Revisiting a case that it first addressed in narrower terms, the U.S. Court of Appeals for the Third Circuit reiterated that the standard to be met in order to use the crime-fraud exception to override attorney-client privilege and the work-product doctrine is whether there is a reasonable basis to do so.

Other circuits have applied different standards, a split panel of the Third Circuit said in an opinion it issued after vacating the opinion it issued in the same case in May. The court had granted rehearing this summer at the request of an unnamed corporation, called ABC Corp., that is under investigation by a grand jury for a complex tax fraud scheme. The government is seeking documents that the company, and its father-and-son executives, maintain were privileged.

The law firm of Blank Rome was caught between the defunct corporation and the government because it has been holding the documents on behalf of the company. The court was sympathetic to the firm’s position.

“Today, we clarify that our precedent is properly captured by the reasonable basis standard,” Judge Thomas Ambro wrote on behalf of the majority in In re Grand Jury. Judge Thomas Hardiman joined the majority and Judge Thomas Vanaskie dissented in part.

“The attorney-client privilege, work-product doctrine, and crime-fraud exception are all compromises based on policy determinations. Although it is difficult to predict whether a particular standard of proof will strike the appropriate balance between these competing policy concerns, we believe, as do other circuit courts, that the reasonable basis standard affords sufficient predictability for attorneys and clients without providing undue protection to those that seek to abuse the privileges afforded to them,” Ambro said.

The court’s holding in this opinion was similar to its earlier ruling, which addressed the order from the Eastern District of Pennsylvania court in March directing the company and the law firm to provide the documents to the government. As in its earlier opinion, the court held that it didn’t have jurisdiction for the appeal.

However, in this opinion, the Third Circuit was also presented with an appeal from an order the district court issued in June, ordering former in-house counsel to the now-defunct company to turn over documents to the government.

The court ruled that it does have jurisdiction to hear ABC Corp.’s appeal of the June order, which was directed at the company’s former in-house counsel. Because the order wasn’t addressed to ABC Corp., the company isn’t in a position to put itself in contempt in order to appeal, as was the case with the March order.

Reaching the merits of the appeal from the June order, the court clarified its stance on the standard to be met for the crime-fraud exception. The Third Circuit held that the district court properly applied the exception.

“Where there is a reasonable basis to suspect that the privilege holder was committing or intending to commit a crime or fraud and that the attorney-client communications or attorney work product were used in furtherance of the alleged crime or fraud, this is enough to break the privilege,” Ambro said.

“The district court found that the evidence submitted ex parte by the government provided a reasonable basis to suspect that ABC Corp. willfully evaded paying federal income taxes … and engaged in a conspiracy to defraud the United States of federal income taxes,” Ambro said.

The Third Circuit doesn’t have jurisdiction to hear ABC Corp.’s appeal of the March order because it is not an immediately appealable order, the court ruled, echoing its earlier stance on the issue.

If the company believes that it is critically important to appeal the order, it can take the standard path requiring it to put itself in contempt of the district court by refusing to comply and then appeal the sanctions imposed upon it. A contempt order is immediately appealable because it is a final judgment.

“The contempt route to an immediately appealable final decision is a firmly established feature of federal appellate procedure, stretching back to at least the Supreme Court’s 1906 decision in Alexander [v. United States], but the decision to travel that route must not be made lightly,” Ambro said. The harshness of the rule is intended to weed out insincere appeals, he explained.

As in the earlier argument, ABC Corp. claimed the Perlman exception, which allows for the privilege holder to appeal an order requiring the custodian of the privileged documents to disclose them if he has no means of disobeying the order himself. The exception was defined by the U.S. Supreme Court in its 1918 opinion in Perlman v. United States.

The company argued that, because the papers are being held by the law firm, which is a third party that doesn’t have the incentive to subject itself to sanctions from the court in order to force appellate review, the Perlman exception should apply.

However, the majority held that the contempt route is still available to the company since the district court’s order is directed to ABC Corp.; even though the documents are physically located at the law firm, they are under the legal control of the company.

“The situation is complicated because the court’s order is also directed at ABC Corp.’s outside counsel, exposing them to potential contempt sanctions if they do not comply with it,” Ambro said, explaining in a footnote where Vanaskie parts ways with the majority.

Vanaskie agreed that the court has no jurisdiction over the review of the March order on the company’s behalf, but “he believes we have jurisdiction over the order to the extent it requires the law firms to produce the documents,” Ambro said. “This approach, we believe, bifurcates the order and emphasizes too technical an understanding of our jurisdiction. Both Judge Vanaskie and we agree that ABC Corp. legally controls the documents and may be held in contempt for refusing to produce them.

“Unlike Judge Vanaskie, however, we see the law firms’ choice whether to follow their client’s directions or be held in contempt as a resolvable practical problem, not a basis for our jurisdiction,” Ambro said.

The case is further complicated because, while ABC Corp. argued that it would be sufficient for Blank Rome to transfer the documents to the company, the government asked that they be given to a specific person who will be charged with the responsibility of the decision of whether or not to turn them over to the government since the company is defunct.

The company told the court that there is nobody willing to take that on, according to the opinion. “This proves too much,” Ambro said. If the officers of the company are “unwilling to suffer contempt sanctions, this only points out that the privilege holder has weighed its chances of success on appeal against the seriousness of the sanctions it will face for disobeying the district court’s order, and determined that it is unwise to seek immediate appeal,” he said.

Saranac Hale Spencer can be contacted at 215-557-2449 or Follow her on Twitter @SSpencerTLI.

(Copies of the 67-page opinion in In re Grand Jury, PICS No. 12-2320, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •