The Crime-Fraud Exception to the Attorney-Client Privilege
© 2000 Dennis L. Perez & Steven M. Palestine(1)
This article provides an overview of the crime-fraud exception to the attorney client privilege. The crime-fraud exception provides, in general, that communications between a lawyer and a client will not be privileged where an attorney's services are utilized in furtherance of a crime or fraud. It has been the authors' experience that in some cases the Department of Justice has been quite aggressive in seeking to overcome the attorney-client privilege on the basis of this exception. For that reason, we have written this article to provide a general overview of both the attorney-client privilege and the crime-fraud exception. The first section of this article provides an introduction to the attorney-client privilege and includes a discussion of the rational, elements, and procedure for invoking the privilege. The second section sets forth the framework for invoking the crime-fraud exception under the Supreme Court's decision in United States v. Zolin. Finally, the third section provides a discussion of several interesting issues that the authors have encountered in practice as well as an overview of a few noteworthy cases applying the exception.
II. Overview of the Attorney-Client Privilege:
Federal Rule of Evidence 501 provides that questions of privilege that arise in the course of adjudication of federal rights shall be "governed 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 United States Supreme Court has recognized the attorney-client privilege as the "oldest of the privileges for confidential communications known to the common law."(2) Courts have long viewed the central purpose of the privilege as one "to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice."(3)
That purpose "requires that clients be free to make full disclosure to their attorneys of past wrongdoings, in order that the client may obtain the aid of persons having knowledge of the law and skilled in its practice."(4) The Ninth Circuit has emphasized that "the attorney-client privilege is not only the oldest privilege known to the common law, but the attorney-client privilege is also, 'perhaps, the most sacred of all legally recognized privileges, and its preservation is essential to the just and orderly operation of our legal system.'"(5)
The party asserting the attorney-client privilege has the burden of proving that the privilege applies to a given set of documents or communications.(6) To meet this burden, a party must demonstrate that its documents or communications adhere to the essential elements of the privilege.(7) The Ninth Circuit has articulated eight essential elements: (1) Where legal advice of any kind is sought, (2) from a professional legal advisor in his capacity as such, (3) the communications relating to that purpose, (4) made in confidence, (5) by the client, (6) are at his instance permanently protected, (7) from disclosure by himself or by the legal advisor, (8) unless the protection be waived.(8)
A similar formulation provides that 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 (iii) assistance in some legal proceeding, 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.(9)
In addition to the crime-fraud exception, there are several other exceptions to the attorney-client privilege. The privilege does not apply where an attorney is not giving legal advice such as where an attorney is consulted in a personal, rather than legal capacity,(10) or where an attorney is giving solely business advice.(11) Moreover, the privilege generally does not protect either the identity or fee arrangements of clients, although the courts have carved out a limited exception to this rule where disclosure of a client's name or fee arrangement would reveal a confidential communication.(12) Courts have also held that where a preexisting document is given by a client to an attorney, and the document would have been subject to production in the hands of the client, then there is no protection under the privilege for the document.(13)
The party asserting the privilege must make a prima facie showing that the privilege protects the information that the party intends to withhold. The Ninth Circuit has recognized several methods to establish the applicability of the attorney-client privilege.(14) One method is the privilege log approach. The privilege log should identify: (1) the attorney and client involved, (2) the nature of the document, (3) all persons or entities shown on the document to have received or sent the document, (4) all persons or entities known to have been furnished the document or informed of its substance, and (5) the date the document was generated, prepared, or dated.(15)
The crime-fraud exception to the attorney-client privilege is well established in American jurisprudence. In a 1933 decision by the United States Supreme Court, Clark v. United States, the Court wrote that while there is a privilege protecting confidential communications between a lawyer and a client, the "privilege takes flight if the relation is abused. A client who consults an attorney for advice that will serve him in the commission of a fraud will have no help from the law. He must let the truth be told."(18)
In United States v. Zolin,(19) the Supreme Court set forth the procedure for invoking the crime-fraud exception. This case addressed the issue of whether the applicability of the crime-fraud exception must be established by "independent evidence" (i.e., without reference to the content of the contested communications themselves) or, alternatively, whether the applicability of the exception can be resolved by an in camera inspection of the allegedly privileged material. The Supreme Court rejected the "independent evidence" approach and held that a district court, under certain circumstances, and at the behest of the party opposing the claim of privilege, may conduct an in camera review of the materials in question.(20)
