also arguing that every time an email or other informal document, like the Withheld Derivative Documents and Redactions, is created that describes or refers to pre-existing opinion work product, there must be a different and independent "anticipation of litigation" showing for the creation of such email or similar document beyond the showing of a litigation purpose for the original opinion work product. (Brief 18.) Such an argument, if it is being advanced here, lacks merit, and the Government cites no authority for it. Indeed, the Government conceded that such an argument was incorrect with respect to board minutes that repeated work product in MIT, 129 F.3d at 687. The repetition of privileged opinions, mental impressions, and legal theories in later, derivative documents shares the "anticipation of litigation" purpose that first called the privileged opinion work product into being. In re Ford Motor Co., 110 F.3d 954, 967 (3d Cir. 1997). The privilege is thus not lost by repetition or discussion of the original work product in later documents -- and the District Court found all of the Withheld Derivative Documents and Redactions to be discussions, quotations, or explanations of the Core Documents.40 (Op. 3.)

Given the ambiguity of the Government's Brief, we hesitate to attribute the formalistic attack described in the prior paragraph to the Government. But if the Government is making such an argument, that argument is also inconsistent with both the "because of" and "primary purpose" tests for work product, both of which permit use of work product for purposes other than litigation preparation, as the Government acknowledges. (Brief 56-57.) The ability to make other use of work product would be hollow indeed if any written repetition or discussion of the work product in the course of such other use resulted in loss of the privilege. So long as such documents are in fact derivative of the original work product, as the District Court found to be the case here, the showing of anticipation of litigation that called for the original opinion work product is shared by the derivative documents.

G. The Government Did Not Attempt to Distinguish Between Core Documents and Derivative Documents Below and May Not Do So For The First Time in This Court

The Government did not argue for a distinction between the Core Documents and the Derivative Documents in the District Court, and it is too late to do so for the first time on appeal. It is well settled that this Court generally will not consider an issue or theory that was not raised in the District Court. Ford v. United States, 989 F.2d 450, 453 (11th Cir. 1993). This Circuit deems arguments not raised below to have been waived unless one of five exceptions has been met. Narey v. Dean, 32 F.3d 1521, 1526-27 (11th Cir. 1994). None of these exceptions, designed to prevent injustice under exceptional circumstances, applies here.41 Therefore the Government has waived its opportunity to introduce this distinction for the first time in this Court.

Nowhere in the case below did the Government make the contention that it now raises at the appellate level -- that Derivative Documents must be analyzed separately from the Core Documents. At the District Court level, the Government repeatedly referred to the documents as one collective body, arguing that none of the disputed documents were entitled, as a matter of law, to work product protection. (Doc. 18, Gov't Brief 3-4, 11, 13, 16, 18-19.) The District Court found that the Government had adopted the "all or nothing" approach. (Op. 3 n. 1.) Because the Government made no distinction among the disputed documents at the District Court level, this Circuit's precedent prevents it from arguing for such a distinction now. Narey, 32 F.3d at 1526-27.

 

II. Review of the Disputed Documents by E&Y Financial

 

Auditors Did Not Waive Work Product Protection

 

 

It is undisputed that Core Documents were later reviewed by E&Y financial auditors who used them as evidential material that the E&Y auditors considered in assessing the adequacy of Regions' tax reserves. (Doc. 21, Lloyd Decl. ¶ 8.) The primary issue before this Court is whether such financial auditor review waived the work product privilege. The Government correctly asserts that no appellate court has directly addressed whether disclosure of opinion work product to financial auditors effects such a waiver. (Brief 61 n.14.) The Government also acknowledges that "the district courts are split on the issue," id., and that the district court decisions that hold that disclosure to financial auditors works as waiver of work product are "fewer in number" than those holding that financial auditor disclosure is not a waiver. (Brief 71.)

But the Government's Brief does not inform the Court that (i) it can cite only two district court cases -- Medinol, Ltd v. Boston Scientific Corp., 214 F.R.D. 113, 117 (S.D.N.Y. 2002) and In re Diasonics Sec. Litig., No. C-83-4584-RFP (FW), 1986 WL 53402 (N.D. Cal. June 15, 1986) -- that have held that disclosure to a financial auditor is a waiver of work product or (ii) that other district courts sitting in the Southern District of New York and Northern District of California have declined to follow these cases.42 Nor does the Government inform the Court that at least twelve district court decisions (including all recent decisions) have held that disclosure to financial auditors does not waive work product.43 Indeed, the only case decided in the context of an IRS summons, United States v. Textron, Inc., 501 F.Supp.2d 138, 152-55 (D.R.I. 2007), appeal pending, No. 07-2631 (1st Cir. argued Sept. 5, 2008), held that disclosure of work product to a financial auditor was not a waiver.44 The Government cites only three of those twelve cases, and in so doing, incorrectly suggests that the district courts, adhering to the majority "no waiver" rule, rest their position on the common interest doctrine. (Brief 72.) Merrill Lynch explicitly contradicts that notion: "[T]he fact that Merrill Lynch and Deloitte & Touche do not share a common litigation interest is of no moment." 229 F.R.D. at 447.45

A. The Overwhelming Weight of District Court Authority Holds That Disclosure to Financial Auditors Does Not Waive Work Product Protection

The Government says that Medinol and Diasonics are "more persuasive" than the twelve contrary decisions. (Brief 71.) But the district courts in Merrill Lynch, American SS Owners, and Jaffe Pension Plan do not agree and explicitly reject Medinol.46Roberts rejects both Medinol and Diasonics. The fulcrum of the Medinol decision was that the disclosure itself "did not serve any litigation interest, either its own or that of [its auditor]" i.e., that the disclosure to the financial auditor was a "non-litigation" use of the work product. 214 F.R.D. at 116. The Medinol court thus simply ignored the Second Circuit's decision in Adlman (now the rule in nine circuits) that documents created "because of" anticipated litigation did not lose that status if used (or even if created) for other purposes as well.47See Adlman, 134 F.3d at 1198, 1200, example (iii). For that reason, later district courts have rejected the Medinol court's conclusion and analysis.

