Ninth Circuit Applies Perlman Rule for Collateral Appeal of Order Rejecting Attorney-Client Privilege for Former Attorneys of NonIndicted Party (10/31/10)

In United States v. Krane, 625 F.3d 568 (9th Cir. 2010), here, the Ninth Circuit upheld the continuing viability of the Perlman rule permitting collateral appeals of rejection of the attorney-client privilege in certain circumstances. Krane arose from a tax shelter prosecution of individuals who conducted their tax shelter activity through Quellos Group LLC. We have previously blogged about this indictment here and here, but suffice it to say now that they were the genre of shelters that led to other prominent prosecutions (e.g., KPMG related individuals and the Daugerdas related individuals). In Krane, the district court allowed the Government to issue a pretrial subpoena for the records of Skadden, Arps, Slate, Meagher & Flom LLP ("Skadden"), a prominent national law firm that had previously represented Quellos, which was not indicted. Quellos advised Skadden that it was asserting the attorney-client privilege. Skadden asserted the privilege. The Government moved to compel. Quellos intervened to sustain the privilege. The trial court rejected the assertion of privilege and ordered Skadden to comply. Quellos appealed the order and the district court stayed compliance with the subpoena pending appeal. The defendants pled guilty. The Government insisted that it needed compliance with the subpoena in order to prepare for sentencing and issued an identical trial subpoena for the sentencing hearing. "Thereafter, Quellos filed a "Notice of Further Proceedings and Suggestion of Mootness" before this court [the Ninth Circuit], which the government opposed." In a footnote, the court noted: "Despite having served the second subpoena on Skadden, the government has yet to file a motion with the district court seeking issuance of a pre-sentencing subpoena duces tecum."

The appeal presented two issues. The first was whether the compulsory order to Skadden Arps was appealable. The second was, if appealable, the pleas of the defendants mooted the need for the subpoenas. The answers to both questions was yes, so the appeal was dismissed, vacated and remanded with instructions.

The appealability issue turned upon the continued viability of the Perlman rule (Perlman v. United States, 247 U.S. 7 (1918)). Perlman held, according to Ninth Circuit interpretation, that "a discovery order directed at a 'disinterested third-party custodian of privileged documents' is immediately appealable because 'the third party, presumably lacking a sufficient stake in the proceeding, would most likely produce the documents rather than submit to a contempt citation.'" (quoting United States v. Griffin, 440 F.3d 1138, 1143 (9th Cir. 2006)). The question presented was the impact of the Perlman rule by a subsequent decision, Mohawk Industries, Inc. v. Carpenter, 130 S. Ct. 599 (2009), here.

Rather than recreate the wheel on Mohawk, I quote the syllabus from Mohawk (most case citations omitted, some punctuation marks omitted, and Rule citations omitted, all for easier readability) :

