Gone are the days when business and fashion trends developed regionally. Remember when certain clothing styles were unique to particular regions in the United States or to different countries? Or when certain foods were generally available only in certain parts of the world? Globalization has brought the world much closer together economically, politically, socially, and culturally, to name a few arenas. Intense competition to stay at the forefront of their industries means that multinational enterprises (MNEs) face multiple pressures to increase efficiency, profits, and innovation.
Today’s MNEs have executives, in-house attorneys, and tax professionals and other advisors located worldwide. This creates a complicated web of communications that must occur for the business to operate. MNEs must learn to navigate, identify, and protect privileged communications that span multiple jurisdictions.
Discovery Rule Smorgasbord
To understand the vast differences in the privilege rules across jurisdictions, it is helpful first to understand the differences in the discovery rules across the world. Protecting documents from being discovered by an adversary is at the heart of any privilege analysis in the United States, but the risk of compulsory disclosure outside the United States is usually less of a concern.
In civil law countries, such as France, Italy, Switzerland, and Germany, judges, not the parties, play the central role in determining what evidence is needed and thus what is disclosed to the court and the other party. In civil law countries, there are no pretrial depositions, discovery, or document production. Instead, judges request documents and other information narrowly tailored to what they believe they need to form their opinions. Litigation in civil law countries “proceeds through a series of short hearing sessions . . . focused on development of evidence. The products of this are then consigned to the case file until an eventual final stage of analysis and decision.”1 In civil law countries, there is no trial equivalent.
In common law countries, such as the United Kingdom, Canada, and Australia, the parties develop the evidence and disclose to the other side what they wish to disclose. Parties generally are not allowed to file suit unless they can make a prima facie case at the time of filing. In the United Kingdom, for example, parties typically have only a matter of weeks to produce all documents and the names of witnesses relevant to the litigation. Discovery is then limited to seeking information about the documents that the other side has disclosed.
In contrast, in the United States, “mutual knowledge of all the relevant facts gathered by both parties is essential to proper litigation.”2 One of the primary purposes of discovery is to make trial “less a game of blind man’s bluff and more a fair contest with the basic issues and facts disclosed to the fullest practicable extent.”3 Sometimes referred to as a “fishing expedition,” discovery in U.S. litigation is extremely broad, and the party seeking the information must show simply that the information may be relevant to any party’s claim or defense and is proportional to the needs of the case.4 Even before discovery begins, in federal district courts, each party is required to disclose, among other things, the names of any individual likely to have discoverable information and a copy of all documents that may be used to support its claims.5 While the U.S. Tax Court has not adopted the Federal Rules of Civil Procedure in their entirety, discovery in the U.S. Tax Court can be time-consuming and expensive, particularly for large matters. In recent transfer pricing cases, taxpayers have had to produce hundreds of thousands of pages of documents and to answer hundreds of interrogatories or questions in response to discovery questions.
Attorney-Client Privilege—Not the Same Everywhere
Given the limitations on compulsory disclosure outside the United States, it is unlikely in another country that an adversary would seek, or even be entitled to receive, communications providing legal advice between in-house counsel and advisors. In the United States, however, adversaries almost always seek these types of communications. If privilege is not carefully managed and maintained, they may be entitled to receive them.
For tax professionals, the risk of having to disclose these communications begins during a federal or state tax audit. Congress has granted the Internal Revenue Service broad latitude to issue summonses to ascertain the correctness of any tax return, to determine a tax liability, and to collect tax, among other reasons.6 The IRS is thereby authorized “[t]o examine any books, papers, records, or other data which may be relevant or material to such inquiry,” or to summon a taxpayer, including any officer or employee of that taxpayer, or to summon any person having possession of information relating to the taxpayer’s tax liability.7 Of course, a party responding to a broad discovery request or a summons may object that such information is privileged, but that party will bear the burden of proving the information truly is privileged.