The other case relied on by the Government, Diasonics, was decided in 1986 before the "because of" rule emerged and was adopted by its home circuit (the Ninth). Diasonics contains little supporting analysis for its conclusory assertion that disclosure of work product to a financial auditor was "at odds" with any expectation of confidentiality.48 The Diasonics court did not consider confidentiality rules binding accountants or analyze whether disclosure to the auditors made disclosure to an adversary more likely. JDS Uniphase, a 2006 decision in the same district, supra, does not discuss Diasonics but does discuss both the Medinol and Merrill Lynch decisions and identifies the "because of" test adopted by the Ninth Circuit as the foundation of its "no waiver" conclusion and rejection of Medinol. Another case in the same district, Roberts, explicitly rejects Diasonics" analysis in favor of the contrary reasoning in Merrill Lynch.

B. E&Y Was Neither Regions' Adversary Nor a Conduit to Such an Adversary

The core issue in deciding whether the work product privilege has been waived is factual: was Regions' disclosure of its opinion work product to the E&Y financial auditors a disclosure either to an "adversary" or "a conduit to a potential adversary?" MIT, 129 F.3d at 687; Merrill Lynch, 229 F.R.D. at 447; United States v. Stewart, 287 F.Supp.2d 461 (S.D.N.Y. 2003)49 Even the Medinol court did not find that financial auditors were adversaries; indeed, it acknowledged that the disclosure to auditors did not "substantially increas[e] the risk that such work product would reach potential adversaries."50 214 F.R.D. at 116.

In Gutter, the Southern District of Florida held that:

 

While disclosure to outside auditors may waive the attorney-client privilege, it does not waive the work product privilege since there is an expectation that confidentiality of such information will be maintained by the recipient.

 

1998 WL 2017926, at *3. The District Court found the same confidentiality expectation to exist in this case.51 (Op. 3, 16.) In Merrill Lynch, the court reasoned that

 

any tension between an auditor and a corporation that arises from an auditor's need to scrutinize and investigate a corporation's records and book-keeping practices simply is not the equivalent of an adversarial relationship contemplated by the work product doctrine.

 

229 F.R.D. at 448. At least twelve other district courts (not including the District Court in this case) concur.

As both the District Court in this case and the Textron court found, 507 F.Supp.2d at 153, disclosure to a financial auditor differs from disclosure to an agency of the Government -- such as the Defense Contract Audit Agency ("DCAA") that received work product documents in the MIT case.52 DCAA was a component of MIT's potential adversary, the Department of Defense, which had defense contracts with MIT. The DCAA could learn something through MIT's disclosures that would lead to conflict between MIT and the Defense Department.53 (Op. 15.) In contrast, in this case, the District Court found that no such conflict could arise from Regions disclosures to E&Y financial auditors about the EBRD Transaction.54Id.

The Government simply has no record to support its contention that E&Y was Regions' adversary or a conduit to such an adversary. Ms. Lloyd's testimony that E&Y was not Regions' adversary is unrebutted.55 Nothing in any Government declaration asserts -- much less persuasively establishes -- that E&Y was Regions' adversary or that disclosure to E&Y was effectively the disclosure to an adversary because E&Y was a "conduit." The District Court found as a factual matter, after considering all the proof, that E&Y was neither Regions' "adversary nor a conduit to an adversary" and hence Regions did not waive Rule 26 protection by disclosure to E&Y. (Op. 16.)

The Government attempts to remedy its lack of record in two ways. First, it cites articles and publications (Brief 63, 65, 69-70) that it did not offer to the District Court and which could not in any event have been competent evidence. Fed. R. Evid. 802 (Hearsay Rule). Moreover, none of the articles and publications cited for the first time in the Government's Brief to this Court assert that financial auditors are adversaries (or conduits to adversaries) of their audit clients.

Next, the Government miscites irrelevant case law with no bearing on or discussion of the waiver issue.56 These cases do not discuss whether any confidential information was disclosed by the auditor to third parties, and there is no indication in these cases that material subject to the work product privilege was reviewed by auditors. None bear on the factual question of whether E&Y was Regions' adversary or was a conduit to Regions' adversaries.

The Government's argument that a financial auditor is a "potential adversary" because an unforeseen dispute may later arise between the auditor and its client is untenable. Although the attorney-client privilege and the work product privilege are distinct in their purposes and in the ways in which each may be waived, courts have acknowledged that both forms of privilege can be waived if a client later sues his or her lawyer or otherwise puts the lawyer's action at issue. See Laughner v. United States, 373 F.2d 326, 327 (5th Cir. 1967) ("The [attorney-client] privilege is not an inviolable seal upon the attorney's lips. It may be waived by the client. . . where . . . the client alleges a breach of duty to him by the attorney . . .");57In re RDM Sports Group, Inc., 277 B.R. 415, 438 (N.D. Ga. 2002) (holding that a document once protected by the work product privilege lost its protection after the client brought an adversarial proceeding against its attorneys). If the potential for a later unforeseen dispute between a lawyer and client or auditor and client were sufficient to cause the lawyer or the auditor to be a "potential adversary" in the MIT sense, no document or opinion could ever be protected as work product because the possibility of a future dispute is always present. The District Court concluded otherwise, and it was surely correct in doing so. (Op. 15-16.)

