Respondents Brief — Upjohn Co. v. United States

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In the Suprene Court of the United Strtes

OCTOBER TERM, 1979

THE UPJOHN COMPANY, ET AL., PETITIONERS

Uv.

UNITED STATES OF AMERICA, ET AL.

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SIXTH CIRCUIT

BRIEF FOR THE UNITED STATES AND

THE FEDERAL RESPONDENT

WADE H. MCCREE, JR.

Solicitor General

M. CARR FERGUSON

Assistant Attorney General

LAWRENCE G. WALLACE

Deputy Solicitor General

STUART A. SMITH

Assistant to the Solicitor General

ROBERT E. LINDSAY

R. BRUCE JOHNSON

Attorneys

Department of Justice

Washington, D.C. 20530

(202) 633-2217

CARANCNTNCR taco ecentee em ee

Ly:

In the Suprene Court of the United States

OCTOBER TERM, 1979

No. 79-886

THE UPJOHN COMPANY, ET AL., PETITIONERS!

UNITED STATES OF AMERICA, ET AL.

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SIXTH CIRCUIT

BRIEF FOR THE UNITED STATES AND

THE FEDERAL RESPONDENT

QUESTIONS PRESENTED

1. Whether the attorney-client privilege protects

against the compelled disclosure of communications be-

tween an attorney—serving as a corporation’s general

counsel, and as an officer and director—and the corpora-

tion’s employees, only when such employees play a sub-

stantial role in directing the corporation’s response to the

legal advice sought.

2. Whether the work product doctrine of Hickman v.

Taylor, 329 U.S. 495 (1947), protects against compelled

disclosure of documentary evidence sought by an internal

revenue summons where the Internal Revenue Service

shows necessity for production of such evidence.

1 In addition to The Upjohn Company, petitioners include Gerard

Thomas, Vice-President and Secretary of The Upjohn Company. In

addition to the United States, respondents include David E. Nowak,

Special Agent, Internal Revenue Service.

TABLE OF CONTENTS

PTS eT LEP OEE CLT CTTER TTL OT

AOTC EE PEP SCC EE TOUT EL. PE TET TERT CETT EET

RE ee re er nn Pre rere sce ey ttre ee

Introduction and summary of argument.................

Argument:

Il.

The attorney-client privilege protects against

the compelled disclosure of communications

between a corporation’s general counsel and

its employees only when such communications

are maintained in confidence and the employ-

ees are part of a “control group” which plays a

substantial role in directing the corporation’s

response to the legal advice sought ..........

A. The attorney-client privilege should not

protect Upjohn’s employees’ communica-

tions because they were neither made in

confidence nor maintained in confidence in

an attorney-client relationship...........

B. The control group test is consistent with

the policy underlying the attorney-client

privilege of encouraging clients to make

full disclosure to their attorneys .........

C. The control group test is cons’stent with

this Court’s decision in Hickman v.

Taylor, 329 U.S. 495 (1947) .............

D. The control group test is a practicable

standard for establishing the scope of the

attorney-client privilege that is in accord

with the realities of corporate life .......

E. The subject matter test is unrelated to the

policies underlying the attorney-client

privilege and encourages abuse ..........

F. State law does not favor the subject mat-

SOF GIDE kc cic cawbowrsockwsuspamesbueneaes

The work product doctrine of Hickman v.

Taylor, 329 U.S. 495 (1947), does not protect

the documentary evidence sought by the

Internal Revenue Service summons from

compelled disclosure because the government

Contents—Continued Page

showed ample necessity for the production of

Se OE oe vikatc can vncictentneeketsus ens 46

CONEY . No abd u kee bcassincdcaadereneedeessasece nie 51

TABLE OF AUTHORITIES

Cases:

Ampicillin Antitrust Litigation, In re, 25 Fed. R.

PAE GUE Nias Sheds sides Sap kei cabeeeienes 14

B&C Trucking Co. v. Holmes & Narver, Inc., 39

A Se |: ery err wen re Pee te ene 22

Blackmer v. United States, 284 U.S. 421......... 18

Branzburg v. Hayes, 408 U.S. 665 ............... 18

Burlington Industries v. Exxon Corp., 65 F.R.D.

DF hak sb owe eo bs bCd ad ed 23

City of Philadelphia v. Westinghouse Electric

Corp., 210 F. Supp. 483, petition for mandamus

and prohibition denied, 312 F.2d 742, cert. de-

a BO | err eer rere 13, 36-37

Colton v. United States, 306 F.2d 633, cert. de-

Sen Sea OE iciccdanaenedexscennsececexe 11, 25

Couch v. United States, 409 U.S. 322 ............ 10

Cox v. Yellow Cab Co., 61 Ill.2d 416, 387 N.E.2d

DE ees kbs Deny <egk bint ane ee ea een 44

D.I. Chadbourne, Inc. v. Superior Court, 60

SL. EEE, GOO FE TOO cio ctnudeesingiatvaness 44

Day v. Illinois Power Co., 50 Ill. App. 2d 52, 199

8 Re ry Pe Ree ie Pas Ore oe 44

Diversified Industries, Inc. v. Meredith, 572 F.2d

| SE Perr ree eye rer Ete 13, 34, 35,

39, 42, 50

Duplan Corp. v. Deering Milliken, Inc., 397 F.

a SRD fhe sink as PPO oe “rye a 13, 23

Elkins v. United States, 364 U.S. 206............ 18

Pe a ee a S| ee ee 11

Fisher v. United States, 425 U.S. 391............ 14, 26

Ford Motor Co. v. O.W. Burke Co., 299 N.Y.S.2d

SOF v ciniwaccntawns Ftsan pecs cueieubena ernie 45

Cases—Continued Page

Garner v. Wolfinbarger, 430 F.2d 1093, cert. de-

ees teen est ecesscccnncccces 32

Garrison v. General Motors Corp., 213 F. Supp.

ERC WEG ES Cac ucccvacesvccccccvcce 13

Goosman v. A. Duie Pyle, Inc., 320 F.2d 45 ..... 50

Graham v. Allis-Chalmers Manufacturing Co., 41

ES > 30

Grand Jury Impaneled January 21, 1975, In re,

Ene b aces bcederecceseses 11

Grand Jury Investigation (Sun Co.), In re, 599

ae Leah aavs cess ceevcs 13, 17, 29, 30,

32, 34, 48, 50

Grand Jury Proceedings (Duffy), In re, 473 F.2d

es hawk sab ncwesecssccceses 17, 48

Grand Jury Subpoena Dated December 19, 1978,

Issued to General Counsel, John Doe, Inc., In

re, 81 F.R.D. 691, rev’d on other grounds, 599

Ne dad geeccasccesess 17, 35, 48, 50

Harper & Row Publishers, Inc. v. Decker, 423

gg A ) 11, 138,

34, 35, 39

Hasso v. Retail Credit Co., 58 F.R.D. 425 ....... 13

Herbert v. Lando, 441 U.S. 158..............000. 18

Hickman v. Taylor, 4 F.R.D. 479, rev’d, 153 F.2d

By ME, BE U.S. BOO 2... ccc cccccccccs passim

Honeywell, Inc. v. Piper Aircraft Corp., 50

asc ews csctesdncesecs 13

8” SE 14, 22

IBM vy. Sperry Rand Corp., 44 F.R.D.10........ 25

Johnson v. Frontier Ford, Inc., 68 Ill. App. 3d

CEE GL ka secccespncecveses 44

Natta v. Hogan, 303 F.2d G86 ..... 1... cc cee neeee 13

Potashnick v. Port City Const. Co., 609 F.2d

Ne iu ve sccocasccvcess 13

Radiant Burners, Inc. v. American Gas Ass’n.,

320 F.2d 314, cert. denied, 375 U.S. 929 ....... 19

Southern Ry. v. Lanham, 403 F.2d 119 .......... 50

Special April 1977 Grand Jury, In re, 581 F.2d

589, cert. denied, 489 U.S. 1046 ............... 11

Cases—Continued Page

Stewart Equipment Co. v. Gallo, 32 N.J. Super.15,

er ET he eivak kechechabeckees euasaneess 45

Sylgab Steel & Wire Corp. v. Imoco-Gateway

Corp., 62 F.R.D. 454, aff’d, 534 F.2d 330 ...... 14

Trammel v. United States, No. 78-5705 (Feb. 27,

| RS A APE Seen Pee NON POT CIR Sued 18

United States v. Amerada Hess Corp., 619 F.2d

ROR ae ry rer er ne pore eee 13, 47, 48

United States v. Bisceglia, 420 U.S. 141 ......... 48, 49

United States v. Brown, 478 F.2d 1088........... 47

United States v. Bryan, 339 U.S. 323 ............ 18

United States v. Cote, 456 F.2d 142.............. 22, 25

United States v. Goldfarb, 328 F.2d 280.......... 14

United States v. Hodge and Zweig, 548 F.2d

BE os 3 Wh ris be bas PM ered ermeenne VAN Used ano 11

United States v. Holmes, 594 F.2d 1167.......... 11

United States v. IBM, 66 F.R.D. 154 ............ 13

United States v. Judson, 322 I'.2d 460 ........... 25

United States v. Kelsey-Hayes Wheel Co., 15

Fs OE own Week eraccsauss cael cveseacnenhiaa 22

United States v. Kovel, 296 F.2d 918............. 19, 20

United States v. LaSalle National Bank, 487 U.S.

REPS AP a SAE ve is my Rdg = TU larg St NAD ga 10

United States v. Louisville & N.R.R., 236 U.S.

eh 00k sh av babe ae ical ee babes Oo 14

United States v. McKay, 372 F.2d 174 ........ 16, 47, 48

United States v. Morton Salt Co., 388 U.S. 682... 16, 42

United States v. Nixon, 418 U.S. 683 ............ 18

United States v. Nobles, 422 U.S. 225............ 46, 47

United States v. Powell, 379 U.S. 48.......... 10, 48, 49

United States v. Schoeberlein, 335 F.Supp. 1048 .. 22

United States v. Shibley, 112 F. Supp. 734 ....... 25

United States v. Tellier, 255 F.2d 441, cert. de-

a, UE A ED 5 cuk bbb) va wee vae > abaweues 25

United States v. United Shoe Machinery Corp., 89

FE Vicks stands pinned ¥ia aeenkieees 5 20

United States v. White, 322 U.S. 694 Wine eg” Senge 42

Cases—Continued Page

Virginia Electric & Power Co. v. Sun Shipbuild-

oF Fk Die bf Se | rere re re 13

Whiting v. Barney, 30 N.Y. 3380 ...............8. 19

Wilaon ¥. COM, SL FR: B17... cecessvcceres 50

Statutes and rules:

Foreign Corrupt Practices Act of 1977, Pub. L. No.

ee SS ROE ak gins ck ods bien ose 90's 30

Internal Revenue Code of 1954 (26 U.S.C.):

eee Se ee re re e erere 24

DEEP oats es cka uss Se ckee scans sac 25

Se AL sis Ciae's.o sah be Sco VbwbEMa eae ae 24

Ne a cies etuec hd ced 04aeh oes 24

IN Be BAP PPP err re ere re Orr eee 24

BS ae REA e eee eee re Ter rrr ee 24

RE Mee cies + 9.65.4 > aa s0 ob abs eas ba5 24

ee Gao. ina, oa gin vik a 048 e868 BS 24

ST EE boob bans ics waedicvasnebe vi 6

EE ses heave savarvncencehs 6, 11, 25

Se SN cate oi wawwhcueds otis anaes 6

Securities Exchange Act of 1934, 15 U.S.C. (&

CSE PUNE Codi cu caw craho uy vs beneeees 30

OR Re RR et ar eer 30

16 U.S.C. (Supp. I) T8m(bMZ) .......eeceees 30

Seas EES TEE kt pines be Sd pwd dw W braean anes 30

Tax Reform Act of 1976, Pub. L. No. 94-455, Sec-

tions 1065, 1066, 90 Stat. 1653, 1654 ........... 24

Fed. R. Civ. P.:

MEN PIS SG ee cubs can Mb sees oa eee eee 8, 15, 17,

32, 46, 48

Gas WS Fis v5 Sh ok NER AKEL AS Ooo Dae 43

i May EG CE 5s uk oan co Pedae doe Re ee oo aoe 11, 45

Uniform Rules of Evidence, Rule 502(a)(2)........ 13

Ark. Stat. Ann.: § 28-1001, Rule 502(a)(2) (repl.

A ORATOR re Se beep my. paren latin coe ee 13

Me. Rev. Stat. Ann., Rules of Evidence, Rule

EE er er See ree oe POE rene 13

Nev. Rev. Stat. § 49.075 (1979) .............eeeee 13, 44

N.D. Cent. Code Ann., Rules of Evidence, Rule

ee I, NORE Fado sh ne ba can end c¥edsubes swan 13

VII

Statutes and rules—Continued:

Okla. Stat. Ann. tit. 12, § 2502 (West 1980).......

S.D. Codified Laws Ann. § 19-13-2, Rules of Evi-

SR GION SES F065 ko te doe sented Dan reas es

Miscellaneous:

B. Bittker & J. Eustice, Federal Income Taxation

of Corporations and Shareholders (4th ed.

WE ri ad anced bon ceseveusEenee etek coe

3A W. Fletcher, Cyclopedia of Private Corpora-

OE Cie Wes COV. TIGR i hed sine ibe ccke caves’

D. McCormick, Evidence (Cleary ed. 1972) .... 22, 23, 39

Note, Functional Overlap Between the Lawyer and

Other Professionals: Its Implications for the

Privileged Communications Doctrine, 71 Yale

Migs SPENT 56s vncdasnghneparnesMpeeeee

Report of the Securities and Exchange Commission

on Questionable and Illegal Corporate Payments

and Practices, submitted to the Senate Banking,

Housing and Urban Affairs Committee, May 12,

1976 (reprinted in Fed. Sec. L. Rep. (CCH) No.

kt eS ee ree

Rev. Rul. 77-442, 1977-2 Cum. Bull. 264 ...... 24, 25, 49

Simon, The Attorney-Client Privilege as Applied

to Corporations, 65 Yale L.J. 953 (1956) .... 22, 40, 42

2J. Weinstein & M. Berger, Evidence (1979) .... 13, 19, 39

Wheat, The Attorney-Client Privilege and the At-

torney’s Work Product Rule—Some Issues for

the Corporate Lawyer, Vol. 3 Course Materials,

University of California, San Diego, 7th Annual

Securities Regulation Institute (Jan. 1980) .....

8 J. Wigmore, Evidence (McNaughton rev. 1961) ...

41-42

12, 14,

18, 19, 20, 22, 23, 40

OPINIONS BELOW

The opinion of the United States Magistrate (Pet. App.

9a-37a; J.A. 171a-209a), which was adopted by the district

court (Pet. App. 39a-40a; J.A. 210a-211a), is not officially

reported. The opinion of the court of appeals (Pet. App.

la-8a) is reported at 600 F.2d 1223.

JURISDICTION

The judgment of the court of appeals was issued on

June 28, 1979 (Pet. App. 45a-46a). On September 10,

1979, the court of appeals denied a petition for rehearing,

with suggestion for rehearing en banc (Pet. App. 48a). The

petition for a writ of certiorari was filed on December 7,

1979, and was granted on March 17, 1980 (J.A. 214a). The

jurisdiction of this Court rests on 28 U.S.C. 1254(1).

