In a significant ruling, the United States Supreme Court (“USSC”) on January 23, 2023 threw out a case in which the petitioner sought to expand the scope of the attorney-client privilege. The petitioner is an unnamed law firm that specializes in international tax issues and has been fighting to shield its communications with its client, a Bitcoin business, from a federal grand jury. The law firm prepared tax returns and also provided legal advice regarding ownership of cryptocurrency assets to its client.
A federal grand jury issued a subpoena for documents related to the client’s tax returns, and the law firm withheld some documents, citing attorney-client privilege. Grand jury secrecy rules protect innocent individuals from disclosure of the fact that they may be under investigation and protects witnesses from being pressured or threatened by potential defendants. As such, the names of the law firm and the client have been kept from the public.
Attorneys sometimes serve dual functions for their clients as both lawyer and as business adviser. When attorney-client communications mix both business and legal issues, courts must decide when the privilege will protect the communications vs. when the communications will be available for discovery in civil and criminal proceedings. After the law firm withheld a select number of documents it said contained “dual-purpose” communications with its client (communications that contained both legal and non-legal advice), it was held in contempt of court, and the legal issue was brought to the U.S. Circuit Court of Appeals for the 9th Circuit (“9th Circuit”).
The 9th Circuit upheld the trial court judge’s utilization of a narrow version of the “primary purpose” rule, where the trial court ruled that legal advice had to be the “primary purpose” of the communication for the communication to be considered attorney-client privileged. Under this narrower approach to the “primary purpose” test, communications are not privileged unless they are for the purpose of obtaining or providing legal advice. Where a dual-purpose communication cannot be determined to allow production of discussions without revealing the substance of a privileged communication, the narrow approach directs a court to decide between business and legal purposes and determine the “primary purpose” of the communication.
A broader “primary purpose” test, where the court does not have to decide whether the communication was either for a business purpose or a legal purpose has also been applied by some courts. A 2014 decision, In re: Kellogg Brown & Root Inc. 756 F3d 754 (D.C. Cir. 2014), authored by then-U.S. Court of Appeals Justice Brett Kavanaugh, held that a court cannot presume that a communication can have only one primary purpose, as a communication can have multiple purposes. This ruling proposed a test in which the court would determine whether obtaining or providing legal advice was “a primary purpose of the communication,” vs. “the primary purpose” of the communication.
The petitioner law firm argued to the 9th Circuit last year that the trial court erred by failing to apply the “a primary purpose” test from the In re: Kellogg Brown & Root Inc. case. The 9th Circuit noted that no other appellate circuits had adopted the “a primary purpose” test, that it didn’t apply to tax cases, and that only in very close cases, where the legal purpose was equally important as the non-legal purpose, would it be helpful. For these reasons, the 9th Circuit declined to adopt the “a primary purpose” test.
The law firm brought a successful petition for a writ of certiorari to the USSC, arguing there is a split among the D.C. Circuit and the 9th Circuit regarding which test to apply to dual-purpose communications. The law firm argued that the attorney-client privilege must be predictable, and if the application of the privilege is uncertain, a client’s willingness to speak frankly with counsel may be chilled. The petitioner argued that adopting the broader “a primary purpose” rule is critical to the legal profession and to the public. Several lawyers’ groups like the American Bar Association filed briefs supporting petitioner, and urging the USSC to adopt a more expansive standard for privilege.
Oral arguments were held at the USSC on January 9, 2023. Some justices, such as Sonia Sotomayor, questioned why the 9th Circuit’s application of “the primary purpose” test was wrong, noting that the vast majority of states use that test. Justice Elena Kagan commented to counsel for the petitioner law firm “if it ain’t broke, don’t fix it.” Conversely, Chief Justice John Roberts expressed concern that federal district courts (trial courts) could be strained if the USSC formally adopts the narrower “the primary purpose” test, saying if there is a memo that is “talking about three different legal issues, and under [the primary purpose] test, the judge is supposed to decide, of these three, this one is the big one, that’s the one that’s most important, and it doesn’t have anything to do with this or whatever.”
On January 23, 2023, the USSC issued an unsigned one-sentence ruling, dismissing “as improvidently granted” the petitioner law firm’s appeal of the order holding it in contempt for not turning over records. By doing so, the USSC did not substantively rule on the appeal or adopt the broad “a primary purpose” test, thereby refusing to significantly expand the scope of the attorney-client privilege for complex mixed-purpose communications. Counsel will need to continue to make a clear showing that they were acting in a legal capacity as to communications withheld on grounds of privilege.
TALG will continue to monitor any developments in this area of law for its clients, and we invite you to contact us with any questions on this or any other legal issue.