Pick the Wrong Test, Be Held in Contempt

By Edward McIntyre

A Central District of California grand jury issued subpoenas to a company and its lawyers related to a criminal investigation of the company’s owner, also a client of the lawyers. The subpoenas sought documents and communications related to that criminal investigation, the target of which was the company’s owner. The company and the lawyers produced some documents, but withheld others based on assertions of the attorney-client privilege and work-product doctrine. Prosecutors pressed the issue. The district court (Hon. John Kronstadt) determined that the withheld documents were not protected by any privilege or were discoverable under the crime-fraud exception to the attorney-client privilege. The company and the law firm disagreed with the court’s rulings and continued to withhold the disputed documents. The court then held the lawyers and the company in contempt because they failed to comply with grand jury subpoenas. 

The district court had ruled that the dual-purpose communications at issue were not privileged because the “primary purpose” of the documents was to obtain tax advice, not legal advice. The company and its lawyers had argued that the applicable test was not “primary purpose,” but rather the “because of” test — that the documents were created “because of” the threat of anticipated tax litigation. The lawyers and the company appealed to the Ninth Circuit.  

A unanimous appellate panel — although it recognized that in an increasingly complex regulatory environment, lawyers often wear dual hats, serving as both lawyer and trusted business advisor; and although the Ninth Circuit had yet explicitly to adopt either the “primary purpose” or the “because of” test to determine whether dual-purpose communications are entitled to attorney-client privilege protection, such that district courts in the circuit had split, applying both tests for attorney-client privilege claims— nonetheless affirmed the district court’s orders holding the company and its lawyers in contempt.  

The company and its lawyers again argued that the district court should have relied on the broader “because of” test. The panel, however, rejected that argument and held that the “primary purpose” test applies to attorney-client privilege claims for dual-purpose communications. The court’s rationale was that the “because of” test is inconsistent with the scope of the attorney-client privilege, defined by the purpose of the communication, consistent with the common law of lawyer-client privilege. At common law, as interpreted by courts in the light of reason and experience, the attorney-client privilege extends only to communications made “for the purpose of facilitating the rendition of professional legal services,” citing United States v. Rowe, 96 F. 3d 1294, 1296 (9th Cir. 1996). 

Under the “primary purpose” test, courts look at whether the primary purpose of the communication is to give or receive legal advice, as opposed to business or tax advice. By contrast, the “because of” test — which typically applies in the work-product context — considers the totality of the circumstances and affords protection when it can fairly be said that the document was created “because of” anticipated litigation and would not have been created in substantially similar situations but for the prospect of that litigation.  

In short, because the nature of the attorney-client privilege and the work-product doctrine are different, the court held that different tests apply. Thus, the panel rejected the invitation to extend the “because of” test to the attorney-client privilege context and held that the “primary purpose” test applies to such dual-purpose communications.  

The panel left open whether the court should adopt “primary purpose” instead of “the primary purpose” as the test, such as the D.C. Circuit did in In re Kellogg Brown & Root, Inc., 756 F.3d 754 (D.C. Cir 2014). In this case, the panel found that the disputed communications did not fall within the narrow universe where the Kellogg test would change the outcome of the privilege analysis because Kellogg’s reasoning in the very specific contest of corporate internal investigations does not apply with equal force in the tax contest. 

The criminal contempt convictions are events the lawyers must now report to the State Bar under Business and Professions Code section 6068, subdivisions (o)(3) and (o)(5), subjecting them to potential discipline. 

The case is In Re Grand Jury, 13 F.4th 710 (9th Cir. 2021), decided September 13, 2021.