Under Zolin, a party seeking to invoke the crime-fraud exception may ask the court to make an in camera review to determine the applicability of the exception. Before engaging in in camera review, "the judge should require a showing of a factual basis adequate to support a good faith belief by a reasonable person, that in camera review of the materials may reveal evidence to establish the claim that the crime-fraud exception applies."(21)
Once that showing is made, the decision whether to engage in an in camera review "rests in the sound discretion of the district court."(22) The district court should make that decision in light of the facts and circumstances of the particular case, including, among other things, (1) the volume of materials the district court has been asked to review, (2) the relative importance to the case of the alleged privileged information, and (3) the likelihood that the evidence produced through in camera review, together with other available evidence then before the court, will establish that the crime-fraud exception does apply.(23) "The district court is also free to defer its in camera review if it concludes that additional evidence in support of the crime-fraud exception may be available that is not allegedly privileged, and that production of the additional evidence will not unduly disrupt or delay the proceedings."(24)
The Supreme Court in Zolin also addressed what kind of evidence a district court may use in determining whether it has discretion to undertake an in camera review. The Court held that "the threshold showing to obtain in camera review may be met by using any relevant evidence, lawfully obtained, that has not been adjudicated to be privileged."(25)
Where a district court invokes the crime-fraud exception, a party need not await the final resolution of a matter before taking an appeal. In the Ninth Circuit opinion, In re Grand Jury Proceedings,(26) the court held that a district court order, compelling an attorney to testify under the crime-fraud exception, is a final, appealable order. The court wrote: "A district court's order compelling a former attorney to obey a grand jury subpoena is a final order for purposes of 28 U.S.C. § 1291 because the former attorney cannot be expected to risk contempt proceedings."(27)
IV. Noteworthy Cases and Issues arising under the Crime-Fraud Exception:
A. Level of Proof Necessary to Establish the Applicability of the Crime-Fraud Exception:
An interesting question is the level of proof necessary to invoke the crime-fraud exception. The prima facie test to overcome the attorney-client privilege was established in Clark where the Supreme Court wrote that to drive the privilege away under the crime-fraud exception, there must be "prima facie evidence that it has some foundation in fact. When that evidence is supplied, the seal of secrecy is broken."(28)
In Zolin, the Supreme Court expressly declined to reach the issue of the quantum of proof necessary to establish a prima facie case that the crime-fraud exception applies. The Court did note, however, that the Court's use of the phrase "prima facie case" in the Clark case to describe the showing needed to defeat the privilege has caused confusion. The court noted that in light of the narrow question presented in the Zolin case, it was not the proper occasion to visit the question of the requisite quantum of proof. However, the Court did write that the quantum of proof necessary to establish the applicability of the exception is a higher evidentiary showing than is necessary to trigger in camera review. The Court wrote: "We therefore conclude that a lesser evidentiary showing is needed to trigger in camera review than is required ultimately to overcome the privilege."(29) Thus, an evidentiary showing greater than the "good faith belief" standard of Zolin must be established.
The Ninth Circuit addressed this issue in a 1996 case, In re Grand Jury Proceedings.(30) The Ninth Circuit wrote that to trigger the crime-fraud exception, the government must establish that the client was engaged in or planned a criminal or fraudulent scheme when it sought the advice of counsel.(31) The court held that the government is not obliged to come forward with proof sufficient to establish the essential elements of a crime or fraud beyond a reasonable doubt, since the crime-
fraud exception does not require a completed crime or fraud but only that the client had consulted the attorney in an effort to complete one. The court continued:
On the other hand, it isn't enough for the government to merely allege that it has a sneaking suspicion the client was engaging in or intending to engage in a crime or fraud when it consulted the attorney. A threshold that low could discourage many would-be clients from consulting an attorney about entirely legitimate legal dilemmas. Rather, the district court must find "reasonable cause to believe" that the attorney's services were "utilized in furtherance of the ongoing unlawful scheme."(32)
B. Ex Parte submission of Nonprivileged Documents to Establish the Applicability of the Crime-Fraud Exception:
The government's ex parte submission of nonprivileged evidence (e.g., grand jury materials) to establish the applicability of the crime-fraud exception creates difficulties for the party seeking to protect the attorney-client privilege. This practice is troubling because the party seeking to protect the privilege is deprived of the opportunity for a fair hearing and to challenge the evidence presented by the government. Despite these potential due process concerns, the appellate courts have approved of this practice.
