Schaeffler v. United States
2015 U.S. App. LEXIS 19617
| 2d Cir. | 2015Background
- Georg F.W. Schaeffler and affiliated entities (Schaeffler Group) acquired a large stake in Continental AG in 2008, financed by an €11 billion loan from a consortium of banks (the Consortium); market turmoil left Schaeffler nearly 89.9% owner and facing insolvency risk.
- To avoid default, Schaeffler and the Consortium negotiated a refinancing/restructuring; both had a strong shared interest in obtaining favorable U.S. tax treatment because tax exposure affected repayment and creditors’ recovery.
- Schaeffler retained Ernst & Young (EY) and Dentons to analyze U.S. tax consequences and potential IRS challenges; EY prepared a detailed tax memorandum (EY Tax Memo) discussing legal arguments and litigation risk.
- Schaeffler shared certain EY analyses with the Consortium under a confidentiality agreement; the IRS issued a summons seeking EY materials provided to parties outside Schaeffler.
- The district court denied Schaeffler’s petition to quash, holding (1) privilege waived by disclosure to the Consortium because the Consortium’s interest was commercial not legal, and (2) the EY Tax Memo was not protected work product because similar advice would have been prepared in the ordinary course.
- The Second Circuit reversed: it held the common-interest doctrine preserved attorney-client privilege as to the Consortium and that the EY Tax Memo was protected work product prepared in anticipation of litigation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether sharing privileged communications with the Consortium waived the attorney-client privilege | Disclosure did not waive privilege because the Consortium shared a common legal interest and participated in a joint legal strategy (confidentiality agreement, mutual obligations) | Sharing with a commercially-interested third party waived privilege; Consortium’s interest was primarily economic, not a legal common interest | Privilege not waived: common-interest rule applied where parties pursued shared legal objectives tied to anticipated IRS enforcement |
| Whether the common-interest doctrine requires identical litigation posture (e.g., co-defendants or criminal charges) | Common legal interest exists even absent parallel litigation; protection covers joint legal strategy and legal advice shared to address legal tax issues | Common-interest doctrine inapplicable because Consortium’s stake was commercial and it would not be a party to IRS litigation | Common-interest doctrine applies in civil/tax context; commercial stake does not preclude a shared legal interest when legal issues materially affect financial exposure |
| Whether the EY Tax Memo is protected by the work-product doctrine | The memo was prepared because litigation with the IRS was highly likely and contains litigation-focused legal analysis and strategy | Memo was a dual-purpose document that would have been prepared in essentially similar form for transaction planning, so not work product | Work-product protection applies: memo was prepared because of the prospect of litigation and not merely ordinary business tax planning |
| Whether regulatory/ethical standards required EY to produce identical advice regardless of litigation expectations | Plaintiff: no professional rule or regulation compelled producing the same detailed litigation-focused analysis absent anticipated audit/litigation | Defendant: treasury and tax practice guidance limit taking audit probability into account, so advice would be similar even without litigation | Court: regulators do not negate work-product protection; the memo’s litigation orientation distinguishes it from ordinary tax-return work |
Key Cases Cited
- United States v. Schwimmer, 892 F.2d 237 (2d Cir. 1989) (articulates the common-interest/joint-defense doctrine for preserving privilege among parties with shared legal interests)
- United States v. Adlman, 134 F.3d 1194 (2d Cir. 1998) (establishes test for work-product protection of documents prepared "in anticipation of litigation" and the "ordinary-course" exception)
- Hickman v. Taylor, 329 U.S. 495 (U.S. 1947) (foundational statement of the attorney work-product doctrine)
- United States v. Mejia, 655 F.3d 126 (2d Cir. 2011) (explains that communications must be for legal advice to qualify for privilege)