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Reasonable suspicion of crime enough to overcome attorney-client privilege

3rd Circuit clarifies standard that must be met to invoke the crime-fraud exception

In a precedential ruling in In re: Grand Jury John Doe 1; John Doe 2; ABC Corp., the 3rd Circuit clarified the standard that has to be met to invoke the crime-fraud exception to attorney-client privilege: a reasonable basis to suspect a crime or fraud.

The crime-fraud exception “permits the government to obtain access to otherwise privileged communications and work product when they are used in furtherance of an ongoing or future crime,” according to the decision.

The court addressed the crime-fraud exception in the context of a grand jury investigation into an alleged criminal tax scheme. Most of the details are secret, but court documents reveal that ABC Corp. bought and sold several companies, possibly engaging in these transactions specifically to avoid income taxes. ABC was formed in 2004 and ceased operation in 2005.

“It looks like this ABC’s entire existence may be predicated upon fraud,” says Jan Conlin, a partner at Robins, Kaplan, Miller & Ciresi.

The government subpoenaed ABC’s in-house and outside counsel, requesting documents on legal advice related to these transactions. Both asserted attorney-client privilege, but based on the crime-fraud exception, the district court rejected those claims and issued disclosure orders.

Disclosure orders are not typically immediately appealable—the recipient usually has to refuse to comply, be found in contempt, then appeal the contempt citation. The 3rd Circuit decided it had jurisdiction to review the disclosure order that the district court gave to ABC’s former in-house counsel because of the exception the Supreme Court created in Perlman v. United States, which found interlocutory appeals of disclosure orders to be permissible if the orders are directed at disinterested third parties. 

With regard to ABC’s former in-house counsel, the 3rd Circuit wrote: “There is … no basis to believe that these former employees are anything but disinterested third parties who are unlikely to stand in contempt to vindicate ABC Corp.’s alleged privilege.”

Limited Protection

The 3rd Circuit reminds in-house counsel that attorney-client privilege and the work product doctrine are “not absolute” protections. To overcome attorney-client privilege, the government had to “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,” the court wrote.

Because of the secrecy of the grand jury proceedings, it isn’t clear what kind of evidentiary showing the government made that met the reasonable basis standard for invoking the crime-fraud exception, but during in camera review, the court determined that the government’s evidence met the standard and upheld the district court’s disclosure order to ABC’s former in-house counsel.

“We don’t know the true underlying facts,” Conlin says. “If those were spelled out, [we] would be better able to understand what kind of inferential leap, if any, was made between the government’s case and the showing required for proving the crime-fraud exception.”

But the court emphasized that “the burden is not a heavy one,” further saying that “prima facie evidence cannot mean ‘enough to support a verdict in favor of the person making the claim.’”

“These prima facie burdens are very hard to describe,” says Seward & Kissel Partner Jack Yoskowitz. “It’s very vague, and it’s very much in the government’s favor.”

Careful Communication

With that in mind, counsel should be cautious in their communications with clients. According to this ruling, counsel can be forced to turn over documents they thought were privileged, or even to testify, regardless of whether they had any knowledge of the crime. 

“Obviously no lawyer thinks they’re engaging in crime fraud,” Yoskowitz says. “But privileges in general have been eroded over the years, and you just have to be careful that whatever you say isn’t going to end up on the front page of the Wall Street Journal.”

In-house counsel must do their best to ensure that communications are as privileged as possible. Day Pitney Partner John Maloney says it’s important to put a legend in all emails “that says this particular communication is protected by the attorney-client privilege or/and the work product doctrine, so that months or years from now when the question comes up, at least at first blush there’s a legend that reminds whoever’s doing the reviewing that this is a communication that can be claimed to be privileged. Then one has to look carefully at the requirements for the privilege and make sure that it’s not subject to any exceptions.”

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