UNITED STATES OF AMERICA v. Sanmina Corporation and Subsidiaries

Filing 51

ORDER AND FINDING RE IN CAMERA REVIEW OF DOCUMENTS WITHHELD BY SANMINA [re 37 USCA Order]. Signed by Judge William Alsup on 10/4/2018. (whasec, COURT STAFF) (Filed on 10/4/2018)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA
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UNITED STATES OF AMERICA,

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For the Northern District of California

United States District Court

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Petitioner,

No. C 15-00092 WHA

v.
SANMINA CORPORATION AND
SUBSIDIARIES,

ORDER AND FINDING
RE IN CAMERA REVIEW
OF DOCUMENTS
WITHHELD BY SANMINA

Respondent.
/

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INTRODUCTION

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In this action to enforce an IRS summons, petitioner seeks production of memoranda

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that respondents claim are protected by the attorney-client privilege and attorney work-product

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doctrine. By request from our court of appeals, the Court has reviewed in camera the

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memoranda submitted by the parties. This order finds that the attorney-client privilege and

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attorney work-product doctrine were waived when Sanmina produced the memoranda to DLA

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Piper and when DLA Piper produced the valuation report to the IRS. Thus, the memoranda are

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subject to production.

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STATEMENT
The Internal Revenue Service is conducting an examination of the federal income tax

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liabilities of respondent Sanmina Corporation and subsidiaries for the 2008, 2009, and 2010

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taxable periods (Dkt. No. 1, Pet. ¶ 3). Its scrutiny comes after Sanmina took a worthless stock

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deduction arising from ownership of shares of stock in a subsidiary named Sanmina

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International AG (Dkt. No. 8 at 1). This deduction totaled roughly $503 million and offset

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all of Sanmina’s taxable income for the 2008 tax year (Dkt. No. 8 at 18). To establish the

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validity of the deduction, Sanmina provided the IRS with a valuation report prepared by DLA

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Piper (ibid). In a footnote on page fifty-six of the 102-page report, DLA Piper referenced two

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memoranda: A July 2, 2006 memorandum titled “Guarantee and Capital Contribution

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Agreement Concerning Sanmina International AG” and a March 11, 2009 memorandum

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titled “Stock and Debt Losses on Swiss-3600” (id. at 3). DLA Piper’s valuation report relied

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on the contents of the memoranda in concluding that Sanmina’s largest asset, an intercompany
receivable worth $113 million, lacked substance and should be disregarded (Docket No. 9-2,

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For the Northern District of California

United States District Court

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Exh. C at 10). The IRS issued a summons on December 18, 2013, demanding Sanmina produce

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the memoranda in question (Dkt. No. 1-2, Exh. A at 3). Sanmina declined to produce the

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memoranda, invoking the attorney-client privilege and attorney work-product. On January 8,

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2015, the IRS filed a petition to enforce the summons (Dkt. No. 1).

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On May 20, 2015, Magistrate Judge Paul S. Grewal issued an order denying

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enforcement of the summons (Dkt. No. 15). The IRS appealed. Our court of appeals remanded

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the matter on December 20, 2017, asking for a more informed analysis after Judge Grewal

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declined to review the memoranda in camera (Dkt. No. 21 at 2). As Judge Grewal is no longer

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serving, this matter was re-assigned to the undersigned as the general duty.

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On remand, the parties disputed the scope of the remand. Consequently, a March 2

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order requested clarification on the scope of remand. On June 19, our court of appeals issued an

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order defining the scope of remand as: (1) whether the memoranda are privileged in the

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first instance and (2) whether such privilege was waived (Dkt. No. 36). This order affirms

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Judge Grewal’s finding that the memoranda are protected by the attorney-client privilege and

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attorney work-product doctrine but finds that privilege was waived when Sanmina disclosed

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the memoranda to DLA Piper to obtain an opinion on value, then turned over the valuation

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report to the IRS.

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ANALYSIS

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THE MEMORANDA ARE PROTECTED BY ATTORNEY-CLIENT
PRIVILEGE AND THE WORK-PRODUCT DOCTRINE.

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Having reviewed the documents in camera, this order finds the memoranda were
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protected by the attorney-client privilege and the work-product doctrine.
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A.

