U.S. v. Roxworthy

• Decision Date: 10 August 2006
• Docket Number: No. 05-5776.,05-5776.
• Citation: 457 F.3d 590
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Patrick J. ROXWORTHY, in the capacity of Vice President, Tax, Yum! Brands, Inc., Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

457 F.3d 590

UNITED STATES of America, Plaintiff-Appellee, v. Patrick J. ROXWORTHY, in the capacity of Vice President, Tax, Yum! Brands, Inc., Defendant-Appellant.

No. 05-5776.

United States Court of Appeals, Sixth Circuit.

Argued: April 26, 2006.

Decided and Filed: August 10, 2006.

ARGUED: Linda T. Coberly, Winston & Strawn, Chicago, Illinois, for Appellant. Frank P. Cihlar, U.S. Department of Justice, Washington, D.C., for Appellee. ON BRIEF: Charles S. Cassis, Tanya Y. Bowman, Frost, Brown, Todd, LLC, Louisville, Kentucky, James M. Lynch, Louis J. Weber, III, David L. Theyssen, Winston & Strawn, Chicago, Illinois, for Appellant. Frank P. Cihlar, John Schumann, U.S. Department of Justice, Washington, D.C., for Appellee.

Before: KEITH and COLE, Circuit Judges; MILLS, District Judge.^*

OPINION

R. GUY COLE, JR., Circuit Judge.

Defendant Patrick J. Roxworthy, in his capacity as Vice President of Tax at Yum! Brands, Inc. ("Yum"), appeals the district court's order enforcing an Internal Revenue Service (IRS) administrative summons demanding production of two memoranda that Yum argues are protected by work product privilege. For the reasons set forth below, we reverse the district court's order to compel their production and remand to the district court for entry of an order granting Roxworthy's motion to quash.

I.

The IRS is conducting an investigation of Yum's tax liability for fiscal years 1997, 1998, and 1999. As part of Yum's response to an informal document request, it produced a "privilege log" listing seven documents that it believed were protected from turnover to the IRS by the work product doctrine. The IRS thereupon issued an administrative summons to Roxworthy in his capacity as Vice President of Tax at Yum, seeking production of the seven documents that appeared on the privilege log. Five of the seven documents were ultimately produced to the IRS after the parties entered into a limitation of waiver agreement. The remaining two documents are memoranda prepared by KPMG, LLP, an audit and consulting firm, analyzing the tax consequences of certain transactions entered by Yum pertaining to the creation of a captive insurance company and related stock transfers, including possible arguments that the IRS could mount against Yum's chosen tax treatment of the transactions and possible counter-arguments. The IRS filed a petition in the United States District Court for the Western District of Kentucky to enforce its summons as to the KPMG memoranda. After a show-cause hearing, a magistrate judge entered a report and recommendation that the summons be enforced, concluding that the KPMG memoranda were created not in anticipation of litigation but rather to assist Yum in the preparation of its taxes and yearly audit.

Roxworthy filed objections to the magistrate judge's findings of fact, conclusions of law, and recommendation, and moved to expand the record to include additional affidavits and deposition testimony. The district court granted Roxworthy's motion to expand the record. Roxworthy introduced additional affidavits clarifying that the memoranda at issue were not prepared to assist Yum in the preparation of its taxes, but rather were created because Yum anticipated litigation due to its upcoming recognition of a $112 million loss for tax purposes but not book purposes, the conspicuousness of such a tax treatment, the certainty of an IRS audit due to Yum's size, the unsettled nature of the law in that area, and Yum's belief that the IRS was inclined to litigate such matters. After hearing oral arguments on Roxworthy's objections, the district court adopted the magistrate judge's report and recommendation as the opinion of the court. Roxworthy filed a motion for a stay pending appeal, which the district court denied. Roxworthy filed an emergency motion for a stay pending appeal in this Court, which we granted on July 25, 2005. This appeal follows.

II.

A. Standard of Review

We review a district court's work product privilege determination for abuse of discretion. Toledo Edison Co. v. G A Techs., Inc., 847 F.2d 335, 341 (6th Cir. 1988).¹ The district court abuses its discretion "if it becomes clear that the judge has applied an improper standard, or has failed to follow the established legal rules or has based the decision on a record devoid of facts to support that decision." Toledo Edison, 847 F.2d at 341. Although Roxworthy correctly observes that the district court decided the matter upon the parties' papers and arguments without hearing any testimony evidence, we have recognized that a district court's factual determinations are subject to clear error review even where no live testimony was heard. See U.S. Steel Corp. v. Fuhrman, 407 F.2d 1143, 1146 (6th Cir.1969).