Accordingly, the attorney-client privilege is undoubtedly the most sacred privilege in the U.S. legal system. The U.S. Supreme Court has explained that the “purpose [of attorney-client privilege] is to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observances of law and administration of justice.”8 In the United States, the privilege belongs to the client and “exists to protect not only the giving of professional advice to those who can act on it, but also the giving of information to the lawyer to enable him to give sound and informed advice.”9
The attorney-client privilege applies to 1) a communication between a lawyer and client or their agents; 2) made in confidence; and 3) for the purpose of seeking legal advice.10 The privilege must be claimed by the client and not waived. The communication can be written or oral. Only the contents of the communication are protected from disclosure, not the underlying facts. The communication must be intended to be in confidence. If the contents of the communication are revealed to a third party, the communication is no longer considered confidential, and the effects of the waiver need to be considered. The communication must also be for the purpose of seeking or giving legal advice. If a lawyer is performing multiple functions, simply including a lawyer on a communication does not make it privileged. The main purpose of the communication needs to be for legal advice.
Many countries have a version of the attorney-client privilege, but it does not always provide the same level of protection as the U.S. version. In the United Kingdom, confidential communications between solicitors and clients seeking legal advice are protected. In China, lawyers are required to put allegiance to the country ahead of any client. In most civil law countries, attorneys have a duty of confidentiality to their clients (the “legal professional privilege”),11 but, as discussed below, this privilege is generally extended only to attorneys who are enrolled in a bar and not to in-house counsel. Unlike the attorney-client privilege, the legal professional privilege belongs to the lawyer and not to the client and cannot be waived. France, Germany, and Italy impose criminal penalties on lawyers for violating the legal professional privilege.
Be Prepared in Anticipation of Litigation: The Work Product Rule
The work product doctrine generally prohibits compelled disclosure of materials prepared or developed in anticipation of litigation unless the party seeking such disclosure demonstrates a substantial need for the materials and is unable to obtain the substantial equivalent of the information by other means without undue hardship.12 Work product that encompasses an attorney’s mental impressions, conclusions, legal theories, and opinion work product is generally not discoverable absent exceptional circumstances.13 Work product protection can apply to materials prepared by or under the supervision of a party’s attorney or other representative and thus does not have to be prepared by an attorney.14 Proving material was prepared in anticipation of litigation rather than for business purposes, however, may be more persuasive if the material is prepared by an attorney. The U.S. Tax Court has broadly interpreted when work product attaches, holding that the doctrine applies to protect tax planning documents prepared before an audit and during the planning stage of an intercompany transaction.15
This protection generally is referred to outside the United States as a “litigation privilege.” The circumstances under which information and documents may be protected under a litigation privilege and the amount of protection afforded such materials again vary by jurisdiction. Due to various disclosure rules, not every jurisdiction has a work product equivalent. In countries where discovery is nonexistent or mostly limited to affirmative disclosure by a party, work product protection is not as important as it is in the United States.
In-House Counsel: Covered or Not?
In the United States, the United Kingdom, Hong Kong, Ireland, and Australia, for example, the protections of privilege and work product extend to in-house counsel. Globally, however, many jurisdictions do not extend these rights to in-house counsel. China, Japan, the Netherlands, and France are among those jurisdictions that explicitly do not extend the privilege and work product rules to in-house counsel.16 In other jurisdictions, the issue remains unsettled. In Germany, for example, in-house counsel may become members of the bar and enjoy privilege protection if 1) the in-house attorney maintains separate offices to which he or she has sole access; and 2) the general counsel must be acting in his or her capacity as an attorney. Typically, however, in-house counsel in Germany is not covered. Even where in-house counsel is treated on par with outside counsel, relevant communications will be afforded protection only if offered in the process of providing legal advice, not business advice.
It also may matter outside the United States whether the confidential legal documents are in the possession of the attorney or the client. In Japan and most civil law countries, including France and Germany, documents in the possession of the client or in-house counsel are not protected by the privilege, but if the same documents are in the possession of outside counsel, they are protected from disclosure.17 In contrast, the United Kingdom and Ireland protect legal advice held by the client.