STATEMENT

1. Petitioner The Upjohn Company is a multinational

corporation engaged in the manufacture and marketing of

pharmaceuticals. It conducts its business in approximately

150 foreign countries, through both foreign s’ dsidiaries

and foreign branches of United States subsidiaries. Up-

john files a consolidated federal income tax return with

some of its subsidiaries, but some of its foreign sub-

sidiaries or affiliates are not included in the return.

Petitioner Gerard Thomas is a vice-president, secretary,

and general counsel of Upjohn. He is also a member of its

board of directors and serves as an officer of some of Up-

john’s subsidiaries (Pet. App. 12a; J.A. 9la, 10la, 174a).

Despite his legal training, Thomas does not necessarily

engage in his functions as a lawyer when he serves the

Company in his capacities as an officer or director (J.A.

100a).

In January 1976, Upjohn’s independent accountants

conducted an audit of one of the Company’s foreign sub-

sidiaries. During the audit, the accountants discovered

that since January 1, 1971, the subsidiary had made pay-

ments to foreign government employees, or to third par-

ties believed to be acting as intermediaries for foreign

government employees. Such payments, which exceeded

$4 million from 1971 through 1975, were made for the pur-

pose of securing government business. The fact of these

payments was known by certain of Upjohn’s inside direc-

tors and officers associated with the international opera-

tions (Pet. App. 12a; J.A. 174a-175a).

In January 1976, the auditors reported the questionable

payments to petitioner Thomas and other individuals in

the Company (J.A. 89a). Thomas consulted R.T. Parfet,

Jr., the chairman of the board, and outside counsel (J.A.

9la). In a letter dated January 16, 1976, Parfet advised

Upjohn’s employees that he had “asked Gerard Thomas to

investigate certain matters of particular concern to Corpo-

rate Management and to the Board of Directors.” In his

capacity as chairman of the board and chief executive offi-

cer, Parfet stated to the employees that he felt that “the

subject must be thoroughly reviewed and [had] charged

Gerard Thomas with that responsibility” (J.A. 39a). He

further warned that “It is imperative that you be com-

pletely candid and cooperate fully in responding to ques-

tions and requests for information” (J.A. 39a; see also id.

at 28a).

Thomas thereafter conducted a factual investigation to

determine the nature and extent of the questionable pay-

ments. The internal investigation was prompted, in part,

by Upjohn’s concern that it had not properly reported the

payments to the Securities and Exchange Commission. As

a part of the investigation, Thomas and outside counsel

prepared a written questionnaire to be mailed by R.T.

Parfet, Jr., the chairman of the board, to 53 foreign gen-

eral and area managers of the Company. The question-

naire sought information regarding questionable payments

and directed the addressee to return the form to Thomas

(Pet. App. 18a; J.A. 40a-48a, 175a).

In a letter dated March 8, 1976, accompanying the ques-

tionnaires, Parfet stated to the Company employees that

he had decided that “it is imperative that the management

of this company [have] full knowledge of any [improper]

payments * * * made by The Upjohn Company or any of

its subsidiaries” (J.A. 40a). He encouraged Upjohn’s em-

ployees “to discuss these questions with anyone in your

subsidiary who you believe would be able to provide useful

information” (J.A. 42a). If the employee had any ques-

tions, Parfet advised that he “should feel free to communi-

cate directly with your management and with Gerard

Thomas who has general responsibility for this investiga-

tion” (J.A. 43a). With respect to the information transmit-

ted by the employees, Parfet imposed a limited standard

of confidentiality. In his letter of March 8, he stated as

follows (ibid. ):

This investigation and the information which it de-

velops should be treated as highly confidential and

not discussed with any persons other than those Up-

john employees who might be of assistance to you in

providing the information requested. This matter

should not be discussed with anyone not employed by

the Company except our regularly retained public ac-

counting firms and such persons as are specifically

designated by Mr. Thomas.

In requesting Upjohn’s employees to cooperate with the

inquiry, Parfet assumed a sympathetic posture as to their

personal responsibilities for making such payments. He

acknowledged that Upjohn’s employees might not have

been aware of the impropriety of their past practices and

that they might have made questionable payments under

the best of intentions because “they believed [that they]

were in the best interests of The Upjohn Company”

(ibid.). However, in order to eliminate any “uncertainty in

the future as to the policy with respect to the practices

which are the subject of [the] investigation,” Parfet an-

nounced that he had “issued a detailed ‘Statement of Pol-

icy on Political Contributions, Payments to Government

Personnel and Proper Accounting Practices.’” He there-

upon put the employees on notice that it would be their

“continuing responsibility to insure that all Upjohn em-

ployees under [their] supervision are aware of and eomply

with the rules set forth in this Statement” (J.A. 43a).

Thomas interviewed ali persons to whom a question-

naire had been sent, and he and two outside counsel also

interviewed other persons who had not been mailed ques-

tionnaires. A total of 86 persons were interviewed, some

of whom were no longer employees of the Company. The

responses to the questionnaires and the notes of the inter-

views have been treated as confidential material and have

not been disclosed to anyone except Thomas and outside

counsel (Pet. App. 13a-14a; J.A. 92a-93a, 175a-176a). The

responses to the questionnaires indicated that Upjohn em-

ployees had made questionable payments to foreign gov-

ernment employees (J.A. 112a). Upjohn was concerned

that these payments might have caused violations of the

securities and tax laws, as well as foreign currency con-

trols, and that these violations could expose the Company

to shareholder suits (J.A. 123a-124a).

On March 26, 1976, following the initial investigation of

the questionable payments, Upjohn filed a preliminary re-

port (J.A. 16la-166a) with the SEC on its Form 8-K, vol-

untarily disclosing detailed information with respect to

some, but not all, of the questionable payments. The re-

port disclosed data with respect to payments since

January 1, 1971, totaling $2,710,000 in 22 of the 136 coun-

tries served by the Company. The report also stated that

the investigation was still in progress and that further in-

formation would be furnished when the investigation was

concluded. However, Upjohn did not submit to the SEC

any of the interview notes or questionnaires containing the

information upon which the reports were based (J.A. 96a).

Upjohn also agreed to furnish the SEC with any additional

data it might request with respect to the questionable

payments (Pet. App. 14a; J.A. 120a, 176a). At the time the

report was filed, Thomas was aware that other companies

were making similar disclosures and that the SEC had in-

dicated a policy of more lenient treatment of corporations

which voluntarily disclosed such questionable payments.

Upjohn made these voluntary disclosures in the hope of

obtaining lenient treatment by the SEC (Pet. App. 2a,

14a; J.A. 176a). With the exception of the three or four

senior executive officers of the Company, Thomas did not

advise any of the Upjohn employees who answered the

questionnaires or who were interviewed, of the Company’s

disclosure to the SEC? (J.A. 118a).

Upjohn also made the reports available to the Internal

Revenue Service, which then commenced its own investi-

gation of the matter to determine the federal income tax

consequences of the payments (Pet. App. 2a; J.A. 157a).

2 On July 26, 1976, the Company filed with the SEC an amendment

to its Form 8-K, in which it reported that it had received oral or writ-

ten responses to all questionnaires, that it had conducted additional

interviews, and that the total of the questionable payments exceeded

$4 million (Pet. App. 14a; J.A. 167a-170a, 176a).

Prior to Upjohn’s filing of the Form 8-K report with the

SEC in March 1976, the Internal Revenue Service was

about to complete an audit of Upjohn’s 1972 and 1973 con-

solidated federal income tax returns. However, because of

Upjohn’s disclosures on its Form 8-K, the Service did not

close the audit. Instead, the revenue agents referred the

case to the Internal Revenue Service’s Intelligence Divi-

sion, which thereupon undertook a joint investigation with

revenue agents for the period 1972-1974 (Pet. App. 14a-

15a; J.A. 177a).

Upjohn furnished two schedules to the Internal Rev-

enue Service regarding the questionable payments.? One

schedule is entitled “Summary of Company Payments by

Year (Companies Listed Are Those Companies with U.S.

Tax Implications Only).” The schedule purported to list all

questionable payments made from 1971 to early 1976, dis-

closing the date, the amount, the company making the

payments, and the country in which the payment was

made. On this schedule Upjohn listed only those payments

that it believed had an effect on its consolidated federal

income tax returns. The payments as to which Upjohn

made such detailed disclosures to the Service totalled ap-

proximately $700,000 (Pet. App. 15a; J.A. 69a—70a, 177a).

The second schedule is less detailed and purported to be

a country-by-country summary of payments made in con-

nection with Upjohn’s foreign operations. Upjohn claimed

that these payments, which totalled approximately

$3,700,000, did not affect its consolidated federal income

tax liability. Upjohn also furnished the Internal Revenue

Service with source documentation underlying the sched-

ules, such as cancelled checks, vouchers, invoices, advices,

etc. (Pet. App. 15a; J.A. 70a-71la, 177a).

Upjohn permitted the Internal Revenue Service to

interview Company employees involved in making ques-

tionable payments, and has agreed to transport some

foreign employees in countries not accessible to revenue

agents to nearby neutral countries. Upjohn, however, re-

fused to permit its employees to answer questions about

transactions that, in its judgment, did not affect its con-

3 These schedules were never put in evidence, but were examined by

the magistrate in camera (Pet. App. 15a n.2; J.A. 177a n.2).

solidated federal income tax returns (Pet. App. 16a; J.A.

121la, :78a).

Upjohn’s limited disclosure with respect to $3.7 million

of the improper payments was inadequate to permit an in-

dependent evaluation of their tax consequences. The

Internal Revenue Service accordingly sought production

from petitioner Gerard Thomas of the documents gener-

ated in the course of the internal investigation. Those

documents were in part responses by 53 of the Company’s

foreign general and area managers to written question-

naires prepared by Thomas. In addition, the documents

consisted of written notes made by Thomas and two out-

side counsel of telephone or personal interviews of all cor-

porate employees to whom the foreign payment question-

naire had been sent, as well as 33 other employees who

had not received a questionnaire (Pet. App. 2a, 18a; J.A.

175a).

Upon Upjohn’s refusal to make available the corporate

documents generated in its internal investigation of the

improper foreign payments, Special Agent David E.

Nowak of the Internal Revenue Service issued a summons

to Upjohn and Gerard Thomas to appear and testify con-

cerning Upjohn’s tax liability for 1972-1974. The summons

was issued pursuant to the Service’s statutory authority

under 26 U.S.C. 7602. It directed petitioners to produce

(Pet. App. 9a, lla; J.A. 17a-18a, 17la, 178a): “All files

relative to the investigation conducted under the supervi-

sion of Gerard Thomas to identify payments to employees

of foreign governments * * * by the * * * Company or any

of its affiliates * * * to determine whether any funds of the

* * * Company had been improperly accounted for on the

corporate books” including “but not limited to written

questionnaires sent to managers of the * * * Company’s

foreign affiliates, and memorandums or notes of the inter-

views conducted * * * with officers and employees of the

* * * Company.”

2. The district court’s decision. Petitioners refused to

produce the records sought by the summons on the

grounds that they were protected by the attorney-client

privilege and the work product doctrine. Pursuant to 26

U.S.C. 7402(b) and 7604(a), the United States and Special

Agent Nowak commenced this proceeding to enforce the

summons in the United States District Court for the

Western District of Michigan. In an affidavit filed with the

district court, Special Agent Nowak swore that the tes-

timony and records sought by the summons were not al-

ready in the possession of the Internal Revenue Service

and that such evidence was necessary for the determina-

tion of the federal tax liabilities of Upjohn and its sub-

sidiaries for 1972-1974 (J.A. 13a, 21a).

The case was referred to a magistrate who, after hold-

ing a hearing, concluded that the attorney-client privilege

protects only communications from those Upjohn employ-

ees who were part of the Company’s control group and

thereby played a substantial role in directing the corpora-

tion’s response to the legal advice sought. In so holding,

the magistrate observed that “In view of the overwhelm-

ing acceptance of the control group test, I have concluded

that it should be followed in this case” (Pet. App. 22a; J.A.

184a; footnote omitted).4

The magistrate further ruled that Upjohn had waived

the attorney-client privilege by its disclosures to the SEC

of the questionable payments in its 8-K report of

March 26, 1976, and its amended 8-K report of July 26,

1976, its agreement to furnish the SEC with any additional

data it might request with respect to such payments, and

4The magistrate explained (Pet. App. 22a-23a; J.A. 184a-185a):

It is apparent from the record that the matter as to which the

interviewees made the disclosures to Mr. Thomas was a matter of

overwhelming importance to the Company but not one as to

which any of the interviewees would be given any substantial

role. When Mr. Thomas first heard of the questionable payments,

he went first to the Chairman of the Board to discuss the matter.

The questionnaire that was sent to the employees went out over

the signature of the Chairman of the Board. Mr. Thomas’ concern

was with the SEC ramifications, the tax consequences, currency

regulations, and the like.(Tr. 79-80). These are matters on the

highest corporate level and hardly within the domain or authority

of the persons interviewed. Clearly, these persons in completing

the questionnaires and submitting to interviews were simply

giving information to Mr. Thomas to enable him to advise the

Board of Directors and its Chairman as to how to handle the se-

curities, tax, and related problems which the questionable pay-

ments created. Only the latter had the authority to act in these

areas. Thus the disclosures made by the interviewees to Mr.

Thomas or the Company’s outside counsel do not fall within the

attorney-client privilege.

its transmission of the SEC reports and related data to the

Internal Revenue Service. As the magistrate observed,

“Having disclosed some data with respect to questionable

payments, it now seeks to hold back other data relating to

the same matter. Under the circumstances, the Company

should be deemed to have waived the attorney-client

privilege with respect to the same matter, if indeed it ever

existed” (Pet. App. 24a; J.A. 186a-187a).

The magistrate also rejected petitioners’ claim that the

summoned material was protected from disclosure by the

work product doctrine of Hickman v. Taylor, 329 U.S.

495 (1947). After noting “at the outset * * * [that there is]

a serious question as to whether the work product doctrine

is even applicable in a summons enforcement proceeding”

(Pet. App. 26a; J.A. 188a), the magistrate concluded that

the government had made a showing of “substantial need”

and an inability “without undue hardship” to obtain the

information by other means. See Fed. R. Civ. P. 26(b). In

support of this conclusion, the magistrate noted that Up-

john “has relegated to itself the determination of what is

or is not relevant to the investigation of the Revenue

Service” (Pet. App. 28a; J.A. 190a).5

Finally, the magistrate found that the necessity for

compelling disclosure in this case is also indicated by the

fact that the persons interviewed reside in foreign coun-

tries beyond the jurisdiction of the court and thus are not

subject to compulsory process (Pet. App. 28a; J.A. 191a).

