Thursday, March 15, 2007
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Ninth Circuit Overturns Order Vitiating Attorney-Client Privilege
Preponderance Standard Applies Where Party Asserts ‘Crime-Fraud’ Exception, Panel Says
By KENNETH OFGANG, Staff Writer
A party asserting the “crime-fraud” exception to the attorney-client privilege in a civil case must prove by preponderance of the evidence that the exception applies, and the opposing party must be permitted to present evidence on the issue, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
The court reversed a discovery order by U.S. District Judge Marilyn Hall Patel of the Northern District of California in connection with suits by various music companies against the German media conglomerate Bertelsmann AG.
The plaintiffs claim that Bertelsmann is vicariously liable for copyright infringement by now-bankrupt Napster, Inc. Bertelsmann, they allege, secretly took control of Napster’s operations in order to retain its base of 40 million users while seeking to convert its now-defunct digital file-swapping service to a licensed system for the distribution of copyrighted music.
Bertelsmann, which loaned Napster about $85 million, denies that it ever controlled the company. Patel shut the Napster service down in July 2001, saying the company failed to comply with a previous injunction requiring it to search for, and remove from the service, files that rights holders had identified as infringing; the company filed for bankruptcy 11 months later.
Bertelsmann appealed after Patel ordered it to produce all attorney-client communications related to a $50 million loan, convertible to equity, that the German company made to Napster in October 2000 while it was appealing the preliminary injunction. The judge held that the plaintiffs had made a prima facie showing that Bertelsmann had fraudulently presented itself as a mere creditor of Napster while in fact exercising control of the company.
The requirement for such a showing in the Ninth Circuit is “quite lenient,” the judge explained, adding that the court was not required to consider countervailing evidence offered by Bertelsmann.
But Judge William Fletcher, writing for the appellate panel, said the judge should have applied a more rigorous standard and denied disclosure.
“Given the lack of clarity of [Supreme Court and Ninth Circuit] precedent, we intend no criticism of the district court when we say that we disagree with its understanding of the applicable law,” Fletcher said, after noting that the Ninth Circuit reviews orders vitiating attorney-client privilege under a de novo standard, not merely for abuse of discretion.
Moving Party’s Burden
To obtain disclosure of attorney-client communications under the crime-fraud exception, the appellate judge explained, the moving party must show that the client sought legal advice in order to further a “criminal or fraudulent scheme” which the client was already engaged in, or was planning to engage in, when it sought the advice, Fletcher said.
The moving party must also show that the communications whose disclosure is sought were made in furtherance of the scheme, the judge added, explaining that it need not be shown that the lawyer was aware of the client’s malevolent purpose and intent.
Fletcher went on to explain that a district judge may, solely on the basis of evidence offered by the moving party, order an in camera inspection of documents as to which the crime-fraud exception may apply. But outright disclosure of the documents cannot be ordered in a civil case without first giving the opposing party an opportunity to present evidence, the judge said.
Fletcher clarified that the court was expressing no opinion on an issue that has arisen in other circuits—whether a district court must consider countervailing evidence before compelling a witness to disclose attorney-client communications to a grand jury under the exception.
Importance of Privilege
Requiring the party seeking outright disclosure in a civil case to establish its position by a preponderance of the evidence “is consonant with the importance of the attorney-client privilege,” Fletcher said, adding that it was “the oldest and arguably most fundamental of the common law privileges recognized” by the Federal Rules of Evidence.
Applying the preponderance standard to claims of “crime-fraud” is not inconsistent with prior law mandating a “prima facie case,” which one court described as “among the most rubbery of all legal phrases,” Fletcher reasoned, saying it was also consistent with the rule that the party seeking to vitiate a privilege must prove any necessary preliminary fact under that standard.
Turning to the merits, the judge said the evidence offered by the plaintiffs was insufficient to show either that the disputed loan “was a sham intended for use in future legal proceedings as a means of disguising Bertelsmann’s purchase of control of Napster,” or that Bertelsmann was trying to deceive the courts by hiding a side agreement that allowed Napster to use some of the money to pay its litigation expenses.
At most, the judge said, the plaintiffs had shown that Bertelsmann was trying to gain the most favorable terms it could for repayment of the loan, including the right to obtain equity, and that its attorneys were making “a lawyerly attempt to make inconspicuous the fact that some of the money could be used for litigation expenses.”
The case is In re Napster, Inc. Copyright Litigation, 06-15886.
Copyright 2007, Metropolitan News Company