Schaeffler v. United States
2015 U.S. App. LEXIS 19617, 116 A.F.T.R.2d (RIA) 6708, 806 F.3d 34 (2015)
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Rule of Law:
Parties who share a common legal interest, even if primarily financial, do not waive attorney-client privilege by sharing confidential communications to further that interest. Separately, documents created to analyze a transaction are protected by the work-product doctrine if, in light of the circumstances, they can fairly be said to have been prepared 'because of' the prospect of litigation, even if they also serve a business purpose.
Facts:
- The Schaeffler Group, majority-owned by Georg F.W. Schaeffler, financed a tender offer for shares of Continental AG with an eleven-billion Euro loan from a consortium of banks (the 'Consortium').
- German law required the offer to be for all shares and prohibited its withdrawal.
- Just before the offer's expiration in September 2008, the Lehman Brothers bankruptcy and ensuing market collapse caused Continental AG's stock price to plummet.
- Consequently, far more shareholders accepted the offer than anticipated, leaving the Schaeffler Group with nearly 90% of Continental AG's shares and facing potential insolvency.
- This situation threatened the Schaeffler Group's ability to repay the Consortium, creating a mutual risk of financial disaster for both parties.
- To avoid this outcome, the Schaeffler Group and the Consortium worked together on a complex debt refinancing and corporate restructuring.
- Anticipating that the novel and complex nature of the restructuring would lead to an IRS audit and litigation, the Schaeffler Group retained Ernst & Young (EY) and the law firm Dentons for advice.
- The Schaeffler Group shared EY's confidential tax analyses and legal opinions regarding the restructuring with the Consortium to further their common goal of securing favorable tax treatment and avoiding default.
Procedural Posture:
- The Internal Revenue Service (IRS) began an audit of Georg F.W. Schaeffler and associated entities.
- During the audit, the IRS issued a summons for documents created by Ernst & Young that had been shared with outside parties, including the Consortium.
- Schaeffler and the Schaeffler Group (appellants) filed a petition in U.S. District Court to quash the IRS summons, asserting attorney-client privilege and work-product doctrine protection.
- A Magistrate Judge for the U.S. District Court denied the petition to quash, ruling that the privilege had been waived and the documents were not protected as work-product.
- Appellants appealed the Magistrate Judge's order to the U.S. Court of Appeals for the Second Circuit.
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Issue:
1. Does sharing otherwise privileged documents with a third-party lender waive the attorney-client privilege when both parties share a common interest in securing a particular legal outcome (favorable tax treatment) to avoid mutual financial disaster? 2. Are documents containing legal analysis of a complex transaction's tax consequences, prepared because litigation with the IRS was anticipated, protected by the work-product doctrine even if they were also created to assist with the business transaction itself?
Opinions:
Majority - Winter, Circuit Judge
1. No. Sharing the documents does not waive the attorney-client privilege. The common interest doctrine applies because the parties were engaged in a 'common legal enterprise.' The Consortium's massive financial interest was inextricably linked to the legal problem of securing favorable U.S. tax treatment for the restructuring. The threat of mutual financial disaster created a strong common legal interest in the outcome of any potential legal encounter with the IRS, making their joint effort a common legal strategy, not merely a commercial one. 2. Yes. The documents are protected by the work-product doctrine. The governing precedent, United States v. Adlman, protects dual-purpose documents if they were prepared 'because of' the prospect of litigation. Here, the tax memos were not prepared in the ordinary course of business; they were created specifically because the size and complexity of the transaction made an IRS audit and subsequent litigation highly likely. The lower court's reasoning that a rational businessperson would have obtained similar advice regardless of litigation 'posits a factual situation at odds with reality' and improperly swallows the work-product protection for dual-purpose documents.
Analysis:
This decision significantly clarifies the scope of the common interest doctrine in the commercial context, affirming that a substantial, shared financial stake dependent on a specific legal outcome is sufficient to create a 'common legal interest.' It prevents adversaries from exploiting communications between parties allied against a common legal threat. Furthermore, the ruling strongly reinforces the 'because of' test for work-product protection established in Adlman, ensuring that legal and strategic analyses prepared for complex transactions where litigation is anticipated remain protected, even if they also serve a business decision-making purpose. This protects candid legal analysis in high-stakes corporate environments from premature disclosure.