Protection for Accountants and Other Non-Lawyers
Finally, certain jurisdictions around the globe afford a separate privilege or protection from disclosure to accountants or for non-lawyer tax advice. In the United States, Section 7525 of the Internal Revenue Code extends the attorney-client privilege, with limitations, to accountants providing tax advice. Section 7525 applies only to civil federal tax issues and not to any written communication in connection with the promotion or participation in a “tax shelter” or any state tax cases. Only a few states have similar laws. Many jurisdictions around the world, such as Canada, India, Japan, and the United Kingdom, do not provide a separate protection for non-lawyer tax advice.
Even where such protections exist, the scope of protection again varies from jurisdiction to jurisdiction. Critical to the work of tax professionals, many jurisdictions around the world allow work by non-lawyers to fall under the privileges and other protections afforded to attorneys if the non-lawyers assist the attorney in rendering legal advice or act in a subordinate or auxiliary capacity to the lawyer. While rules in this regard are stated in a variety of different terms across the jurisdictions permitting such protection, the common thread is that for a non-lawyer to fall under the privilege afforded the lawyer, the accountant or other non-lawyer must play a supporting role that is subordinate to the lawyer, and it must be the lawyer that provides substantive legal advice.18
The most common pitfall that plagues organizations seeking to protect communications is waiver. In the United States, attorney-client privilege is lost or “waived” upon disclosure to a third party. Except where Federal Rule of Evidence 502 applies, waiving attorney-client privilege results in a subject matter waiver for all communications on the same subject. Federal Rule of Evidence 502 addresses waiver and inadvertent disclosure made in a federal proceeding or to the IRS or another federal agency. Because the penalty for waiving attorney-client privilege can be significant, it is important to distinguish between privileged materials and those that were never intended to be privileged.
In the United States, for example, disclosure of materials protected under the attorney-client privilege to a company’s financial auditors is generally considered to waive attorney-client privilege, because auditors owe a preexisting legal duty to disclose material information to shareholders and the public. Yet, in the United Kingdom, sharing a copy of a privileged document with a third party may not result in a waiver as long as the materials have not become public and remain confidential and were disclosed for a limited purpose.
With respect to work product, disclosure to a third party does not automatically waive protection. Rather, waiver is generally based on a) disclosures that make it more likely that an adversary will have access to the work product materials and b) disclosures of work product to a “testifying expert” that require the adversary to have the same documents, under the doctrine of fairness, to fully understand the expert’s testimony. Work-product waiver is limited to the communication that was waived and does not result in a subject matter waiver.
The “Touch Base” Test of U.S. Courts
In resolving cross-border privilege disputes, courts in the United States may look to whether the subject of the communication relates to litigation in the United States or another country (“choice-of-law” analysis): “Any communications touching base with the United States will be governed by the federal discovery rules while any communications related to matters solely involving [a foreign country] will be governed by the applicable foreign statute.”19 Practically, this means that for communications about U.S. tax issues, U.S. courts will probably apply U.S. rules.
Competing Interests: Pressure to Be Transparent While Maintaining Privilege
MNEs are under increasing pressure by tax authorities and others to be transparent. Rules are being implemented, mostly in European jurisdictions, requiring MNEs to publicly disclose information on their tax positions. Country-by-country reports continue to be under threat of public disclosure, and many tax professionals think it is only a matter of time before some version of CbC reporting becomes public. The new EU Directive on Administrative Cooperation requires mandatory reporting of certain cross-border arrangements by advisors and companies starting in August 2020. The United Kingdom requires certain companies to publish their tax strategy as it relates to or affects U.K. taxation. It is unlikely that these will be the final rules MNEs will face requiring transparency and more public information.
Some believe that withholding documents based on privilege inherently conflicts with the need for transparency. On the one hand, during an ongoing investigation, disclosing privileged communications may show cooperation, support the legal positions taken, and end inquiries early. Yet, disclosing a privileged communication in one country may waive privilege for the communication everywhere. Equally important, tax authorities around the world are sharing information, formally and informally. It is no longer uncommon for information provided in Country A to be shared by the revenue authority with Country B and Country C to aid in an investigation of a taxpayer.
