Circuit Consensus Of No “Anticipation Of Litigation” Requirement To Attorney-Client Privilege Common Interest Doctrine

In administrative summonses enforcement case, defendant accounting firm (which allegedly failed to properly disclose the potentially abusive tax shelters that it promoted) could assert protection of the attorney-client privilege so that it need not disclose a legal memorandum (written by its inside counsel and forwarded by the firm’s partner to outside counsel requesting legal advice on pending IRS regulations); the operation of the common interest doctrine applied even though their common interests were not shared under a threat of litigation, in United States v. BDO Seidman, LLP, 492 F.3d 806 (7th Cir. July 2, 2007) (Nos. 05-3260, 05-3518)

The common interest doctrine extends the attorney-client privilege to otherwise non-confidential communications that were made by the privilege claimant to other parties when those other parties were part of a joint effort concerning their common legal interests. Is the measure of common legal interests whether or not litigation is pending or threatening? In 2007 the Seventh Circuit suggested that a circuit consensus had formed so that the attorney-client privilege could be construed as extending to communications on common legal interests, even if those interests did not involve the threat of litigation.

In the case, the IRS received information that defendant BDO Seidman (BDO), an accounting firm, was promoting abusive tax shelters. It appeared that the defendant was not complying with the law’s requirements to maintain a list of persons to whom such tax shelters were sold. Nor had the defendant registered as a seller of such shelters, as required. The IRS issued administrative summonses for production of documents and testimony about various transactions and information on the identity of clients who had invested in the defendant's shelters. The defendant opposed the summonses for various reasons, including that many of the requested documents were protected by the attorney-client privilege. After initial litigation, the district court rejected the claim and ordered defendant to produce all responsive documents except for those listed on the privilege logs (which would be submitted to the court for in camera inspection). When defendant BDO informed its clients of this order, several of the clients moved to intervene in order to assert the attorney-client in relation to 267 documents that the trial court ordered produced.

After extensive litigation, including several appeals decided by the Seventh Circuit, the litigation focused in part on whether a legal memorandum of the defendant BDO (the “Kerekes Memorandum, which was written by inside counsel and forwarded by the firm’s partner to outside counsel requesting legal advice on pending IRS regulations) was covered by the attorney-client privilege. For the most part, the litigation concerned the application of the crime-fraud exception to the defendant's privilege claim. But the case also set the grounds for assessing whether the communication was covered by the privilege to begin with, through application of the common interest doctrine. If so, then the next concern would be whether the crime-fraud exception applied.

The Seventh Circuit affirmed the trial court’s finding that the Kerekes Memorandum was covered by the attorney-client privilege. The defendant was not barred from asserting the privilege because of the operation of the "common interest doctrine". Under this doctrine, the privilege can attach to the memorandum even though it went through several hands before it was transmitted to outside counsel. The circuit noted that the common interest doctrine:

“extends the attorney-client privilege to otherwise non-confidential communications in limited circumstances. For that reason, the common interest doctrine only will apply where the parties undertake a joint effort with respect to a common legal interest, and the doctrine is limited strictly to those communications made to further an ongoing enterprise.”
BDO Seidman, 492 F.3d at 815-16 (citing United States v. Evans, 113 F.3d 1457, 1467 (7th Cir. 1997) (Common interest doctrine did not apply to a friend of the defendant so that he could claim the attorney-client privilege protected statements the defendant made to his attorney in his friend’s presence because the friend did not share common interest in proving defendant’s innocence, despite claim that as a police officer the friend would be subject to discipline for not reporting defendant’s actions were defendant found to be involved in criminal activity.))

One argument against this interpretation was the contention that that the common interest doctrine covered only communications made in “anticipation of litigation.” The circuit rejected this, emphasizing that it applied to all communications “otherwise protected by the attorney-client privilege” where “parties with a shared legal interest … seek legal ‘assistance in order to meet legal requirements and to plan their conduct’ accordingly.” BDO Seidman, 492 F.3d at 816 (citing In re Regents of the Univ. of California, 101 F.3d 1386, 1391 (Fed. Cir. 1996) (“It is well established that the attorney-client privilege is not limited to actions taken and advice obtained in the shadow of litigation. Persons seek legal advice and assistance in order to meet legal requirements and to plan their conduct; such steps serve the public interest in achieving compliance with law and facilitating the administration of justice, and indeed may avert litigation.”))