The issue of whether E&Y was an adversary or a conduit to an adversary is not a legal issue but a factual issue which the District Court decided in favor of Regions based on the record before it. The Government lacks any record support for its contrary contentions. Moreover, as demonstrated above, the District Court and the twelve other district courts that have found disclosure to financial auditors not to waive work product have the better reasoned positions. Later use of the opinion work product generated at General Counsel Upchurch's request by E&Y auditors is an "other use" of work product permissible under either the "primary purpose" or "because of" test. The Government's position on waiver here amounts to an effort to impose a rule contrary to both the "because of" and "primary purpose" tests by asserting that any use of work product for purposes other than litigation results in waiver. All circuits' work product tests are contrary to that position, as the District Court properly concluded. (Op. 6, n.4.) See also Adlman, 134 F.3d at 1200.

 

CONCLUSION

 

 

The District Court found after review of the documents at issue and the evidence presented in the record that (i) both the Core Documents and the Derivative Documents contain precisely the kind of legal analysis that the work product exists to protect and (ii) E&Y was neither an adversary nor conduit to an adversary of Regions. These factual findings had ample support, and the District Court did not abuse its discretion in making its findings. For the reasons set forth above, the decision of the District Court should affirmed.

September 30, 2008

Respectfully Submitted,

 

 

Kenneth W. Gideon

 

Albert B. Turkus

 

Daniel P. Phillips

 

Skadden, Arps, Slate, Meagher &

 

Flom LLP

 

1440 New York Avenue, NW

 

Washington, DC 20005

 

(202) 371-7540

 

 

Attorneys for Appellee

 

CERTIFICATE OF SERVICE

 

 

It is hereby certified that the original and six copies of this Brief for the Appellees were sent to the Clerk of this Court by FedEx on this 30th day of September, 2008, and that service of this brief was made on counsel for the appellant and on counsel for Ernst & Young LLP on this 30th day of September, 2008, by sending two paper copies thereof in envelopes properly addressed as follows:

 

Judith A. Hagley, Esq.

 

Attorney

 

U.S. Department of Justice

 

950 Pennsylvania Avenue, NW

 

Suite 4333

 

Washington, DC 20530

 

 

Bonnie B. Monroe, Esq.

 

Maynard, Cooper & Gale, P.C.

 

1901 Sixth Ave., North

 

2400 AmSouth Harbert Plaza

 

Birmingham, AL 35203

 

It is also certified that the Internet upload of the electronic brief to the Court of Appeals was completed on this date.
Kenneth W. Gideon

 

Attorney for Appellees

 

FOOTNOTES

 

 

1 In this brief, references to "Brief" are to the Government's Brief for the Appellant filed August 29, 2008, and to "Op." are to the District Court's Opinion dated May 8, 2008. References to "Doc." followed by a number are to documents so numbered in the District Court record. Page references after the term "Op." are to pages in the District Court's Slip Opinion found in the record below as Doc. 27. Some of the documents in the District Court record have exhibits and appendices which are referred to in this brief as "Ex." and "App." The term "Decl." refers to witness declarations found in the District Court record. References to "Code" are to the Internal Revenue Code of 1986, as amended.

2 In this brief, Regions uses the District Court's terms, "Core Documents" and "Derivative Documents" to refer to the documents at issue. The Government argues that the District Court's terms "Core Documents" and "Derivative Documents" "create confusion" and has re-labeled the "Core Documents" as "tax advice documents" and the "Derivative Documents" as "financial audit documents" in its Brief. (Brief 15, n.4.) The Government's re-labeling, however, is unsupported by the record, and is contrary to the District Court's findings. See Parts I.E. and F. below.

3 EBRD is an international financial institution that is treated as foreign rather than domestic entity. The United States Secretary of the Treasury is a member of its Board of Governors. See www.ebrd.com/about/structure/govern.htm.

4 Although the Government alleges that the IRS departed from its policy of restraint (under which it does not normally seek documents from financial auditors) because Regions invested in "listed transactions," the EBRD Transaction is not a "listed transaction." The "listed transactions" allegedly giving rise to the Summons are referred to by the IRS as "SILO" transactions. None of the disputed documents in this case concern SILOs; all disputed documents are about the EBRD Transaction. (Brief 6-7, 13.) See Notice 2004-67, 2004-41 C.B. 600; Notice 2005-13, 2005-9 C.B. 630; Notice 2006-16, 2006-9 C.B. 538; Notice 2007-57, 2007-29 C.B. 87; Notice 2007-83, 2007-45 C.B. 960; Notice 2008-34, 2008-12 C.B. 645 (identifying all "listed transactions" currently recognized by the IRS).

5 General Counsel Upchurch's concerns about conflict with the IRS proved to be well-founded. The IRS is challenging Regions' tax reporting of the EBRD Transaction, and Regions is defending its position. (Brief 13-14; Doc. 21, Phillips Decl., Ex. P-1.)

6 The Government quotes Regions' initial pleading in the District Court to convey the misleading impression that Regions has agreed that the disputed documents are "tax-accrual workpapers." (Brief 10.) Regions has disputed that characterization from the outset. Regions' initial pleading (Doc. 1, ¶¶ 11-15) makes clear that it is using the term "Tax Accrual Workpapers" as defined by the Summons (i.e., the term was capitalized and referred to the defined term in the Summons). Regions challenged the Summons because it improperly sought opinions and analyses protected by Rule 26(b)(3). (Doc. 18, Hawkins Decl., Ex. 1, 1 and Attachment 2.)