Under the Microscope: Learn the Rules and Create Procedures to Function Smartly
Notwithstanding the growing global pressure on disclosure and transparency, MNEs ultimately need to be able to receive “sound and informed” legal advice while being able to maintain and protect privileged communications from disclosure. To do so, MNEs need to understand the rules of the jurisdictions they frequently work with and create internal procedures for working together. For example, if you have significant operations in Germany, you should be aware that in-house counsel in Germany are generally not subject to the attorney-client privilege and that documents maintained by in-house counsel in Germany is not considered privileged.
If you are about to undertake a significant global transaction or regularly work across borders, analyze the applicable privilege rules up front and try to have a plan in place for communications. Consider who will be involved and who is in the core group. Be cautious about who gets copied on communications. Address legal communications to lawyers and use the appropriate legal title when conveying legal advice. Reference anticipated litigation or audits in the communication. Have a plan for securing privileged communications. Include privileged or work product notations on correspondence, but not on any and all correspondence. Try to segregate legal advice from business advice in communications. Do not assume that U.S. rules apply everywhere or that in-house lawyers’ communications are privileged. Do not assume that your colleagues are knowledgeable about the various privilege rules and concerns. Consider whether in certain jurisdictions outside counsel should be engaged to help maintain privilege. Do not freely disclose legal advice or quickly forward emails. Anticipate the use of any new communication forums and how or if they should be used by in-house counsel for privileged communications. Do not copy a lawyer on every email and think that doing so makes it privileged.
Finally, when in doubt, ask your friends for help. The privilege rules are complex and challenging. If in-house counsel in France had a copy of a risk assessment of the MNE’s tax structure that is now in the hands of the French tax authority after an early-morning raid and, through the exchange of information, will soon be in the hands of the IRS and the governments of Germany, Austria, and others, wouldn’t it have been better to spend time up front thinking through these privilege issues than after the fact?
Jenny Austin is a partner and Andrew Allen is an associate with the law firm of Morgan, Lewis & Bockius LLP.
- Geoffrey C. Hazard Jr., From Whom No Secrets Are Hid, 76 Tex. L. Rev. 1665, 1673 (1998) (citations omitted).
- Hickman v. Taylor, 329 U.S. 495, 507 (1947).
- United States v. Proctor & Gamble Co., 356 U.S. 677, 682 (1956).
- Fed. R. Civ. Proc. 26(b)(1).
- Fed. R. Civ. Proc. 26(a).
- See United States v. Clarke, 573 U.S. 248, 250 (2014).
- I.R.C. Section 7602(a)(1); see also United States v. Powell, 379 U.S. 48 (1964).
- Upjohn Co. v. United States, 449 U.S. 383, 389 (1981).
- Id. at 393.
- Fed. R. Evid. 501
- See Case C-155/79, AM & S Europe v. Comm’n of the European Cmtys., 1982 E.C.R. I-1575.
- Fed. R. Civ. Proc. 26(b)(3); see also Tax Ct. R. 70(c).
- Fed. R. Civ. Proc. 26(b)(3).
- See Sundstrand Corp. v. Commissioner, 96 T.C. 226, 375, 392-93 (1991); Eli Lilly & Co. v. Commissioner, 84 T.C. 996 (1985).
- See, e.g., Case C-550/07, Akzo Nobel Chems. Ltd. v. European Comm’n, 2010 E.C.R. I-8360 (in EU proceedings, in-house counsel are not entitled to the legal practitioner privilege).
- It should be noted that in certain civil law countries, in particular, a company’s operations may be raided as part of an investigation. Thus, there is an increased risk of the government obtaining materials that the company would prefer not to have disclosed if the documents are in the possession of in-house counsel.
- See United States v. Kovel, 296 F.2d 918 (2d Cir. 1961).
- Golden Trade v. Lee Apparel Co., 143 F.R.D. 514, 520 (S.D.N.Y. 1992); see also Astra Aktiebolag v. Andrx Pharmaceuticals, Inc., 222 F. Supp. 2d. 423 (S.D.N.Y. 2002); Eisai Ltd. v. Dr. Reddy’s Labs, 406 F.Supp. 2d 341 (S.D.N.Y. 2005).