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July 17, 2017 Top Story

Crime-Fraud Exception to Privilege Requires Misuse of Advice

Work-product protection upheld where there was no act in furtherance of a crime

Connor D. Jackson

The crime-fraud exception cannot be used to pierce the attorney work-product privilege without the required showing that the work product was actually used in furtherance of the purported crime or fraud. The U.S. Court of Appeals for the Third Circuit clarified that, without more, even compelling evidence of a crime or fraud is insufficient to invoke the exception. The ruling has important ramifications for practitioners advising clients on the contours of lawful conduct.

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Inadvertent Disclosure in Response to Grand Jury Subpoena

In In re Grand Jury Matter #3, the government empaneled a grand jury to investigate the allegedly fraudulent business practices of Company A, and John Doe, its sole owner and president, following numerous individual and class action lawsuits throughout the country. Deposition testimony obtained during one class action reflected that Doe had transferred ownership of Company A to Company B, and that Company A was out of business, with few remaining assets. Those disclosures led to a settlement of ten percent of the full value of plaintiffs' claims. The government theorized that Doe never transferred ownership of his company, and that Doe and his business associate made false representations to induce a lower settlement.

In response to a grand jury subpoena, Doe's accountant inadvertently produced a privileged email between Doe and Doe's attorney that advised amending Doe's records to reflect that Doe's business associate, rather than Doe, owned Company A during the subject time period. Doe forwarded the email to his accountant, stating, "Please see the seventh paragraph down re; my tax returns. Then we can discuss this." There was no evidence that Doe ever amended his returns or acted upon his attorney's advice. The attorney later told the accountant to "stand by," but gave no further instructions.

The U.S. District Court for the Eastern District of Pennsylvania ruled that the government could present the email to the grand jury. It found there was no attorney-client privilege, since Doe did not forward the email to his accountant to obtain legal advice. It further held that because the accountant was not adverse to Doe, the attorney work-product privilege did apply, but ultimately concluded that the grand jury could view the email since the crime-fraud exception to the privilege also applied.

No Intent, No Use of Attorney Advice, No Crime-Fraud Exception

The Third Circuit reversed on appeal. It held that the government had failed to establish both elements of the crime-fraud exception, which require that "there is a reasonable basis to suspect (1) that the [lawyer or client] was committing or intending to commit a crime or fraud, and (2) that the . . . attorney work product was used in furtherance of the alleged crime or fraud."

The Third Circuit emphasized that the "in furtherance" requirement was intended to ensure that "we are not punishing someone for merely thinking about committing a bad act." As an example, the court explained, "If a client approaches a lawyer with a fraudulent plan that the later convinces the former to abandon, the relationship has worked precisely as intended," and the work-product protection remains "intact." But if "the client uses work product to further a fraud, the relationship has broken down, and the lawyer's services have been 'misused,'" leading to waiver of the privilege.

The appellate court acknowledged that the government had strong evidence in support of the first element, including a recording of Doe admitting that he paid his business associate to give false testimony regarding the ownership of Company A. However, the Third Circuit observed that Doe had done nothing more than forward the email to his accountant, and there was "no record evidence suggesting that Doe ever made up his mind." Doe did not amend his tax returns or other records, nor did he instruct his accountant to do so. In the absence of an act misusing attorney advice in furtherance of a crime or fraud, the Grand Jury court concluded that the crime-fraud exception did not apply.

Best Practices for Attorneys Advising Clients

Advising clients on potentially illegal or unethical actions can be problematic. "It's a tricky area for lawyers to navigate, and it depends on the circumstances, including how the issue resulting in the offering of the option arose," says Emily Crandall Harlan, Washington, D.C., cochair of the ABA Section of Litigation's Criminal Litigation Committee. For example, "if a client asks a lawyer to opine on a proposed course of action that the lawyer believes would violate the law, communicating that to the client goes to the core of the lawyer's function.

But where a lawyer advises the client that although the proposed course of action may violate the law, the client is unlikely to suffer consequence from pursuing it, the area becomes more gray," she explains. In short, "a lawyer cannot advise a client whether or how to break the law. But a lawyer should be able to help a client understand what does and does not violate the law," concludes Harlan.

Some Section leaders counsel attorneys to prepare confidentiality agreements with any non-adverse third parties involved with litigation. "The writing should specify that the lawyer must be notified in the event that work product-protected documents are sought by a third party," advises Michael T. Dawkins, Jackson, MS, chair of the Ethics and Professionalism Subcommittee of the Section's Criminal Litigation Committee. "A written agreement with a third party evidences that the information is intended to be confidential and provides protection in the event of a claim of waiver," adds Dawkins.

More litigation may arise from this decision. "I suspect that, in future cases, we will see parties arguing about what acts qualify as actual use of the lawyer's advice in furtherance of fraud," anticipates Harlan.


Connor D. Jackson is a contributing editor for Litigation News.

Keywords: work-product doctrine, crime-fraud exception, attorney-client privilege

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