Third Circuit Refuses To Apply Attorney-Client Privilege To Documents In Law Firm’s Possession

Posted On Wednesday, January 2, 2013
By: John A. Schwab

In an appeal arising out of the Eastern District of Pennsylvania, the Third Circuit affirmed the district court’s enforcement of grand jury subpoenas served upon outside counsel, rejecting claims that the subpoenas sought privileged material.  In Re: Grand Jury, Nos. 12-1697, 12-2878 (3d Cir. Dec. 11, 2012).  The subpoenas focused on a corporation and two individuals, described only as John Doe 1 and John Doe 2, all of whom were targets of the grand jury investigation.  The subpoenas at issue were directed to two separate law firms and three attorneys, who were formerly employed by the corporation as in-house counsel.

The decision to require production of otherwise privileged communications and work product was based the “crime-fraud” exception to the attorney-client and work product privilege.  This exception, established by the U.S. Supreme Court opinion in United States v. Zolin, 491 U.S. 594, 562-563 (1989), limits the attorney-client privilege “where the desired advice refers not to prior wrong doing, but to future wrong doing.”  The Third Circuit has extended the crime-fraud exception to the work product doctrine in In Re: Grand Jury Subpoenas, 604 F.2d 798, 802 (3d Cir. 1979).  To overcome the attorney-client privilege and employ the crime-fraud exception, the government 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.  See In re: Grand Jury Subpoena, 223 F.3d 213, 217 (3d Cir. 2000).

The record of the proceedings below indicated that the district court reviewed the evidence submitted by the government ex parte and found a reasonable basis to suspect that ABC Corp.[1] willfully evaded paying federal income taxes and engaged in an alleged conspiracy to defraud the government of federal income taxes.  According to the government, the corporation allegedly acquired stock of closely held companies with large cash accounts, little tangible assets, and significant tax liabilities.  It would then strip away significant amounts of the target company’s cash assets, transfer the stock of the target companies to two limited liability companies, and engage in transactions that fraudulently eliminated the target company’s tax liability.  The government further alleged that, with the tax liability eliminated, John Doe 1 and John Doe 2 would then divert the target company’s cash assets to themselves and family members. 

While ABC Corp. had evidence demonstrating otherwise, as well as favorable precedent from the U.S. Tax Court, the Third Circuit stated that it was bound to employ the facts of the alleged criminal scheme under investigation by the grand jury.  In reviewing the record, the Third Circuit held that the district court correctly found that the government had satisfied its burden to overcome the attorney-client and work product privileges. 

A complete copy of the opinion can be found here.

[1] The Third Circuit referred to the corporation as ABC Corp., a pseudonym, to protect the secrecy of the grand jury process as well as to preserve the corporation’s anonymity.