Disclosure to Outside Auditors Waives Attorney-Client Privilege But Not Work Product

The IRS summons in United States v. Textron, 507 F.Supp.2d 138 (D.R.I. 2007), sought the corporation’s tax accrual workpapers. Textron claimed that the workpapers were privileged because they included, inter alia, estimates by Textron’s counsel expressing, in percentages, their judgments regarding Textron’s chances of prevailing in any litigation over relevant tax issues and the dollar amounts reserved as a result. Textron did, however, permit its outside auditors (E&Y) to examine the workpapers on the understanding that the auditors would treat them as confidential. Held, the workpapers were privileged because they “essentially consist of nothing more than counsel’s opinions regarding Textron’s chances of prevailing in any ensuing litigation,” but the privilege was waived by the disclosure of the advice to the independent auditors (as was the tax practitioner privilege of 26 U.S.C. § 7525). Work product protection was preserved, though, because “disclosure of information to an independent auditor does not waive the work product privilege because it does not substantially increase the opportunity for potential adversaries to obtain the information” (citing In re JDS Uniphase Corp. Sec. Litig., 2006 U.S. Dist. LEXIS 76169, 2006 WL 2850049 (N. D. Cal. 2006); Lawrence E. Jaffe Pension Plan v. Household Int'l, Inc., 237 F.R.D. 237 F.R.D. 176, 183 (N.D. Ill. 2006); Frank Betz Assocs., Inc. v. Jim Walter Homes Inc., 226 F.R.D. 533, 535 (D.S.C. 2005); Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc., 229 F.R.D. 441 (S.D.N.Y. 2004); Gutter v. E.I. DuPont de Nemours & Co., 1998 U.S. Dist. LEXIS 23207, 1998 WL 2017926 (S.D. Fla. 1998); In re Pfizer Inc. Sec. Litig., 1993 U.S. Dist. LEXIS 18215, 1993 WL 561125 *6 (S.D.N.Y. 2003)).

Question of the day: Would the same privilege waiver be found if the disclosure were made to internal as opposed to outside auditors?

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