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Penetrating the Attorney-Client Privilege – An Aggressive Trend in the Wake of Corporate Scandals

The attorney-client privilege is an essential element of any system of justice. It protects communication between attorneys and their clients from compelled disclosure. The crime-fraud exception removes this attorney-client privilege for communications made in furtherance of a crime or fraud. Therefore, the confidentiality afforded to attorney-client communications does not extend to interactions for the purpose of committing a crime or fraud.

There are notable cases such as United States v. Richard Nixon, where attorneys find themselves giving evidence against their clients. In the Watergate scandal, President Nixon’s assertion of executive privilege was overridden because of potential criminal activity. In a landmark Supreme Court decision, Justice Warren Burger wrote:

“…when the ground for asserting privilege as to subpoenaed materials sought for use in a criminal trial is based only on the generalized interest in confidentiality, it cannot prevail over the fundamental demands of due process of law in the fair administration of criminal justice. The generalized assertion of privilege must yield to the demonstrated, specific need for evidence in a pending criminal trial.”

When Attorney-Client Privilege Yields to Crime-Fraud Exception?

U.S. Federal courts use a two-party test to decide whether to apply the crime-fraud exception. The two parts of the test are:

1. First, it must be established that the client was engaged in or planning criminal or fraudulent conduct when the advice of counsel was sought or committed a crime or fraud after receiving the benefit of counsel’s advice.
2. If the first part of the test is established then, there must be a showing that the attorney’s assistance was obtained in furtherance of the criminal or fraudulent activity or was closely related to it.

If both parts of the test are satisfied, the court would allow intrusion into the attorney and client interaction and the attorney work product.

A crime or fraud does have to be proven for the exception to be invoked. All that is needed is probable cause. Evidence that establishes a reasonable basis to suspect that the client was committing or intending to commit a crime or fraud, and that the attorney-client communication was used in furtherance of that crime or fraud is enough. Courts may conduct an in-camera review of the allegedly privileged materials to determine whether the exception applies.

President Donald Trump had to stare down his long-time attorney, Michael Cohen, who became a lead witness in the Stormy Daniels hush-money trial. New York prosecutors asserted that they had probable cause to believe that President Trump used the services of his attorney to commit crimes.

Crime-Fraud Exception Not Restricted to Criminal Conduct

You could tell from the name crime-fraud that the principle is not limited to crimes. A court or prosecutor does not have to search the penal code to find a specific crime you are committing, before applying the crime-fraud exception. Court have looked beyond mere crimes to pierce the attorney and client privilege. This is so because fraudulent conduct may be civil and criminal. It on this front that the crime-fraud exception is being used to chip away at the attorney and client privilege.

If you are in a position of trust and confidence and seek legal advice to breach your fiduciary duty, the crime-fraud exception maybe applied even if no crime is being committed. This is because the breach of a fiduciary duty may constitute civil fraud.

Courts have gone further to apply the crime-fraud exception in circumstances where there is tortious interference with contract. Tortious interference with contract is where you intentionally disrupt the contractual relationship between two parties.

You should not assume that every interaction with an attorney will be protected by the attorney-client privilege. Instead, you and your attorney should be aware of the kinds of interaction that may pierce the veil of secrecy.

The crime-fraud exception applies regardless of whether the attorney was aware of the client’s criminal or fraudulent intentions. The focus is on the client’s intent to misuse the attorney’s services to further a crime or fraud. If the client sought legal advice to explore the legality of a proposed course of conduct, the privilege remains intact. However, if the client intended to use the attorney’s advice to perpetrate or conceal a crime or fraud, the privilege is forfeited.

Why C-Suite Executives Should be on High Alert

The invoking of the crime-fraud exception has surged after corporate scandals became prevalent. As corporate scandals spark public outcry, there has been a notable rise in the invocation of the crime-fraud exception prosecutors. This has contributed to growing effort to pierce attorney-client privilege in cases where legal advice may have been used to further criminal or fraudulent activities.

Regulators and prosecutors are also broadening the scope of application of the crime-fraud exception. Recent analyses suggest that the scope of the crime-fraud exception has expanded. Courts have applied the exception not only to clear-cut cases of crime or fraud but also to situations involving breaches of fiduciary duty and other wrongful conduct. This broader interpretation indicates a more frequent application in diverse legal contexts.

All professionals and entrepreneurs should note the trend by prosecutors to aggressively use the crime-fraud exception to penetrate the attorney and client privilege. It could impact you, particularly if you are in arenas such as real estate, trust and estates, asset management, information technology and cyber security.