Although Upjohn has said that it will make its employees

available for interviews, it has not agreed to bring them to

the United States for this purpose (J.A. 120a-121a). But

even if such employees were made available for inter-

views, the magistrate noted that it was “not unreasonable

to expect some hesitancy, if not actual hostility, in an-

swering questions with respect to payments which might

5In the magistrate’s view, Upjohn’s self-serving and uncorroborated

assertion of relevance could not stand against Special Agent Nowak’s

testimony that “instead of accepting the summary of the Company’s

investigation at face value, he wishe[d] to obtain additional informa-

tion, such as verification of the recipients of the payments, and to

check whether there may have been payments which were not re-

corded on the Company’s books” (Pet. App. 28a; J.A. 190a-191a; see

also J.A. 56a-57a, 7la-72a).

have been made in violation of local laws” (Pet. App. 29a;

J.A. 19la). The magistrate also observed that “where in-

terviews have in fact been permitted, the scope of the in-

quiry has been limited to what the Company’s counsel

deemed appropriate” (ibid.; see also J.A. 79a-81a).

In light of the foregoing, the magistrate found that “the

record establishes ample necessity for compelling disclo-

sure of the summoned material in this case, and that the

work product doctrine does not shield the material from

such disclosure” (Pet. Apy. 30a; J.A. 192a). He therefore

recommended that the summons be enforced (Pet. App.

37a; J.A. 199a). The districi court adopted the magis-

trate’s recommendation and ordered the summons en-

forced (Pet. App. 39a-40a, 41a-42a; J.A. 210a~-211a, 212a).

3. The court of appeals’ decision. a. The court of appeals

affirmed in part, reversed in part, and remanded the case

to the district court for further findings of fact (Pet. App.

la-8a). It agreed with the district court that the scope of

the attorney-client privilege in the context of communica-

tions between in-house counsel and corporate employees

was limited to the “control group” of the corporation, viz.,

those senior officers who play a substantial role in direct-

ing the corporation’s response to the legal advice given. In

so holding, it rejected petitioners’ claim that the applica-

bility of the privilege should be governed by the “subject

matter” test. Pursuant to that test, if the corporation’s

employee possesses information acquired in the ordinary

course of business relating to the subject matter of his

employment and the information is communicated confi-

dentially to corporate counsel to assist him in giving legal

advice to the corporation, then the communication is

privileged (Pet. App. 4a-7a). In the court of appeals’ view,

the “subject matter” test urged by petitioners would “en-

courage corporate managers to shield themselves from in-

formation about possibly illegal transactions” (id. at

5a—6a) and create a “broad ‘zone of silence’” (id. at 7a).

However, because the record indicated that some of the

communications sought by the summons were made by

senior corporate officers who were in all likelihood mem-

bers of the “control group,” the court of appeals remanded

the case to the district court for further findings and to

deny enforcement of the summons with respect to these

“control group” communications (Pet. App. 7a).

b. The court of appeals also rejected petitioners’ claim

that the documents sought by the summons were pro-

tected by the work product doctrine. It left undisturbed

the district court’s finding (Pet. App. 30a; J.A. 192a) that

“the record establishes ample necessity for compelling dis-

closure of the summoned material in this case, and that the

work product doctrine does not shield the material from

such disclosure.” However, the court of appeals also ex-

pressed the view that “(t]he work-product doctrine of

Hickman v. Taylor * * * [829 U.S. 495 (1947)] and Fed.

R. Civ. P. 26(b)(3) is not applicable to administrative

summonses issued under 26 U.S.C. § 7602” (Pet. App. 7a

n.13). As the court of appeals concluded, “[t]he IRS simply

must show that the inquiry is relevant to a good faith in-

vestigation conducted pursuant to a legitimate purpose,

that the information sought is not in the IRS’ possession

and that proper administrative procedures have been fol-

lowed. United States v. Powell, 379 U.S. 48, 57-58

(1964)” (Pet. App. 7a n.13).®

8 Special Agent Nowak further swore that “no recommendation for

prosecution of the taxpayer has been made to the United States De-

partment of Justice” (J.A. 21a, see also id. at 57a).

Petitioners correctly point out (Br. 59 n.73) that on September 17,

1979, after the decision of the court of appeals in this case, the Internal

Revenue Service made a recommendation to the Department of Justice

regarding a criminal prosecution that might arguably be related to the

investigation that led to the issuance of the summonses here. Since the

enforceability of a summons is determined by the facts existing at the

time of its issuance (see Couch v. United States, 409 U.S. 322, 329 n.9

(1973)), the Service’s subsequent recommendation should have no

bearing on this case. However, because the nature of that prosecution

is not part of the record before the Court, we agreed with petitioners

at the time they filed their brief that any claim that the Service’s rec-

ommendation rendered the summons unenforceable under United

States v. LaSalle National Bank, 437 U.S. 298 (1978) should be ad-

dressed by the district court in the first instance. However, on July 30,

1980, the Assistant Attorney General in charge of the Tax Division

advised petitioners’ counsel that the Department of Justice had de-

clined the Service’s prosecution recommendation and had transmitted

the case back to the Internal Revenue Service. For the convenience of

the Court, we have lodged copies of these letters with the Clerk.

Hence, the Service’s post-summons recommendation for prosecution is

no lor.ger an issue in this case.

INTRODUCTION AND SUMMARY OF ARGUMENT

The principal question presented in this case—involving

the proper scope of the attorney-client privilege in the

context of communications from corporate employees to

the corporation’s counsel—is one over which the courts of

appeals have divided and which this Court left unresolved

in Harper & Row Publishers, Inc. v. Decker, 423 F.2d 487

(7th Cir. 1970), aff'd by an equally divided Court, 400 U.S.

348 (1971). As illustrated by the instant case, the issue is

important for the enforcement of the internal revenue laws

when the Commissioner issues summonses to compel dis-

closure of corporate records in accordance with his au-

thority under 26 U.S.C. 7602. But the significance of the

attorney-client privilege in the corporate setting is not

limited to IRS summons enforcement proceedings. Since

the corporation is a fact of modern business life in virtually

every sphere of commercial activity, the issue of the

attorney-client privilege could arise in other disputes be-

tween a federal agency and a corporation or in the context

of a grand jury investigation. Moreover, as the decisions

of the lower courts demonstrate, the question has signifi-

cance as well for private litigation involving corporations.

The decision of this Court as to the proper test for the

attorney-client privilege for corporations will govern a

broad spectrum of litigation arising in the federal courts.

Rule 501 of the Federal Rules of Evidence states that in

the absence of any constitutional or statutory provision or

judicial rule, “the privilege of a witness * * * shall be gov-

erned 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.” The federal courts have ac-

cordingly looked to “federal common law” in determining

the scope of evidentiary privileges in summons enforce-

ment proceedings as in analogous grand jury proceedings.?

7See, e.g., United States v. Hodge and Zweig, 548 F.2d 1347, 1353

(9th Cir. 1977); Colton v. United States, 306 F.2d 633, 636 (2d Cir.

1962), cert. denied, 371 U.S. 951 (1963). See also Jn re Grand Jury

Impaneled January 21, 1975, 541 F.2d 378, 379 (8d Cir. 1976); Jn re

Special April 1977 Grand Jury, 581 F.2d 589 (7th Cir.), cert. denied,

439 U.S. 1046 (1978); United States v. Holmes, 594 F.2d 1167, 1171

(8th Cir. 1979); In re Fischel, 557 F.2d 209, 211 (9th Cir. 1977).

Thus, this Court’s resolution of the conflict among the cir-

cuits with respect to the question involving the attorney-

client privilege will establish a uniform rule for summons

enforcement and grand jury proceedings, federal criminal

cases, and other cases involving claims arising under fed-

eral statutes.

A. While the question before the Court involves the

limits of the attorney-client privilege in the corporate set-

ting, we submit at the outset that the record in this case

supports the district court’s conclusion that the employee

communications sought by the summons were neither

made in confidence nor maintained in confidence in an

attorney-client relationship. In urging Upjohn’s employees

to cooperate with the Company’s internal investigation

into questionable foreign payments, the Chairman of the

Board did not limit their communications to counsel but

permitted them to discuss the matter with anyone em-

ployed by the Company as well as the Company’s regularly

employed outside accountants. Moreover, petitioner

Gerard Thomas, who gathered the information sought by

the summons here, was a member of senior management

as well as the Company’s general counsel. Finally, Up-

john’s subsequent disclosures to the IRS of part of the ma-

terial sought by the summons amounted to a waiver of the

attorney-client privilege with respect to the remaining

employee communications. Indeed, this rule against par-

tial waiver is designed to prevent the very stratagem em-

ployed by Upjohn in this tax investigation—disclosing only

so much of allegedly privileged matter as is helpful to its

case. The attorney-client privilege cannot be selectively

invoked with respect to the same subject matter so as to

be used as both a sword and a shield. 8 J. Wigmore, Evi-

dence § 2827 (McNaughton rev. 1961). Thus, whatever the

scope of the attorney-client privilege in the corporate set-

ting, the decision of the court of appeals can be affirmed on

the independent ground that the privilege never attached

or that Upjohn waived whatever privilege might have at-

tached.

B. The rule that we urge here in determining the scope

of the attorney-client privilege in the corporate setting is

the control group test. Under that test, applied by the

courts below in the instant case and by many other deci-

sions as well,® the privilege is limited to communications

from those senior officers or employees of the corporation

who control or play a substantial role in any decision the

corporation may make as a result of the advice of counsel.

Petitioners, however, seek a much broader privilege that

would cloak virtually all communications between corpo-

rate employees and corporate counsel in accordance with

the so-called “subject matter” test. In petitioners’ view,

the attorney-client privilege should protect all communica-

tions without regard to the employee’s function in the cor-

porate structure, if the communication is made by the em-

ployee at the direction of his superiors and the subject

matter of the communication concerns the performance of

the employee’s duties.®

8See, e.g., City of Philadelphia v. Westinghouse Electric Corp., 210

F. Supp. 485, 485 (E.D. Pa.), petition for mandamus and prohibition

denied, 312 F.2d 742 (3d Cir. 1962), cert. denied, 372 U.S. 943 (1963);

Natta v. Hogan, 392 F.2d 686 (10th Cir. 1968); Jn re Grand Jury In-

vestigation (Sun Co.), 599 F.2d 1224 (8d Cir. 1979); United States v.

Amerada Hess Corp., 619 F.2d 980 (3d Cir. 1980). See also Potashnick

v. Port City Const. Co., 609 F.2d 1101, 1119 n.12 (5th Cir. 1980); Vir-

ginia Electric & Power Co. v. Sun Shipbuilding & D.D. Co., 68 F.R.D.

397 (E.D. Va. 1975); Honeywell, Inc. v. Piper Aircraft Corp., 50

F.R.D. 117 (M.D. Pa. 1970); Garrison v. General Motors Corp., 213 F.

Supp. 515 (S.D. Cal. 1963); United States v. IBM, 66 F.R.D. 154 (S.D.

N.Y. 1974).

The control group test has been adopted by statute in six states:

Arkansas (Ark. Stat. Ann. § 28-1001, Rule 502(a)(2) (repl. 1979));

Maine (Me. Rev. Stat. Ann., Rules of Evidence, Rule 502); Nevada

(Nev. Rev. Stat. § 49.075 (1979)); North Dakota (N.D. Cent. Code

Ann., Rules of Evidence, Rule 502 (Supp. 1979)); Oklahoma (Okla.

Stat. Ann. tit. 12, § 2502 (West 1980)); South Dakota (S.D. Codified

Laws Ann. § 19-13-2, Rules of Evidence (rev. 1979)).

Moreover, the control group test has been adopted in Rule 502(a)(2)

of the Uniform Rules of Evidence. Although it was originally incorpo-

rated in the Proposed Federal Rules of Evidence, it was withdrawn in

1971 largely as a result of the affirmance by an equally divided Court in

Harper & Row Publishers, Inc. v. Decker, supra. See 2 J. Weinstein &

M. Berger, Evidence 4 503[01] (1979).

®The subject matter test was first announced by the Seventh Circuit

in Harper & Row Publishers, Inc. v. Decker, supra, and followed in

modified form in Diversified Industries, Inc. v. Meredith, 572 F.2d

596 (8th Cir. 1977) (en banc). See pages 40-43, infra. See also Duplan

Corp. v. Deering Milliken, Inc., 397 F. Supp. 1146, 1165 (D. S.C.

1974); Hasso v. Retail Credit Co., 58 F.R.D. 425 (E.D. Pa. 1973); Syl-

As we shall show (pages 26-45, infra), the control group

test is more consistent with the policies underlying the

attorney-client privilege. The principal contemporary jus-

tification for the attorney-client privilege is its presumed

value in encouraging clients to make full disclosures to

their attorneys. 8 J. Wigmore, supra, §§ 2291, and 2306,

at 590. If damaging information could more readily be ob-

tained from an attorney following disclosure than from the

client himself in the absence of disclosure, a client aware

of that fact would be reluctant to confide in his lawyer.

See, e.g., United States v. Louisville & N.R.R., 236 U.S.

318, 336 (1915). The result would be greater difficulty in

obtaining fully informed legal advice. But “since the

privilege has the effect of withholding relevant informa-

tion from the factfinder, it applies only where necessary to

achieve its purpose. Accordingly, it protects only those

disclosures—necessary to obtain informed legal advice—

which might not have been made absent the privilege.”

Fisher v. United States, 425 U.S. 391, 403 (1976). See also

In re Horowitz, 482 F.2d 72, 81 (2d Cir. 1973) (Friendly,

J.); United States v. Goldfarb, 328 F.2d 280 (6th

Cir. 1964); 8 J. Wigmore, supra, § 2291.

We submit that the communications from Upjohn’s em-

ployees to petitioner Thomas would have been made in the

absence of any protection of the attorney-client privilege.

The employees in question were required by R.T. Parfet,

Jr., Upjohn’s chairman and chief executive officer, to re-

spond to the questionnaires and to cooperate with the in-

quiry. Moreover, the inquiry itself was directed to the

Company’s employees by petitioner Thomas, a vice presi-

dent and director. Hence, the employees’ incentive to

cooperate was not prompted by the protection afforded by

the attorney-client privilege but by the fact that their

superiors directed them to cooperate and that this direc-

tion was made in the corporate chain of command. In

every practical sense of the word, Upjohn’s middle and

lower-level employees were not Thomas’ clients; they were

company subordinates reporting to him at the direction of

gab Steel & Wire Corp. v. Imoco-Gateway Corp., 62 F.R.D. 454 (N.D.

Ill. 1974), aff'd, 534 F.2d 330 (7th Cir. 1976) (table); /n re Ampicillin

Antitrust Litigation, 25 Fed. R. Serv. 2d 1248, 1254-1255 (D. D.C.

1978).

senior management who initiated the inquiry upon the

recommendation of counsel and appointed Thomas to con-

duct it. Only this senior management had the authority

and discretion to control the corporation’s response to any

legal advice sought, and thus only they were, in effect, the

corporate client whose communications with counsel

should be protected by the attorney-client privilege. In-

deed, the Company’s disclosure to the IRS of the informa-

tion provided by many of its employees, without even in-

forming, much less consulting, them, strongly supports

the inference that senior management, who made the deci-

sion to disclose (and thereby waived any claim of privilege)

was the client, and not the company’s middle and lower-

level employees.

C. The control group test is consistent with this Court’s

decision in Hickman v. Taylor, 329 U.S. 495 (1947), which

formulated the qualified attorney work product doctrine

now codified in Fed. R. Civ. P. 26(b). There, in considering

whether an attorney’s notes of interviews with his client’s

employees were subject to discovery by opposing counsel,

the Court at the outset rejected the claim that the state-

ments were protected by the attorney-client privilege. In

this respect, the Court stated, “We also agree that the

memoranda, statements and mental impressions in issue in

this case fall outside the scope of the attorney-client

privilege and hence are not protected from discovery on

that basis” (329 U.S. at 508).

