Upjohn Warnings in Entity Investigations

In United States v. Ruehle, 583 F.3d 600 (9th Cir. 2009), a nontax criminal case, the Ninth Circuit rejected a corporate officer's claim that his interview by attorneys representing the corporation in an internal investigation and representing Ruehle in related civil litigation. There was a dispute between Ruehle and the attorneys as to whether the attorneys had given the so-called Upjohn or "corporate Miranda" warning. See Upjohn Co. v. United States, 449 U.S. 383 (1981). The attorneys, not surprisingly, claimed that they had given the warning. Ruehle testified he could not recall that they did. The district court "seems to have disbelieved the Irell lawyers who took no notes nor memorialized their conversation on this issue in writing, and it apparently credited Ruehle's testimony that no such warnings were given." (See n.3.)

The Court of Appeals held, however, that Ruehle's assertion of attorney-client privilege to the communications failed. The court repeated its version of the standard attorney-client privilege definition as follows:

(1) Where legal advice of any kind is sought (2) from a professional legal adviser in his capacity as such, (3) the communications relating to that purpose, (4) made in confidence (5) by the client, (6) are at his instance permanently protected (7) from disclosure by himself or by the legal adviser, (8) unless the protection be waived.

The party asserting the privilege must prove the existence of each element. Here, Ruehle failed to meed the fourth element -- that the communication be made in confidence. Ruehle understood that the fruits of the investigation would be made available to the accountants.

The salient point from a privilege perspective is that Ruehle readily admits his understanding that all factual information would be communicated to third parties, which undermines his claim of confidentiality to support invoking the privilege. Ruehle's subjective shock and surprise about the subsequent usage of the information he knew would be disclosed to third-party auditors--e.g., information subsequently shared with securities regulators and the Justice Department now used to support a criminal investigation and his prosecution--is frankly of no consequence here.

These issues of course arise in entity investigations arising from tax cases. Upjohn itself was a tax case, and the issue has arisen in other tax cases (e.g., the KPMG prosecution).

Economic Substance in Tax Crimes

In American Boat LLC v. United States, ___ F.3d ___ (7th Cir. 2009), the Seventh Circuit affirmed a district court's holding that a taxpayer in a Son of Boss transaction was not liable for civil penalties for claiming the tax shelter on his return (I need not differentiate the civil penalties for present purposes). The essence of the relief granted was that the taxpayer had reasonable cause because of the tax lawyer's involvement and opinion (essentially like the other opinions for Son of Boss). The shelter was Jenkens & Gilchrist shelter of the type for which the lawyers promoting it have been indicted. (See discussion of indictment here.)

Echoing the mantra in the Nixon Watergate debacle, the Court said that "Again, the focus is on what Jump [the taxpayer] knew or should have known at the time he obtained the opinion letter." Focusing on the issuer of the opinion in a criminal context, it seems to me that the issue is the same -- to paraphrase, the focus is on what the lawyer knew or should have known at the time he issued the opinion letter. I don't think my paraphrasing is particularly insightful, but I do think it is helpful to state the truism from time to time, for I think it will help focus on the issue I raised in my earlier blog yesterday (see here). Keep in mind that the lawyer is guilty of a tax crime only if he knew the law (i.e., the crime was both knowable and he knew it) and he intended to violate the law.
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Uncertainty in the Law and Willfulness

In an article in today's New York Times here, Adam Liptak discusses Justice Scalia's dissent from denial of certiorari in Sorich v. United States, 129 S.Ct. 1308 (2009). Justice Scalia's lament is that the "honest services" crime does not provide an intelligible standard for criminal conduct. This theme is presented in the tax cases from James forward requiring a knowable law for tax crimes. Since the tax law requires willfulness, defined as the intentional violation of a known legal duty, then the legal standard must be knowable so that the defendant -- any defendant, even the hypothetical reasonable defendant -- charged with the crime must be able to ascertain the legal standard in order to intend to violate the standard.

Mr. Liptak notes with respect to "honest services" that "If you can make sense of that phrase, you have achieved something that has so far eluded the nation’s appeals courts." As a result, it is fair to say that citizens cannot ascertain the legal standard with any certainty and, correspondingly, judges and juries cannot predictably hold them to that uncertain standard. This phenomenon, Justice Scalia notes, violates fundamental constitutional principles, and gives the prosecutors too much unchecked power to pick and choose their defendants in a wide swath of conduct. Liptak notes:
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