7 The Government's assertion that only "most" rather than all E&Y tax accrual workpapers were produced (Brief 52) rests on its persistent effort to mislabel the opinion work product at issue in this case as if it were part of the "tax accrual workpapers." Instead, the District Court found that Regions and E&Y had already produced the information normally referred to as "tax accrual workpapers," i.e., information concerning the fact and amount of Regions' tax reserves. (Op. 13 n. 12.)

8 The Government's Brief describes tax-accrual workpapers as "documents analyzing a company's tax reserve for deferred or contingent tax liabilities and related representations in the company's audited financial statements." (Brief 3, citing United States v. Arthur Young & Company, 465 U.S. 805, 808 (1984).) But the Government omits the crucial characteristic of the tax accrual workpapers considered by the Supreme Court in that case: "Tax accrual workpapers are documents and memoranda relating to Young's evaluation of Amerada's reserves for contingent tax liabilities." Id. (emphasis added). There was no contention in that case that the documents there were prepared in anticipation of litigation.

Tax reserves are a creature of financial accounting. They are not deductible for tax purposes and have no bearing on tax liability.

9 The initial A&B Opinion and the E&Y Memo were created contemporaneously with the closing of the EBRD Transaction in December 2000, well before financial audit activity for 2002 and 2003 began. See Doc. 21, Phillips Decl., Ex. P-3 (referred to as the "Privilege Log") item ##1 and 4. A&B later updated its opinion on two occasions. (Privilege Log ##2, 3; Doc. 21, Upchurch Decl. ¶¶ 9, 13; Wheeler Decl. ¶¶ 4, 7; Garlock Decl. ¶¶ 6-7.) Regions gave E&Y the A&B Opinion. (Op. 3.)

10 Regions understands that the documents that the District Court reviewed in camera were not forwarded with the record on appeal to this Court but have been maintained by the District Court and could be made available to this Court upon appropriate order. Although the District Court's findings about the nature and content of disputed documents are clear, should any question remain Regions urges this Court to enter an appropriate order to the District Court to provide the documents so that this Court, like the District Court, may review the documents in camera.

11 At various points (e.g., Brief 15, 17), the Government identifies the following record citations as support for its speculations about the Derivative Documents: Doc. 18, Hawkins Decl. ¶ 47 and Ex. 3, 6, and 8 to that declaration and Doc. 21 at 31, 45, and 82-85. Agent Hawkins' testimony on the content of documents she never saw is pure speculation that the District Court appropriately rejected after inspection of the documents. Hawkins Decl., Ex. 3 is the Regions Privilege Log. (Doc. 21, Phillips Decl., Ex. P-3.) Hawkins Decl., Ex. 6 and 8 are letters to the IRS from Regions' counsel, neither of which provide any evidence that the documents contain auditor analyses or GAAP discussions. Exhibit 8 does not discuss authorship at all while Exhibit 6 (item e) establishes that Jeffrey Travis had a dual role as a tax advisor and auditor. "Doc. 21 at 31" apparently refers to Lloyd Decl. ¶ 7 where Ms. Lloyd states that audit team members wrote some documents that refer to the conclusions and analysis in the Core Documents. Ms. Lloyd does not state, however, that these documents constituted independent audit team analysis. The reference to Doc. 21 at 45 is apparently to Phillips Decl. ¶ 6 which states that the Derivative Documents "contain references to assessments and/or analyses made in the A&B Opinion and the E&Y Memo, [i.e. in the Core Documents]" (emphasis added). The Government's references to "Doc. 21 at 82-85" (Brief 18) appear to be an error. Nothing in the document that would fall in the page range cited (were Document 21 to be consecutively paginated) discusses the Derivative Documents. (Doc. 21, Phillips Decl., Ex. P-2.) None of the Government's record citations support the assertion that the Derivative Documents contain auditor conclusions or address compliance with GAAP.

12 In ¶ 46 of her declaration, Agent Hawkins alleged that the three documents authored by Alston & Bird LLP, Regions' legal counsel, were not prepared in anticipation of litigation, an allegation that the Government effectively admits is erroneous given its concession that the A&B-prepared Core Documents were work product. (Brief 45.)

13 Contrary to Agent Hawkins' assertion, the Withheld Derivative Documents and the Redactions in each case discuss, quote, or explain opinion work product created at the behest of General Counsel Upchurch. (Op. 3.)

14 The Government, again with no record support, characterizes Agent Hawkins inclusion of the E&Y Memo in paragraph 47 of her declaration as a "mistake[]" in "her analysis of E&Y's financial-audit documents." (Brief 21 n.5.) Agent Hawkins' grouping of the disputed documents in her declaration is certainly inconsistent with the Government's new argument, but there is no evidence, however, that Agent Hawkins ever asserted that there was a distinction between the E&Y Memo and other documents she described in paragraph 47 of her declaration or that she ever made an analysis of "E&Y financial-audit documents." Her supplemental declaration (Doc. 25) did not correct her alleged "mistake." The term "E&Y financial-audit documents" is not to be found in either of Agent Hawkins' declarations or in any Government submission to the District Court.

15 The Government makes numerous unsupported and erroneous factual assertions that are contrary to the District Court's findings, e.g., that "Regions' affiants did not disagree" that all Derivative Documents "were generated for financial-reporting purposes" (Brief 18); that Regions argued only that the four Core Documents were not tax accrual workpapers (Brief 22); that Regions did not claim that the 16 Derivative Documents were prepared in anticipation of litigation (Brief 23); Regions did not address "the fact" that the Derivative Documents were "auditor-prepared" (Brief 24); that the District Court did not analyze the purpose for which the 16 Derivative Documents were generated (Brief 25); that it is "undisputed" that the 16 Derivative Documents recorded "the auditors' tax accrual analysis" and were "generated to comply with the federal securities laws" (Brief 39) (emphasis added); that the "undisputed evidence" is that the 16 Derivative Documents were generated in the ordinary course of the annual audit and only for that purpose (Brief 50); that the "undisputed facts" establish that "part of the auditor's own independent analysis" has been withheld. (Brief 59.) Regions disputed these allegations in the most effective manner available to it: it furnished the disputed documents to the District Court for an in camera review. After reviewing the documents, the District Court made findings contrary to all these Government assertions (Op. 2-3, 11-13).

