Curtain Finally Comes Down On Schaeffler Privilege Dispute

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Readers may recall the dispute involving the IRS and richest man in Germany, Georg Schaeffler. Schaeffler and the IRS disagreed on the the scope of the attorney-client privilege and work product protection after IRS looked into the tax consequences of a restructuring transaction following the 2008 stock market collapse that landed right in the middle of Schaeffler’s bid to buy German company Continetal AG .

The issue of waiver in the context of complex commercial transactions when there are teams of advisors is one that has troubled the courts. To ensure the possible existence of privilege, parties working in tandem need to demonstrate a common legal interest. Guest poster Ben Bolas discussed the Second Circuit Schaeffler opinion that pushed back on some other cases that essentially concluded that the existence of a common commercial interest invalidated a common legal interest.

The Second Circuit Schaeffler opinion did not cover all the documents at issue in the summons; that led to a remand to the district court to determine whether other documents were protected by the attorney client privilege or work product doctrine. Following the remand, IRS withdrew the summons and moved to dismiss the petition to quash the summons due to mootness. (As background, a case becomes moot and a court loses jurisdiction if issues presented are no longer live or the parties lack a legally cognizable interest in the outcome).

Schaeffler opposed the motion to dismiss and sought a judgment quashing the summons. The district court found for the IRS, looking to a long line of cases that held that a withdrawal of a summons moots the case.

Last summer in Update on Schaeffler Privilege and Work Product Dispute I discussed that somewhat odd aspect of the dispute; in my post I leaned on my colleague Jack Townsend (and lead author in the revised criminal section of the IRS Practice & Procedure treatise) who suggested that Schaeffler wanted to get some assurance going forward that the IRS would not be able to access certain documents in a subsequent audit.

Schaeffler appealed the district court holding on mootness. In a summary order  from earlier this week, the Second Circuit affirmed the district court. In so doing, the order discussed the “voluntary cessation of illegal activity” exception to the mootness doctrine. That exception states “[a]s a general rule, ‘voluntary cessation of allegedly illegal conduct does not deprive the tribunal of power to hear and determine the case, i.e., does not make the case moot.’”

In making its case on appeal, Schaeffler did not argue that the summons power in and of itself was illegal; instead it argued that by summonsing certain documents it was not entitled to receive (due to privilege) the exception came into play. The Second Circuit did not agree:

Schaeffler contends that by summonsing some documents that may or may not be subject to the attorney-client or work-product privileges, the summons became “illegal.” We cannot endorse such a tortured under- standing of illegality. If the IRS were to exercise its lawful authority and issue a summons in the future, privilege issues could be litigated then. Doing so here, in the absence of a summons, would result in an impermissible advisory opinion.

The Second Circuit was reluctant to issue a blanket rule that would have expanded the considerable scope of its earlier opinion. While the earlier Second Circuit opinion meant that Schaeffler enjoyed a considerable victory, it was not meant to provide carte blanche protection.  In the future, the courts could entertain specific disputes if they were to arise.

While this ends the dispute without the complete victory that Schaeffler sought, the order notes that the IRS had assured the court during oral argument that the case was effectively over and it would not reissue a summons. With the withdrawal came the end of the Schaeffler group’s obligation to turn over documents, and if the IRS keeps to its word the fight over documents pertaining to the restructuring.

About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

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