D. The control group is a practicable, flexible standard

that is in accord with the realities of corporate life. In-

deed, the opinion of the court of appeals effectively meets

petitioners’ claim that the real decision-makers in a corpo-

ration are often lower-level or middle-level management

who are not included in the control group. The court de-

fined a control group as “those officers, wswally top man-

agement, who play a substantial role in deciding and di-

recting the corporation’s response to the legal advice

given” (Pet. App. 5a; emphasis added). Here, where the

necessary decisions were to be made by the senior officers

and the board of directors, these officers and directors

constituted the “control group.” If, on the other hand, a

district manager needed legal advice on a decision that he

was to make, he wouid be in the control group for pur-

poses of that decision.

E. The subject matter test urged by petitioners is un-

related to the policies underlying the attorney-client

privilege and is subject to abuse. Under the subject mat-

ter test, the attorney-client privilege encompasses all

communications made by a corporation’s employees to cor-

porate counsel where the communication is made at the

direction of the employee’s superiors and the subject of

the communication is the performance by the employee of

the duties of his employment.

Under the subject matter test, corporations would be

allowed to use privileged communications to collect infor-

mation about the activities of lower-level employees which

they would collect regardless of the privilege. The subject

matter test therefore fails to reflect the policy of the

privilege to encourage communications with counsel that

would otherwise not be made.

Indeed, the overly broad subject matter test would en-

courage corporations to create a “zone of silence” around

any information that has potential legal consequences by

funneling such information through house counsel. Such

manipulation of the attorney-client privilege and the use of

corporate executives (such as petitioner Thomas) whe

happen to be lawyers to perform what are essentially

non-legal fact gathering tasks would undermine the

legitimate right of law enforcement agencies “to satisfy

themselves that corporate behavior is consistent with the

law and the public interest.” United States v. Morton Salt

Co., 338 U.S. 632, 652 (1950).

Il.

The work product doctrine of Hickman v. Taylor,

329 U.S. 495 (1947), does not protect the documentary

evidence sought by the Internal Revenue Service sum-

mons here from compelled disclosure because the govern-

ment showed ample necessity for the production of that

evidence.

We do not quarrel with petitioners’ submission that the

work product doctrine is applicable to IRS summons en-

forcement proceedings. Apart from the decision below, the

sole appellate authority to the contrary, United States v.

McKay, 372 F.2d 174, 176 (5th Cir. 1967), relied upon the

analogy of the Commissioner’s summons authority to the

inquisitorial power of the grand jury. But the courts of

appeals have subsequently held without exception that the

work product rule is applicable to a grand jury subpoena. ?!°

Since there appear to be no unique characteristics or spe-

cial policies inherent in summons enforcement cases that

would foreclose similar application of the work product

doctrine in that context, we agree that the Hickman

rationale and Rule 26(b), Fed. R. Civ. P., can be invoked

to resist production of an attorney’s work product pur-

suant to an internal revenue summons.

This is not to say, however, that petitioners’ work prod-

uct claim should defeat enforcement of the summons at

issue here. We submit that the district court’s finding—

left undisturbed by the court of appeals—that “the record

establishes ample necessity for compelling disclosure of

the summoned material in this case” (Pet. App. 30a; J.A.

192a)—is correct and presents a proper basis for affir-

mance of the judgment rejecting petitioners’ work product

claim.

Here, the government seeks from counsel copies of

questionnaires submitted to him by Upjohn’s employees

and his notes of interviews with such employees with re-

spect to questionable payments they made abroad on be-

half of the Company. Some of the employees are no longer

with the Company. Most of the remaining employees are

located throughout the world, some in countries where the

government representatives would not have easy access.

While Upjohn has offered to transport these employees to

a neutral country, it has forbidden its employees to discuss

with the Internal Revenue Service any payments that

Upjohn has concluded are irrelevant. Since the interviews

are to be conducted according to ground rules established

by Upjohn and Upjohn refuses to allow its employees to

discuss certain information, it is clear that absent produc-

tion of the questionnaires and interviews the information

is unavailable to the Internal Revenue Service. Fur-

thermore, many of the employees are foreign nationals

who may not be subject to the process of the federal

10See In re Grand Jury Subpoena Dated December 19, 1978, Issued

to General Counsel, John Doe, Inc., 599 F.2d 504 (2d Cir. 1979); In re

Grand Jury Investigation (Sun Co.), 599 F.2d 1224 (3d Cir. 1979); In

re Grand Jury Proceedings (Duffy), 473 F.2d 840 (8th Cir. 1973).

courts. The information sought by the summons is there-

fore not available by direct examination of the

employees—whose fading memories of the myriad transac-

tions involved are, in any event, a far less accurate source

than the questionnaires and interview notes for deter-

mining Upjohn’s correct tax liability.

ARGUMENT

THE ATTORNEY-CLIENT PRIVILEGE PRO-

TECTS AGAINST THE COMPELLED DISCLO-

SURE OF COMMUNICATIONS BETWEEN A

CORPORATION’S GENERAL COUNSEL AND ITS

EMPLOYEES ONLY WHEN SUCH COMMUNI-

CATIONS ARE MAINTAINED IN CONFIDENCE

AND THE EMPLOYEES ARE PART OF A “CON-

TROL GROUP” WHICH PLAYS A SUBSTANTIAL

ROLE IN DIRECTING THE CORPORATION’S

RESPONSE TO THE LEGAL ADVICE SOUGHT

As the Court reaffirmed only last Term in Trammel v.

United States, No. 78-5705 (Feb. 27, 1980), slip op. 10,

quoting United States v. Bryan, 339 U.S. 323, 331 (1950),

any claim of privilege must overcome the settled principle

that “ ‘the public * * * has a right to every man’s evi-

dence.’ ” Accord: Branzburg v. Hayes, 408 U.S. 665, 688

(1972). “Whatever their origins, these exceptions to the

demand for every man’s evidence are not lightly created

nor expansively construed, for they are in derogation of

the search for truth.” United States v. Nixon, 418 U.S.

683, 710 (1974). See also Herbert v. Lando, 441 U.S. 153,

175 (1979); Blackmer v. United States, 284 U.S. 421, 488

(1932); 8 J. Wigmore, supra, § 2192. Because testimonial

privileges preclude the use of highly relevant evidence and

therefore tend to be “an obstacle to the administration of

justice” (id. § 2192, at 73; see United States v. Nixon,

supra, 418 U.S. at 711-718), such privileges are tolerable

only when they “are designed to protect weighty and

legitimate competing interests” (id. at 709). See also El-

kins v. United States, 364 U.S. 206, 234 (1960) (Frankfur-

ter, J., dissenting).

In a claim of attorney-client privilege, the weighty and

legitimate competing interests are particularly difficult to

establish because that privilege rests upon grounds that

are not objectively demonstrable. As we have noted (page

14, supra), the principal justification for the privilege is to

encourage a client to place in his lawyer the “unrestricted

and unbounded confidence” (United States v. Kovel, 296

F.2d 918, 921 (2d Cir. 1961)) that is viewed as essential to

the protection of his legal rights.11 But whether and to

what extent the privilege actually does promote candor in

lawyer-client relations remains a subject of considerable

dispute. The only serious empirical study of the subject

suggests that the presumed correlation between the

privilege and client candor may not in fact exist. See Note,

Functional Overlap Between the Lawyer and Other Pro-

fessionals: Its Implications for the Privileged Communi-

cations Doctrine, 71 Yale L.J. 1226 (1962). Given the com-

plexity of modern corporate life, clients of necessity seek

out attorneys largely because there is no ready substitute

for legal advice.!2 Their candor with their lawyers may be

encouraged by the privilege, but surely must result prin-

cipally from a realization that the costs of withholding in-

formation are likely to be far greater than the disadvan-

tages flowing from the risk of compelled disclosure of their

11The privilege originated as a protection for the attorney’s honor—

allowing him to keep the confidence of his client—and it belonged to

the attorney alone. 8 J. Wigmore, supra, § 2290. In the eighteenth

century, this reasoning fell into disrepute. Since that time, the

privilege has been justified as necessary to encourage full disclosure by

the client. At the time of this shift in the rationale of the privilege, the

client himself could not be called to testify in either civil or criminal

proceedings. Accordingly, in the absence of any privilege, any confi-

dence reposed in an attorney would have provided a substantial addi-

tion to the sources of proof available to the client’s opponent. 8 J.

Wigmore, supra, § 2290; 2 J. Weinstein & M. Berger, Evidence

{ 503[02] (1979). Under present practice, however, a party must re-

spond to discovery and must testify if called, subject only to his

privilege against compulsory self-incrimination. Accordingly, it is

questionable whether the privilege is still as helpful as it once was in

encouraging the client’s confidence. See Whiting v. Barney, 30 N.Y.

330, 332-333 (1864).

12Tt is now well settled that the attorney-client privilege is available

to corporations. Radiant Burners, Inc. v. American Gas Ass’n, 320

F.2d 314 (7th Cir.), cert. denied, 375 U.S. 929 (1963).

confidential communications. Indeed, even assuming that

corporate employees are aware of the privilege (although

there is no suggestion that Upjohn’s employees were so

aware in this case at the time they participated in Thomas’

inquiry), the uncertainty as to whether the privilege

applies to a particular communication greatly weakens the

basis for any presumption that such an employee in fact

relied upon it.

The classic definition of the attorney-client privilege is

set forth in United States v. United Shoe Machinery

Corp., 89 F. Supp. 357, 358-359 (D. Mass. 1950):

The privilege applies only if (1) the asserted holder of

the privilege is or sought to become a client; (2) the

person to whom the communication was made (a) is a

member of the bar of a court, or his subordinate and

(b) in connection with this communication is acting as

a lawyer; (3) the communication relates to a fact of

which the attorney was informed (a) by his client (b)

without the presence of strangers (c) for the purpose

of securing primarily either (i) an opinion on law or

(ii) legal services or (ili) assistance in some legal pro-

ceeding, and not (d) for the purpose of committing a

crime or tort; and (4) the privilege has been (a)

claimed and (b) not waived by the client.

Accord: 8 J. Wigmore, supra, § 2292.

Like other privileges or immunities, the attorney-client

privilege stands in derogation of the public’s “right to

every man’s evidence” (8 J. Wigmore, supra, § 2192, at

70), and as “an obstacle to the investigation of the truth”

(id., § 2291 at 554). Accordingly, “[i]t ought to be strictly

confined within the narrowest possible limits consistent

with the logic of its principle” (ibid.). As Dean Wigmore

succinctly put it, “Its benefits are all indirect and specula-

tive; its obstruction is plain and concrete” (ibid.). Given

the high social cost of immunizing a class of evidence from

discovery, it is vital to a claim of privilege that the com-

munications between client and attorney are made in con-

fidence and maintained in confidence. And, as with all

privileges, the claimant has the burden of establishing all

essential elements. United States v. Kovel, supra, 296

F.2d at 923.

A. THE ATTORNEY-CLIENT PRIVILEGE SHOULD NOT

PROTECT UPJOHN’S EMPLOYEES’ COMMUNICA-

TIONS BECAUSE THEY WERE NEITHER MADE IN

CONFIDENCE NOR MAINTAINED IN CONFIDENCE

IN AN ATTORNEY-CLIENT RELATIONSHIP

While the principal question before the Court involves

the propriety of the control group test in establishing the

limits of the attorney-client privilege in the corporate set-

ting, we submit at the outset that the privilege never at-

tached because the communications were not made in the

context of an attorney-client relationship. Moreover, even

if the privilege did attach, petitioner Upjohn waived it be-

cause of its failure to maintain such communications in

confidence.

1. Petitioner Thomas’ multiple roles in the corporation

as vice-president, secretary, director, and general counsel

make it unclear whether he conducted the inquiry in his

capacity as an attorney. In this respect, it is significant

that Chairman Parfet’s initial letter of January 16, 1976,

did not identify Gerard Thomas as the Company’s general

counsel. Rather, he simply advised the employees that he

had “asked Gerard Thomas to investigate certain matters

of particular concern to Corporate Management and to the

Board of Directors” (J.A. 39a). While Parfet later, in the

March 8 letter accompanying the questionnaire, identified

Thomas as the Company’s general counsel (J.A. 40a), it is

not clear that the employees submitted the information to

Thomas in his capacity as a lawyer for the purpose of ob-

taining legal advice or intended the submission to be a

confidential communication in a context of an attorney-

client relationship. Indeed, given Thomas’ other roles as

officer and director and the fact that the employees were

directed to cooperate with him as with any other company

executive in the chain of corporate command, the case for

application of the attorney-client privilege is hardly com-

pelling. To the contrary, the record suggests that the em-

ployees made the communications for business purposes,

rather than for the purpose of securing legal services. In

these circumstances, petitioners have not carried their

burden of establishing that the privilege ever attached to

the communications at issue here.!%

13Petitioners argue (Br. 12 n.4) that the court of appeals left undis-

turbed findings that legal advice had been sought by Upjohn from

2. It is, of course, settled that the client’s subsequent

disclosure to a third party of a communication with his at-

torney eliminates whatever privilege the communication

may have originally possessed, either because such disclo-

sure indicates that confidentiality is no longer intended or

serves as a waiver of the privilege.'4 As Judge Friendly

observed in Jn re Horowitz, supra, 482 F.2d at 81-82, “it

is vital to a claim of privilege that the communications be-

tween client and attorney were made in confidence and

have been maintained in confidence.”

The record in this case supports the district court’s con-

clusion (Pet. App. 23a—25a; J.A. 185a-—187a) that the

communications at issue were neither made in confidence

nor maintained in confidence. To begin with, Chairman

Parfet’s letter of March 8, 1976, accompanying the ques-

tionnaire permitted the employees to discuss the matter

with “your management” (J.A. 43a). The only limitation

imposed upon the employees was not to discuss the inves-

tigation “with anyone not employed by the Company ex-

cept our regularly retained public accounting firms and

such persons as are specifically designated by Mr.

Thomas” (ibid.). Clearly, any communications with the

Company’s auditors or management would not be covered

professional legal counsel. But the cited record references to the

magistrate’s findings of fact (Pet. App. 12a—13a; J.A. 174a-175a) sim-

ply set forth the undisputed fact that Thomas “conducted a factual in-

vestigation to determine the nature and extent of the questionable

payments and to be in a position to give legal advice to the Company

with respect to the payments” (Pet. App. 13a; J.A. 175a). They do not,

however, support the conclusion that Thomas functioned in the capac-

ity of an attorney rather than as a company executive vis-a-vis the

company employees so as to cloak their communications to him under

the attorney-client privilege. At all events, the magistrate’s findings

do not support the conclusion that Upjohn’s employees knew that they

were communicating with Thomas as an attorney. Hence, there are no

findings that support the existence of an attorney-client privilege with

respect to the communications at issue.

14See 8 J. Wigmore, supra, § 2311, at 599; D. McCormick, Evidence

§ 93, at 197 (Cleary ed. 1972); Simon, The Attorney-Client Privilege as

Applied to Corporations, 65 Yale L.J. 953, 981 (1956); United States v.