16 Regions does not agree, however, that the E&Y financial auditors' access to the disputed documents waived its work product privilege. See Part II below.

17 The Government urges that the District Court committed clear error in stating that a "confidentiality agreement protected any documents Regions gave to E&Y, an agreement that assured that E&Y could not give the documents to another party." (Op. 16; Brief 30, 64-67.) It is the Government, not the District Court, that is in error. The District Court did not refer to a separately-executed agreement but both Regions' and E&Y's understanding that the opinions on and analyses of the EBRD Transaction furnished to E&Y (as well as tax analysis of that Transaction by E&Y furnished to General Counsel Upchurch) would be kept confidential, that E&Y was obligated to maintain those confidences, and that all documents containing that analysis were in fact kept confidential. (Doc. 21, Upchurch Decl. ¶ 15; Garlock Decl. ¶ 8; Lloyd Decl. ¶¶ 9, 11; Wheeler Decl. ¶ 8.)

18 The Government mistakenly attempts to portray Ms. Lloyd as only having financial audit responsibilities. (Brief 12, 17.) The record is clear, however, that she, with the E&Y tax professionals who wrote the E&Y Memo included in the Core Documents, participated in the delivery of advice to Regions well before any financial audit activity commenced. (Doc. 21, Lloyd Decl. ¶¶ 2, 4-6.)

19 Ala. Admin. Code Ch. 30-X-6-.04(l) states: "A registrant [certified public accountant] shall not disclose any confidential information obtained in the course of a professional engagement except with the consent of the client." Rule 301 of the American Institute of Certified Public Accountants ("AICPA") Code of Professional Conduct provides: "A member in public practice shall not disclose any confidential client information without the specific consent of the client."

20 The Government argues that there was no expectation of confidentiality with respect to the Derivative Documents. (Brief 19.) But E&Y could not have fulfilled its confidentiality obligations with respect to the Core Documents if the Derivative Documents (emails and informal memoranda quoting or referring to the Core Documents) were not also kept confidential. The record is clear that the Derivative Documents, like the Core Documents, were kept confidential. (Op. 3, 16; Doc. 21, Lloyd Decl. ¶ 9, Garlock Decl. ¶ 8.)

21 The Government improperly attempted to introduce in the proceeding below declarations by Douglas Carmichael prepared for another case by attaching them as exhibits to Agent Hawkins' declaration. (Doc. 18, Hawkins Decl., Ex. 13-14, note different case captions.) Regions objected to this below and renews its objection here. There is no showing that Mr. Carmichael has considered or has any knowledge of the facts in this case. While the District Court did not explicitly rule on the objection, it made no use of Mr. Carmichael's testimony.

Without waiving the foregoing objection, Regions notes that there is no testimony in either of Mr. Carmichael's declarations that an auditor is an adversary of an audited entity or a conduit to such an adversary. Nor did Mr. Carmichael consider the confidentiality requirement imposed by the state of Alabama. See Ala. Admin. Code Ch. 30-x-6-04(l). Moreover, Mr. Carmichael's observation in another case that auditors may disclose confidential information in response to a summons or subpoena (Brief 19-20; Doc. 18, Hawkins Decl., Ex. 14, ¶ 2) simply does not address the immunity of work product that is privileged under Rule 26.

22 No Eleventh Circuit authority is cited for this proposition. The First Circuit case cited by the Government states that "discretionary judgments such as evidentiary rulings are reviewed for abuse of discretion." United States v. Mass. Inst, of Tech., 129 F.3d 681, 683 (1st Cir. 1997) (hereinafter cited as "MIT").

23 Neither Upjohn nor Euge is cited or discussed in the Government's Brief.

24 The District Court found that "The IRS has made neither a legal argument no[r] an evidentiary showing that suggests that it could demonstrate a degree of hardship sufficient to overcome whatever burden actually applies." (Op. 4 n.3.)

25 The Supreme Court had earlier refused to recognize an "accountant-client" privilege in Couch v. United States, 409 U.S. 322 (1973), as had this court in In re Int'l Horizons, Inc., 689 F. 3d 996 (11th Cir. 1982). Neither case involved and neither case purports to discuss documents subject to Rule 26(b)(3).

26 The case the Government cites (Brief 33) for its "narrow construction" argument, Cavallaro v. United States, 284 F.3d 236, 245 (1st Cir. 2002), concerns the attorney-client privilege, not the work product doctrine, and in any event that case explicitly disclaimed reliance on "narrow construction" of traditional privileges.

27 The Government miscites Arthur Young at page 66 (and also at pages 36 and 59) of its Brief when it asserts that the Supreme Court "held that a company's litigation predictions regarding its 'questionable' tax positions that had been provided to an auditor were subject to an IRS summons . . . even though the parties deemed the information 'confidential.'" (emphasis added). What the Supreme Court actually said at 465 U.S. at 812-13 was that in preparing the auditor's own analysis "[t]he auditor will also obtain and assess the opinions, speculations, and projections of management with regard to unclear, aggressive, or questionable tax positions that may have been taken on prior tax returns." There is no reference on those pages of the Supreme Court's opinion to "litigation predictions," "confidentiality," or "work product." The "confidentiality" references the Government cites are to the reversed Second Circuit opinion in the case. In any case, the documents at issue involve legal analysis which is the essence of opinion work product, not "litigation predictions."

