United States v. MIT

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT

No. 97-1287
No. 97-1382

UNITED STATES OF AMERICA,

Petitioner-Appellee, Cross-Appellant,

v.

MASSACHUSETTS INSTITUTE OF TECHNOLOGY,

Respondent-Appellant, Cross-Appellee.

APPEALS FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. George A. O'Toole, Jr., U.S. District Judge]

Before

Boudin, Circuit Judge,

Hill,* Senior Circuit Judge,

and Pollak,** Senior District Judge.

Jeffrey Swope with whom Matthew P. Schaeffer and Palmer & Dodge

LLP were on brief for respondent.

Sara S. Holderness, Tax Division, Department of Justice, with

whom Loretta C. Argrett, Assistant Attorney General, Donald K. Stern,

United States Attorney, and Charles E. Brookhart, Tax Division,

Department of Justice, were on brief for petitioner.

November 25, 1997

*Of the Eleventh Circuit, sitting by designation.

**Of the Eastern District of Pennsylvania, sitting by designation.

BOUDIN, Circuit Judge. This case concerns an attempt by

the Massachusetts Institute of Technology to assert the

attorney-client privilege and work-product doctrine in

response to a document request by the Internal Revenue

Service. The most important issue presented is whether MIT's

disclosure of certain of the documents to another government

agency caused it to lose the privilege. The background facts

are essentially undisputed.

MIT is a famous university with tax-exempt status under

26 U.S.C. 501(c)(3). In 1993, the IRS conducted an

examination of MIT's records to determine whether MIT still

qualified for exempt status and to determine whether it was

complying with provisions relating to employment taxes and

the reporting of unrelated business income. In aid of this

examination, the IRS requested from MIT copies of the billing

statements of law firms that had represented MIT and minutes

of the MIT Corporation and its executive and auditing

committees.

In response, MIT supplied the documents requested but

redacted information claimed to be covered by the attorney-

client privilege or the work-product doctrine or both. In

mid-1994 the IRS requested that the redacted information be

supplied, and MIT declined. At this point the IRS sought to

obtain the same documents in unredacted form from the Defense

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Contract Audit Agency ("the audit agency"), the auditing arm

of the Department of Defense.

It appears that the same billing statements and possibly

some or all of the minutes sought by the IRS had earlier been

provided to the audit agency pursuant to contracts between

MIT and components of the Department of Defense. The audit

agency helps entities in the Department of Defense review

contract performance to be sure that the government is not

overcharged for services. Not surprisingly, the audit agency

often reviews the private contractor's books and records.

In November 1994, the audit agency advised the IRS that

it would not turn over the documents provided to it by MIT

without the latter's consent, which MIT declines to give.

The audit agency had made no unconditional promise to keep

the documents secret, but its regulations and practices

offered MIT some reason to think that indiscriminate

disclosure was unlikely. The IRS then served an

administrative summons on MIT in December 1994 seeking

specific unredacted minutes of nine meetings of the MIT

Corporation and auditing and executive committees in 1990 and

1991, and attorneys' billing statements for almost all legal

expenses paid or incurred by MIT from July 1, 1990, through

June 30, 1991. 26 U.S.C. 7402(b), 7604(a).

When MIT declined to comply, the IRS in early 1996

petitioned the district court to enforce the summons. The

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district court obtained briefs, heard arguments and

considered the matter without an evidentiary hearing on the

basis of the declaration filed by the IRS and an affidavit

submitted by MIT. In January 1997, the district court issued

a memorandum and order enforcing the IRS administrative

summons as to the unredacted legal bills and the unredacted

versions of most of the minutes sought by the IRS.

The district court held that the disclosure of the legal

bills to the audit agency forfeited the attorney-client

privilege. As to the minutes, the district court said that

the privilege remained available because the government had

not proved that the minutes had been disclosed to the audit

agency. After reviewing the minutes in camera, the court

found that three contained privileged material and ordered

MIT to turn over the others as unprivileged or because MIT

had lost the privilege by disclosing the substance of the

minutes in its now unprivileged legal bills.

The district court followed a different path in

resolving MIT's work product objection. The court held that

neither the legal bills nor the minutes were "prepared in

anticipation of litigation or for trial." Fed. R. Civ. P.

26(b)(3). It ruled that they were therefore discoverable as

ordinary business records. Accordingly, the court did not

discuss whether work product protection was waived by

disclosure to the audit agency.