Attorney-Client Privilege.

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The attorney-client privilege protects communications between a client and his attorney
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related to the purpose of securing legal advice. In re Fischel, 557 F.2d 209, 211 (9th Cir. 1977).
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The privilege not only covers the substance of the client’s communication, but also extends to
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the attorney’s advice in response. Ibid. Here, Sanmina sufficiently showed that the memoranda
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advice communicated in confidence to Sanmina executives (Dkt No. 8 at 18, Decl. ¶ 6). Thus,
For the Northern District of California

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were prepared by in-house counsel, in response to a request for legal advice, and contain legal
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the memoranda are protected by attorney-client privilege.
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B.

Work-Product Doctrine.

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Under Federal Rule of Civil Procedure 26(b)(3), documents prepared in anticipation of
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litigation are not discoverable. In circumstances where a document is not prepared exclusively
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for litigation, the “because of” test is used. United States v. Richey, 632 F.3d 559, 568 (9th Cir.
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2011). In determining whether a dual purpose document was prepared “because of” litigation,
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“courts must consider the totality of the circumstances” surrounding the document’s creation.
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Ibid.
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Here, while there was no pending litigation when the memoranda were drafted, Sanmina
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reasonably anticipated that the IRS would scrutinize its $503 million stock deduction, so it
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engaged in-house counsel to analyze the consequences of taking such a deduction (Dkt. No. 8 at
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20, Decl. ¶ 7). Thus, the memoranda were protected work-product because they were prepared
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because of a potential challenge by the IRS.
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2.
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SANMINA WAIVED ATTORNEY-CLIENT PRIVILEGE
AND WORK-PRODUCT PROTECTION.

In deciding whether attorney-client privilege or work-product protection have been
waived, the controlling decision in our circuit is Weil v. Inv./Indicators, Research & Mgmt.,

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Inc., 647 F.2d 18 (9th Cir. 1981). There, our court of appeals held that “voluntary disclosure of

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the content of a privileged attorney communication constitutes waiver of the privilege as to all

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other communications on the same subject.” Id. at 24. Weil involved testimony by the directors

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of a mutual fund that disclosed confidential communications with their counsel. Id. at 23. The

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court reasoned that the mutual fund could not disclose a privileged attorney communication

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about a matter that was relevant and material to issues in the case, then invoke privilege to

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shield other communications on the same matter. Ibid.

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A.

Disclosure of the Memoranda
To DLA Piper Constituted Waiver.

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Any attorney-client privilege that might have attached to the memoranda was waived
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receiving legal advice, but for the purpose of determining the value of Sanmina AG’s common
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when Sanmina voluntarily disclosed the memoranda to DLA Piper, not for the purpose of
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stock. Sanmina engaged DLA Piper for the purpose of conducting a fair market value analysis
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to be used for tax compliance reasons (Dkt. No. 9-2, Exh. C at 2). Anticipating that the IRS
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would adopt an “adverse position” to taking a $500 million deduction, Sanmina sought DLA
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Piper’s services in producing the valuation report (Dkt. No. 8 at 18, Decl. ¶ 3). Thus, the point
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of waiver took place when Sanmina provided the privileged memoranda to DLA Piper for the
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purpose of producing a valuation report to then turn over to the IRS. Sanmina cannot disclose a
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privileged attorney communication relevant to an issue of material fact, then invoke privilege to
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shield that communication from discovery. Weil, 647 F.2d at 23.
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Sanmina seeks to minimize DLA Piper’s reliance on the memoranda by arguing that
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DLA Piper merely reviewed the memoranda and the valuation report’s conclusions were not
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based on the memoranda (Dkt. No. 47 at 15). This is in direct conflict with the valuation report
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itself. The valuation report explicitly stated that DLA Piper based its conclusions on “the
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related documents provided by management” then referenced the memoranda by name in a
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footnote (Dkt No. 9-2, Exh. C at 10).* As such, this order finds that Sanmina waived any

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privilege when it disclosed the memoranda to DLA Piper.

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B.

Disclosure of DLA Piper’s Valuation Report
To the IRS Waived Privilege.

