United States v. Chen
99 F.3d 1495 (1996)
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Rule of Law:
The crime-fraud exception to the attorney-client privilege applies when a client uses an attorney's services in furtherance of a crime or fraud, regardless of whether the attorney is aware of the client's illicit purpose.
Facts:
- Tei-Fu Chen and Oi-Lin Chen owned Sunrider Corporation, which imported health food and skin care products.
- The Chens faced a conflict between customs duties (tariffs), which are lower for lower-priced goods, and income taxes, which are lower for higher-cost goods.
- The government alleged the Chens paid tariffs based on the true, low price of imported goods.
- Subsequently, the Chens' comptroller allegedly created fictitious, high-priced invoices for the same goods.
- These inflated invoices were allegedly used to calculate the cost of goods sold for tax purposes, thereby fraudulently reducing Sunrider's income tax liability.
- Fearing discovery of the discrepancy between the values reported to Customs and the IRS, the Chens hired the law firm Stein, Shostak, Shostak & O'Hara.
- The law firm, believing it was bringing the company into compliance with customs law, filed a 'prior disclosure' with Customs, stating that Sunrider had previously undervalued its imports and enclosed a check for the additional tariffs owed based on the higher, fictitious values.
- The government alleged this disclosure was not a correction, but a fraudulent act designed to align the Customs declarations with the inflated figures used for the tax evasion scheme, with the attorneys being unwitting participants.
Procedural Posture:
- During a grand jury investigation, subpoenas were issued to Sunrider's in-house counsel, James D. Wilets, and outside counsel, Joseph P. Cox.
- The Chens and Sunrider (appellants) filed a motion to quash the subpoenas in the U.S. District Court, asserting attorney-client privilege.
- The government (appellee) filed a cross-motion to compel testimony, arguing that the crime-fraud exception applied.
- The district court found a prima facie case that the Chens had utilized their attorneys in furtherance of an unlawful scheme, even though the attorneys themselves were innocent of any wrongdoing.
- The district court denied the motion to quash, ordering the attorneys to testify about the customs disclosures.
- The Chens and Sunrider appealed the district court's order to the United States Court of Appeals for the Ninth Circuit.
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Issue:
Does the crime-fraud exception to the attorney-client privilege apply when a client utilizes an attorney's services in furtherance of an ongoing crime, even if the attorney is innocent of any wrongdoing and unaware of the client's criminal intent?
Opinions:
Majority - Kleinfeld, Circuit Judge
Yes. The crime-fraud exception to the attorney-client privilege is applicable even if the attorney is unaware of the client's illegal intent. The privilege belongs to the client, and therefore it is the client's knowledge and intentions that are of paramount concern for the application of the exception. The purpose of the crime-fraud exception is to prevent the attorney-client privilege from being used to shield ongoing or future criminal conduct. Here, the government made a prima facie showing of 'reasonable cause' to believe that the Chens utilized their attorneys' services in furtherance of an ongoing tax evasion scheme. The attorneys' innocence is irrelevant because the privilege cannot be used as a tool for crime. While the government made a procedural error by submitting privileged communications to the district court without first satisfying the two-step process required by United States v. Zolin, the error was harmless because the district judge explicitly disregarded the improperly submitted material in reaching his decision.
Analysis:
This decision solidifies the principle that the crime-fraud exception's focus is solely on the client's intent, not the attorney's. It clarifies that an attorney can be an unwitting pawn in a client's criminal scheme, and if so, the communications related to that scheme are not privileged. This precedent reinforces that the attorney-client privilege is not absolute and cannot be used as a sword to perpetrate fraud. For future cases, it means that litigants seeking to pierce the privilege must present evidence of the client's criminal purpose, and the innocence or ignorance of the attorney will not serve as a defense against the exception's application.
