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October 31, 2016

The Second Circuit Protects the Attorney-Client Privilege under the Common Interest Doctrine

Farrah Champagne

In Schaeffler v. United States, 806 F.3d 34 (2015), Georg F.W. Schaeffler appealed a magistrate’s order denying a petition to quash a summons from the IRS.  The Schaeffler Group is a supplier of automotive and industrial parts incorporated in Germany. Mr. Schaeffler lives in Dallas, Texas, and owns 80 percent of the Schaeffler Group. This appeal arises from the Schaeffler Group’s attempt to acquire a minority interest in Continental AG, a German company. The Schaeffler Group executed an $11 billion Euro loan in order to finance the offer. When the Lehman Brothers Holding Inc. announced its bankruptcy, resulting in the stock market collapse, Continental AG shares fell. The Schaeffler Group was unable to withdraw its offer based on German law and became owner of 89.9 percent of Continental AG shares. As a result, the Schaeffler Group had difficulty meeting its payment obligations to the Bank Consortium. Mr. Schaeffler, as an 80 percent owner of the Schaeffler Group, expected IRS scrutiny and retained Ernst & Young to advise him on federal tax implications of the transactions and possible future litigation.

Just as Mr. Schaeffler expected, the IRS audited him, which led to the issuance of a summons, which is what is at issue here. The summons sought “all documents created by Ernst & Young, including but not limited to legal opinions, analysis, and appraisals, that were provided to parties outside [appellants], that relate to [the restructuring].” Appellants sought to quash the demand for the production of legal opinions after producing several thousand other requested documents.

The District Court’s Ruling
The district court denied the petition to quash, holding that the appellants waived the attorney-client privilege by sharing the documents sought to be withheld with the bank consortium. The court analyzed the close work between the bank consortium, the Shaeffler Group, Ernst & Young, and Dentons. It ruled that because there was no “common interest” between the consortium and the appellants, the appellants’ attorney-client privilege had been waived.

The U.S Court of Appeals for the Second Circuit’s Ruling
The Second Circuit analyzed the findings of the district court regarding the attorney-client privilege, stating that while the privilege is generally waived by voluntary disclosure of the communication to another party, the privilege was not waived by disclosure of communications to a party that was engaged in a “common legal enterprise” with the holder of the privilege. Thus, the court held that because the appellants had a “common interest” with the bank consortium, which was of “sufficient legal character to prevent a waiver of the sharing of the communications,” it did not waive the attorney-client privilege when it shared the documents.

The court vacated and remanded the decision of the district court.

Practice Point
The question addressed was whether the bank consortium shared a “common interest” with Schaeffler so much so that the attorney-client privilege would be honored by the court upon the sharing of documents. The Second Circuit found that there was a “common interest” because Schaeffler had to comply with certain conditions imposed on him by the bank consortium to follow the legal advice he received from Ernst & Young. There are two parts to the legal problem presented in this case: 1.) the strategy Schaeffler would pursue when dealing with the IRS audit and possible subsequent litigation, and 2.) the limitations the bank consortium imposed on Shaeffler while he was pursuing the strategy.

This is a pertinent case for the “common interest” doctrine as related to the attorney-client privilege. It took a two-part strategy for Schaeffler and the consortium to solve common problems including avoiding the problem of the Schaeffler Group’s insolvency.

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Farrah Champagne

Attorney in Catonsville, Maryland.