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MIT now appeals, arguing that disclosure of the billing

statements to the audit agency should not forfeit the

privilege; MIT no longer claims work product protection for

the billing statements. The government has cross-appealed

from the district court's refusal to order production of the

three remaining minutes; it says that the burden was on MIT

to prove that the minutes had not been disclosed to the audit

agency. MIT responds that the privilege was not waived even

if the minutes were disclosed to the audit agency, and that

the minutes remain protected by the work product doctrine.

On an appeal respecting a privilege claim, the standard

of review depends on the issue. Rulings by the district

court on issues of law are reviewed de novo; fact findings

are tested under a clear error standard; and discretionary

judgments such as evidentiary rulings are reviewed for abuse

of discretion. See United States v. Wilson, 798 F.2d 509,

512 (1st Cir. 1986). On the principal issue before us--

forfeiture by disclosure--this case goes about as far as

possible in posing an abstract issue of law and review is

plenary.

The question whether MIT forfeited protection in

disclosing documents to the audit agency is not governed by

any federal constitutional provision, federal statute, or

rule prescribed by the Supreme Court. Nor is the enforcement

of an IRS summons a matter with respect to which state law

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supplies a rule of decision. Accordingly, the scope of the

privilege is "governed by the principles of the common law as

they may be interpreted by the courts of the United States in

the light of reason and experience." Fed. R. Evid. 501. See

also United States v. Zolin, 491 U.S. 554, 562 (1989).

MIT's Appeal. We begin with the attorney-client

privilege. That privilege has been familiarly summed up by

Wigmore in a formula that federal courts have often repeated:

(1) Where legal advice of any kind is
sought (2) from a professional legal
adviser in his capacity as such, (3) the
communications relating to that purpose,
(4) made in confidence (5) by the client,
(6) are at his instance permanently
protected (7) from disclosure by himself
or by the legal adviser, (8) except the
protection be waived.

8 J. Wigmore, Evidence 2292, at 554 (McNaughton rev. 1961).

The government argues, and the district court agreed, that by

its disclosure to the audit agency, MIT waived the privilege

to whatever extent that it might otherwise have protected the

billing statements and various of the minutes.

The attorney-client privilege is well-established and

its present rationale straightforward: by safeguarding

communications between lawyer and client, it encourages

disclosures by client to lawyer that better enable the client

to conform his conduct to the requirements of the law and to

present legitimate claims or defenses when litigation arises.

See Upjohn Co. v. United States, 449 U.S. 383, 389-90 (1981).

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Waiver issues aside, the contours of the privilege are

reasonably stable.

Quite a different scene presents itself when one turns

to the problem of "waiver," a loose and misleading label for

what is in fact a collection of different rules addressed to

different problems. Cases under this "waiver" heading

include situations as divergent as an express and voluntary

surrender of the privilege, partial disclosure of a

privileged document, selective disclosure to some outsiders

but not all, and inadvertent overhearings or disclosures.

See McCormick on Evidence 93, at 341-48 (J.W. Strong ed.,

4th ed. 1992).

Even where the cases are limited to those involving a

deliberate and voluntary disclosure of a privileged

communication to someone other than the attorney or client,

the case law is far from settled. But decisions do tend to

mark out, although not with perfect consistency, a small

circle of "others" with whom information may be shared

without loss of the privilege (e.g., secretaries,

interpreters, counsel for a cooperating co-defendant, a

parent present when a child consults a lawyer).1

1See, e.g., United States v. Bay State Ambulance & Hosp.

Rental Serv., Inc., 874 F.2d 20, 28 (1st Cir. 1989); Kevlik

v. Goldstein, 724 F.2d 844, 849 (1st Cir. 1984); Indian Law

Resource Center v. Department of the Interior, 477 F. Supp.

144, 148 (D.D.C. 1979); J. Weinstein & M. Berger, Weinstein's

Federal Evidence 503.08[2], at 503-36 (J. McLaughlin ed.,

2d ed. 1997).

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Although the decisions often describe such situations as

ones in which the client "intended" the disclosure to remain

confidential, see, e.g., Kevlik v. Goldstein, 724 F.2d 844,

849 (1st Cir. 1984), the underlying concern is functional:

that the lawyer be able to consult with others needed in the

representation and that the client be allowed to bring

closely related persons who are appropriate, even if not

vital, to a consultation. Cf. Westinghouse Elec. Corp. v.

Republic of the Philippines, 951 F.2d 1414, 1424 (3d Cir.

1991). An intent to maintain confidentiality is ordinarily

necessary to continued protection, but it is not sufficient.