B. Meaning of "in anticipation of litigation"

The "work product privilege" was first recognized by the Supreme Court in Hickman v. Taylor, 329 U.S. 495, 67 S.Ct. 385, 91 L.Ed. 451 (1947). The doctrine's rationale, as originally articulated, was to permit an attorney to "assemble information, sift what he considers to be the relevant from the irrelevant facts, prepare his legal theories and plan his strategy without undue and needless interference . . . to promote justice and to protect [his] clients' interests." Id. at 511, 67 S.Ct. 385. The current doctrine, as set forth in Federal Rule of Civil Procedure 26(b)(3), protects from discovery documents and tangible things prepared in anticipation of litigation by or for a party or by or for that party's representative. A party asserting the work product privilege bears the burden of establishing that the documents he or she seeks to protect were prepared "in anticipation of litigation." In re Powerhouse Licensing, LLC, 441 F.3d 467, 473 (6th Cir.2006); Toledo Edison, 847 F.2d at 339.

We have yet to define "in anticipation of litigation." Other circuits have adopted the standard first articulated in Wright and Miller's Federal Practice and Procedures, asking whether a document was "prepared or obtained because of the prospect of litigation." United States v. Adlman (Adlman II), 134 F.3d 1194, 1202 (2d Cir.1998); accord Nat'l Union Fire Ins. Co. of Pittsburgh v. Murray Sheet Metal Co., 967 F.2d 980, 984 (4th Cir. 1992); Binks Mfg. Co. v. Nat'l Presto Indus., Inc., 709 F.2d 1109, 1119 (7th Cir. 1983); In re Grand Jury Proceedings, 604 F.2d 798, 803 (3d Cir.1979). We have articulated and applied the "because of" standard in our unpublished cases, see Stampley v. State Farm Fire & Cas. Co., 23 Fed.Appx. 467, 470 (6th Cir.2001); Arkwright, Mutual Ins. Co. v. Nat. Union Fire Ins. Co., 1994 WL 58999, at *3, and district courts from our circuit have also applied this test, see In re OM Group Sec. Litig., 226 F.R.D. 579, 585 (N.D.Ohio 2005); Guardsmark, Inc. v. Blue Cross & Blue Shield of Tenn., 206 F.R.D. 202, 209 (W.D.Tenn.2002). Today, we join our sister circuits and adopt the "because of" test as the standard for determining whether documents were prepared "in anticipation of litigation."

Adopting this standard prompts the further question of when documents can be said to have been created because of the prospect of litigation. It is clear that documents prepared in the ordinary course of business, or pursuant to public requirements unrelated to litigation, or for other nonlitigation purposes, are not covered by the work product privilege. Fed.R.Civ.P. 26(b)(3) advisory committee's notes (1970); Nat'l Union, 967 F.2d at 984; In re Sealed Case, 146 F.3d 881, 888 (D.C.Cir.1998). Thus, a document will not be protected if it would have been prepared in substantially the same manner irrespective of the anticipated litigation. Adlman II, 134 F.3d at 1205. Furthermore, courts applying the "because of" test have typically recognized both a subjective and objective element to the inquiry; that is, a party must "have had a subjective belief that litigation was a real possibility, and that belief must have been objectively reasonable." In re Sealed Case, 146 F.3d at 884; see also Martin v. Bally's Park Place Hotel & Casino, 983 F.2d 1252, 1260 (3d Cir.1993) (requiring anticipation to be objectively reasonable); Nat'l Union, 967 F.2d at 984 (same); Guardsmark, 206 F.R.D. at 209-10 (following In re Sealed Case). We therefore embrace the test used by a number of the district courts in our circuit, including the district court in this case, which asks (1) whether a document was created because of a party's subjective anticipation of litigation, as contrasted with an ordinary business purpose, and (2) whether that subjective anticipation of litigation was objectively reasonable. See, e.g., In re OM Group Sec. Litig., 226 F.R.D. at 584-85; Guardsmark, 206 F.R.D. at 209-10.

C. Subjective anticipation of litigation

The two memoranda at issue here were made available to us for in camera review. The documents appear to be two versions of the same memorandum. Both are dated March 29, 2000, and are addressed from KPMG to Matthew M. Preston, identifying him as the Corporate Counsel of Tricon Global Restaurants, Inc. ("Tricon"), which was Yum's predecessor company. The memoranda are similar in content but differ in length: One is fifty-eight pages, and the other is twenty-four pages. Both bear a designation of attorney-client privilege but do not bear any work-product designation.

Yum argues that the documents themselves are the best evidence that they were created in anticipation of litigation. Indeed, apart from eleven pages of background facts regarding Tricon's creation of a captive insurance company and subsequent transfer of stock, both of which occurred prior to the memoranda's completion, the memoranda contain dense legal analysis of current tax law, including arguments and counter-arguments in certain areas of law that the memoranda argue are unsettled. The "Conclusions" portion of each memo states that "it is more likely than not . . . that the following federal tax consequences (among others)...