Cote, 456 F.2d 142 (8th Cir. 1972); United States v. Schoeberlein, 335

F. Supp. 1048 (D. Md. 1971); B&C Trucking Co. v. Holmes & Narver,

Inc., 39 F.R.D. 317 (D. Hawaii 1966); United States v. Kelsey-Hayes

Wheel Co., 15 F.R.D. 461, 465 (E.D. Mich. 1954).

by the privilege and other persons designated by Thomas

might not be covered as well.

Whatever further fact finding might reveal as to the de-

gree of confidentiality maintained by Upjohn’s employees

with respect to the information produced by Thomas’ in-

vestigation, the Company’s subsequent disclosures to the

Internal Revenue Service resulted in a waiver of the

privilege. As a general rule, a waiver of the privilege as to

all communications between an attorney and client on the

same subject follows from the voluntary waiver of one or

more similar communications. This is the case even if the

disclosures are accompanied with reservations. “Thus, if a

client, through his attorney, voluntarily waives certain

communications, but guarded with a specific written or

oral assertion at the time of the waiver that it is not its

intention to waive the privilege as to the remainder of all

similar communications, the privilege, as to the remaining

undisclosed communications, is nevertheless waived.”

Duplan Corp. v. Deering Milliken, Inc., 397 F. Supp.

1146, 1162 (D. S.C. 1974). Indeed, this rule against partial

waiver is designed to prevent the very stratagem em-

ployed by Upjohn in this tax investigation—disclosing

only so much of allegedly privileged matter as is helpful to

its case.

The attorney-client privilege cannot be selectively in-

voked so as to be used as both a sword and a shield. See 8

J. Wigmore, supra, § 2327 (the “principle of complete-

ness” is analogous to this principle); D. McCormick,

supra, § 98. As the court observed in Burlington Indus-

tries v. Exxon Corp., 65 F.R.D. 26, 46 (D. Md. 1974),

“Once the party begins to disclose any confidential com-

munication for a purpose outside the scope of the

privilege, the privilege is lost for all communications re-

lating to the same matter.” Thus, even assuming that the

employees’ communications were once privileged, Up-

john’s partial disclosures to the IRS amounted to a waiver

of the privilege with respect to the material sought by the

summons. The attorney-client privilege cannot be invoked

to aid Upjohn’s uncorroborated self-serving claim that the

withheld evidence has no bearing on its United States tax

liability.15.

15 Contrary to Upjohn’s contention (Br. 6 n.2), questionable pay-

ments by controlled foreign subsidiaries could affect its United States

Contrary to petitioners’ argument (Br. 12 n.4), which

the court of appeals apparently accepted (Pet. App. 7a

n.12), for purposes of determining whether a waiver oc-

curred, there is no basis for a distinction between the facts

tax liability for the years in issue in some circumstances. To begin

with, if the subsidiaries improperly deducted the questionable pay-

ments in derogation of Section 162(c) of the 1954 Code (26 U.S.C.) and

joined in the consolidated return, those deductions would of necessity

have understated Upjohn’s United States tax liability. The summons in

this case is intended in part to corroborate Upjohn’s assertion that it

has accounted for all questionable payments made by its subsidiaries

which were part of the consolidated group.

But even on the assumption that there are no remaining questionable

payments of members of the consolidated group to be disclosed, Up-

john’s United States tax liability may nevertheless be affected. Section

951 of the Code provides that a United States shareholder of a “con-

trolled foreign corporation” shall include in income his pro rata share of

the controlled foreign corporation’s Subpart F income. Subpart F in-

come is defined in Section 952, and is specifically limited by Section

952(c) to the earnings and profits of the controlled corporation for the

taxable year, as defined in Section 964. During the tax years in issue,

the earnings and profits of the controlled subsidiary could have been

reduced by illegal bribes or kickbacks although no deduction would

have been allowed under Section 162(c). See Rev. Rul. 77-442, 1977-2

Cum. Bull. 264. (Section 1065 of the Tax Reform Act of 1976, Pub. L.

No. 94-455, 90 Stat. 1653, added Section 952(a)(4) specifically to in-

clude in Subpart F income any illegal bribes, kickbacks or other pay-

ments, and amended Section 964(a) to provide that such payments,

made after November 3, 1976, shall not reduce earnings and profits for

purposes of Subpart F (see Section 1066 of the Tax Reform Act of 1976,

90 Stat. 1654)). Accordingly, Upjohn argues that any such payments by

controlled foreign corporations before November 3, 1976, could not

have affected its consolidated income tax returns for the years in issue

because such payments, by reducing earnings and profits, would have

been eliminated from Subpart F income.

Although the compucation of Subpart F income may not be affected,

there may be situations where payments were made by a subsidiary,

not for its own benefit, but for the benefit of the parent or another

member of the consolidated group. Depending on the factual cireum-

stances, the Commissioner might determine that such payments re-

quire reallocation of income between Upjohn and its controlled foreign

subsidiaries under Section 482, or that they were constructive divi-

dends to the beneficiary of such payments. See generally B. Bittker &

J. Eustice, Federal Income Taxation of Corporations and Sharehold-

ers 44 7.05, 15.06 (4th ed. 1979). Indeed, David S. Creamer, manager

of Upjohn’s corporate tax planning unit, conceded on cross-

examination (J.A. 138a, 146a-147a) that there could be numerous ways

in which the parent’s tax liability could be affected. Such results are

disclosed by Upjohn to the IRS and the original communi-

cations to counsel from which they were selectively

gleaned. Surely whether a waiver of the attorney-client

privilege occurred cannot turn upon whether the piece of

paper containing the disclosed facts is the original client

communication or another document upon which those

facts have been recorded.'®

not affected by Rev. Rul. 77-442, supra, the authority upon which

petitioners rely. That ruling addresses only the determination of

earnings and profits, and does not speak to the question of possible

constructive dividends or Section 482 allocations. As Creamer’s tes-

timony indicates, it is therefore erroneous to conclude that these pay-

ments could never affect Upjohn’s United States tax liability. Since the

tax consequences of these payments depend on the circumstances sur-

rounding the payments, the Commissioner is entitled to summon the

evidence necessary to make an independent determination of Upjohn’s

tax liability pursuant to his authority under 26 U.S.C. 7602.

16In this respect, United States v. Cote, 456 F.2d 142 (8th Cir.

1972), upon which the court of appeals relied for its conclusion that no

waiver occurred (Pet. App. 7a n.12), actually supports our submission

that Upjohn waived the privilege with respect to all the documents

sought by the summons. There, the taxpayer’s filing of a tax return,

which contained in part information set forth on otherwise privileged

workpapers, was held to be a “disclosure [that] effectively waived the

privilege not only to the transmitted data but also as to the details

underlying that information” (456 F.2d at 145). Here, too, Upjohn’s

partial disclosure of the substance of its employees’ communications

concerning questionable payments waived the privilege with respect to

all of its communications with counsel with respect to that subject. As

the court stated in United States v. Tellier, 255 F.2d 441, 448 (2d

Cir.), cert. denied, 358 U.S. 821 (1958), “the privilege attaches to the

substance of a communication and not to the particular words used to

express the communication’s content.” See also United States v.

Shibley, 112 F. Supp. 734, 742 (S.D. Cal. 1953).

The other authorities cited by the court of appeals (Pet. App. 7a

n.12) do not support its distinction between a waiver of the facts dis-

closed by Upjohn and the underlying data. Neither United States v.

Judson, 322 F.2d 460 (9th Cir. 1963), nor Colton v. United States, 306

F.2d 633, 639 (2d Cir. 1962), cert. denied, 371 U.S. 951 (1963), involved

a waiver. Moreover, unlike this case, JBM v. Sperry Rand Corp., 44

F.R.D. 10, 13 (D. Del. 1968), involved a waiver “to the limited extent”

of a particular subject discussed in a set of documents. Here, on the

other hand, the evidence sought by the summons involves a single

subject, viz., Upjohn’s questionable payments.

In our view, Upjohn’s selective disclosures to the IRS

waived the attorney-client privilege. Thus, whatever the

scope of the attorney-client privilege in the corporate set-

ting, the decision of the court of appeals can be affirmed on

the independent ground that Upjohn waived the

- privilege.+?

B. THE CONTROL GROUP TEST IS CONSISTENT WITH

THE POLICY UNDERLYING THE ATTORNEY-

CLIENT PRIVILEGE OF ENCOURAGING CLIENTS

To MAKE FULL DISCLOSURE TO THEIR ATTOR-

NEYS

1. As we have pointed out (pages 14, 19, supra), the

principal policy justification for the attorney-client

privilege 3 to encourage clients to make full disclosure to

their attorneys without fear that their attorneys would

become witnesses against them. ‘However, since the

privilege has the effect of withholding relevant informa-

tion from the factfinder, it applies only where necessary to

achieve its purpose. Accordingly, it protects only those

disclosures—necessary to obtain informed legal

advice—which might not have been made absent the

privilege.” Fisher v. United States, supra, 425 U.S. at

403.

Here, Upjohn’s employees would have made the disclo-

sures to petitioner Thomas in the absence of the privilege.

Their factual submissions to Thomas were made pursuant

to the orders of R.T. Parfet, Jr., the chairman and chief

executive officer of the Company, and were not prompted

or encouraged by the protection of the attorney-client

privilege. In directing the employees to cooperate with the

investigation, neither Parfet nor Thomas gave any assur-

ances to the employees that their disclosures would be

protected by the attorney-client privilege. Given their

subordinate place in the corporate hierarchy, Upjohn’s

17 If the Court holds that the privilege did not attach or that Upjohn

waived the privilege, the case should be remanded to the court of ap-

peals with instructions to modify its judgment so that the summons

could be immediately enforced. In these circumstances, there would no

longer be any need for the district court to determine which communi-

cations were made by members of the “control group” (see Pet. App.

7a).

employees could hardly have refused to cooperate with

Parfet’s directive to provide Thomas with the pertinent

information necessary to make business decisions on be-

half of the Company.

Thus, the attorney-client privilege did not play any part

in encouraging Upjohn’s employees to make the required

disclosures; they did so in compliance with an order issued

to them in the corporate chain of command. Indeed, the

fact that Upjohn’s senior management ultimately decided

to disclose many of the employees’ statements to the SEC

and the IRS—without so much as advising the employees

that such disclosures were being made (Pet. App. 22a-23a;

J.A. 18a, 184a-185a)—-graphically demonstrates that the

employees did not rely upon the attorney-client privilege

in cooperating with Thomas’ investigation. If the privilege

protected these statements, the Company’s senior man-

agement surely would have had to consult with the af-

fected employees prior to the disclosure of their state-

ments to law enforcement agencies. Hence, it is plain that

the employees had no privilege either at the time they

made their communications or at the time Upjohn deter-

mined to disclose them in part. In fact, the decision by

Upjohn’s senior management to make the disclosures to

the IRS shows that senior management, with authority to

act for the corporation in this matter, and not the employ-

ees, was in fact the client of Thomas as the alter ego of his

corporate client and confirms the correctness of the con-

trol group test.28®

18 Petitioners suggest (Br. 39 n.41) that the argument that a corpo-

ration will disclose information provided to its counsel by non-control

group employees “ignores reality” because it will discourage the em-

ployees from cooperating with counsel. In support of this contention,

they claim “that there are few cases where the corporation has waived

the privilege vis-a-vis the employee” (ibid.). See also Amicus Curiae

Brief of the American College of Trial Lawyers at 13 n.10. But one

need go no further than this case for an instance where management

has made such a disclosure. Indeed, any employee who is seriously

concerned about his own potential liability cannot rely on what the cor-

poration has done in the past. Rather, he must be aware of what the

corporation has the power to do.

Petitioners further urge (Br. 39 n.41) that the solution is to broaden,

rather than narrow, the corporation’s privilege to alleviate this prob-

lem. But the employee whose disclosures are communicated to man-

As the representative officials of the client, the control

group had the authority to make disclosures on beha!f of

the company in accordance with the advice of counsel and

therefore play a role in directing the corporation’s re-

sponse to the legal advice sought. It is accordingly the

communications of the control group with counsel that are

protected by the attorney-client privilege.

In light of the foregoing, it is clear that even on the as-

sumption that the attorney-client privilege applies to

communications of employees outside the control group,

such employees could not depend upon any assurance of

confidentiality conferred by the privilege because, in fact,

there is none from their standpoint. Corporate counsel

interviewing employees outside the control group cannot

promise them that their communications will remain confi-

dential. To the contrary, candid counsel must advise such

employees that in all likelihood their communications will

be revealed to their supervisors and that their communica-

tions might be disclosed to law enforcement or regulatory

agencies if the corporate control group determines that

such disclosure is in the best interests of the corporation.

The destiny of each communication necessarily rests in the

hands of the control group; and, like them, the corpora-

tion’s counsel owes his professional loyalty to his corporate

client rather than to the individual non-control group em-

ployees. Accordingly, the corporation’s attorney-client

privilege cannot encourage a non-control group employee

interviewed by corporate counsel to disclose any more

than he would be willing to disclose to any other manage-

ment representative. In short, the subordinate employee’s

willingness to cooperate with corporate counsel is there-

fore solely a function of his deference to the corporate

chain of command and bears no relationship to the avail-

ability of the attorney-client privilege. Since extension of

the attorney-client privilege to protect the employees’

communications would not achieve its purpose of en-

couraging candid disclosure, the privilege should not apply

to such evidence.

agement through its counsel can in no event have an independent

privilege that would restrict management’s use of the information.

There is no escaping the fact that management, and not the lower-level

employee, is the client who has the privilege and who has full authority

to disclose the information transmitted by the employee.

2.a. Given the fact that the employees would have made

the disclosures even in the absence of the attorney-client

privilege, there is no basis for petitioners’ contention (Br.

35, 39) that the control group test would inhibit communi-

cations between corporate counsel and employees outside

the control group. The attorney’s need to consult such em-

ployees does not necessarily dictate that their communica-

tions should be privileged. The policy of the attorney-

client privilege demands that it apply only when it would

enhance candid disclosure. That is not the case with re-

spect to employees outside the control group. As the Third

Circuit correctly concluded in Jn re Grand Jury Investi-

gation (Sun Co.), supra, 599 F.2d at 1236, such employees

would in all events confide in corporate counsel whether or

not the privilege were applicable. “In short, we do not be-

lieve that extension of the corporation’s privilege against

disclosure would significantly add to an attorney’s ability

to obtain information from employees outside the control

group” (‘bid.). Accordingly, the control group test will not

discourage lower-level employees from cooperating with

corporate counsel. Such employees respond to such in-

quiries because they are directed to do so by corporate

management.

b. Nor will the application of the control group test dis-

courage a corporation from conducting internal investiga-

tions or dissuade corporate counsel from ferreting out the

necessary information in such investigations. Despite

petitioners’ (Br. 35-41) and several of the amici curiae’s

assertions to the contrary (American Bar Association Br.

15-17; American College of Trial Lawyers Br. 23-28; Fed-

eral Bar Association Br. 18), even in the absence of the

privilege, corporate management will continue to conduct

such investigations in a thorough manner simply because

they have little choice.