On the contrary, where the client chooses to share

communications outside this magic circle, the courts have

usually refused to extend the privilege.2 The familiar

platitude is that the privilege is narrowly confined because

it hinders the courts in the search for truth. See Fisher v.

United States, 425 U.S. 391, 403 (1976); 8 Wigmore, supra,

2291, at 554. Fairness is also a concern where a client is

permitted to choose to disclose materials to one outsider

while withholding them from another. See, e.g., Permian

Corp. v. United States, 665 F.2d 1214, 1221 (D.C. Cir. 1981).

2In addition to the cases cited in note 3 below, see In

re Grand Jury Proceedings, 78 F.3d 251, 254 (6th Cir. 1996);

United States v. Jones, 696 F.2d 1069, 1072 (4th Cir. 1982);

In re Sealed Case, 676 F.2d 793, 818 (D.C. Cir. 1982); In re

Horowitz, 482 F.2d 72, 81 (2d Cir.), cert. denied, 414 U.S.

867 (1973); McCormick on Evidence, supra, 93, at 347-48.

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Should this inclination not to protect a document

disclosed outside the circle apply where, as here, the

initial disclosure was to and at the request of a government

agency? This problem has presented itself to six circuits.

The most common cases have been disclosures of otherwise

privileged attorney-client communications to the Securities

and Exchange Commission by corporations during voluntary

internal investigations or in response to SEC subpoenas. The

Eighth Circuit, en banc but without more than a paragraph of

analysis, treated this kind of disclosure as not comprising a

total waiver of the privilege. See Diversified Indus., Inc.

v. Meredith, 572 F.2d 596, 611 (8th Cir. 1978) (en banc).

Subsequently, the Second, Third, Fourth, Federal and D.C.

Circuits took the opposite view and ruled that such limited

disclosures do destroy the privilege.3

The primary argument in favor of the Eighth Circuit

position is that loss of the privilege may discourage the

frank exchange between attorney and client in future cases,

wherever the client anticipates making a disclosure to at

least one government agency. We put to one side the interest

of the government agency in obtaining voluntary disclosures;

3See Genentech, Inc. v. United States Internat'l Trade

Comm'n, 122 F.3d 1409, 1417 (Fed. Cir. 1997); In re

Steinhardt Partners, L.P., 9 F.3d 230, 235 (2d Cir. 1993);

Westinghouse, 951 F.2d at 1424-26; In re Martin Marietta

Corp., 856 F.2d 619, 623-24 (4th Cir. 1988), cert. denied,

490 U.S. 1011 (1989); Permian, 665 F.2d at 1220-21.

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such agencies usually have means to secure the information

they need and, if not, can seek legislation from Congress.

By contrast, the safeguarding of the attorney-client

relationship has largely been left to the courts, which have

a comparative advantage in assessing consequences in this

sphere.

But MIT, like any client, continues to control both the

nature of its communications with counsel and the ultimate

decision whether to disclose such communications to third

parties. The only constraint imposed by the traditional rule

here invoked by the government--that disclosure to a third

party waives the privilege--is to limit selective disclosure,

that is, the provision of otherwise privileged communications

to one outsider while withholding them from another. MIT has

provided no evidence that respecting this constraint will

prevent it or anyone else from getting adequate legal advice.

Admittedly, the arguments on the other side are far from

overwhelming. The IRS' search for truth will not be much

advanced if MIT simply limits or recasts its disclosures to

the audit agency. But the general principle that disclosure

normally negates the privilege is worth maintaining. To

maintain it here makes the law more predictable and certainly

eases its administration. Following the Eighth Circuit's

approach would require, at the very least, a new set of

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difficult line-drawing exercises that would consume time and

increase uncertainty.