When respondent Norman Carpenter informed the human resources department of his employer, petitioner Mohawk Industries, Inc., that the company employed undocumented immigrants, he was unaware that Mohawk stood accused in a pending class action -- the Williams case -- of conspiring to drive down its legal employees' wages by knowingly hiring undocumented workers. Mohawk directed Carpenter to meet with the company's retained counsel in Williams, who allegedly pressured Carpenter to recant his statements. When he refused, Carpenter maintains in this unlawful termination suit, Mohawk fired him under false pretenses. In granting Carpenter's motion to compel Mohawk to produce information concerning his meeting with retained counsel and the company's termination decision, the District Court agreed with Mohawk that the requested information was protected by the attorney-client privilege, but concluded that Mohawk had implicitly waived the privilege through its disclosures in the Williams case. The court declined to certify its order for interlocutory appeal, and the Eleventh Circuit dismissed Mohawk's appeal for lack of jurisdiction, holding, inter alia, that the District Court's ruling did not qualify as an immediately appealable collateral order under Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541 (1949), because a discovery order implicating the attorney-client privilege can be adequately reviewed on appeal from final judgment.
Held:
Disclosure orders adverse to the attorney-client privilege do not qualify for immediate appeal under the collateral order doctrine.
(a) Courts of Appeals "have jurisdiction of appeals from all final decisions of the district courts." 28 U.S.C. § 1291. "Final decisions" encompass not only judgments that "terminate an action," but also a "small class" of prejudgment orders that are "collateral to" an action's merits and "too important" to be denied immediate review, Cohen, supra, at 545-546. That small category includes only decisions that are effectively unreviewable on appeal from the final judgment in the underlying action. The decisive consideration in determining whether a right is effectively unreviewable is whether delaying review until the entry of final judgment would imperil a substantial public interest or some particular value of a high order. In making this determination, the Court does not engage in an individualized jurisdictional inquiry, but focuses on the entire category to which a claim belongs. If the class of claims, taken as a whole, can be adequately vindicated by other means, the chance that the litigation at hand might be speeded, or a particular injustice averted, does not provide a basis for § 1291 jurisdiction.
(b) Effective appellate review of disclosure orders adverse to the attorney-client privilege can be had by means other than collateral order appeal, including postjudgment review. Appellate courts can remedy the improper disclosure of privileged material in the same way they remedy a host of other erroneous evidentiary rulings: by vacating an adverse judgment and remanding for a new trial in which the protected material and its fruits are excluded from evidence. Moreover, litigants confronted with a particularly injurious or novel privilege ruling have several potential avenues of immediate review apart from collateral order appeal. First, a party may ask the district court to certify, and the court of appeals to accept, an interlocutory appeal involving "a controlling question of law" the prompt resolution of which "may materially advance the ultimate termination of the litigation." § 1292(b). Second, in extraordinary circumstances where a disclosure order works a manifest injustice, a party may petition the court of appeals for a writ of mandamus. Another option is for a party to defy a disclosure order and incur court-imposed sanctions that, e.g., direct that the matters embraced in the order or other designated facts be taken as established, prohibit the disobedient party from supporting or opposing designated claims or defenses, or strike pleadings in whole or in part. Alternatively, when the circumstances warrant, a district court may issue a contempt order against a noncomplying party, who can then appeal directly from that ruling, at least when the contempt citation can be characterized as a criminal punishment. These established appellate review mechanisms not only provide assurances to clients and counsel about the security of their confidential communications; they also go a long way toward addressing Mohawk's concern that, absent collateral order appeals of adverse attorney-client privilege rulings, some litigants may experience severe hardship. The limited benefits of applying the blunt, categorical instrument of § 1291 collateral order appeal to privilege-related disclosure orders simply cannot justify the likely institutional costs, including unduly delaying the resolution of district court litigation and needlessly burdening the courts of appeals,
(c) The admonition that the class of collaterally appealable orders must remain narrow and selective in its membership, has acquired special force in recent years with the enactment of legislation designating rulemaking, not expansion by court decision, as the preferred means for determining whether and when prejudgment orders should be immediately appealable. Any further avenue for immediate appeal of adverse attorney-client privilege rulings should be furnished, if at all, through rulemaking, with the opportunity for full airing it provides.

In Wilson v. O'Brien, 621 F.3d 641 (7th Cir. 2010), here, decided after Mohawk but before Krane, the Seventh Circuit ducked the continuing viability of the Perlman rule after Mohawk because the prior attorney subject to compulsory process had, on order of the court, testified to the allegedly privileged information. The Seventh Circuit first said:

Mohawk Industries calls Perlman and its successors into question, because, whether the order is directed against a litigant or a third party, an appeal from the final decision will allow review of the district court's ruling. Only when the person who asserts a privilege is a non-litigant will an appeal from the final decision be inadequate.

The Seventh Circuit then held that it need not decide the continued viability of Perlman because the witness had already testified. The court said:

The premise of an interlocutory appeal in a case such as Perlman or Burden-Meeks [Burden-Meeks v. Welch, 319 F.3d 897, 900-01 (7th Cir. 2003)] is that the holder of the information has yet to comply with the order. Interlocutory review permits a decision before the cat is out of the bag. By answering the questions at his deposition, Nims revealed to the defendants the privileged information. Wilson's appeal cannot achieve an order relieving Nims of the choice between disclosing and standing in contempt; Nims has disclosed already. The only remaining question is whether defendants may use information that they now possess. Mohawk Industries holds that the district court's resolution of that issue be reviewed on appeal from the final decision.

Krane, of course, involved a third party, Quellos, whose information had not yet been disclosed. The Ninth Circuit held that Perlman survives Mohawk at least for such a nonparty.

Of course, serious damage can be done from compulsion to testify or produce documents over the assertion of privilege by a party. But, as noted, the law has means to mitigate (at least somewhat) the damage that might occur from those compulsions if they ultimately prove to have been improvident. This issue is presented in civil cases (Mohawk and Wilson) as well as criminal cases (Krane).

As to mootness and the Government's plaint of need for sentencing, the Ninth Circuit said that the district court could indeed allow such a subpoena to issue (note above that the Government had not requested it) but that the district court should consider the relevant Nixon factors, inspired by United States v. Nixon, 418 U.S. 683, 699-700 (1974), citing United States v. Winner, 641 F.2d 825, 833 (10th Cir. 1981).