*Cross-posted at Forbes’ On the Docket
The Supreme Court declined on Monday to review an important case that many in-house counsel across America had been watching closely. The Court’s denial of certiorari in Textron v. United States leaves in place a controversial en banc decision by the U.S. Court of Appeals for the First Circuit that drastically undermines the important work-product privilege on which corporate counsel have long relied when representing their clients. Reversing both an earlier panel opinion and a district court order—both of which ruled that Textron’s tax accrual work papers were protected as attorney work product—the en banc First Circuit effectively eviscerated a venerable staple of American legal culture and practice for over 60 years.
The case arose in connection with an IRS audit of Textron’s tax returns. Although Textron produced several thousand pages of documents in response to the IRS’s demands, it withheld as privileged certain tax accrual work papers, which were prepared by its in-house lawyers and accountants. These papers contained the legal opinions and conclusions of Textron’s counsel and tax advisers as to certain issues where the tax laws were vague and possibly subject to challenge by the IRS, as well as percentage estimates of Textron’s likelihood of prevailing on these issues in litigation, including the dollar amount of tax reserves needed for Textron’s potential tax liabilities if its legal positions were ultimately unsuccessful. Such opinion work product, which consists of the mental impressions and legal theories of in-house attorneys, lies at the very heart of the work-product privilege first announced in 1947 by the Supreme Court in Hickman v. Taylor.
At its core, the work-product doctrine shelters the mental processes of an attorney, providing a privileged area within which he can analyze and prepare his client’s case in anticipation of future litigation. Here, Textron clearly prepared the relevant materials with an eye towards a potential tax dispute with the IRS. Prudent companies such as Textron routinely anticipate such controversies and begin legal preparation well in advance of the time an appeal or litigation is formally commenced. In this case, it was undisputed that the IRS has audited every Textron tax return since 1980. In seven of its past eight audit cycles, Textron has appealed disputed tax matters to the IRS Appeals Board. Three of these disputes ultimately resulted in litigation.
Although the district court found that the documents were clearly created in anticipation of a future dispute with the IRS and thus protected, the appeals court ultimately reversed, establishing for the first time that materials qualify for work-product protection only if they are intended “for use” in litigation. The decision creates a three-way split among the federal circuits on the proper application of Rule 26 of the Federal Rules of Civil Procedure. Textron’s petition for certiorari garnered the support of eleven separate amici, including the Washington Legal Foundation, whose brief argued that the First Circuit’s narrow test for the work-product privilege contravenes the Supreme Court’s landmark opinion in Hickman, which recognized a robust work-product privilege for all materials containing the mental impressions of an attorney and prepared “with an eye towards” future litigation.
The Textron decision will significantly impact corporate counsel’s ability to thoroughly assess a client’s chances in potential litigation, not only in the specific, tax-related context of this case, but well beyond. Indeed, the decision may have a chilling effect on how attorneys behave. By drastically undermining a reliable and predictable work-product privilege, the First Circuit’s ruling gives little incentive for attorneys to maintain candid written assessments of their client’s position. In the future, diligent and prudent companies will be unfairly disadvantaged if forced to turn over their internal legal analyses to future litigation opponents. These disincentives will significantly undermine the quality of representation as a whole.