A corporation has a strong incentive to monitor the ac-

tivities of all its employees that might expose it to liabil-

ity. Though the directors who ultimately control the ac-

tivities of a corporation may usually rely on the officers’

good faith and on the books of account of the corporation,

generally applicable fiduciary principles impose upon di-

rectors an affirmative duty to act with reasonable dili-

gence to inquire into the facts and to take whatever cor-

rective action is required when the propriety of the offi-

cers’ conduct or the accuracy of the corporate books is

called into question, as the outside auditors did in the in-

stant case. See 3A W. Fletcher, Cyclopedia of Private

Corporations § 1039, at 38 (M. Wolf rev. 1975). Failure to

conform to these responsibilities may implicate the direc-

tors and the corporations on whose boards they serve in

violations of state corporate laws or the federal securities

laws. See Graham v. Allis-Chalmers Manufacturing Co.,

41 Del. Ch. 78, 85, 188 A.2d_ 125, 130 (1963); 15 U.S.C.

770; 15 U.S.C. 78t. As the Third Circuit correctly noted in

In re Grand Jury Investigation (Sun Co.), supra, 599

F.2d at 1237, “the potential costs of undetected non-

compliance are themselves high enough to ensure that

corporate officials will authorize investigations regardless

of an inability to keep such investigations completely con-

fidential.”+®

The fact that communications similar to those made by

Upjohn’s employees would have taken place without re-

gard to the availability of the attorney-client privilege is

graphically illustrated by the facts of this case. In the

course of an audit by Upjohn’s independent auditors, the

corporation’s control group was notified of the existence of

certain questionable payments made by employees

stationed abroad. Thus, they were put on notice that the

corporate books might not have projected an accurate fi-

nancial picture. Although the extent of the payments was

unknown, the possibility clearly existed that Upjohn’s fi-

nancial statements were materially inaccurate or that the

payments had exposed the Company to potential liabilities

that had to be disclosed. An investigation into the scope

and nature of these payments was therefore required. The

chairman turned to one of the officers, who served as well

as general counsel, and ordered him to obtain the factual

19 See 15 U.S.C. (Supp. I) 78m(b)(2). Under this provision, which

Congress added to the Securities Exchange Act of 1934, 15 U.S.C. 77b

et seq., as a part of the Foreign Corrupt Practices Act of 1977, Pub. L.

No. 95-213, 91 Stat. 1494, every publicly held company is required to

keep accurate books and records and maintain internal accounting con-

trols that are sufficient to provide, inter alia, reasonable assurances

that transactions are executed and recorded in accordance with man-

agement’s direction. This statute was enacted as a result of informa-

tion submitted in the SEC’s voluntary disclosure program. See page

31 and note 20, infra.

information from the lower-level employees that was re-

quired for the Company to make the proper business deci-

sions. The chairman directed those employees to respond

fully and accurately to the inquiry. At the time Upjohn

initiated this investigation, the scope of the attorney-client

privilege in the corporate context was unsettled. Thus, the

corporation had no guarantee that the information pro-

vided by the lower-level employees was protected by the

attorney-client privilege. The investigation nevertheless

proceeded. It is therefore apparent that the existence vel

non of the attorney-client privilege did nothing either to

encourage the initiation of the investigation or to delineate

its scope. The investigation was undertaken simply be-

cause good “business sense” required it.?°

Nor is there merit in petitioners’ suggestion (Br. 35)

that an attorney operating under the control group test

“will be uncomfortably aware that any information he

elicits [from a non-control group employee] might later be

used against the corporation or the employee by an adver-

20 The investigation was also prompted by petitioner’s desire to par-

ticipate in the SEC’s voluntary disclosure program. Under this pro-

gram, petitioners were aware that the SEC could require disclosure of

the supporting documents. The Report of the Securities and Exchange

Commission on Questionable and Illegal Corporate Payments and Prac-

tices, submitted to the Senate Banking, Housing and Urban Affairs

Committee, May 12, 1976 (reprinted in Fed. Sec. L. Rep. (CCH) No.

642, at 9 n.8 (May 19, 1976)), states:

An essential element of the voluntary disclosure program is that

companies must agree to grant the Division of Enforcement ac-

cess to the report and its underlying documentation.

Materials submitted to the Commission may be subject to release

under the Freedom of Information Act or pursuant to Congres-

sional requests. * * *

Moreover, petitioner Thomas conceded that the company was willing to

disclose whatever documentation the SEC might require in order to

obtain the benefits of the program. As he testified (J.A. 120a):

I think at the time of the disclosure, that we had to make some

representation. I can’t remember—I believe it was in a letter,

but it may have been by verbally that we would, if they felt it

was necessary, maybe that—that we would make additional dis-

closures to their Enforcement Division. I believe the practice was

and the implication was that they wouldn’t press on that, they

wouldn’t make us do it; but as part of the voluntary program, we

had to agree to do that, if they determined that was necessary.

sary” and, hence, “will be hesitant to probe deeply.” Even

in the absence of the absolute protection afforded by the

attorney-client privilege, communications between counsel

and employees outside the control group would be pro-

tected in some degree by the qualified work product

privilege recognized in Hickman v. Taylor, 329 U.S. 495

(1947). (See Point II, pages 46-51, infra.) Thus, a party

seeking production of such material will not have untram-

meled access to information collected by an attorney but

will have to show necessity for such disclosure. (See Point

II, pages 46-51, infra.) *

At all events, a guarantee of secrecy does not establish

or narrow an attorney’s obligation in the giving of legal

advice to his client. See Garner v. Wolfinbarger, 430 F.2d

1093, 1102 (5th Cir. 1970), cert. denied, 401 U.S. 974

(1971). If an attorney is to fulfill his ethical obligation to

the corporation to which he is rendering legal advice, he

should resolve any fear he may have of disclosure in favor

of a complete and comprehensive investigation. See /n re

Grand Jury Investigation (Sun Co.), supra, 599 F.2d at

1236-1237. A claim that attorneys will ignore their ethical

obligations to their clients in the absence of the protection

of the attorney-client privilege is poor justification indeed

for an extension of the privilege.?!

C. THE CONTROL GROUP TEST IS CONSISTENT WITH

THIS COURT’S DECISION IN HICKMAN V. TAYLOR,

329 U.S. 495 (1947)

1. The Court’s analysis in Hickman v. Taylor, 329 U.S.

495 (1947), which formulated the attorney work product

doctrine now codified in Fed. R. Civ. P. 26(b), is consist-

21 Petitioners also suggest (Br. 35-36) that if the “control group” test

were adopted, a corporate counsel would hesitate to advise strongly

against any action which he suspects that his client might ultimately

decide to adopt for fear that his advice would be subject to disclosure.

But any such advice concerning a possible course of action would be

expressed to those within the corporation who would decide upon the

course of conduct to be pursued. These individuals would necessarily

be members of the control group, and such communications would be

privileged. At all events, the prospective decision of the client does not

define the attorney’s ethical obligation to advise his client fully and

completely on all aspects of a proposed course of action. Garner v.

Wolfinbarger, supra, 430 F.2d at 1102.

ent with the control group test employed by the courts

below. That case involved a wrongful death action against

the Taylor & Anderson Towing and Lighterage Company,

which was in the business of operating tugboats. One of

the boats sank and five crew members drowned. In antici-

pation of litigation, the company engaged a law firm to

defend them against potential lawsuits. In this connection,

a member of the law firm took statements from the sur-

vivors with an eye toward the anticipated litigation and

the survivors signed these statements. In the ensuing liti-

gation, the plaintiffs sought discovery of all such state-

ments. The lawyers for the company refused to comply on

the ground that such requests called “for privileged mat-

ter obtained in preparation for litigation” and constituted

“an attempt to obtain indirectly counsel’s private files”

(329 U.S. at 499).

In considering whether such material was subject to dis-

covery by plaintiffs’ counsel, the Court at the outset re-

jected the tugboat company’s claim that the survivors’

statements in its attorney’s files were protected by the

attorney-client privilege. As the Court stated (329 U.S. at

508):

We also agree that the memoranda, statements and

mental impressions in issue in this case fall outside

the scope of the attorney-client privilege and hence

are not protected from discovery on that basis. * * *

For present purposes, it suffices to note that the pro-

tective cloak of this privilege does not extend to in-

formation which an attorney secures from a witness

while acting for his client in anticipation of litigation.

Nor does this privilege concern the memoranda,

briefs, communications and other writings prepared

by counsel for his own use in prosecuting his client’s

case; and it is equally unrelated to writings which re-

flect an attorney’s mental impressions, conclusions,

opinions or legal theories.

The situation here is precisely analogous. Here, as in

Hickman, subordinate employees of a client company re-

sponded to questions put by company counsel. Such em-

ployees did not engage the counsel nor did they play any

role in directing the company’s response to the legal ad-

vice sought. They are outside the company control group.

Hence, their communications to the company counsel are

not protected by the attorney-client privilege because

their status is not that of a client but of a subordinate em-

ployee charged by superiors to disclose the facts of a par-

ticular incident to company counsel.

2. Contrary to the decisions adopting the broader sub-

ject matter test, the Court’s refusal in Hickman to extend

the protection of the attorney-client privilege to the

lawyer’s conversations with the partnership’s employees

was based upon the status of the employees within the

company rather than upon the duties the employees were

performing at the time of the accident. Exponents of the

“subject-matter” or the modified “subject matter” test

seek to avoid the conflict with Hickman v. Taylor by

exempting from the privilege information gathered by em-

ployees as mere “bystander witnesses.” See Harper &

Row Publishers, Inc. v. Decker, supra, 423 F.2d at 491;

Diversified Industries, Inc. v. Meredith, 572 F.2d 596,

609 (8th Cir. 1977) (en banc). See Jn re Grand Jury In-

vestigation (Sun Co.), supra, 599 F.2d at 1235-1236 n.7.

Thus, in attempted deference to Hickman, the subject

matter test requires that, to be privileged, the subject

matter of the employee’s communications to the attorney

be “within the scope of the employee’s corporate duties”

(Diversified Industries, Inc. v. Meredith, supra, 572 F.2d

at 609) and not relate to “fortuitously[ ] observe[d] events

which may generate liability on the part of the corpora-

tion” (Harper & Row Publishers, Inc. v. Decker, supra,

423 F.2d at 491).

But this attempted reconciliation with Hickman cannot

withstand analysis. The manner in which an employee ob-

tains his information is entirely unrelated to the issue

whether the privilege is required to encourage communi-

cation of the information to counsel. Accordingly, the

“scope of employment” gloss on the subject matter test

does not further any policy of the attorney-client privilege.

More importantly, the subject matter test begs the

critical question whether the employee is the “client”

whose communications are for the purpose of obtaining

legal advice. An employee’s regular duties may well in-

clude observing and reporting any accident that may sub-

ject the corporation to liability. If a corporation were so to

state in an employment*manual, or to require regular acci-

dent reports from employees, such observations might

well then be “nonfortuitous” and “within the scope of the

employee’s corporate duties” and privileged under the

subject matter test. If so, this Court’s rvjection of the

privilege in Hickman would be effectively overruled by

the fiat of the nation’s corporations.

For these reasons, the artificial nature of the “scope of

employment” gloss is readily apparent. The crew members

in Hickman were not “mere bystanders” who fortuitously

observed an event that might generate liability. While en-

gaged in the performance of their duties, they witnessed

an accident which was a foreseeable possibility within the

scope of their employment. The accident clearly involved a

matter within the scope of their duties. See Jn re Grand

Jury Subpoena Dated December 19, 1978, Issued to Gen-

eral Counsel, John Doe, Inc., 81 F.R.D. 691, 694 (S.D.

N.Y.), rev’d on other grounds, 599 F.2d 504 (2d Cir. 1979).

The Court’s rejection of the claim of privilege necessarily

turned on the employees’ subordinate status and not the

nature of their duties.

Harper & Row and Diversified Industries therefore

misread Hickman. The employee-attorney communica-

tions in Hickman were found to be the nonprivileged

communications of witnesses not because the employees’

observations were outside the scope of their duties, but

because the employees’ status was outside the “control

group” of the tugboat company. The employees were not

clients of the attorney.?? Since the “control group” test

turns on the status of the particular employee within the

corporation it is consistent with Hickman.?%

22Indeed, had Taylor himself, one of the partners of the tugboat

company, been present on the sinking vessel, there can be no doubt

that his communications with counsel about the events of the accident

would have been privileged, as would the communications of any client

in such a situation, even though his observations wou!d not have con-

cerned the subject matter of his business duties. But such communica-

tions would not be privileged under the scope of employment test.

Thus, unless this Court in Hickman intended radically to alter the

attorney-client privilege’s traditicnal application to communications

between client and attorney, it reached its result on the basis of the

status of the employees and not on what they saw. The employees were

not the client.

23 Amicus American College of Trial Lawyers seeks to distinguish

Hickman (Br. 11 n.7) on the ground that the employees in that case

D. THE CONTROL GROUP TEST IS A PRACTICABLE

STANDARD FOR ESTABLISHING THE SCOPE OF

THE ATTORNEY-CLIENT PRIVILEGE THAT IS IN

ACCORD WITH THE REALITIES OF CORPORATE

LIFE

1. In light of the foregoing, we submit that the control

group test is the appropriate standard that furthers the

policy of the attorney-client privilege of encouraging client

candor and is consistent with this Court’s decision in

Hickman v. Taylor, 329 U.S. 495 (1947). But it is also a

practicable test that responds to the countless factual

variations that occur in the corporate setting. Thus, the

control group test does not inflexibly decree that only cer-

tain corporate officials by virtue of their position or rank

constitute the control group. As Judge Kirkpatrick stated

in his seminal formulation of the test in City of Philadel-

were in an adversarial posture. In support of this purported distinc-

tion, they cite a brief parenthetical comment in a statement filed by

defense attorney Fortenbaugh after the trial court opinion was entered

that “Settlement has been made in various nominal amounts with all of

the four survivors * * * ” (No. 47 Hickman record at 70a). Forten-

baugh’s deposition, however, clearly states (id. at 56a) that statements

of the survivors were taken as soon as was practicable, as was always

the procedure in such cases. There is no indication that an adversarial

relationship existed at the time the statements were made and it is

clear that no litigation was instituted by any of the survivors (id. at

61a).

Of greater import in considering the scope of the Court’s opinion in

Hickman, however, is the fact that no court adverted to any adversarial

relationship between the company and its surviving employees in dis-

cussing the status of statements of those employees, treating the em-

ployees, instead, as mere witnesses at all times. See 329 U.S. at 508; 4

F.R.D. 479, 480 (E.D.Pa.); 153 F.2d 212, 222 (3d Cir. 1945). It is clear

from the Court’s opinion that it did not view the employer-employee

relationship in Hickman as sufficient to convert communications of the

employee into communications of the client partnership for purposes of

the attorney-client privilege. It therefore had no reason even to reach

the question posed by amicus American College of Trial Lawyers. In-

deed, Judge Kirkpatrick’s formulation of the “control group” test in

City of Philadelphia v. Westinghouse Electric Corp., supra, was

largely in response to Hickman v. Taylor, which, according to Judge

Kirkpatrick (210 F. Supp. at 485), “very clearly shows the distinction

between statements by employees of the client and statements by the

client itself.” Since Judge Kirkpatrick wrote the trial court opinion in

Hickman v. Taylor, he was fully aware of its factual bases.

phia v. Westinghouse Electric Corp., 210 F. Supp. 488,

485 (E.D.Pa.), petition for mandamus and prohibition de-

nied, 312 F.2d 742 (8d Cir. 1962), cert. denied, 372 U.S.

