Ethics

On August 13 the first circuit released an en banc decision on whether material not prepared for litigation but which "relates to a subject that might or might not occasion litigation" fall within the work product privilege (here). The materials in question were prepared in order to obtain a "clean audit" for Textron and included lawyer assessments of the risks associated with various filing positions taken by Textron in tax matters.  The majority held the materials were not privileged.  It was insufficient that they were prepared by lawyers and/or represented legal insight and it was insufficient that the only reason that the auditors required the information was that litigation could result (and could, if decided favourably to the IRS, render Textron's financial statements inaccurate).  The basic position of the Court: "To sum up, the work product privilege is aimed at protecting work done for litigation, not in preparing financial statements. Textron's work papers were prepared to support financial filings and gain auditor approval; the compulsion of the securities laws and auditing requirements assure that they will be carefully prepared, in their present form, even though not protected; and IRS access serves the legitimate, and important, function of detecting and disallowing abusive tax shelters."

The dissenting judges argued that the proper legal test is that materials were prepared because of the prospect of litigation, not that they were prepared for litigation, and that the test was satisfied here.

I don't know enough about US law on privilege to have an informed opinion about the legal accuracy of this judgment.  As a policy matter I question the desirability of requiring a company to provide its legal advice to an auditor to satisfy legal reporting requirements and then using that advice to go after the company for its tax positions.  The questionable transactions engaged in by Textron were evident from other materials and their legitimacy as tax avoidance transactions could be challenged without the aid of Textron's advice from counsel being provided to the IRS.