4-2-3 Circuit Split On Crime-Fraud Exception

In appeal to forestall enforcement of grand jury subpoenas for delivery of documents and testimony claimed by target of a criminal tax-scheme investigation to be covered by its attorney-client privilege, Third Circuit joins majority of circuits in applying a "reasonable basis" foundation for successfully interposing the crime-fraud exception to the privilege, in In re Grand Jury, 705 F.3d 133 (3d Cir. Dec. 11, 2012) (Nos. 12-1697, 12-2878)

In a recent case the Third Circuit considered the application of the crime-fraud exception to the attorney-client privilege, as recognized through FRE 501. The circuit noted a variety of problems in reaching this issue when it arose in the case. The Third Circuit highlighted a division among the circuits concerning the application of the exception.

In the case, a grand jury investigated the involvement of target ABC Corp. in a criminal tax scheme. Testimony and documents from ABC's former in-house counsel was sought and this effort was resisted by ABC claiming the matter was protected by the attorney-client privilege. In response, the prosecution moved that the district court enforce the subpoenas - in particular that the former counsel for the investigative targets "be required to disclose 171 of the 303 documents identified in the privilege logs." The government disputed that the attorney-client privilege applied to this evidence and "even if the documents were ... entitled to protection under the attorney-client privilege and work product doctrine, the crime-fraud exception wipes away that protection." In re Grand Jury, 705 F.3d at _.

After the district court found for the government, it directed the target's former attorneys "to produce 167 of the 171 requested documents" reasoning that "the crime-fraud exception barred ABC Corp.'s privilege and work product claims." In a subsequent order, the trial judge "reaffirmed the ... prior crime-fraud ruling." In this second order, the court required former in-house counsel "to produce 11 of the 45 withheld documents, finding that they were either not privileged at all or that any privilege was vitiated by the crime-fraud exception." ABC Corp appealed this order, as it had the previous order, and the circuit consolidated the appeals for review. In re Grand Jury, 705 F.3d at __.

The appeal regarding the discovery of this evidence involved a number of complex issues -- such as ABC Corp's standing to contest the grand jury subpoenas and the lack of standing of two of the corporate officers to make this assertion, and the applicability of the Perlman doctrine to permit ABC Corp. to appeal the trial court's orders without incurring a finding of contempt. However, a important issue of the appeal involved whether the crime-fraud exception or even the attorney-client privilege itself applied to some of the testimony and documents sought by the government. In addressing this issue, the circuit reviewed the elements of a claim of attorney-client privilege, work product doctrine, and the application of the crime-fraud exception. In re Grand Jury, 705 F.3d at __.

Circuit Split

The circuit noted that "early cases" on the crime-fraud exception made the "mere charge of illegality" sufficient to apply the exception, without the necessity of any evidentiary support. But if this early standard no longer applied, the Third Circuit noted that it was replaced by a split of the circuits. The split concerned the "quantum of proof" that the government had to produce in order to have a cognizable claim that the evidence was no longer privileged in a criminal case. The circuit observed that to answer the question, it was necessary to consider the "'prima facie' standard ... from the Supreme Court's decision" in Clark v. United States, 289 U.S. 1 (1933). The circuit characterized this standard as requiring a "party seeking to overcome the privilege ... "must make a prima facie showing that (1) the client was committing or intending to commit a fraud or crime, and (2) the attorney-client communications were in furtherance of that alleged crime or fraud." In re Grand Jury, 705 F.3d at __ (citing In re Grand Jury Subpoena, 223 F.3d 213, 217 (3d Cir. 2000) (citations omitted)).

The circuit cautioned that this two-part showing was a matter of "general agreement" but that "courts of appeals are divided as to the appropriate quantum of proof necessary to make a prima facie showing." The circuit explained this split as a result of the concept of "'Prima facie' [being] among the most rubbery of all legal phrases; it usually means little more than a showing of whatever is required to permit some inferential leap sufficient to reach a particular outcome." In re Grand Jury, 705 F.3d at __ (citing In re Grand Jury Proceedings, 417 F.3d 18, 22-23 (1st Cir. 2005) (citing Black's Law Dictionary 1228 (8th ed. 2004); McDonnell Douglas Corp. v. Green, 411 U.S. 792, 802 (1973)).

