A Case Study on the “Crime-Fraud” Exception to the U.S. "Attorney-Client Privilege"

The protection of privilege in communications between clients and lawyers is very important under U.S. law. Its basic premise is that when a client seeks legal advice from a lawyer, the communication between the client and the lawyer is confidential and its disclosure cannot be demanded during litigation.

An important purpose of this system is to encourage clients to communicate fully and freely with lawyers in the process of seeking legal help. The "lawyers" here include both external lawyers and in-house lawyers.

However, such privilege protection is not absolute. For example, when a client seeks an attorney's legal services for criminal or fraudulent purposes, he or she is not entitled to privilege protection. This is the "crime-fraud exception" to the attorney-client privilege. The case described below involves the "fraud" exception.

In re: Abbott Laboratories, No. 23-2412 (3d Cir. 2024)

Abbott (the petitioner in this case) is the owner of a pharmaceutical patent. Perrigo and Teva are two pharmaceutical companies that sought Food and Drug Administration ("FDA") approval for two generic drugs respectively, claiming that the petitioner's patents were either invalid or did not cover the formulations of their generic drugs.

Abbott sued Perrigo and Teva for patent infringement on two generic drugs during the litigation window provided by the Hatch-Waxman Act, and subsequently reached settlement agreements with both. In Perrigo's case, Abbott paid $2 million to Perrigo in exchange for Perrigo delaying the launch date of its generic drugs; in Teva's case, Abbott agreed to grant a patent license to Teva at a future date.

Later, the Federal Trade Commission ("FTC") launched an antitrust lawsuit against Abbott, believing that it maintained an illegal monopoly position by initiating sham patent lawsuits against two potential competitors. The court of first instance held that Abbott's corporate legal affairs department had actual knowledge that the lawsuit was baseless and acted in bad faith.  The only purpose of launching the lawsuit was to impose on the competitor costs and delay. The Court of Appeal upheld the first instance judgment, holding that Abbott maliciously filed an objectively baseless lawsuit to injure potential competitors.

After the appeal judgment of the antitrust case was rendered, some other entities (the respondents) initiated a lawsuit against the petitioner which led to the case under discussion in this article, claiming that the petitioner violated the Sherman Act in delaying the launch of generic drugs by initiating patent infringement lawsuits including the Perrigo case, which constitutes abuse of monopoly.

After the evidence discovery process in this case was initiated, the respondents asked the court to order the petitioner to provide a number of documents that could reveal the views of its legal counsel in the Perrigo case about the baselessness of the lawsuits. The petitioner contended that the documents requested were protected by attorney-client privilege. The respondent argued that, given that the court has determined that the Perrigo lawsuit was a sham, any communication from the petitioner's attorney regarding whether to file such a lawsuit was for the purpose of fraud, and was thereby subject to the crime-fraud exception to the attorney-client privilege.

The court ultimately ordered the petitioner to provide some of the requested documents, holding that it could be reasonably inferred that the petitioner's legal counsel knew that a sham lawsuit would be filed and used the relevant documents in support of the fraudulent purpose, thus rendering these documents unprotected by the attorney-client privilege.

The petitioner petitioned the Third Circuit Court for a writ of mandamus to vacate the District Court's order. The Third Circuit Court held that the requirements for grant of a mandamus order were not met and rejected the petitioner's request. 

Comments:

Firstly, although the District Court determined that a sham lawsuit could be a “fraud” within the meaning of the “crime-fraud” exception to the attorney - client privilege, as the Third Circuit Court noted, the Third Circuit Court did not have a binding authority for that. In the absence of a binding legal basis, the Third Circuit Court held that the District Court’s conclusion that a sham litigation could trigger the “crime-fraud” exception was not a “clear and undisputed abuse of discretion or error of law”.

Secondly, different circuit courts in the United States may have different standards for determining what constitutes “fraud”. For example, the petitioner in this case claimed that when the Federal Circuit Court of Appeals examined this issue in patent cases, it concluded that if the actor did not make a misrepresentation of fact or the other party did not rely on the misrepresentation, there would be no fraud exception to the privilege protection. However, the Third Circuit Court considered that the Federal Circuit Court of Appeal had no jurisdiction over this case, and found that there was no clear error by the District Court in applying the Third Circuit law and in determining there was no “reliance requirement” in fraud exception.

Thirdly, as the Third Circuit Court mentioned, sham litigation needs to be distinguished from frivolous litigation under Rule 11 of the Federal Rules of Civil Procedure. Frivolous litigation may trigger sanctions but does not necessarily constitute an exception to the attorney-client privilege. In this case, the "crime-fraud exception" was triggered because of the objectively baseless litigation launched by the petitioner, combined with its subjective intention to use its patent rights to interfere with relevant administrative and judicial procedures.

Finally, this case is a reminder for both companies and lawyers (including external lawyers and corporate legal counsel): whether it is taking advantage of the litigation opportunity provided by the generic drug marketing approval process as shown in this case, or at other litigation opportunities that are considered "favorable", initiating litigation without an objective basis and using litigation procedures as an unfair competition tool to interfere with a competitor's business may be considered a sham lawsuit. In this case, the party’s sham lawsuit not only led to its loss of the antitrust lawsuit initiated by the FTC, but also subsequently triggered the antitrust civil lawsuit initiated by the respondent in the present case. As illustrated in this case, it may also put the perpetrator at risk of losing the critically important attorney-client privilege protection in a litigation process.