MIT says that even if we are not prepared to follow the

Eighth Circuit onto new ground, MIT's disclosure to the audit

agency should be regarded as akin to the disclosure by a

client's lawyer to another lawyer representing another client

engaged in a common defense. Invoking the concept of "common

interest," MIT seeks to compare its situation to cases where

disclosure has been allowed, without forfeiting the

privilege, among separate parties similarly aligned in a case

or consultation (e.g., codefendants, insurer and insured,

patentee and licensee).4

In a rather abstract sense, MIT and the audit agency do

have a "common interest" in the proper performance of MIT's

defense contracts and the proper auditing and payment of

MIT's bills. But this is not the kind of common interest to

which the cases refer in recognizing that allied lawyers and

clients--who are working together in prosecuting or defending

a lawsuit or in certain other legal transactions--can

exchange information among themselves without loss of the

4Compare In re Regents of Univ. of Cal. 101 F.3d 1386,

1390-91 (Fed. Cir. 1996), cert. denied, 117 S. Ct. 1484

(1997), and Hewlett-Packard Co. v. Bausch & Lomb, Inc., 115

F.R.D. 308, 310 (N.D. Cal. 1987), and Roberts v. Carrier

Corp., 107 F.R.D. 678, 687-88 (N.D. Ind. 1985), with In re

Grand Jury Subpoena Duces Tecum, 112 F.3d 910, 922-23 (8th

Cir.), cert. denied, 117 S. Ct. 2482 (1997), and Linde

Thomson Langworthy Kohn & Van Dyke, P.C., v. Resolution Trust

Corp., 5 F.3d 1508, 1515 (D.C. Cir. 1993).

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privilege. To extend the notion to MIT's relationship with

the audit agency, which on another level is easily

characterized as adversarial, would be to dissolve the

boundary almost entirely.

MIT further argues that the disclosure to the audit

agency was not "voluntary" because of the practical pressures

and the legal constraints to which it was subject as a

government contractor. The extent of those pressures and

constraints is far from clear,5 but assuming arguendo that

they existed, MIT chose to place itself in this position by

becoming a government contractor. In short, MIT's disclosure

to the audit agency resulted from its own voluntary choice,

even if that choice was made at the time it became a defense

contractor and subjected itself to the alleged obligation of

disclosure. See In re John Doe Corp., 675 F.2d 482, 489 (2d

Cir. 1982).

Anyone who chooses to disclose a privileged document to

a third party, or does so pursuant to a prior agreement or

understanding, has an incentive to do so, whether for gain or

to avoid disadvantage. It would be perfectly possible to

carve out some of those disclosures and say that, although

the disclosure itself is not necessary to foster attorney-

5MIT's main citation for its duty to disclose is not to
a statute or regulation but to a procedures manual maintained
by the audit agency. There is no actual evidence that MIT
would have been denied payment if it had sought to negotiate
some lesser disclosure.

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client communications, neither does it forfeit the privilege.

With rare exceptions, courts have been unwilling to start

down this path--which has no logical terminus--and we join in

this reluctance.

We add, finally, a word about reliance and fair warning.

MIT may have had some reason to think that the audit agency

would not disclose the documents to the IRS (and the agency

did not do so). But MIT had far less reason to think that it

could disclose documents to the audit agency and still

maintain the privilege when IRS then sought the same

documents. See note 3, above. The choice to disclose may

have been reasonable but it was still a foreseeable gamble.

The IRS Appeal. We turn now to the government's cross-

appeal. Here, the IRS challenges the district court's

refusal to require MIT to produce three specific minutes.

The refusal reflected the district court's view that the

documents contained privileged material, and that there was

no waiver because MIT had not been shown to have disclosed

those minutes to the audit agency. On the latter point, MIT

effectively concedes error, and properly so.

Where privilege is claimed and the opponent alleges a

specific disclosure, the burden of proof is upon the claimant

to show nondisclosure wherever that is material to the

disposition of the claim. Cf. United States v. Wilson, 798

F.2d 509, 512-13 (1st Cir. 1986). Here, MIT concedes that it

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cannot prove that the minutes in question were withheld from

the audit agency. Instead, it proffers alternative grounds

for sustaining the district court's judgment as to these

minutes, namely, that the minutes were protected under the

attorney-client privilege and the work product doctrine and

that these protections were not waived even though the

minutes were turned over to the audit agency.

A party may defend a judgment in its favor on any

legitimate ground without appealing from the judgment on that

issue. Martin v. Tango's Restaurant, Inc., 969 F.2d 1319,

1325 (1st Cir. 1992). Our discussion of the billing

statements disposes of MIT's argument that the protection of

the attorney-client privilege survived disclosure to the

audit agency. We therefore turn to the work product

doctrine. In doing so, we reject the government's claim that

MIT waived this work product argument by only raising it in

its reply brief; MIT's "reply" brief was effectively its

answering brief on the government's cross appeal, and the

government filed its own "reply" in turn.

The district court assumed that work product protection

did not apply because the minutes were not prepared "in

anticipation of litigation," as required by Fed. R. Civ. P.

