On September 19, 2008 then-President George Bush signed into law new Federal Rule of Evidence 502 (FRE 502) "Attorney-Client Privilege and Work Product; Limitations on Waiver." One could imagine a huge sigh of relief coming from lawyers across the country. Prior to this rule, if a lawyer inadvertently included a privileged document within a discovery request response, he or she may have been held to have waived the attorney-client and/or work product privilege for the entire subject matter covered by that document.
It is important to note in the area of taxation that much of the material furnished to an attorney for the preparation of a tax return is not privileged because it is "given for transmittal by the attorney to others-for example, for inclusion in the tax return." Colton v. U.S., 306 F. 2d 633, 638 (2nd Cir. 1962). Additionally, business or other advice (investment advice) "gives rise to no privilege whatever." Colton, at 638.The work product privilege is actually not a rule of privilege at all - it is a rule of immunity from the discovery rules under the Federal Rules of Civil Procedure (Rule 26(b)(3) 1). This rule has its origin in the Supreme Court case Hickman v. Taylor, 329 U.S. 495 (1947).
On April 12, 2006, the Supreme Court approved proposed amendments to the Federal Rules of Civil Procedure referred to as the "E-discovery Amendments." The rules that were changed were 16, 26, 33, 34, 37, and 45. The rule that led the way to new Federal Rule of Evidence 502 was 26(b)(5)(B). This allowed parties to claim a privilege after a protected document was produced.
The reason for the rule changes is the sheer volume of electronically stored information. "When the complexities of the legal landscape are added to the logistical difficulties of performing effective privilege reviews on tens of thousands or perhaps millions of page-equivalents of information within the tight timeframes of typical pretrial discovery, it should come as no surprise that efforts are being made on several fronts to develop uniform laws for privilege and privilege waiver." Carl G. Roberts, The Attorney-Client Privilege and the Amended Federal Discovery Rules, Law Practice Today, ABA Law Practice Management Section, December 2006, available at: http://www.abanet.org/lpm/lpt/articles/mgt12062.shtml.
[Rule 502] was signed into law by President Bush, effective September 19, 2008.
... [I]f a waiver is intentional (for example in a tax shelter case, if a taxpayer asserts that he or she relied on advice of counsel), then the waiver will extend to the disclosed and undisclosed material concerning the same subject matter if the material ought in fairness be considered together. Rule 502(a). The main section to Rule 502 is (b). As is evident, if an inadvertent disclosure is made in a Federal proceeding or to a Federal office or agency (e.g. the IRS) then there is no general subject matter waiver if the party took reasonable steps both to avoid disclosure and to rectify the error.One of the issues during the discussions of proposed Rule 502 was the effect of cross disclosure - for example if a disclosure is made in a State proceeding, the effect on a Federal proceeding; and conversely if a disclosure is made in a Federal proceeding, the effect on a State proceeding...
Subdivision (e) of the new rule clarifies that if parties enter into an agreement to limit the effect of a waiver, that agreement binds only the parties to the agreement. It does not affect non-parties unless the agreement is made part of a court order.
...[T]his rule in no way affects the substantive law on both the attorney-client and work product privileges. The Textron case (including the recent Supreme Court denial of certiorari) has been the subject of much commentary lately. Rule 502 would not change the result in Textron in any way. The First Circuit in Textron cited to the District Court Textron opinion and reported that the District Court had earlier determined that Textron waived the privilege by furnishing the tax accrual workpapers to their outside accountant, Ernst & Young. See U.S. v. Textron, 507 F. Supp. 2d 138, 152 (D.R.I. 2007). This was a waiver due to a disclosure to a third party. Evidence Rule 502 would not even be applicable, because first, the disclosure to Ernst & Young was not inadvertent and second, the disclosure was made to its outside auditor, not to a Federal office or agency, or to an adversary in a Federal proceeding. The work product privilege was inapplicable because the First Circuit found the documents were not prepared in anticipation of litigation. The substantive law of privilege is unchanged. This evidence rule is really procedural in nature.
LEXIS users can access the complete commentary. Additional fees may be incurred. (Approx. 9 pages)
RELATED LINKS: For further information, see:
LexisNexis Tax Advisor -- Federal Topical 5B:11.01
Tax Controversies: Audits, Investigations, Trials §11.01