The Ninth Circuit addressed this issue in a 1989 decision, In re Grand Jury Proceedings (John Doe).(33) This case addressed whether a litigant was denied due process by a districts court's in camera inspection of materials submitted by the government in support of its contention that the crime-fraud exception applied. The Ninth Circuit wrote that it had not addressed this issue but noted that other circuits which had considered the question of in camera inspection generally condoned the practice. The Ninth Circuit wrote:
Typically, these cases justify in camera inspection by noting that the disclosure of sensitive grand jury materials to the target of the investigation could seriously impede the function of the grand jury. This is the situation presented in the present case. The grand jury is currently investigating Doe. Both the government and the grand jury have a substantial interest in maintaining the secrecy of the materials submitted for the district court's in camera inspection. Under these circumstances, the balance is weighted in favor of maintaining secrecy of the grand jury proceedings. Accordingly, we hold that Doe was not denied due process by the district court's in camera inspection of the materials upon which the government based its showing of the crime-fraud exception.(34)
The other circuits that have addressed this issue are in accord with the Ninth Circuit. For example, the Second Circuit, in John Doe v. United States,(35) held that the government's use of in camera proceedings to establish the applicability of the crime-fraud exception did not violate due process. The Second Circuit rejected the argument that the use of ex parte submissions by the government violates the Zolin case. The second believed that "nothing in Zolin prohibits ex parte examination of nonprivileged threshold material. The cautionary tone of Zolin with respect to the use of in camera proceedings concerns the disclosure of the communications for which the privilege is claimed. It does not address the propriety of ex parte submissions of non-privileged material."(36)
A related question is whether a party seeking to protect the attorney-client privilege in the face of a crime-fraud challenge may make ex parte submissions of the allegedly privileged documents or communications to the court. This could be a very helpful strategy, especially where the privileged materials support the claim that the crime-fraud exception does not apply. The Supreme Court recognized in Zolin that disclosure of allegedly privileged materials to the district court for purposes of determining the merits of a claim of privilege does not have the legal effect of terminating the privilege and noted that it had approved of such practice in past cases.(37) The Ninth Circuit has also noted that a party seeking to establish the applicability of the attorney-client privilege may make use of in camera submissions.(38)
C. An Attorney Need Not Have Knowledge of the Crime or Fraud:
The courts have held that the crime-fraud exception can apply even where the attorney has no knowledge of the crime or fraud and takes no affirmative step in furtherance of such crime or fraud. The Ninth Circuit addressed this issue in In re Grand Jury Proceedings.(39) That case involved a government investigation into alleged tax and immigration crimes. The government subpoenaed two attorneys who had represented the defendant and the district court ordered the attorneys to testify before the grand jury. The Ninth Circuit affirmed the district court's order holding that an attorney need not be aware of the alleged crime or fraud in order for the exception to apply. The court wrote:
Inasmuch as today's attorney-client privilege exists for the benefit of the client, not the attorney, it is the client's knowledge and intentions that are of paramount concern to the application of the crime-fraud exception; the attorney need know nothing about the client's ongoing or planned illicit activity for the exception to apply.(40)
The Ninth Circuit also rejected the argument that the communications with the attorneys could not have been "in furtherance of" criminal activity because neither attorney took an affirmative step that actually furthered the crimes. The court wrote that: "The crime-fraud exception does not require that the attorney have participated, even unwittingly, in the client's criminal activity."(41)
D. Other Noteworthy Cases Involving the Crime-Fraud Exception:
An interesting case decided by the Ninth Circuit is United States v. Laurins.(42) Laurins involved an IRS investigation into an abusive tax shelter. The promotional material of the company that promoted the shelter listed Aleksandrs Laurins, a former IRS attorney, as managing director. The IRS served a summons on the company requiring the production of all books and records for 1982 and 1983 relating to the investment scheme. The attorney for Mr. Laurins informed the IRS that the company's records were no longer in San Francisco, and during the summons enforcement proceedings, indicated to the court that the company no longer did business in San Francisco. The FBI subsequently seized approximately twenty-one boxes of business records from Mr. Laurins' home on Clay Street in San Francisco.
Mr. Laurins was subsequently convicted of several crimes including obstruction of justice. At trial, his former attorney testified that throughout the summons enforcement proceedings, Laurins told him that the company records were no longer the property of the company and were out of the country. The district court held that the attorney-client privilege did not exist with respect to those communications because they were made in furtherance of a crime or fraud. The Ninth Circuit affirmed the district court holding that the crime-fraud exception had been established.(43) The court relied on the fact that the attorney's services had been used to disseminate false information to the IRS.