Three Different Standards Of Proof

The Third Circuit noted at least three approaches to explaining this "proper measure of proof." This division is reflected in the listing below:

Circuits Requiring "there ... be probable cause or a reasonable basis to suspect or believe that the client was committing or intending to commit a crime or fraud and that the attorney-client communications were used in furtherance of the alleged crime or fraud."
- First Circuit: In re Grand Jury Proceedings, 417 F.3d 18, 23 & n.4 (1st Cir. 2005)
- Second Circuit: United States v. Jacobs, 117 F.3d 82, 87 (2d Cir. 1997)
- Sixth Circuit: United States v. Collis, 128 F.3d 313, 321 (6th Cir. 1997)
- Ninth Circuit: In re Grand Jury Proceedings, 87 F.3d 377, 381 (9th Cir. 1996)
Circuits Requiring "evidence sufficient to compel the party asserting the privilege to come forward with an explanation for the evidence offered against the privilege."
- Fifth Circuit: In re Grand Jury Subpoena, 419 F.3d 329, 336 (5th Cir. 2005)
- Seventh Circuit: United States v. Boender, 649 F.3d 650, 655-56 (7th Cir. 2011)
Circuits Requiring "a showing of evidence that, if believed by a trier of fact, would establish that some violation was ongoing or about to be committed and that the attorney-client communications were used in furtherance of that scheme."
- D.C. Circuit: In re Grand Jury, 475 F.3d 1299, 1305 (D.C. Cir. 2007)
- Fourth Circuit: In re Grand Jury Proceedings #5 Empanelled January 28, 2004, 401 F.3d 247, 251 (4th Cir. 2005)
- Eleventh Circuit: In re Grand Jury Investigation, 842 F.2d 1223, 1226-27 (11th Cir. 1987)

Third Circuit Joins "Reasonable Basis" Circuits

The Third Circuit cast its lot with the First, Second, Sixth, and Ninth Circuits in employing a "reasonable basis that the client has committed a fraud" in order to apply the crime-fraud exception to the attorney client privilege. As explained by the circuit:

Today, we clarify that our precedent is properly captured by the reasonable basis standard. The attorney-client privilege, work product doctrine, and crime-fraud exception are all compromises based on policy determinations. Although it is difficult to predict whether a particular standard of proof will strike the appropriate balance between these competing policy concerns, we believe, as do other circuit courts, that the reasonable basis standard affords sufficient predictability for attorneys and clients without providing undue protection to those that seek to abuse the privileges afforded to them. This is also the standard that we believe is closest to the Supreme Court's pronouncement that, for the crime-fraud exception to apply, "there must be something to give colour to the charge" that the attorney-client communication was used in furtherance of a crime or fraud.

In re Grand Jury, 705 F.3d at __ (citing Clark v. United States, 289 U.S. 1, 15 (1933) ("There are early cases apparently to the effect that a mere charge of illegality, not supported by any evidence, will set the confidences free. But this conception of the privilege is without support in later rulings. It is obvious that it would be absurd to say that the privilege could be got rid of merely by making a charge of fraud. To drive the privilege away, there must be something to give colour to the charge; there must be prima facie evidence that it has some foundation in fact.

Application of the "Reasonable Basis" for the crime-fraud exception was premised on the idea that "the privilege holder was committing or intending to commit a crime or fraud and that the attorney-client communications or attorney work product were used in furtherance of the alleged crime or fraud, this is enough to break the privilege." According to the Third Circuit this standard "is intended to be reasonably demanding; neither speculation nor evidence that shows only a distant likelihood of corruption is enough." The circuit also cautioned that the opponent of the privilege "is not required to introduce evidence sufficient to support a verdict of crime or fraud or even to show that it is more likely than not that the crime or fraud occurred. The reasonable basis standard is one with which courts are familiar, and we are confident that they will be able to apply it consistently to achieve the policy objectives of the privileges and the crime-fraud exception. In re Grand Jury, 705 F.3d at __ (citing In re Grand Jury Proceedings, 417 F.3d at 22-23; In re Grand Jury Investigation, 445 F.3d 266, 275 (3d Cir. 2006))

Having traced the three-way division of the circuits on the standard of proof regarding a claim of the crime fraud exception, the Third Circuit joined the majority on the "Rational Basis" test employed by the First, Second, Sixth and Ninth Circuits. With this decision, it appears that in only the Eighth and Tenth Circuit is this test an open issue.