26(b)(3). MIT argues that the minutes contained substantive

information that did represent attorney work product even if

the minutes had a more general function. There is little law

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in this area--partly, one suspects, because work product

usually remains embodied in documents unquestionably prepared

for litigation or, if given to the client, in documents

independently protected by the attorney client privilege.

The government has chosen in its brief to assume that,

to the extent that the minutes contained "the mental

impressions, conclusions, opinions, or legal theories" of

MIT's attorneys, Fed. R. Civ. P. 26(b)(3), the district

court erred in concluding that work product lost its

protection when repeated in another confidential document not

prepared in anticipation of litigation. A Third Circuit

precedent supports this assumption, which MIT presses and the

government does not resist. See In re Ford Motor Co., 110

F.3d 954, 967 (3d Cir. 1997). In view of the government's

concession, we will take the point as settled for this case.

Nevertheless, the government claims that any such

protection was lost when the minutes were turned over to the

audit agency, MIT having conceded that it cannot prove that

the minutes were not so disclosed. One might wonder why the

standard of waiver for the attorney-client privilege--that

any voluntary disclosure outside the magic circle constitutes

waiver--would not also apply to the work product doctrine.

Equivalent waiver standards would make easier the resolution

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of evidentiary disputes where, as often happens, the two

objections are raised together.

Nonetheless, the cases approach uniformity in implying

that work-product protection is not as easily waived as the

attorney-client privilege. The privilege, it is said, is

designed to protect confidentiality, so that any disclosure

outside the magic circle is inconsistent with the privilege;

by contrast, work product protection is provided against

"adversaries," so only disclosing material in a way

inconsistent with keeping it from an adversary waives work

product protection. At least five circuits have adopted this

rule in some form.6 See also 8 C. Wright, A. Miller & R.

Marcus, Federal Practice and Procedure 2024, at 368-69

(1994) (citing cases).

Perhaps such formulations simply beg the question. If

one wanted to explain the discrepant outcomes, it might be

more persuasive to say that the privilege is strictly

confined because it is absolute; on the other hand, work

product protection (with certain qualifications) can be

overcome by a sufficient showing of need. See Fed. R. Civ.

P. 26(b)(3). In all events, it would take better reason than

6See Westinghouse, 951 F.2d at 1428-29; Steinhardt

Partners, 9 F.3d at 234-35; In re Subpoenas Duces Tecum, 738

F.2d 1367, 1371-75 (D.C. Cir. 1984); Martin Marietta Corp.,

856 F.2d at 625; In re Chrysler Motors Corp. Overnight

Evaluation Program Litig., 860 F.2d 844, 846-47 (8th Cir.

1988).

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we have to depart from the prevailing rule that disclosure to

an adversary, real or potential, forfeits work product

protection.

MIT's disclosure to the audit agency was a disclosure to

a potential adversary. The disclosures did not take place in

the context of a joint litigation where the parties shared a

common legal interest. The audit agency was reviewing MIT's

expense submissions. MIT doubtless hoped that there would be

no actual controversy between it and the Department of

Defense, but the potential for dispute and even litigation

was certainly there. The cases treat this situation as one

in which the work product protection is deemed forfeit. See,

e.g., Steinhardt Partners, 9 F.3d at 234; Westinghouse, 951

F.2d at 1428-31; In re Subpoenas Duces Tecum, 738 F.2d at

1372 (D.C. Cir. 1984).

In closing, it may be helpful to stress that--with

regard to both the attorney-client privilege and the work

product doctrin
ine--we are concerned only with loss of protection

as to the very documents already disclosed to the audit

agency. Nothing in this opinion is intended to be directed

to the different and difficult question when disclosure of

one document warrants forfeiture of protection for a

different but related document. That issue was touched on in

the district court but has not been pursued on appeal.

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Similarly, even where work product can be discovered,

the governing rule directs that "the court shall protect

against disclosure of the mental impressions, conclusions,

opinions, or legal theories of an attorney or other

representative of a party concerning the litigation." Fed.

R. Civ. P. 26(b)(3). Conceivably, the strong policy

underlying this reservation might serve to protect such

materials, even if protection of ordinary work product

materials were deemed waived because of selective disclosure.

This possibility has not been briefed or argued to us; it may

or may not be pertinent in this case; and we mention it only

to stress that we are not deciding the issue.

Accordingly, on MIT's appeal, the judgment of the

district court is affirmed. On the government's cross-

appeal, the judgment of the district court refusing to order

production of three specified minutes is vacated, and the

matter is remanded to the district court for further

proceedings consistent with this opinion.

It is so ordered.

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