28 The Government's assertion (Brief 51-52) that the District Court disregarded "binding precedent" and "undisputed facts" concerning the purpose for which the Derivative Documents were created is thus spurious. (Op. 12-13.)

29 The Arthur Young opinion could not have asserted that both the SEC and private litigants would "surely be entitled" to discovery of the Young workpapers, 465 U.S. at 820, had those workpapers contained anything protectable under Rule 26. Thus, the Government's argument that the SEC was "entitled" to the Young workpapers (Brief 62) attempts to assume away the issue in this case. S.E.C. subpoenas, like IRS summonses, are subject to Rule 26(b)(3) work product privilege. SEC v. R.J. Reynolds Tobacco Holdings, Inc., No. MISC.A.03-1651 (JDB), 2004 WL 3168281 (D.D.C. June 29, 2004). The Government's argument (Brief 65-66) that auditors like all other citizens must comply with summonses and subpoenas is similarly beside the point. Proper assertion of a recognized privilege such as that provided in Rule 26(b)(3) limits the reach of an IRS summons.

30 The Government asserts the District Court "completely ignored" the Supreme Court's Arthur Young decision in its opinion. (Brief 44.) But in its detailed discussion of Newton (Op. 7 & n.5), the District Court discussed and distinguished this Circuit's precedent that reached the same result as Arthur Young. Moreover, it cannot be presumed that the District Court ignored the Arthur Young decision since it was extensively discussed on both briefs below. (Doc. 18, Government's District Court Brief at 4, 10-13, 16, 20; Doc. 22 at 15-16, 29-30.)

31 The Government cites Adlman once (Brief 21) and Roxworthy once (Brief 55) without discussing the conflict between the position it asserts here and the holdings in those cases. The Government erroneously asserts that affirmance of the District Court would create a conflict with United States v. El Paso Co., 682 F.2d 530 (5th Cir. 1982). (Brief 56.) But El Paso found that the annual tax pool analysis at issue there was created solely for financial accounting purposes, and not in anticipation of litigation. 682 F.2d at 542-43. The facts here as found by the District Court are directly contrary. The Government, however, does not explain how this Court could reverse this case without creating a direct conflict with Adlman and Roxworthy. Moreover, the cited passage of the El Paso opinion makes clear that the Fifth Circuit's analysis in that case rested on the "primary purpose" test for work product which has now been rejected by nine circuits. See n.35. Adoption of the "primary purpose" test would place this Court in conflict with those circuits. Moreover, it is unclear that even the Fifth Circuit consistently applies a "primary purpose" test. See Hoover v. United States Dep't. of the Interior, 611 F.2d 1132 (5th Cir. 1980); Hodges, Grant & Kaufman v. United States, 768 F.2d 719 (5th Cir. 1985); see also Op. 8-9.

32 In Roxworthy, the Sixth Circuit concluded that the taxpayer's belief that litigation was anticipated was objectively reasonable, 457 F.3d at 599-600, citing Coastal States Gas Corp. v. Dep't of Energy, 617 F.2d 854, 865 (D.C. Cir. 1980) (protected documents are those prepared with reference to "a specific claim supported by concrete facts which would likely lead to litigation in mind"). Here the District Court found that Regions anticipated litigation (Op. 14) and the IRS challenge to Regions tax reporting of the transaction makes it apparent that Regions' "anticipation" was reasonable. (Op. 12; Doc. 21, Phillips Decl., Ex. P-1.)

33 The Second Circuit also noted that in Delaney, Migdall & Young Chartered v. IRS, 826 F.2d 124 (D.C. Cir. 1987), the Government successfully argued against the Fifth Circuit "primary purpose" test in defense of the IRS's own work product. The D.C. Circuit found that the IRS documents in that case had both a business purpose and a litigation hazard analysis purpose. The D.C. Circuit denied discovery of the IRS work product stating that the party seeking discovery was

 

seeking the agency attorneys' assessment of the program's legal vulnerabilities [of a statistical sampling program] in order to make sure it does not miss anything in crafting its legal case against the program. This is precisely the type of discovery the [Supreme] Court refused to permit in Hickman v. Taylor.

 

United States v. Adlman, 134 F.3d 1194, 1201 (2d Cir. 1998) (Second Circuit's emphasis), quoting 826 F.2d at 124. Agent Hawkins' Declaration recites a virtually identical purpose for seeking Regions' opinion work product. (Doc. 18, Hawkins Decl. ¶ 51, last sentence.) See also Roxworthy, 457 F.3d at 595.

34 In this case, there is an important distinction -- the opinion work product analyses were created at General Counsel Upchurch's behest before any financial audit activity, then later reviewed by the auditors, i.e., the preparation of opinion work product was primarily motivated by the need to assess litigation hazard then that opinion work product was later reviewed by the financial auditors. The facts here thus provide an even stronger basis for work product protection.

35 In Adlman, the Second Circuit specifically rejected "primary purpose" analysis of El Paso. Including the decision in Adlman, nine circuits have adopted the "because" of" test, and none, other than possibly the Fifth (see n.31), now use the "primary purpose" analysis of El Paso. See Maine v. United States Dep't of Interior, 298 F.3d 60, 68 (1st Cir. 2002); Martin v. Bally's Park Place Hotel & Casino, 983 F.2d 1252, 1258 (3d Cir. 1993); Nat'l Union Fire Ins. Co. v. Murray Sheet Metal Co., 967 F.2d 980, 984 (4th Cir. 1992); Roxworthy, 457 F.3d at 593 (6th Cir.); Logan v. Commercial Union Ins. Co., 96 F.3d 971, 976-77 (7th Cir. 1996); Diversified Indus., Inc. v. Meredith, 572 F.2d 596, 604 (8th Cir. 1977); In re Grand Jury Subpoena (Torf), 357 F.3d 900, 909 (9th Cir. 2004); In re Sealed Case, 146 F.3d 881, 884 (D.C. Cir. 1998).

