On December 11, the U.S. Court of Appeals for the Third Circuit
issued a precedential ruling that reasonable suspicion of an
intended crime is sufficient proof to overcome the attorney-client
privilege. In re: Grand Jury: John Doe 1, John Doe 2, ABC
Corp., Case Nos. 12-1697 & 12-2878, 2012 U.S. App. LEXIS
25318 (3rd Cir. Dec. 11, 2012).
Relevant Facts
The case involved a grand jury investigation of an
unidentified corporation (the "Corporation") that engaged
in an alleged criminal tax scheme. Id. at *7. The
Corporation purchased several companies with large cash accounts
and substantial tax liabilities. Id. After the purchase,
the stock of the acquired companies was transferred to limited
liability companies that engaged in various transactions to
eliminate the acquired companies' tax liabilities. Id.
The Corporation's principal and sole shareholder then
purportedly siphoned the acquired companies' funds to
themselves and their family. Id.
Subpoenas
The government issued subpoenas to the Corporation's former
outside counsel and in-house counsel for documents and testimony
relating to those transactions. Id. at *8-9, 13. The
attorneys all objected to the discovery requests on the ground that
they were protected by the attorney-client privilege and work
product doctrine. Id. at *8, 13. The government argued,
and the district court agreed in substantial part, that the
government was entitled "to obtain access to otherwise
privileged communications and work product when they are used in
furtherance of an ongoing or future crime." Id. at
*2-3.
Appellate Jurisdiction
The Third Circuit dismissed the appeal of the district court's
disclosure order to outside counsel for lack of appellate
jurisdiction. Id. at *4. The court explained that the
disclosure orders themselves were not "immediately appealable
final decisions," and for the Corporation and its outside
counsel to seek review, they first would have to disobey the
disclosure order, be held in contempt, and then appeal the contempt
order. Id. at *3. Relying on the exception to the contempt
rule first established in Perlman v. United States, 247
U.S. 7 (1918), however, the court granted immediate appellate
review of the otherwise nonfinal decision of the district
court's disclosure order to the Corporation's three former
in-house counsel. Id. at *3-5. The Perlman
exception applied to that order because the court found that the
former in-house counsel, unlike outside counsel,
"are...disinterested third-parties unwilling to be held in
contempt to vindicate [the Corporation's] privilege."
Id. at *5.
Attorney-Client Privilege and Work Product
Doctrine
The attorney-client privilege protects from disclosure confidential
communications between an attorney and client for the purpose of
obtaining or providing legal advice to promote full and frank
discussions. Id. at *41. The work product doctrine
protects from discovery documents and things prepared by an
attorney in anticipation of litigation to preserve a zone of
privacy in which a lawyer can develop legal theories and strategy
free from intrusion. Id. at *41-42.
Crime-Fraud Exception
The attorney-client privilege and work product doctrine
are not absolute bars to disclosure and are subject to several
exceptions. Id. at *42. Under the crime-fraud exception,
attorney-communications the client uses or intends to use to
facilitate or perpetrate an illegal activity are not shielded from
discovery. Id. at *42-43. To establish the crime-fraud
exception, the party seeking disclosure must make a prima facie
showing that the client (1) engaged in, or intends to engage in,
fraud or a crime; and (2) obtained legal advice in furtherance of
the crime or fraud. Id. at *43 (internal citations
omitted). If the showing is made, the privilege does not protect
the communication at issue. See id. at *43-44. The purpose
of this exception is to prevent the exploitation of the
attorney-client privilege and work product doctrine to assist in
the commission of a fraud or crime, which frustrates the goal of
the proper administration of justice afforded by those privileges.
Id. Further, "[f]or the crime-fraud exception to
apply, the attorney does not have to...[aid] in the crime or fraud
or even have knowledge of the alleged criminal or fraudulent
scheme." Id. at *61-62. The client's "misuse
or inten[t] to misuse the attorney's advice in furtherance of
an improper purpose" triggers the exception. Id. at
*62.