943 (1963):

if the employee making the communication, of what-

ever rank he may be, is in a position to control or

even to take a substantial part in a decision about any

action which the corporation may take upon the ad-

vice of the attorney, or if he is an authorized member

of a body or group which has that authority, then, in

effect, he is (or personifies) the corporation when he

makes his disclosure to the lawyer and the privilege

would apply. In all other cases the employee would be

merely giving information to the lawyer to enable the

latter to advise those in the corporation having the

authority to act or refrain from acting on the advice.

The fact that the composition of the control group may

vary from case to case does not, as petitioners contend

(Br. 40-44), render the control group test unworkably

vague or unpredictable in result. Here, the court of ap-

peals defined the control group as “those officers, usually

top management, who play a substantial role in deciding

and directing the corporation’s response to the legal advice

given” (Pet. App. 5a; footnote omitted). Contrary to

petitioners’ assertion, there is nothing in this formulation

that is beyond the abilities of the average corporate coun-

sel to understand and apply. In this case, it is undisputed

that the corporate officials who sought and received legal

advice were the senior officers and directors of the parent

corporation (Pet. App. 22a-23a; J.A. 184a-185a). The bulk

of the employees interviewed were not within this group.

The remand ordered by the court of appeals was not

caused by any difficulty in determining who was in the

control group, but because some employees, who both par-

ties agree belonged to the control group, were denied the

privilege.?4

We do not quarrel with petitioners’ assertion (Br. 42-43)

that the control group has been given varying interpreta-

tions in various cases. But that fact is hardly surprising in

light of the different types of corporate decisions that can

24See Govt. C.A. Br. 17 n.4. For the convenience of the Court, we

are lodging a copy of this brief with the Clerk.

be made in these cases. Any reasonable corporate attor-

ney, however, is capable, in a given fact situation, of de-

termining whether he is merely gathering facts from a

subordinate employee or is giving legal advice to a

decision-maker. The definition of the “control group” is

within the ability of the average corporate counsel to un-

derstand and apply.

At all events, any minor variations in the composition of

the control group from case‘to case will not discourage

candid employee communications with counsel in the cor-

porate setting. This appears to be self-evident from the

apparent ability of corporations to function effectively in

the past under conditions where the scope of the

attorney-client privilege in the corporate context had not

been conclusively established and the independent need

for such consultations to take place nevertheless existed

(see pages 12-15, supra).

2. Nor do the variations in the composition of the con-

trol group from case to case render the control group in-

sensitive to the realities of corporate life. Petitioners

argue (Br. 16-17, 20) that the real decision-makers in a

corporation are often lower-level or middle-level manage-

ment who are not included in the “control group” as de-

termined by the court of appeals. They therefore urge that

the “control group” test ignores this aspect of corporate

life and deprives the real corporate decision-makers of any

privilege whatsoever.

But the opinion of the court of appeals effectively re-

futes petitioners’ claim. In this case, where the necessary

decisions were to be made by the senior officers and the

board of directors, these officers and directors constituted

the “control group.” If, on the other hand, a district man-

ager needed legal advice on a decision that he was to

make, he would be in the “control group” for purposes of

that decision. Petitioners therefore err in characterizing

(Br. 12; footnote omitted) the decision of the court of ap-

peals as holding that the “ ‘client’ consists only of the cor-

poration’s controlling group of central managers.” To the

contrary, the control group test protects communications

made by “those officers, usually top management, who

play a substantial role in deciding and directing the corpo-

ration’s response to the legal advice given” (Pet. App. 5a;

emphasis supplied).

The court of appeals’ control group test is therefore not

as inflexible as petitioners would have it. Any employee of

a corporation who needs legal advice for a decision he

makes or has a substantial role in making would be cov-

ered by the privilege under the control group test. Far

from ignoring the realities of corporate life, the control

group test deals with those realities in a practical manner

by assessing the authority and the responsibilities of the

employees communicating with corporate counsel in a

given case. Those who are seeking legal advice on behalf of

the corporation fall within the privilege. On the other

hand, those employees who, like bystander witnesses,

merely provide facts on which legal advice to other em-

ployees or officers will be based are not within the abso-

lute privilege. See D. McCormick, supra, § 87.

E. THE SUBJECT MATTER TEST IS UNRELATED TO

THE POLICIES UNDERLYING THE ATTORNEY-

CLIENT PRIVILEGE AND ENCOURAGES ABUSE

In marked contrast to the control group test applied by

the courts below, the subject matter test urged by

petitioners would encompass all communications made by

a corporation’s employees to corporate counsel where the

communication is made at the direction of the employee’s

superiors and the subject of the communication upon

which the attorney’s advice is sought is the performance

by the employee of the duties of his employment. See

Harper & Row Publishers, Inc. v. Decker, supra, 423

F.2d at 491-492. Subsequent to Harper & Row, the

Eighth Circuit adopted the subject matter test in Diver-

sified Industries, Inc. v. Meredith, 572 F.2d 596 (1977),

adding the requirement that the employee’s superior must

have requested the employee to communicate with the

lawyer so that the corporation could obtain legal advice.

Accord: 2 J. Weinstein & M. Berger, Evidence

{ 503(b)[04](1979).

A large corporation’s employees regularly generate a

great deal of information that is transmitted to their

superiors and, in some instances, to the corporation’s at-

torneys. Gathering of such information is an essential as-

pect of the conduct of the corporation’s business. Under

the broad subject matter test, corporate management

would be allowed to use counsel to create a channel of

privileged communications to collect information about the

activities of lower-level employees which they would col-

lect regardless of the privilege. Since the policy justifica-

tion for the privilege is to encourage communications with

counsel that would otherwise not be made, the subject

matter test fails to reflect the purposes of the privilege.?5

Indeed, the subject matter test would encourage corpo-

rations to create a broad “zone of silence” around any in-

formation that has potential legal consequences by fun-

neling such information through house counsel. Thus, for

example, a former SEC Commissioner recently recom-

mended at a professional conference that any internal in-

25Contrary to the argument of the amicus American Bar Association

(Br. 4-9), the question as to the scope of the attorney-client privilege

cannot be resolved by protecting the communications of any corporate

employee to counsel on the formalistic basis that he is an agent of the

corporation. To be sure, a client’s freedom of communication requires

that he be permitted to engage a person to communicate with his at-

torney, if circumstances so dictate. On the other hand, the privilege

does not protect the disclosures of third parties, even though the

lawyer may communicate with those parties at the instance of the

client. See 8 J. Wigmore, supra, § 2317(2).

If a corporation were permitted to designate any of its employees as

its agent and thereby claim protection for communications, the corpo-

rate privilege would be far broader than that of an individual. The

question is therefore whether all corporate employees are deemed to

be the “client” on the basis of their agent status or whether some

might be so far removed from the decision-making level as to be essen-

tially third parties vis-a-vis the corporation. As one commentator has

observed, “The problem cannot be solved by a simple reference to the

law of agency, for it is not enough that the spokesman is a corporate

agent; the question is whether the good that the privilege seeks to

accomplish—candor between client and attorney—would be defeated

unless the particular agent were permitted to speak for the corpora-

tion” Simon, The Attorney-Client Privilege as Applied to Corpora-

tions, 65 Yale L.J. 953, 956 (1956). Here as we have pointed out (pages

26-28, supra), the policy of the privilege would not be served by ex-

tending it to the employee communications at issue because the em-

ployees would have made their disclosures even in the absence of the

privilege. Indeed, if the question turned on the formalities of the law of

agency, the employees’ statements in Hickman v. Taylor, supra,

would have been protected by the attorney-client privilege, a claim

that the Court explicitly rejected (8329 U.S. at 508).

——

vestigation conducted by a corporation into possible

wrongdoing should be undertaken by outside counsel and

“at all events, it should not be undertaken by non-

lawyers.” Wheat, The Attorney-Client Privilege and the

Attorney's Work Product Rule—Some Issues for the Cor-

porate Lawyer, Vol. 3 Course Materials, University of

California, San Diego, 7th Annual Securities Regulation

Institute 18 (Jan. 1980).2® Such manipulation of the

26The pertinent part of Mr. Wheat’s “Some Practical Hints” reads as

follows (Wheat, supra, at 18-19; emphasis in original):

A. It is highly desirable that any investigation into possible

_ corporate wrongdoing be undertaken by the corporation before

the SEC or any other agency gets into the act.

B. It is preferable for the investigation to be undertaken by

outside counsel; at all events, it should not be undertaken by

non-lawyers.

C. Should you undertake an investigation, it is advisable to

enter into an engagement letter which specifies, among other

things:

1. that you are to investigate for the purpose of rendering

legal advice,

2. that your engagement is in preparation for possible tax,

SEC criminal class and/or derivative actions against the corpora-

tion, should the results of your inquiry show that the law was

violated,

3. that you expect to prepare a report addressed to the

board (or a committee of the board) which will contain your legal

advice and will not be disseminated beyond the board, certain

designated officers and the inside general counsel, unless you are

instructed differently by the board.

D. A senior officer of the corporation should instruct in writing

employees you wish to interview to cooperate fully with you in

furnishing information you may request relating to his activities

as an employee of the corporation.

E. All documents prepared in the course of the investigation

should in fact be held confidential and, where appropriate,

marked to show their confidential and privileged nature.

F. If any documents are voluntarily given to the SEC, it

should be pursuant to formal order of investigation and a rel-

evant subpoena.

G. If accountants and other non-lawyers are to be engaged to

assist in the investigation, they should be engaged by, and report

only to, the lawyers in charge of the investigation.

* * o* * *

attorney-client privilege and the use of corporate execu-

tives (such as Thomas) who happen to be lawyers to per-

form what are essentially non-legal fact gathering tasks

would undermine the legitimate right of law enforcement

agencies “to satisfy themselves that corporate behavior is

consistent with the law and the public interest.” United

States v. Morton Salt Co., 338 U.S. 632, 652 (1950). See

also United States v. White, 322 U.S. 694, 700 (1944). Asa

noted commentator foresaw long before the current con-

flict between the control group and subject matter tests

reached the courts, “Where corporations are involved,

with their large number of agents, masses of documents,

and frequent dealings with lawyers, the zone of silence

grows large.” Simon, The Attorney-Client Privilege As

Applied to Corporations, 65 Yale L.J. 953, 955 (1956). The

author expressed the belief, which is consistent with our

submission, that “Few judges * * * would long tolerate

any common law privilege that allowed corporations to in-

sulate all their activities by discussing them with legal ad-

visers.” Simon, supra, at 955-956.27

27To be sure, the modification to the subject matter test adopted by

the Eighth Circuit in Diversified Industries would limit the opportu-

nity for wholesale manipulation of the privilege by requiring that the

employee’s superior must have requested the employee to communi-

cate with the lawyer so that the corporation could secure legal advice.

Under this modified subject matter test, a corporation would be unable

to shield all potentially sensitive information by funneling it through

its counsel. However, in a particular instance, it would be relatively

easy, as in the instant case, for management to direct an employee to

communicate with counsel so that the corporation could obtain legal

advice. Such an arrangement would not be unusual, for as petitioners

acknowledge (Br. 19-20), legal advice is relevant in almost every ac-

tivity of modern corporate enterprise.

At all events, it is significant that petitioner (Br. 21-23), and the

amici American Bar Association (Br. 6) and the American College of

Trial Lawyers (Br. 10 n.5) reject the modified subject matter test.

Petitioners argue (Br. 23) that “It should suffice if a corporation’s

attorney-client privilege were understood to encompass all communica-

tions made in confidence by corporate employees to corporate counsel

regarding matters within their knowledge as employees and relevant

to advice sought by the corporation from counsel.” Thus, the broad

subject matter test urged by petitioners would result in the very

abuses that even the formulation in Diversified Industries sought to

avoid.

Finally, it is no answer to argue, as do petitioners

(Br. 29), that a litigant may always obtain the testimony of

each individual employee. The argument might have some

merit in a case in which the corporation is small. But in a

corporation of the size of Upjohn, the argument stands re-

ality on its head. Here, there were some 53 questionnaires

and 86 interviews. There could conceivably have been

hundreds or thousands. It is for this reason that corporate

officers and directors have the fiduciary duty to apprise

themselves of the activities of their subordinates and that

Rule 33, Fed. R. Civ. P., provides that an officer or agent

shall be designated to provide all the information known to

a corporation. Yet petitioners seek to undermine these

policies by using corporate counsel to investigate wrong-

doing and then claiming protection for their findings under

the absolute attorney-client privilege. If corporate officers

ean fulfill their fiduciary duties without apprising them-

selves of unpleasant facts that they, as opposed to their

counsel, may have to disclose, then counsel will indeed be-

come the exclusive repository of such unpleasant facts.

Indeed, Upjohn’s denial (Br. 28) that this is the conse-

quence of its argument is belied by its acknowledgment

(Br. 19) that such facts are not realistically available from

any central source other than counsel. The Court should

therefore reject the overly broad subject matter test and

adopt the control group test as more responsive to the

policies of the attorney-client privilege and to the respon-

sibilities of corporations to the public.

F. STATE LAW DOES NoT FAVOR THE SUBJECT

MATTER TEST

Contrary to petitioners’ argument (Br. 24-27), the

subject matter test is not supported by “[t]he over-

whelming majority of state courts.” That assertion seri-

ously mischaracterizes the import of the state authorities.

To begin with, as we have pointed out (page 13, note 8,

supra), six states (Arkansas, Maine, Nevada, North

Dakota, Oklahoma, and South Dakota) have adopted the

control group test by statute. Petitioners therefore err in

including Nevada and South Dakota in their list of states

(Br. 26 n.30) favoring a broad test in defining the

attorney-client privilege for corporations.?®

Moreover, although petitioners concede (Br. 26 n.30)

that the Appellate Court of Illinois applied the control

group test in Day v. Illinois Power Co., 50 Ill. App. 2d

52, 199 N.E.2d 802 (1964), they claim that the authority of

that case has been undermined by the Illinois Supreme

Court’s decision in Cox v. Yellow Cab Co., 61 Ill. 2d 416,

337 N.E.2d 15 (1975). In petitioners’ view, the Cox opin-

ion’s citation of D.J. Chadbourne, Inc. v. Superior Court,

60 Cal. 2d 723, 388 P.2d 700 (1964)—a California Supreme

Court decision upholding the subject matter test—

demonstrates a shift in the Illinois decisional law in favor

of the subject matter test.

But an examination of Cow reveals that the court simply

cited D.J. Chadbourne, Inc. for the undisputed proposi-

tion that the claimant to the privilege must prove the facts

that give rise to the privilege (see 61 Ill. 2d at 420; 337

N.E.2d at 18). In Cox, the court held that the claimant

had not established a factual basis for the applicability of

the privilege. In the absence of any evidence that the

communications were made in the context of an attorney-

client relationship, the fact that they found their way into

the files of an attorney was deemed irrelevant. Hence,

Cox in no way vitiates the authority of Day v. Illinois

Power Co., supra, or the applicability of the control group

test in Illinois. See Johnson v. Frontier Ford, Inc., 68 II.