Another interesting case decided by the Ninth Circuit is United States v. Bauer.(44) This case presented an appeal from a conviction for making false statements on, and omitting assets from, a bankruptcy petition. The defendant had filed for bankruptcy listing certain assets and liabilities on his petition. At that time, the defendant was represented by an attorney whom he had consulted several times. Subsequent to the filing of the bankruptcy petition, the trustee discovered that several assets had not been reported on the petition and other assets had been transferred within one year of the filing of the petition. The case was referred to the FBI for criminal investigation.
The grand jury returned an indictment charging the defendant with concealing assets and making false statements on his bankruptcy petition. The case boiled down to a dispute over the defendant's intent. As its final witness, the government called the defendant's bankruptcy attorney to testify. Over objection, the attorney testified on direct examination that he advised the defendant that there was a duty to disclose all property on the bankruptcy petition and that the petition was filed under penalty of perjury.
The defendant argued on appeal that the district court violated his attorney-client privilege by allowing his bankruptcy attorney to testify. The government countered that the attorney's statements fell under the crime-fraud exception. The Ninth Circuit believed that there was no reasonable basis for concluding that the attorney's legal advice was used in furtherance of the defendant's fraudulent conduct.(45) The attorney had advised the defendant to disclose all of his assets and avoid lying on his bankruptcy petition. The defendant did precisely the opposite. The court found that "it is impossible to discern a casual connection or functional relationship between the advice given by [the attorney] and the actions taken by [the defendant]. Therefore, the crime-fraud exception to the attorney-client privilege does not apply here."(46)
This case is noteworthy because it is one of the few decisions that carefully analyze the causal connection between the advice given by the attorney and the actions taken by a criminal defendant. This decision appears to be inconsistent with an earlier decision by the Ninth Circuit, In re Grand Jury Proceedings (discussed above).(47) In that case, the Ninth Circuit wrote:
A communication between client and attorney can be "in furtherance of" the client's criminal conduct even if the attorney does nothing after the communication to assist the client's commission of a crime, and even though the communication turns out not to help (and perhaps even to hinder) the client's completion of a crime.(48)
The authors believe that this discussion of the crime-fraud exception was not a proper application of the exception in that it read out the "in furtherance of" requirement. As noted earlier, the exception applies where the attorneys services are utilized "in furtherance of" an ongoing crime or fraud. The problem with the Ninth Circuit's application of the exception in the In re Grand Jury Proceedings case is that the exception would apply anytime the communications are related to a client's fraudulent conduct regardless of whether the attorney counseled the client against such conduct. This approach was properly rejected by the Ninth Circuit in Bauer which is the better reasoned opinion.
The 1994 decision by the Ninth Circuit, In re Grand Jury Subpoena,(49) presented a novel issue in applying Zolin. The issue was whether a district court must consider evidence presented by a party seeking to establish that the attorney-client privilege applies when applying the first prong of the Zolin test. The party asserting the attorney-client privilege urged the Ninth Circuit to hold that a district court must consider "other available evidence," in addition to that presented by the government, at both steps of the Zolin analysis. The Ninth Circuit disagreed, writing "the first step of the analysis should focus only on evidence presented by the party seeking in camera review."(50) The court believed that to require a detailed consideration of all available evidence at the threshold step of the Zolin analysis would severely disrupt the balance struck by the Supreme Court in the Zolin case.(51) The court did note, however, that in the second step of the Zolin analysis, when the district court considers whether to exercise its discretion to conduct in camera review, it may consider other available evidence then before the court. The court wrote that: "Although it is clearly proper for a court to entertain such evidence at the second step of the analysis, Zolin does not require that the court undertake such an examination."(52)
As noted above, the authors have found that in some cases the Department of Justice will consider seeking to overcome the attorney-client privilege on the basis of the crime-fraud exception. The courts will carefully scrutinize any attempt by the government to overcome the attorney-client privilege, and for that reason, any such attempt should be vigorously resisted.
2. Upjohn Co. v. United States, 449 U.S. 383, 389 (1981).
4. United States v. Zolin, 491 U.S. 554, 562 (1989) (quoting Fisher v. United States, 425 U.S. 391 (1976) and Hunt v. Blackburn, 128 U.S. 464 (1888)).
5. In re Grand Jury Proceedings, 162 F.3d 554, 556 (9th Cir. 1998) (quoting United States v. Bauer, 132 F.3d 504, 510 (9th Cir. 1997)).
6. In re Grand Jury Investigation, 974 F.2d 1068, 1070 (9th Cir. 1992).
8. Id. at 1071 n.2 (quoting In re Fischel, 557 F.2d 209, 211 (9th Cir. 1977)).
9. In re Sealed Case, 737 F.2d 94, 98-99 (D.C. Cir. 1984) (quoting United States v. United Shoe Machinery Corp., 89 F. Supp. 357, 358-59 (D. Mass. 1950)).
