The Ninth Circuit formally adopted a standard for determining whether a party waived protections of the work-product doctrine, and it is significantly different than the standard governing attorney–client privilege waiver. The Court held that a party waives work-protections when it discloses work-product materials to an adversary in litigation or substantially increases the chances of disclosure to an adversary. This standard means that disclosure to a “conduit to an adversary” results in waiver. United States v. Sanmina Corp. & Subsidiaries, 2020 WL 4558285 (CA9 Aug. 7, 2020).
This opinion, available here, contains significant privilege and work-product waiver issues, so let’s unpack it.
An Opinion, a Footnote, and Disclosure
Sanmina Corporation took a $503M worthless stock deduction based on its ownership shares in a Swiss subsidiary. It anticipated IRS scrutiny of such a large deduction—correctly, as it turned out—and retained DLA Piper. But for what purpose, exactly?
The law firm stated that Sanmina hired it to “provide an estimate of the fair market value” of 100% of its common stock of its wholly owned subsidiary. Sanmina’s Director of Tax Controversy and Tactical Support (an awesome title, by the way) added, in a declaration available here, that Sanmina sought “advice” from DLA in anticipation that the IRS would disagree with the size of its worthless tax deduction. Does this mean that Sanmina sought “legal advice” from the firm?
Whatever the purpose, DLA produced a 102-page valuation report. On page 56 of that report—in a footnote—DLA cited as support two memoranda authored by Sanmina’s in-house counsel. Note that the footnote referenced the in-house lawyers’ memos but did not disclose their content.
DLA provided the valuation report to Sanmina and Sanmina disclosed the report—with the footnote—to the IRS. And, of course, the IRS demanded production of the in-house counsel memos.
Trial Court Ruling
No one disputed that the attorney–client privilege and work-product doctrine covered the two memos. The question was whether Sanmina waived those protections by (1) disclosing the memos to DLA and (2) disclosing the valuation report—with the referenced memos—to the IRS.
The USDC, in an opinion available here, ruled that Sanmina waived the attorney–client privilege by disclosing the two in-house counsel memos to DLA. The court determined that Sanmina retained DLA to provide a non-legal valuation report rather than to obtain legal advice. The court also found waiver of the work-product doctrine without performing a separate analysis.
Privilege Waiver but no Dual-Purpose Standard
The Ninth Circuit deliberated whether Sanmina’s disclosure to DLA—a law firm—waived the privilege. If Samina did not retain DLA for its legal services, then the firm was a third-party for privilege-waiver purposes. On the one hand, DLA’s statement that Sanmina retained it for a FMV analysis, coupled with the Tax Controversy Director’s declaration that failed to mention “legal” advice, proved DLA was a regular third party and not—in this engagement—a legal-services provider.
On the other hand, the Court noted that these same evidentiary sources provided “inferential support” that Sanmina retained DLA for legal-advice purposes. Although the Tax Controversy Director did not explicitly say the company retained DLA for “legal advice,” one can infer that because DLA is a law firm a rebuttable presumption arises that it was retained to provide legal advice.
Perhaps Sanmina retained DLA for dual-purposes—some business (valuation) and some legal. The Court noted that it had never opined on the standard to apply in dual-purpose situations, and district courts within the circuit employ differing standards (a common problem). Unfortunately, the Court declined to provide us with a dual-purpose standard.
In the end, the Court, applying a “clearly erroneous” standard of review, held that the trial court did not clearly err in determining that Sanmina retained DLA for a non-legal purpose. And without a legal purpose, Sanmina’s disclosure of privileged memos to the law firm resulted in privilege waiver.
Adoption of Standard for Assessing Work-Product Waiver
Many courts apply a different standard for evaluating work-product waiver than the standard for privilege waiver. But the Ninth Circuit has never addressed the issue. The Circuit had relied upon other authorities expressing the principle that “waiver of the attorney–client privilege by disclosure to a third party does not necessarily affect the work-product doctrine.”
This is because “the two are designed to accomplish different results.” The privilege protects confidential communications, so disclosing these communications to third parties is inconsistent with the protection. The work-product doctrine, by contrast, protects a lawyer’s strategic information from discovery by adversaries.
Based on these “unique purposes” of the work-product doctrine, the Ninth Circuit formally adopted a work-product waiver standard. Under this standard, disclosing work-product materials to a third party does not waive the protection. A party waives the protection only when it (1) discloses work-product material to an adversary or (2) “has substantially increased the opportunities for potential adversaries to obtain the information.”
The Court explained that “the voluntary disclosure of attorney work product to an adversary or a conduit to an adversary waives the work-product protection for that material.” But what is a “conduit to an adversary”?
Totality of Circumstances with Two Inquiries
Courts should base this determination on the “totality of circumstances.” This assessment means that a party waives work-product protection when his conduct reaches a “certain point of disclosure towards his adversary such that fairness requires his privilege shall cease, whether he intended that result or not.”
This determination includes two inquiries. The first inquiry is one of selective disclosure—did the party engage in self-interested selective disclosure by revealing its work product to some adversaries but not others. The second inquiry is based on a reasonable expectation of confidentiality—whether the disclosing party had a reasonable basis for believing that the recipient would keep the work-product material confidential.
A Narrow Escape
The Court analyzed whether Sanmina disclosed the two in-house counsel memos to an adversary or a conduit to an adversary by providing the memos to DLA or providing the DLA report—which referenced the memos—to the IRS. Regardless whether Sanmina retained DLA for legal services, DLA certainly was not an adversary.
But was DLA a conduit to an adversary (the IRS)? Not here, the court ruled, because Sanmina reasonably expected that DLA would keep the memos confidential. So, even though Sanmina waived the attorney–client privilege by disclosing the memos to DLA, that disclosure did not waive the work-product doctrine.
Whether Sanmina waived the work-product protection when it disclosed the DLA report to the IRS presented a tougher question. The report referenced the memos, but Sanmina did not disclose the memos’ contents. This fact was important and meant that Sanmina did not expressly waive the work-product protection.
But the report’s reference to the memos impliedly waived the protection because it was inconsistent with the maintenance of secrecy over the memos. It is unfair, the Court found, for Samina to reference the memos as supporting it valuation but prevent the IRS from examining the memos to assess their validity.
But Sanmina achieved a narrow escape. The Court ruled that the waiver extended only to the fact work-product portions of the memos and not to opinion work product. According to the Court, at this stage of the litigation fairness did not warrant expanding Sanmina’s implied waiver beyond the factual foundations contained in the memos.
The Ninth Circuit has now extensively outlined the standard governing a work-product waiver analysis. But the “conduit to an adversary” portion of that standard will cause anxiety. Parties considering disclosing work product to gain an advantage cannot simply evaluate whether the recipient is an adversary.
The more complex analysis is whether one could consider the recipient a conduit to an adversary. To foreclose the conduit argument, parties should focus on the reasonable expectation of confidentiality. For example, a pre-disclosure agreement that the recipient will not further unveil the work-product material is likely persuasive in a reasonable-expectation analysis. A blind disclosure with no distribution restrictions could spell waiver trouble.
But Sanmina could have avoided the nuances of the work-product waiver standard if it ensured that its relationship with DLA was a legal-advice one. If it had proven that it retained DLA for legal services, then it would not have waived the privilege upon disclosing the two in-house counsel memos. Perhaps a well-worded engagement letter would have sufficed? Could the DLA report have explained the relationship in a more legal-advice way? And was it necessary to footnote the two privileged memos?