App. 3d 315, 319 (1979).29

28See Nev. Rev. Stat. § 49.075 (1979) (‘Representative of the

client’ means a person having authority to obtain professional legal

services, or to act on advice rendered pursuant thereto, on behalf of

the client”); S.D. Codified Laws Ann. § 19-13-2, Rules of Evidence

(rev. 1979) (“A representative of the client is one having authority to

obtain professional legal services, or to act on advice rendered pur-

suant thereto, on behalf of the client”).

29The remaining decisions cited by petitioners (Br. 26 n.30) do not

support their assertion that 13 additional states favor a broad

attorney-client privilege for corporations. None of those cases ad-

dresses the question presented as to the propriety of the control group

test as furthering the policies of the attorney-client privilege. Al-

though some of them contain dicta favoring a privilege encompassing

communications between “agents” of the corporation and counsel, their

analyses for the most part blur the distinction between the absolute

attorney-client privilege and the qualified work product privilege.

In sum, the decisions of the state courts offer little, if

any, guidance for resolution of the question in this case.

As the foregoing discussion indicates, to the extent that

state law has addressed the question presented, seven

states have adopted the control group test, and only one

state, California, has adopted the subject matter test.

Contrary to petitioners’ overstatement (Br. 25), there has

not been an “overwhelming” adoption of the subject mat-

ter test by the state courts to which this Court should give

deference. *°

Nor do the lower court opinions in Ford Motor Co. v. O.W. Burke

Co., 299 N.Y.S.2d 946 (Sup. Ct. 1969), or Stewart Equipment Co. v.

Gallo, 32 N.J. Super. 15, 107 A.2d 527 (Law Div. 1954), which

petitioners cite (Br. 25), indicate that New York or New Jersey have

“adopted” the subject matter test. The former case held that the

privilege applied to a plant employee’s report to in-house counsel in

anticipation of litigation. However, the case turns entirely upon

whether the privilege applies to in-house as well as independent coun-

sel. The court’s opinion in no way addresses the status of the em-

ployee. At all events, it would appear that the report would be covered

by the qualified work product doctrine.

Stewart Equipment Co. v. Gallo, supra, is likewise distinguishable.

There, the communication to counsel by a corporate official serving as

vice-president and sales manager was held to be within the attorney-

client privilege. While the court held that the official in question could

not waive the privilege on behalf of the corporation because he was not

a director, such an officer could well be viewed as a member of the

control group. Since neither Ford Motor Co. nor Stewart Equipment

Co. addressed the relative merits of the control group and subject mat-

ter tests, there is no basis for petitioners’ claim (Br. 25) that “[tJhe

decision in D.J. Chadbourne reflects the virtually unanimous view of

those states that have considered the question.”

3°Contrary to petitioners’ further argument (Br. 27 n.31), a federal

rule adopting the control group test would not displace the state rules

of evidentiary privileges. Under Rule 501 of the Federal Rules of Evi-

dence, federal courts will apply a federal rule of privilege only in fed-

eral question cases. Rule 501 further provides that the federal courts

will apply the state rule in diversity jurisdiction cases.

THE WORK PRODUCT DOCTRINE OF

HICKMAN V. TAYLOR, 329 U.S. 495 (1947), DOES

NOT PROTECT THE DOCUMENTARY

EVIDENCE SOUGHT BY THE INTERNAL

REVENUE SERVICE SUMMONS FROM

COMPELLED DISCLOSURE BECAUSE THE

GOVERNMENT SHOWED AMPLE NECESSITY

FOR THE PRODUCTION OF SUCH EVIDENCE

1. As we have pointed out (pages 32-35, supra), the

Court in Hickman v. Taylor, 329 U.S. 495 (1947), recog-

nized a qualified privilege for certain materials prepared

by an attorney “acting for his client in anticipation of liti-

gation” (id. at 508). There, with an eye to potential litiga-

tion arising out of a tugboat accident, the defendant’s

counsel had personally secured written and oral state-

ments from witnesses in preparation for possible trial. The

plaintiffs’ counsel, in order to prepare for his own exam-

ination of these witnesses, sought to discover copies of the

signed written statements and the defendant’s attorney’s

detailed resumes of the oral statements. The Court,

characterizing these materials as the “work product” of

the lawyer, indicated that without a showing of special

need, they were privileged from discovery. As the Court

stated, “We do not mean to say that all written materials

obtained or prepared by an adversary’s counsel with an

eye toward litigation are necessarily free from discovery

in all cases. Where relevant and non-privileged facts re-

main hidden in an attorney’s file and where production of

those facts is essential to the preparation of one’s case,

discovery may properly be had. * * * And production

might be justified where the witnesses are no longer avail-

able or may be reached only with difficulty” (7d. at 511).*?

31As we have pointed out (pages 32-34, supra), the work product

doctrine is a qualified privilege that is distinct from the absolute pro-

tection afforded by the attorney-client privilege. See United States v.

Nobles, 422 U.S. 225, 238 n.11 (1975). Since Hickman, Congress, the

courts and the commentators have uniformly viewed the work product

doctrine solely as 2 limitation on pretrial discovery and not as a qual-

ified evidentiary privilege. Thus, Fed. R. Civ. P. 26(b) incorporates

much of what the Court held in Hickman with respect to pretrial dis-

covery.

In the instant case, the district court observed that

“(t]here is, at the outset, a serious question as to whether

the work product doctrine is even applicable in a summons

enforcement proceeding” (Pet. App. 26a; J.A. 188a). See

United States v. McKay, 372 F.2d 174 (5th Cir. 1967).

Contra: United States v. Brown, 478 F.2d 1038 (7th Cir.

1973); United States v. Amerada Hess Corp., 619 F.2d

980, 987-988 (3d Cir. 1980). But even if the work product

doctrine is applicable to summons enforcement proceed-

ings, the district court found that the government had

shown ample necessity for compelling disclosure (see Pet.

App. 28a--30a; J.A. 190a—192a). The court of appeals also

rejected petitioners’ claim that the documents sought by

the summons were protected by the work product doc-

trine. Although it left undisturbed the district court’s

finding that the record established ample necessity for

compelling disclosure of the summoned material, the court

of appeals also expressed the view that ‘[t]he work-

product doctrine of Hickman v. Taylor * * * is not appli-

cable to administrative summonses issued under 26 U.S.C.

§ 7602” (Pet. App. 7a n.13).

2. As we acknowledged in our brief (page 10) in re-

sponse to the petition in this case, the courts of appeals

have expressed disparate views as to whether the work

product doctrine applies in a summons enforcement pro-

ceeding. See United States v. Nobles, 422 U.S. 225, 247

n.6 (1975) (White, J., concurring). Compare United States

v. McKay, supra, 372 F.2d at 176 (“relevancy of the work

product privilege enunciated in the Hickman case to a

proceeding for the enforcement of the Commissioner’s

summons may well be doubted”) with United States v.

Brown, supra, 478 F.2d at 1041 (“work product doctrine

does have applicability to a proceeding for the enforce-

ment of an Internal Revenue summons”).3? Recently, the

Third Circuit expressed agreement with Brown, although

32In McKay, the court also held that the appraisal report at issue

was in no sense the work product of a lawyer (see 372 F.2d at 177). In

Brown, the court ruled that the Commissioner had shown sufficient

cause to rebut the taxpayer’s work product claim on the ground that

the document—an attorney’s memorandum—was “necessary for a cor-

rect determination of the taxpayer’s liabilities and that the information

contained therein could not be obtained from any other source” (478

F.2d at 1041; see also id. at 1039-1040).

it enforced the summons on the ground that the govern-

ment had made the requisite showing of necessity because

the work product in question was of minimal substantive

content. United States v. Amerada Hess Corp., supra,

619 F.2d at 987-988.

3. We do not quarrel with petitioners’ submission that,

as a matter of law, the work product doctrine is applicable

to IRS summons enforcement proceedings. Apart from the

decision below, the sole appellate authority to the con-

trary, United States v. McKay, supra, 372 F.2d at 176,

relied upon the analogy of the Commissioner’s summons

authority to the inquisitorial power of the grand jury. See

United States v. Poweli, 379 U.S. 48, 57 (1964); United

States v. Bisceglia, 420 U.S. 141, 147-148 (1975). But the

courts of appeals have thus far uniformly held that the

work product rule is applicable to a grand jury subpoena.*4

Since there appear to be no unique characteristics or spe-

cial policies inherent in summons enforcement cases that

would foreclose similar application of the work product

doctrine in that context, we agree that the Hickman

rationale and Rule 26(b), Fed. R. Civ. P., can be invoked

to resist production of an attorney’s work product pur-

suant to an internal revenue summons.

This is not to say, however, that petitioners’ work prod-

uct claim should defeat enforcement of the summons at

issue here. We submit that the district court properly

found that “the record establishes ample necessity for

compelling disclosure of the summoned material in this

case” (Pet. App. 30a; J.A. 192a). Indeed, Upjohn’s conduct

33In In re Grand Jury Investigation (Sun Co.), supra, the Third

Circuit held that materials similar to those involved here sought by a

grand jury subpoena were protected by the work product doctrine, and

that the government had demonstrated good cause to overcome that

protection with respect to questionnaires and interview memoranda

generated by a deceased employee of the corporation because of the

government’s inability to secure the information from any more reli-

able source. However, the court deferred ordering production of all of

the other materials sought until the government had subpoenaed wit-

nesses before the grand jury (see 599 F.2d at 1228-1233).

34See In re Grand Jury Subpoena Dated December 19, 1978, Issued

to General Counsel, John Doe, Inc., 599 F.2d 504 (2d Cir. 1979); In re

Grand Jury Investigation (Sun Co.), 599 F.2d 1224 (3d Cir. 1979); Jn

re Grand Jury Proceedings (Duffy), 473 F.2d 840 (8th Cir. 1973).

during the audit and its refusal to permit independent cor-

roboration of its assertions concerning the tax conse-

quences of its questionable payments constitute an almost

classic case of “ample necessity” and “special need” suffi-

cient to rebut a work product claim under Hickman v.

Taylor, supra. Here, petitioners have conceded that there

are approximately $3 million of questionable payments

that are inaccurately reflected on the corporate books.

They nevertheless contend that these payments are not

relevant to its federal tax liability, and have refused to

permit corporate employees to be questioned by the IRS

about these payments. The Commissioner understandably

wishes to exercise his own independent judgment in mak-

ing that determination. All the government is seeking here

is the factual data—set forth on the employees’ question-

naires and the notes of their interviews—necessary to

make that independent judgment that is at the heart of

effective enforcement of the tax laws.

Production of such evidence is firmly grounded in the

strong public policy favoring enforcement of Internal Rev-

enue summonses. See United States v. Bisceglia, 420

U.S. 141, 146 (1975). Given this policy and the relevance

and importance of the employee questionnaire and inter-

view notes, the government has here shown sufficient

need for the evidence and its virtual unavailability from

any other source. Some of the employees are no longer

with the Company (J.A. 114a—118a). Most of the remain-

ing employees are located throughout the world, some in

countries where the government representatives would

not have easy access. While Upjohn has offered to trans-

port these employees to a neutral country (J.A. 121a), it

has forbidden its employees to discuss with the IRS any

payments that Upjohn has concluded are irrelevant*5 (Pet.

35With regard to these payments, petitioners are effectively requir-

ing the Commissioner to show probabie cause why their records should

be made available in spite of this Court’s holding in United States v.

Powell, 379 U.S. 48, 57 (1964), that no such showing is necessary for

the enforcement of an IRS summons. Furthermore, contrary to

petitioners’ suggestion (Br. 61), the IRS cannot determine whether the

payments in question are covered by Rev. Rul. 77-442, 1977-2 Cum.

Bull. 264, until it knows the nature of the payment, as well as for

whose benefit the payment was made. Clearly, the IRS need not accept

petitioners’ characterization of such payments (see pages 23-25, note

15, supra).

App. 16a; J.A. 178a). Since the interviews are to be con-

ducted according to ground rules established. by Upjohn

and Upjohn refuses to allow its employees to discuss cer-

tain information, it is clear that absent production of the

questionnaires and interviews the information is, as a

practical matter, unavailable to the IRS. Furthermore,

many of the employees are foreign nationals (J.A. 79a,

125a) who may not be subject to the process of the federal

courts. See Wilson v. David, 21 F.R.D. 217, 221-222

(W.D. Mich. 1957). There is accordingly no basis for

petitioner’s assertion (Br. 62-63) that the information is

available by direct examination of the employees.

Finally, it should be emphasized that approximately

three years have elapsed since the questionnaires at issue

were sent out and the final Form 8-K was filed. Memories

grow cold with the passage of time. It is therefore likely

that the employees have forgotten some of the details of

the myriad transactions they reported. The questionnaires

and interview notes—taken at times more contemporane-

ous with the years under audit—are a far more accurate

source for determining Upjohn’s correct tax liability than

the employees’ present recollection, assuming that they

can be located and questioned. Indeed, it is not unrealistic

to assume that Upjohn’s employees might be less coopera-

tive in responding to direct examination by an internal

revenue agent than to a request from a company

superior.?7 See Southern Ry. v. Lanham, 403 F.2d 119,

127-129 (5th Cir. 1968); Goosman v. A. Duie Pyle, Inc.,

320 F.2d 45 (4th Cir. 1963).

36The case is therefore distinguishable from: (1) Jn re Grand Jury

Investigation (Sun Co.), supra, 599 F.2d at 1232, where the govern-

ment made no effort to secure the testimony of the interviewees, and

their unavailability was purely conjectural; (2) Diversified Industries,

Inc. v. Meredith, supra, 572 F.2d at 611, where the employees them-

selves were apparently fully available; and (3) Jn re Grand Jury Sub-

poena Dated December 19, 1978, Issued to General Counsel, John

Doe, Inc., supra, 599 F.2d at 512, where the employees were to be

called to testify before the grand jury and the government was only

trying to determine beforehand to whom it should grant immunity.

37Counsel for petitioner Thomas stated at the hearing that whether

Upjohn’s employees will testify will depend on the laws of their own

countries. He also stated that he was not even sure some of them

would testify and that Upjohn would not compel them to do so (J.A.

78a—79a).

Accordingly, the judgment of the court of appeals can be

affirmed on the basis of the district court’s finding that

“the record establishes ample necessity for compelling dis-

closure of the summoned material in this case” (Pet. App.

30a; J.A. 192a). As the Court stated in Hickman v.

Taylor, supra, 329 U.S. at 511-512, in terms that are par-

ticularly appropriate in describing the obstacles that the

IRS would otherwise face in pursuing its investigation of

Upjohn, “production might be justified where the witnes-

ses are no longer available or can be reached only with

difficulty. Were production of written statements and

documents to be precluded under such circumstances, the

liberal ideals of the deposition-discovery portions of the

Federal Rules of Civil Procedure would be stripped of

much of their meaning.” Petitioners’ work product claim

should therefore be rejected and the summons enforced.

CONCLUSION

The judgment of the court of appeals should be affirmed.

Respectfully submitted.

WADE H. MCCREE, JR.

Solicitor General

M. CARR FERGUSON

Assistant Attorney General

LAWRENCE G. WALLACE

Deputy Solicitor General

STUART A. SMITH

Assistant to the Solicitor General

ROBERT E. LINDSAY

R. BRUCE JOHNSON

Attorneys

SEPTEMBER 1980

w U.S. GOVERNMENT PRINTING OFFICE: 1980 327439 63

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