Mhp Records, Inc. v.  3065 -- 1 of 35 --  BERTELSMANN AG; BERTELSMANN, INC.; BEMUSIC, INC.

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
 In re: NAPSTER, INC. COPYRIGHT
LITIGATION,
UMG RECORDING, INC.; INTERSCOPE
RECORDS; MOTOWN RECORD
COMPANY, L.P.; JERRY LEIBER;
MIKE STOLLER, individually and
dba as Mike Stoller Music; FRANK
MUSIC CORPORATION; PEER
INTERNATIONAL CORPORATION, on No. 06-15886
behalf of themselves & all others D.C. Nos.
similarly situated; CAPITOL CV-00-01369-MHP
RECORDS, INC.; CAROLINE RECORDS,  CV-04-01166-MHP
INC.; NOO TRYBE RECORDS, INC.; CV-04-01671-MHP
VIRGIN RECORDS AMERICA, INC.; CV-04-01351-MHP
NARADA PRODUCTIONS, INC.; HIGHER CV-04-02121-MHP
OCTAVE MUSIC, INC.; PRIORITY
RECORDS LLC; FOREFRONT
COMMUNICATIONS GROUP, INC.;
JUBILEE COMMUNICATIONS, INC.;
EMI CHRISTIAN MUSIC GROUP, INC.;
BRIDGEPORT MUSIC, INC.;
SOUTHFIELD MUSIC, INC.;
WESTBOUND RECORDS, INC.,
Plaintiffs-Appellees,
v. 
3065

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 BERTELSMANN AG; BERTELSMANN,
INC.; BEMUSIC, INC.,
Defendants-Appellants,
and
HUMMER WINBLAD VENTURE
PARTNERS; HUMMER WINBLAD 
VENTURE PARTNERS IV, LP;
HUMMER WINBLAD TECHNOLOGY
FUND IV, LP; HUMMER WINBLAD
EQUITY PARTNERS IV, LLC; HANK
BARRY; JOHN HUMMER,
Defendants. 
 In re: BERTELSMANN, INC.; In re:
BEMUSIC, INC.; In re: BERTELSMANN
AG, No. 06-72515
D.C. Nos.
BERTELSMANN AG; BERTELSMANN, CV-00-01369-MHP
INC.; BEMUSIC, INC., CV-04-01166-MHP
Petitioners, CV-04-01671-MHP
CV-04-01351-MHPv. CV-04-02121-MHP
UNITED STATES DISTRICT OPINIONCOURT FOR THE NORTHERN
DISTRICT OF CALIFORNIA,
Respondent, 
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 CAPITOL RECORDS, INC.; CAROLINE
RECORDS, INC.; NOO TRYBE
RECORDS, INC.; VIRGIN RECORDS
AMERICA, INC.; NARADA
PRODUCTIONS, INC.; HIGHER OCTAVE
MUSIC, INC.; PRIORITY RECORDS
LLC; FOREFRONT COMMUNICATIONS
GROUP, INC.; JUBILEE
COMMUNICATIONS, INC.; EMI
CHRISTIAN MUSIC GROUP, INC.; 
UMG RECORDINGS INC.; INTERSCOPE
RECORDS; MOTOWN RECORD
COMPANY; JERRY LEIBER,
individually and dba Jerry Leiber
Music; MIKE STOLLER, individually
and dba as Mike Stoller Music;
FRANK MUSIC CORPORATION; PEER
INTERNATIONAL CORPORATION,
Real Parties in Interest. 
Appeal from the United States District Court
for the Northern District of California
Marilyn H. Patel, District Judge, Presiding
Argued and Submitted
September 13, 2006—San Francisco, California
Filed March 14, 2007
Before: Ferdinand F. Fernandez, William A. Fletcher, and
Johnnie B. Rawlinson, Circuit Judges.
Opinion by Judge William A. Fletcher
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COUNSEL
R. Bruce Rich, Kenneth L. Steinthal, Weil Gotshal & Manges,
New York, New York; Matthew D. Powers, Gayle E. Rosen-
stein, Weil Gotshal & Manges, Redwood Shores, California,
Weil Gotshal & Manges, Austin, Texas; John W. Keker,
Michael H. Page, Keker & Van Nest, San Francisco, Califor-
nia, for the appellants.
Daniel P. Collins, Glenn Douglas Pomerantz, Kelly M. Klaus,
Munger Tolles & Olson, Los Angeles, California; Carey
Ramos, Lynn B. Bayard, Paul Weiss Rifkind Wharton & Gar-
rison, New York, New York; Peter L. Simmons, Mitchell E.
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Epner, Fried Frank Harris Shriver Jacobsen, New York, New
York; Paul H. Duvall, Richard Steven Busch, King & Ballow,
La Jolla, California, for the appellees.