10. In re Kinoy, 326 F. Supp. 400, 403-06 (S.D. NY 1970); In re Grand Jury Subpoena (Peek), 682 F. Supp. 1552, 1556 (M.D. GA 1987).
11. United States v. Huberts, 637 F.2d 630, 640 (9th Cir. 1980); United States v. Millman, 822 F.2d 305, 310 (2nd Cir. 1987).
12. United States v. Liebman, 742 F.2d 807 (3rd Cir. 1984); Liew v. Breen, 640 F.2d 1046, 1049-50 (9th Cir. 1981); In re Horn, 976 F.2d 1314, 1317-18 (9th Cir. 1992); Clarke v. American Commerce Nat'l Bank, 974 F.2d 127, 129 (9th Cir. 1992).
13. Fisher v. United States, 425 U.S. 391, 403-04 (1976) (collecting cases).
14. In re Grand Jury Investigation, 974 F.2d at 1071; Dole v. Milonas, 889 F.2d 885 (9th Cir. 1989).
15. In re Grand Jury Investigation, 974 F.2d at 1071; Dole, 889 F.2d at 888 n.3.
16. Dole, 889 F.2d at 890.
18. Clark v. United States, 289 U.S. 1, 15 (1933). See also United States v. Chen, 99 F.3d 1495, 1500 (9th Cir. 1996) ("It is a truism that while the attorney-client privilege stands firm for client's revelations of past conduct, it cannot be used to shield ongoing or intended future criminal conduct.")
19. 491 U.S. 554 (1989).
20. Id. at 556-57.
21. Id. at 572 (citations and internal quotations omitted); United States v. Chen, 99 F.3d 1495, 1502 (9th Cir. 1996).
22. Zolin, 491 U.S. at 572.
23. Id; see also Chen, 99 F.3d at 1502-03.
24. Zolin, 491 U.S. at 572.
25. Id. at 575. The Supreme Court in Zolin noted an interesting distinction between Federal evidence law and California evidence law. The Court noted that Federal Rule of Evidence 104(a) is markedly different from the comparable California evidence rule that provides that "the presiding officer may not require disclosure of information claimed to be privileged under this division in order to rule on the claim of privilege." Cal. Evid. Code § 915(a).
26. 162 F.3d 554 (9th Cir. 1998).
27. Id. at 555 n.2.
28. Clark, 289 U.S. at 15 (emphasis added) (citations omitted).
29. Zolin, 491 U.S. at 572.
30. 87 F.3d 377 (9th Cir. 1996).
31. Id. at 381.
32. Id. See also United States v. Bauer, 132 F.3d 504, 509 (9th Cir. 1997); United States v. Chen, 99 F.3d 1495, 1503 (9th Cir. 1996). The Second Circuit has articulated the standard as a "probable cause" test. See John Doe v. United States, 13 F.3d 633 (2nd Cir. 1994).
33. 867 F.2d 539 (9th Cir. 1989).
34. 867 F.2d at 540-41 (citations omitted).
35. 13 F.3d 633 (2nd Cir. 1994).
36. Id. at 636. See also In re Grand Jury Subpoena, 884 F.2d 124 (4th Cir. 1989) (district court's in camera proceedings did not violate due process).
37. Zolin, 491 U.S. at 568.
38. Dole, 889 F.2d at 890.
39. 87 F.3d 377 (9th Cir. 1996).
40. Id. at 381-82.
41. Id. at 382. The Ninth Circuit's holding on this issue is consistent with the Supreme Court's 1933 decision in Clark where the Supreme Court wrote: "The attorney may be innocent, and still the guilty client must let the truth come out." Clark, 289 U.S. at 15. See also United States v. Hodge and Zweig, 548 F.2d 1347, 1354 (9th Cir. 1977) ("The crime or fraud exception applies even where the attorney is completely unaware that his advice is sought in furtherance of such an improper purpose."); United States v. Friedman, 445 F.2d 1076, 1086 (9th Cir. 1971) ("The attorney need not himself be aware of the illegality involved; it is enough that the communication furthered, or was intended by the client to further, that illegality.").
42. 857 F.2d 529 (9th Cir. 1988).
43. Id. at 541.
44. 132 F.3d 504 (9th Cir. 1997).
45. Id. at 509-10.
46. Id. at 510.
47. 87 F.3d 377 (9th Cir. 1996).
48. Id. at 382.
49. 31 F.3d 826 (9th Cir. 1994).
50. Id. at 829.
51. Id. at 830.