In United States v. Deloitte LLP, 610 F.3d 129 (D.C. Cir., June 29, 2010), the Circuit Court of Appeals for the District of Columbia recently held that outside auditors’ record of an attorney’s mental impressions is protected from disclosure in later litigation even though the outside auditors, not the company’s outside attorneys, initially recorded the mental impressions of the attorneys.

The Deloitte decision concerns whether the government could force disclosure of certain documents by a party litigant (“the company”) during tax litigation. The key document in dispute was a 1993 draft document prepared by outside auditors summarizing a meeting between company employees, the company’s outside attorneys, and the outside auditors about the possibility of litigation over a limited partnership and the necessity of accounting for the possibility of litigation in an ongoing audit of the company (“document”).

In Deloitte the District Court denied the government’s motion to compel the first document holding it was work-product, as it was “prepared because of the prospect of litigation with the IRS over the tax treatment” of a company asset. Although the first document was drafted by the outside auditors, the District Court held it was protected as the company’s work-product because its contents recorded the thoughts of [the company’s] outside counsel “regarding the prospect of litigation.” Id.

The Circuit Court in Deloitte agreed with the District Court. It rejected the argument that the company waived work-product protection for the first document when it orally disclosed the attorney’s impressions with its outside auditors. The Deloitte court ruled the identity of the person initially recording the attorney’s mental impressions was not controlling. The governing rule as to work-product Rule 26(b)(3) protects “documents and tangible things that are prepared ... by or for another party or its representative” in preparation for litigation. Given this language alone, the document arguably was not work-product because the outside auditors were not the company’s “representatives.” This point, unsuccessfully argued in Deloitte, was based on United States v. Arthur Young & Co., 465 U.S. 805 (1984), in which the Supreme Court refused to recognize an accountant work-product privilege.

In Arthur Young, the court contrasted the role of an attorney with that of an accountant, explaining that an attorney is “a loyal representative whose duty it is to present the client’s case in the most favorable possible light,” whereas an independent certified public accountant has a “public responsibility” and “owes ultimate allegiance to the corporation’s creditors and stockholders, as well as to the investing public.” Id. at 817-18.

In Deloitte, the government relied on Arthur Young to argue the outside auditors cannot be the company’s representative and that the document cannot be protected work-product under Rule 26(b)(3). The company successfully countered that the “representative” for purposes of Rule 26(b)(3) is its counsel, whose thoughts and opinions were recorded in the document, rendering the document work-product because it recorded those mental impressions. The Deloitte court agreed. Deloitte holds the core of work-product protection is the mental impressions of counsel, regardless of how they are recorded.

Deloitte relies on the work-product doctrine and protections first announced in Hickman v. Taylor, 329 U.S. 495 (1947). Hickman holds an attorney’s notes of interviews with witnesses to a litigation-prompting event were protected from discovery. Id. at 509-10. (cont. page 2)

To prepare for litigation, an attorney must “assemble information, sift what he considers to be the relevant from the irrelevant facts, prepare his legal theories” and plan strategy “without undue and needless interference.” Id. at 511. This preparation “is reflected . . . in interviews, statements, memoranda, correspondence, briefs, mental impressions, personal beliefs, and countless other tangible and intangible ways.” Id. The Hickman court reasoned that giving an opposing party access to such work-product would impair work essential of all attorneys:

[M]uch 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. The effect on the legal profession would be demoralizing. And the interests of the clients and the cause of justice would be poorly served...

329 U.S. at 512 (emphasis added). The Hickman court concluded attorney work-product is protected from discovery unless “the one who would invade that privacy” carries the burden of “establish[ing] adequate reasons to justify disclosure.” Id. at 512.

The Deloitte court (based on Hickman) ruled, even if the document fell outside the definition of Rule 26(b)(3), it may be work-product because Rule 26(b)(3) is not an exhaustive description of workproduct. Although the rule describes work-product it addresses only “documents and tangible things.” The definition of work-product, however, extends to “intangible” things, including non-recorded mental impressions. Hickman, 329 U.S. at 511. As those “intangible things” include an attorney’s “mental impressions,” a document recording protected mental impressions is protected from discovery. Id. at 512-13. Deloitte makes clear that Hickman’s provision of work-product protection for intangible work-product is not limited to the text of Rule 26. The key work-product question is not who created the document or how that person is related to the party asserting work-product protection, but whether the document contains an attorney’s thoughts and opinions developed in anticipation of litigation. The auditor’s document in Deloitte recorded those protected thoughts even though outside auditors, not the company attorneys, committed those thoughts to paper. The work-product protection does not depend on whether the attorney’s thoughts or opinions were communicated orally or in writing. The protection depends on whether the thoughts were prepared by an attorney in anticipation of litigation. The outside auditor’s recording of the mental impressions did not alter the work-product protection available for the mental impressions of the company attorneys.

The fact that the document was generated by the auditors during an annual audit of the company did not require a different conclusion. The Deloitte court rejected the argument that work-product is to be identified based on the function of the document rather than the contents. 610 F3d at 137. The fact that the work-product was embedded in a document initially used to facilitate an audit of the company and not primarily to prepare the company for actual litigation did not alter the work-product character of the contents. A record of the attorneys’ thought processes prepared or used for multiple purposes remains protected so long as the impressions were prepared because of the prospect of litigation.

The Deloitte ruling is important for the principles announced but is, between the parties, not yet final. The District Court in Deloitte ruled on the work-product issue without examining the auditor’s document in chambers. Accordingly, there was an insufficient evidentiary foundation for the District Court ruling that the entire document was protected as work-product.

A second dispute in Deloitte involves an issue of waiver of workprotection as to two other documents. Both were prepared by attorneys and delivered to the same outside auditors. Prior to Deloitte, no Circuit Court had addressed whether disclosing work-product to an independent auditor was a waiver of work-product protection. Voluntary disclosure waives the attorney-client privilege if the disclosure is inconsistent with the confidential attorney-client relationship. However, voluntary disclosure does not waive workproduct protection if the disclosure is not to the public or to an adversary or does not occur in a manner inconsistent with maintenance of secrecy from the disclosing party’s adversary.

In Deloitte, no waiver was found by reason of the company disclosure of the two documents to its outside auditors because the company, under the circumstances, had a justified expectation of confidentiality with its auditors. The independent auditor is obligated to refrain from disclosing confidential client information. Deloitte, 610 F3d at 142. The Deloitte court also noted independent auditors have “significant leverage” over companies whose finances they audit. An auditor, the court noted, can “essentially compel” disclosure by refusing to provide the company an unqualified audit if the disclosure is refused. Finding a waiver in such a case would discourage candor by the company and its counsel and would thereby defeat several of the core goals of work-product protection. Forced waiver might discourage companies from seeking legal advice and from candidly disclosing that advice to independent outside auditors. Id. at 143. Granting discovery to an adversary would undercut the adversary process. Id.

The principal Deloitte ruling as to work-product protection provides strong support for protection of attorney mental impressions regardless when they are recorded or by whom. The rule announced in Deloitte requires caution, however, because it is announced in a factual framework that involved a specific and highly controlled audit. An opposite outcome could easily occur in a slightly different factual setting. If the work-product impressions of counsel were to be delivered to outside auditors for use in any public filing as opposed to a private and strictly controlled audit, the work-product impressions would not be protected. The favorable ruling in Deloitte is confined to the favorable facts there, and is therefore narrow. Even after Deloitte, cautious attorneys and auditors should not record or disclose mental impressions of possible litigation if future public disclosure of the attorney’s mental impressions is in any way foreseeable or possible.