Third Circuit Clarifies that Reasonable Basis Standard Appropriate Quantum of Proof to Apply Crime-Fraud Exception to Attorney-Client Privilege
Clarifying the proofs necessary to apply the crime-fraud exception, the Third Circuit Court of Appeals in In re: Grand Jury recently held that a “reasonable basis” standard should be used, explaining that such a standard affords sufficient predictability for attorneys and clients without providing undue protection to those who seek to abuse the attorney-client and the work-product privileges afforded to them.
ABC Corp., John Doe 1, and John Doe 2 were subjects of an ongoing grand jury investigation into an alleged criminal tax scheme involving the purchase and sale of companies to fraudulently evade federal income taxes. The present appeal centers on two District Court orders: (1) a March Order directing both ABC Corp. and its law firms (present and past) to produce withheld documents; and (2) a June Order directed solely at ABC Corp.’s in-house counsel requiring production of non-privileged documents withheld and using the crime-fraud exception to overcome any additional privilege protection.
Finding ABC Corp. alone had standing to challenge only the June Order, the Court analyzed the District Court’s use of the crime-fraud exception. Recognizing that courts disagree about the amount of evidence of a crime or fraud that is required to trigger the exception and that its own past statements “of the proof necessary to apply the crime-fraud exception [are] not particularly helpful,” the Third Circuit clarified that the amount of proof necessary to trigger the crime-fraud exception “is properly captured by the reasonable basis standard.” The reasonable basis standard requires the presentation of adequate evidence demonstrating a reasonable basis to suspect the perpetration of a crime, see In re Grand Jury Investigation, or, put differently, “the proposed factual basis must strike a prudent person as constituting a reasonable basis to suspect the perpetration or attempted perpetration of a crime or fraud, and that the communications were in furtherance thereof,” see United States v. Jacobs (internal citations and quotation marks omitted). For the Court, this standard afforded sufficient protection under the attorney-client and work-product privileges without providing protection to those seeking to abuse the system; and most closely adhered to Supreme Court precedent on the crime-fraud exception.