36 The Government's assertion (Brief 29) that auditors by definition may not be a party's representative lacks any case law support. The issue was not presented in either Arthur Young or Newton because those cases did not involve Rule 26 work product. Moreover, the assertion is beside the point in this case: accounting firms, not acting in a audit capacity undoubtedly can be party representatives who can create work product as the cases cited in the next note illustrate and as the Government admits that E&Y did here in the case of the E&Y Memo.

37See United States v. Adlman, supra, and United States v. Roxworthy, supra, discussed in Part I.D. above, both of which accord work product protection to documents created by accounting firm personnel who were not acting as auditors.

38 The Government did not request findings from the District Court that the Withheld Derivative Documents or any Redactions reflected auditors' independent conclusions or "GAAP analysis."

39 The Government's assertion that "other than the court below, no court has held that the work product doctrine protects tax accrual workpapers prepared by an independent auditor" (Brief 38) is factually wrong because the record does not support the Government's characterizations of the disputed documents as "tax accrual workpapers," or "auditor analysis." Other courts have held documents not meaningfully distinguishable from the disputed documents to be work product. See Part I. D.

40 Contrary to the Government's assertion, (Brief 18) there is no requirement that each work product document be communicated to the client. Natta v. Zletz, 418 F.2d 633, 637-38 (7th Cir. 1969) (intra-office circulation of summaries of legal research and comments on technical information were work product).

41 The exceptions are: (1) the issue involves a pure question of law and refusal to consider it would result in a miscarriage of justice; (2) the appellant is raising an objection to an order which he had no opportunity to raise at the district court level; (3) the interest of substantial justice is at stake; (4) the proper resolution is beyond any doubt; or (5) the issue presents significant questions of general impact or of great public concern. Narey, 32 F.3d at 1526-27.

42Medinol is the only recent decision that adopts the Government's position on waiver. Since Medinol was decided, three other district courts, two in the Southern District of New York and one in Illinois have explicitly rejected its holding as contrary to Adlman. Merrill Lynch & Co. v. Allegheny Energy, Inc., 229 F.R.D. 441 (S.D.N.Y. 2004); Am. S.S. Owners Mut. Prot. & Indem. Ass 'n v. Alcoa S.S. Co., No. 04 Civ 4309 LAKJCF, 2006 WL 278131 (S.D.N.Y. Feb. 2, 2006); Lawrence E. Jaffe Pension Plan v. Household Int'l, Inc., 237 F.R.D. 176 (N.D. III. 2006). Moreover, five cases in the Southern District of New York hold, contrary to Medinol, that disclosure to financial auditors does not waive work product. See n.43.

Two recent Northern District of California cases reject the conclusion of In re Diasonics that disclosure to auditors results in waiver. In re JDS Uniphase Corp. Sec. Litig., No. C-02-1486 CW (EDL), 2006 WL 2850049 (N.D. Cal. 2006); SEC v. Roberts, No. C 07-04580 MHP, 2008 WL 3925451 (N.D. Cal. Aug. 22, 2008).

43SEC v. Roberts, supra; United States v. Textron, Inc., 507 F.Supp.2d 138 (D.R.I. 2007), appeal pending, No. 07-2631 (1st Cir. argued Sept. 5, 2008); Lawrence E. Jaffe Pension Fund, supra; American S.S. Owners, supra; In re JDS Uniphase Corp. Sec. Litig., supra; Int'l Design Concepts, Inc. v. Saks Inc., No. 05 CIV. 4754(PKC), 2006 WL 1564684 (S.D.N.Y. June 6, 2006); Frank Betz Assocs., Inc. v. Jim Walter Homes, Inc., 226 F.R.D. 533, 535 (D.S.C. 2005); Merrill Lynch & Co. v. Allegheny Energy, Inc., supra; In re Honeywell Int'l, Inc. Sec. Litig., 230 F.R.D. 293 (S.D.N.Y. 2003); Gutter v. E.I. Dupont de Nemours & Co., No. 95-CV-2152, 1998 WL 2017926 (S.D. Fla. May 18, 1998); In re Pfizer Inc. Sec. Litig., No. 90 Civ. 1260 (SS), 1993 WL 561125 (S.D.N.Y. Dec. 23, 1993); Gramm v. Horsehead Indus., Inc., No. 87 CIV. 5122 (MJL), 1990 WL 142404 (S.D.N.Y. Jan. 25, 1990).

44 The Government is correct that the Textron case differs from this case (Brief 53-54) in that the taxpayer in Textron seeks to protect itemized listings of issues for which it has tax reserves and the amounts of those reserves that were prepared by its attorneys then shared with its financial auditors. Thus, Textron does concern documents that would generally be referred to as "tax accrual workpapers" while this case does not. The issue of whether disclosure of work product to financial accountants waives the privilege, however, is the same in both Textron and this case. The Government has appealed Textron's holding that disclosure to auditors does not waive work product.

45Gutter, supra, also cited by the Government, contains no mention of a "common interest" in its analysis. In re Pfizer, supra, does discuss common interest.

46 The Government's citation of United States v. Noall, 587 F.2d 123, 126 (2d Cir. 1978) as rejecting the twelve majority cases cited in note 43 and establishing a special exception from Rule 26 for IRS summonses because "the revenue stands apart" (Brief 73 n.16) is a miscitation of that case. Noall involved internal audit reports and related workpapers, not work product or even papers created by outside auditors. The Government acknowledges that no appellate court has addressed the waiver issue presented here, a concession that correctly if not explicitly includes Noall. (Brief 61 n.14.) Noall does not discuss any of the majority cases cited in note 43.