In taking this position, the Seventh Circuit identified a circuit consensus on whether there was an “anticipation of litigation” requirement to the common interest doctrine. The circuit explained that its conclusion in BDO Seidman was in accord with the “weight of authority.” It cited that most circuits do not require “that litigation need … be actual or imminent for communications to be within the common interest doctrine.” BDO Seidman, 492 F.3d at 816 n.6. Only the Fifth Circuit departed from this interpretation in United States v. Newell, 315 F.3d 510, 525 (5th Cir. 2002) (Common interest doctrine only applied only when the parties faced a “palpable threat of litigation at the time of the communication.”) (quoting In re Santa Fe Int’l Corp., 272 F.3d 705, 711 (5th Cir. 2001))

Other circuits reflecting the majority view that the threat of litigation is not a prerequisite to the common interest doctrine include:

  • First Circuit: In re Grand Jury Subpoena (Custodian of Records, Newparent, Inc.), 274 F.3d 563, 572 (1st Cir. 2001) (“Because the privilege sometimes may apply outside the context of actual litigation, what the parties call a ‘joint defense’ privilege is more aptly termed the ‘common interest’ rule.”; applied to communications made between two officers of subsidiary corporation, and attorney who served as outside counsel for subsidiary and also represented officers in their personal capacities)
  • Second Circuit: United States v. Schwimmer, 892 F.2d 237, 244 (2d Cir. 1989) (Common interest doctrine applied to information defendant furnished to an accountant hired by codefendant’s attorney to serve joint interests of defendant and codefendant was protected by attorney-client privilege, noting that it was “unnecessary that there be actual litigation in progress for the common interest rule of the attorney-client privilege to apply.”)
  • Fourth Circuit: United States v. Aramony, 88 F.3d 1369, 1392 (4th Cir. 1996) (In case where defendant who headed a non-profit organization communicated with attorneys representing the nonprofit organization, noting that to apply the common interest rule to the communications it must be shown that the defendant and the non-profit “must first share a common interest about a legal matter. But it is unnecessary that there be actual litigation in progress for this privilege to apply.”) (citation omitted)
  • Ninth Circuit: United States v. Zolin, 809 F.2d 1411, 1417 (9th Cir. 1987) (“Even where the non-party who is privy to the attorney-client communications has never been sued on the matter of common interest and faces no immediate liability, it can still be found to have a common interest with the party seeking to protect the communications.”), aff’d in part and vacated in part on other grounds, United States v. Zolin, 491 U.S. 554 (1989)
  • Federal Circuit: In re Regents of the Univ. of California, 101 F.3d 1386, 1390-91 (Fed. Cir. 1996) (noting and applying the “established [rule] that the attorney-client privilege is not limited to actions taken and advice obtained in the shadow of litigation”)

Examing the trial court record in light of the finding that the common interest doctrine applied so that the attorney client privilege was applicable to the communication, the circuit affirmed the trial court’s factual findings. The Kerekes Memorandum was written by BDO’s in house attorney and sent by BDO’s partner to the firm’s outside counsel requesting legal advice on pending IRS regulations. Both BDO and the outside law firm jointly serviced a number of common clients with respect to tax products. “In essence," concluded the circuit, "through the [Kerekes] Memorandum, two joint venturers, BDO and Jenkens & Gilchrist, undertook a consultation between their respective in-house counsel and BDO’s outside counsel with respect to the legality of the proposed financial course of action they would recommend to their common clients.” The circuit concluded that “[t]his effort, as the district court recognized, was clearly within the scope of the common interest doctrine.” BDO Seidman, 492 F.3d at 817.

In this light the circuit articulated four “principles” that were helpful “in analyzing the scope of common interest doctrine”:

  1. Courts construe privilege to apply only where necessary to achieve its purpose;
  2. Only those communications which reflect lawyer’s thinking or are made for purpose of eliciting lawyer’s professional advice or other legal assistance fall within privilege;
  3. Because one of the objectives of the privilege is assisting clients in conforming their conduct to the law, litigation need not be pending for communication to be made in connection to provision of legal services; and
  4. Because the privilege “is in derogation of the search for truth,” any exceptions to requirements of attorney-client privilege “must be strictly confined.” BDO Seidman, 492 F.3d at 815.

Federal Rules of Evidence