In U.S. v. Captive Alternatives, LLC, No. 8:22-cv-406-TPB-CPT (M.D. Fla. Aug. 29, 2023), Florida Magistrate Judge Christopher P. Tuite denied respondent’s Rule 502(d) order request, which would have allowed them to produce documents to the IRS without first reviewing them for privilege, finding (among other things) that “the IRS agents investigating Captive are not trained to evaluate whether a communication is subject to the attorney client privilege”.

Case Background

In this case involving an IRS investigation of the respondent, the court issued a report and recommendation (R&R) recommending that the presiding District Judge largely grant the IRS’s petition and instruct respondent to produce (i) all responsive documents and materials, other than correspondence or records of communications, within forty-five days of the Court’s Order; and (ii) all non-privileged correspondence or records of communications within sixty days of the Court’s Order, along with a privilege log.

One month after the R&R’s issuance, the parties filed a joint motion requesting that the presiding District Judge adopt the R&R, but with a couple of caveats, one of which related to whether an order pursuant to Federal Rule of Evidence 502 may be appropriate. The parties were unable to reach an agreement regarding the Rule 502(d) issue, which led to respondent’s Rule 502(d) order request.

The respondent requested that the Court issue an order (1) authorizing respondent “to produce summonsed materials to the IRS without first reviewing every record for privilege;” (2) stating that respondent would not be deemed to waive any privilege or protection as a result of such disclosures in connection with the litigation pending before the Court or “in any other federal or state proceeding;” (3) precluding the IRS and the Department of Justice’s Tax Division from “mak[ing] any public use of any document produced pursuant to the Summons without first giving Captive…ten days advance notice;” and (4) allowing respondent thereafter to assert a claim of privilege in writing within ten days, which would then foreclose the government from making any public use of the document until the privilege question was resolved either by the parties or the Court. In support of the proposed order, respondent explained that the items it must deliver to the IRS “total over 1.1 million,” and that the protections it sought were necessary given the “costs associated with reviewing and producing such a significant volume of documents and the near inevitability of making mistakes in doing so.” The IRS opposed respondent’s motion.

Judge’s Ruling

Judge Tuite stated: “Captive’s motion fails. To begin, as the IRS emphasizes, the instant proceeding is summary in nature and does not involve discovery as that term is understood in civil litigation…This action is thus distinct from other matters in which courts traditionally enter Rule 502(d) orders at a party’s request or for “good cause” shown…Indeed, it appears that had Captive complied with the Summons upon receiving it, the IRS would not have initiated this proceeding and Rule 502(d) would not have come into play at all.”

Judge Tuite also rejected respondent’s point that the IRS has agreed to the entry of a Rule 502(d) order in a few other proceedings, including cases involving Microsoft and Facebook, stating: “In both actions, Microsoft and Facebook had already determined the privileged nature of the documents to which the claw back orders applied. Further, in Microsoft, the parties’ claw back agreement did not—as Captive proposes it be permitted to do here—entitle Microsoft to produce carte blanche all items responsive to the IRS’s summons with the ability to assert a privilege over the disclosed documents at some unspecified later date.”

He added: “Captive’s sought-after Rule 502(d) order poses other concerns as well. As the IRS highlights, unlike a civil proceeding where each side’s attorneys would review the items exchanged, the IRS agents investigating Captive are not trained to evaluate whether a communication is subject to the attorney client privilege…As a result, the ‘potentially privileged nature’ of certain communications might not be ‘readily apparent to [those] agents.’…Further compounding this problem is that the information needed to make such determinations may be solely within Captive’s possession.”

In denying respondent’s Rule 502(d) order request, Judge Tuite also stated: “Captive’s proposed Rule 502(d) order is problematic in another respect as well. As the IRS observes, the order places no temporal restriction on when Captive may designate a document as privileged…Accordingly, Captive could theoretically challenge the IRS’s use of the materials years after their production…Such an unlimited time frame could likewise be read to oblige the Court to retain jurisdiction indefinitely over any dispute regarding the use of such information. The Court is disinclined to take on such an unbounded commitment.”

So, what do you think? Are you surprised that the Court denied respondent’s Rule 502(d) order request? Please share any comments you might have or if you’d like to know more about a particular topic.

Case opinion link courtesy of eDiscovery Assistant, an Affinity partner of eDiscovery Today. See Kelly Twigger discuss this case here!

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