47 The Government erroneously asserts (Brief 71-72) that the district courts in the majority, which have concluded that work product is not waived by disclosure to financial auditors, fail to consider the auditors' "public-watchdog function" and the "extent to which law and accounting standards required disclosure of information provided to auditors" and instead rely on policy considerations rejected in Arthur Young. The frequently-cited Merrill Lynch decision, however, explicitly considered an auditor's "public watchdog" role, 229 F.R.D. at 446, but based its decision on the "because of" test, not policy considerations, which permits non-litigation use of work product. The Merrill Lynch court found that the crucial inquiry for waiver of work product was whether disclosure to the auditor made disclosure to an adversary more likely. See Part II B. below

48Diasonics cited Arthur Young but did not explain how that case, which did not consider Rule 26 work product, could support its decision. It also cited a decision in conflict with all the decisions listed in note 35 by a court that no longer exists, United States v. Gulf Oil Corp., 760 F.2d 292 (Temp. Emer. Ct. App. 1985).

49 In Stewart, the court held that Martha Stewart did not lose work product privilege for an attorney email disclosure of that document to her daughter (even though such disclosure did waive the attorney-client privilege). The daughter was neither an adversary nor a conduit to an adversary.

50Diasonics, the other waiver case on which the Government has "chiefly relied" (see Brief vi), does not discuss whether financial auditors are adversaries or conduits to adversaries.

51 In Textron, the court relied on the same confidentiality rule of the AICPA relied on in part by the District Court here, 501 F.Supp.2d at 153, stating that "even if the AICPA Code coupled with E&Y's promise did not establish an absolute guarantee of confidentiality, they made it very unlikely that E&Y would provide Textron's 'tax accrual workpapers' to the IRS and they negate any inference that Textron waived its work product privilege."

52 The Textron court explained the difference as follows:

 

DCAA, as the DOD's audit agency, had both an obligation to DOD to determine whether the amounts charged by MIT to DOD were correct, and the authority to sue MIT in order to recover any overcharges. By contrast, in [ Textron ], E&Y was a truly independent auditor that had no obligation to the IRS to determine whether Textron's tax return was correct and no authority to challenge the return.

 

507 F.Supp.2d at 153-54. See also Merrill Lynch, 229 F.R.D. at 446.

53In re Raytheon Sec. Litig., 218 F.R.D. 354 (D. Mass. 2003), does not support the Government's position. In that case, the court ordered an in camera inspection to determine whether the documents were work product, an examination already made by the District Court in this case.

54 Other citations in the portion of the Government's Brief devoted to the waiver issue are simply irrelevant to the issue before this Court, see e.g., United States v. AT&T Co., 642 F.2d 1285 (D.C. Cir. 1980) (joint trial preparation does result in waiver); Castle v. Sangamo Weston, Inc., 744 F.2d 1464 (11th Cir. 1984) (same); Ricoh Co. v. Aeroflex Inc., 219 F.R.D. 66 (S.D.N.Y. 2003) (waiver by disclosure to a potential expert witness). None of these situations are involved here, and none of these cases address whether financial auditors are adversaries.

55 The Government miscites In re Int'l Horizons, Inc., 689 F.2d 996, 1003-05 (11th Cir. 1982) for its assertion that the Alabama rule (see supra at 21 n.19; Doc. 21, Lloyd Decl. ¶ 11) that obligates certified public accountants to maintain client confidences would be irrelevant in a summons enforcement proceeding. (Brief 65-66 n.15) The pages of that case cited by the Government decline to apply a Georgia statute creating a state law "accountant-client" privilege in a Federal bankruptcy proceeding. The Alabama rule is not a privilege statute, but it (together with the AICPA rules) creates confidentiality obligations applicable to all certified public accountants practicing in Alabama. Int'l Horizons does not discuss such obligations. The Alabama and AICPA rules are relevant here because they reinforced and mandated Regions' and E&Y's understanding that the disputed documents would be maintained in confidence.

56See, e.g., SEC v. Price Waterhouse, 797 F.Supp 1217 (S.D.N.Y. 1992), Pegasus Fund, Inc. v. Lareneta, 617 F.2d 1335 (9th Cir. 1980), Oleck v. Fischer, 623 F.2d 791 (2d. Cir. 1980), Nat'l Med. Transp. Network v. Deloitte & Touche, 72 Cal. Rptr. 2d 720 (Cal. App. 1998).

57Laughner is binding precedent in the circuit under Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc) (adopting as binding precedent decisions of the former Fifth Circuit rendered prior to October 1, 1981).

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Case Name
    REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES, Petitioner/Cross-Respondent-Appellees ERNST & YOUNG LLP, Cross-Respondent-Appellee v. UNITED STATES OF AMERICA Respondent/Cross-Petitioner-Appellant
  • Court
    United States Court of Appeals for the Eleventh Circuit
  • Docket
    No. 08-13866
  • Authors
    Gideon, Kenneth W.
    Turkus, Albert B.
    Phillips, Daniel P.
  • Institutional Authors
    Skadden Arps Slate Meagher & Flom LLP
  • Cross-Reference
    For the district court opinion in Regions Financial Corp. et al. v.

    United States, No. 2:06-cv-00895 (N.D. Ala. May 8, 2008), see

    Doc 2008-10349 or 2008 TNT 92-64 2008 TNT 92-64: Court Opinions.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2008-22638
  • Tax Analysts Electronic Citation
    2008 TNT 210-12
Copy RID