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The foregoing is dispositive but the following additional point deserves mention.
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Sanmina’s disclosure of the DLA Piper valuation report to the IRS waived any applicable
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privilege as to materials used to reach the valuation. DLA Piper’s valuation report relied on
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the contents of the memoranda in concluding that Sanmina’s largest asset, an intercompany
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receivable worth $113 million, lacked substance and should be disregarded (Docket No. 9-2,
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Exh. C at 10). DLA Piper explicitly stated in the valuation report that it based its conclusions,
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report’s conclusions should, in fairness, be considered together. Fed. R. Evid. § 502(a)(3).
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at least in part, on the two memoranda at issue (ibid). The analyses that informed the valuation
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In order for the IRS or any other reader to evaluate the DLA Piper opinion, the materials on
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which the opinion were based became discoverable. Otherwise, the IRS or any other reader
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would be forced to simply accept the opinion without access to the foundational material,
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and, in this case, to the foundational material explicitly relied on in forming the opinion.
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Thus, privilege was waived.
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Sanmina argues that the footnote merely disclosing the existence of the memoranda
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did not waive any applicable privilege as to their entire contents (Dkt. No. 47 at 12).
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Sanmina attempts to distinguish the government’s case law, but fails to provide case law to
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support its position, arguing that the IRS must “first demonstrate that Sanmina disclosed the
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content of the communications . . . before it argues the scope of the waiver” (Dkt. No. 47 at 13).
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* DLA Piper’s valuation report stated, in relevant part: “We believed that the book value of each
liability provides the best estimation of its [fair market value]. However, based on interviews with Management
and related documents provided by management [fn6], we concluded that the intercompany loan between
Sanmina Holding AB and Sanmina Kista (about US$90 million) as well as the intercompany non-trade
receivable between Sanmina-SCI and Sanmina AG (about US$ 113 million) should be disregarded (Dkt.
No. 9-2, Exh. C at 10).
Footnote six, referenced above, refers to three cited documents, including the two memoranda in
question: Capital Contribution Agreement between Sanmina-SCI Corporation and Sanmina International AG,
July 3, 2006 and Memo: Guarantee and Capital Contribution Agreement Concerning Sanmina International AG,
July 2, 2006 (ibid).

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Sanmina cites Tennenbaum v. Deloitte & Touche, 77 3d 337 (9th Cir. 1996), which actually

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supports the government’s position. There, our court of appeals held that a promise to waive

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privilege is not, in itself, a waiver, rather, it is disclosure that triggers waiver. Id. at 341.

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The court noted that waiver is rooted in notions of “fundamental fairness” and that its principal

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purpose is “to protect against the unfairness that would result from a privilege holder selectively

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disclosing privileged communications to an adversary, revealing those that support the cause

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while claiming shelter of the privilege to avoid disclosing those that are less favorable.”

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Id. at 340.

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Here, Sanmina wishes to do just that. Sanmina relies on DLA Piper’s determination
supporting a $503 million stock deduction, but it avoids disclosing the very foundational

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For the Northern District of California

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analysis that informed its conclusion. DLA Piper acknowledged that it based its conclusions

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on the memoranda in question. Thus, it would be fundamentally unfair for Sanmina to disclose

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the valuation report while withholding its foundation. Fed. R. Evid. § 502(a)(3).

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It is unnecessary to resort to the specialized rules governing experts in federal court

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litigation under Federal Rule of Civil Procedure 26(b)(4)(C). The events in question occurred

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outside of federal litigation and are governed by general principles.

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Finally, Sanmina argues that the government has not produced any evidence

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of unfairness, but fails to cite case law that supports its argument (Dkt. No. 47 at 14).

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Sanmina, however, bears the ultimate burden of establishing all elements of the privilege,

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including non-waiver. See Weil, 647 F.2d at 25. Sanmina has failed to do so.

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CONCLUSION

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Having reviewed the contested memoranda submitted in camera, this order finds

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Sanmina waived attorney-client privilege and work-product protection. The clerk is directed

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to inform our court of appeals of this order. Additionally, counsel shall please promptly inform

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our court of appeals of this order and provide the two memoranda at issue under seal and

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ex parte to the appellate panel (if requested) so that the panel can review this order.

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Dated: October 4, 2018.

WILLIAM ALSUP
UNITED STATES DISTRICT JUDGE

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For the Northern District of California

United States District Court

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