Company counsel looking to shield privileged communications and documents from the prying eyes of the government and litigation adversaries historically have faced a tougher battle than their outside counsel counterparts.
A closely-watched case pending before the 1st Circuit presents an opportunity to reclaim some privileged territory. Business and corporate counsel groups are urging the court to protect documents and communications between in-house attorneys, company officials and non-adversarial third parties, such as auditors.
The U.S. Chamber of Commerce and the Association of Corporate Counsel (ACC) filed a joint amicus curiae brief, arguing that absent confidentiality protection companies will be forced to choose between having open communications with their auditors, and protecting themselves from litigation exposure.
“Companies really need to have clarity and predictability,” said Robin S. Conrad executive vice president of the National Chamber Litigation Center. “That is essential across the board. When you have the abhorrent [attorney privilege] policies coming from the federal government it creates really murky situations for companies. They just don’t know how to conduct their affairs.”
Last year, a federal judge in Rhode Island ruled that tax accrual work papers prepared by in-house attorneys at aerospace and defense conglomerate Textron Inc. were protected by the work product privilege. As a result, the company did not have to produce them in response to a summons by the Internal Revenue Service.
However, the judge ruled the tax documents were not protected by the attorney-client privilege because Textron attorneys shared the documents with a third party – an independent auditor.
“It is well established that voluntary disclosure to a third party waives the attorney-client privilege even if the third party agrees not to disclose the communications to anyone else,” wrote District Court Judge Earnest Torres in U.S. v. Textron, (507 F. Supp. 2d 138).
The IRS appealed the decision and the case is now before the 1st Circuit, where oral arguments are scheduled this summer. A decision is expected soon after.
IRS Chief Counsel Donald Korb said the decision has not caused a changed in IRS policy in seeking tax-related documents. “We’re not going to change anything as a result of this case,” Korb said. “Nothing in the decision undermines the IRS policy of seeking tax accrual work papers when appropriate.”

Essential business practice

But corporate counsel advocates say that communications with auditors is an essential business practice. In-house attorneys engage in risk assessment concerning potential litigation and other factors – assessments that require the help of auditors. Declaring that communications between the two is a waiver of the privilege will prevent in-house attorneys from being able to do their jobs, they say.
“Lawyers assess risk, and auditors ensure they are properly assessing what the risks are,” said Susan Hackett, general counsel and senior vice president of the ACC. “You want companies working with auditors aggressively to ensure policing of the financial integrity of the company. That happens on a daily basis. If that information is discoverable, lawyers are going be loathe to provide it to auditors. They are not going the able to engage in that meaningful review as to whether a company has appropriately set aside funds in their reserves for potential liability.”
Business groups said the decision creates a double-standard for in-house attorneys, whose work is as essential to businesses and worthy of protection as the work of attorneys at outside firms, which is clearly shielded by the privileges.
“There is a balance that needs to be struck,” Conrad said. “This case really is just one exemplar of what is going on out there with the very narrow interpretation what the [in-house] attorney-client privilege and what the work product doctrine is all about.”
Decisions like Textron make it harder for company officials to communicate openly with auditors. They also potentially expose businesses to liability if the papers fall into the hands of adversaries.

‘One big stone’

“What that does is kill two good policies with one big stone,” Conrad said. “You have the important policy of working openly with auditing firms, and the other good policy of protecting the attorney work product. It’s important for the company to work very closely and not have communications chilled between it and its auditor. If the information exchanged all of a sudden is opened up to litigation, it makes that more difficult.”
Other business groups, including Financial Executives International – an advocacy group comprised of financial officers from companies in a variety of sectors around the globe – have also filed amicus briefs in the case.
“Our member companies take seriously their obligation to prepare financial statements that fairly reflect their financial position,” said FEI’s Tax and Economic Policy director Matt Miller. “But in meeting this obligation, they should not be compelled to disclose information that would be used unfairly by a litigation adversary, including the IRS.”