Standard of Proof -- Reasonable Suspicion
Courts are split as to the standard of proof necessary to
establish the crime-fraud exception. Id. at *44. The Third
Circuit adopted the reasonable basis standard in this case,
rejecting the Corporation's request that the court require the
government "to demonstrate by a preponderance of the evidence
that the privilege has been employed to commit a crime or
fraud." Id. at *47, 50. In so holding, the court
admitted that, until now, it had not clearly articulated how much
proof is sufficient to determine the applicability of the
crime-fraud exception. Id. at *46. The court determined
that the reasonable basis standard supports "the objectives of
the privileges and the crime-fraud exception," as it
"affords sufficient predictability for attorneys and clients
without providing undue protection to those that seek to abuse the
privileges." Id. at *49-50. It is
"'reasonably demanding'" in that
"'speculation [or] evidence that shows only a distant
likelihood of corruption is [not] enough.'" Id.
at *49 (citation omitted). "[A]t the same time," the
party invoking the crime-fraud exception "is not required to
introduce evidence sufficient to support a verdict of crime or even
to show that it is more likely than not that the crime or fraud
occurred." Id. at *49-50. The decision of the Third
Circuit to establish a less demanding standard in criminal
proceedings was influenced by the specific "need for speed,
simplicity," and policy against "secrecy,"
particularly in the grand jury context, that militate against a
standard "'that requires courts to hear testimony or to
determine facts from conflicting evidence before making a
crime-fraud determination.'" Id. at *52-53
(citation omitted).
The Corporation also argued, though, "that, regardless of the
proof required," the government did not satisfy its burden.
Id. at *53. To the contrary, the Third Circuit found that
the district court's finding that there was a "reasonable
basis to suspect that [the Corporation] was engaged in a criminal
scheme" was supported by the evidence submitted by the
government. Id. at *57. Specifically, the Third Circuit
found that proof of the scheme involving the evasion of tax
payments and the diversion of the companies' cash was
sufficient to show that the Corporation "engaged in a
conspiracy to defraud the United States of federal income taxes in
violation of 18 U.S.C. § 371." Id. at
*54-57.
Two questions regarding the application of the reasonable suspicion
standard of proof in the context of the crime-fraud exception
remain in the wake of this new Third Court decision. First,
although the question before the Third Circuit concerned only the
crime-fraud exception to the attorney-client privilege, the court
left open the possibility of an innocent attorney defense that may
be available to an attorney to protect against the disclosure of
work product that a client may have used to further a crime or
fraud. Id. at *64-65. The court reasoned that the work
product doctrine "protects the interests of attorneys"
separate and apart "from the interest of clients," which
may warrant an attorney to "properly claim and prevail in
asserting a work product privilege even when his client
cannot." Id. at *64 (internal citation
omitted).
Second, the court declined to address "whether [the
same or] a higher standard should be applied in the civil
litigation context" of the fraud exception to the
attorney-client privilege and suggested (notwithstanding its
disclaimer to the contrary) that a higher standard may apply to
civil cases. Id. at *52, n.20. The Third Circuit
recognized that two different standards could potentially exist and
pointed to the Ninth Circuit as an example. Id. (citing
UMG Recording, Inc. v. Bertelsmann (In re Napster,
Inc. Copyright Litig.), 479 F.3d 1078, 1094-95 (9th
Cir. 2007) (holding that the facts necessary to apply the
crime-fraud exception should be determined by a preponderance of
the evidence standard in civil cases but the reasonable cause
standard is appropriate for grand jury investigations)).
Practitioners and businesses alike should be aware that a
reasonable suspicion standard is a relatively low standard to
satisfy and removes the protections afforded by the attorney-client
privilege when an attorney's advice is used improperly. The
attorney's involvement in the fraud or crime is irrelevant; the
client's misuse of the privileged communication is all that
matters to the court.