OPINION
W. FLETCHER, Circuit Judge:
In this appeal, we must decide whether the district court
properly ordered the disclosure of privileged attorney-client
communications under the crime-fraud exception. We hold
that in a civil case the district court must allow both the party
seeking discovery of the communications and the party assert-
ing the privilege to present evidence relevant to the privilege
and the exception, and must weigh that evidence before order-
ing outright disclosure. We further hold that in a civil case,
when the district court is asked to order outright disclosure,
the burden of proof on the party seeking to vitiate the privi-
lege is preponderance of the evidence. We conclude the
appellees in this case have failed to make the requisite eviden-
tiary showing to support a finding that the crime-fraud excep-
tion applies. We reverse and remand for further proceedings
consistent with this opinion.
I. Background
This appeal arises out of litigation over alleged copyright
infringement by various parties who funded Napster, the now-
defunct online file-sharing service. In December 1999 and
January 2000, plaintiffs Jerry Leiber et al. and Capitol
Records et al., as well as other music industry players, sued
Napster for copyright infringement. Leiber et al. and Capitol
Records et al. (collectively “appellees”) are now appellees in
this court.
Appellees alleged that Napster’s service enabled the unau-
thorized reproduction and distribution of copyrighted digital
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music files. See A&M Records, Inc. v. Napster, Inc., 114 F.
Supp. 2d 896 (N.D. Cal. 2000), aff’d in part, rev’d in part,
239 F.3d 1004 (9th Cir. 2001) (as amended). In July 2000, the
district court entered a preliminary injunction requiring Nap-
ster to search for, and remove from its service, files that rights
holders had identified as infringing. A&M Records, Inc., 239
F.3d at 1011. We stayed the preliminary injunction two days
later, but substantially affirmed in February 2001. Id. at 1029.
Napster’s service was shut down in July 2001 after Napster
failed to comply with the terms of a modified preliminary
injunction. See A& M Records, Inc. v. Napster, Inc., No. C
99-05183, 2001 WL 227083 (N.D. Cal. Mar. 5, 2001), aff’d,
284 F.3d 1091 (9th Cir. 2002). Napster filed for bankruptcy
in June 2002, and its ultimate liability for copyright infringe-
ment was never adjudicated.
Appellant Bertelsmann AG is a German media conglomer-
ate. Between October 2000 and October 2001, Bertelsmann
loaned Napster a total of about $85 million to fund its antici-
pated transition to a licensed digital music distribution sys-
tem. However, Napster failed fully to launch the new licensed
system before declaring bankruptcy. Bertelsmann did not
obtain Napster’s assets in the bankruptcy proceedings.
In April 2003, appellees and others separately filed suit
against Bertelsmann in federal court in the Southern District
of New York, claiming that Bertelsmann was vicariously and
contributorily liable for copyright infringement by Napster
and/or Napster’s users. Appellees charged that by lending
Napster millions of dollars Bertelsmann assumed control over
Napster’s file-sharing service, or prolonged its allegedly
infringing operations, in order to avoid dispersion of Nap-
ster’s estimated 40 million users before the anticipated new
licensed digital music distribution system was functional. The
Judicial Panel on Multidistrict Litigation subsequently trans-
ferred appellees’ suits against Bertelsmann to the Northern
District of California, where the In re Napster, Inc. Copyright
Litigation was pending.
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In July 2003, Bertelsmann moved to dismiss appellees’
suits for failure to state a claim under Federal Rule of Civil
Procedure 12(b)(6). UMG Recordings, Inc. v. Bertelsmann
AG, 222 F.R.D. 408, 410 (N.D. Cal. 2004). Bertelsmann
argued as a matter of law that merely lending money to an
alleged copyright infringer cannot give rise to liability under
either a vicarious or contributory copyright infringement the-
ory. Id. at 412. Bertelsmann further argued that its loan did
not give it the ability to control Napster.
The district court denied Bertelsmann’s motion to dismiss,
holding that appellees had stated a claim by alleging Bertels-
mann’s control of Napster’s operations. It explained that
[Bertelsmann and co-defendants’] motions to dis-
miss are premised on the theory that plaintiffs have
accused them only of what might be considered “aid-
ing and abetting” Napster’s copyright violations,
viz., providing Napster with additional funding that
allowed it to continue operating. According to defen-
dants, plaintiffs thus state claims for what this court
has termed “tertiary infringement” — vicarious or
contributory assistance to a vicarious or contributory
infringer, here Napster — and towards which this
court has previously expressed disfavor. . . . Defen-
dants have not properly characterized plaintiffs’
complaints. Rather than alleging that defendants
merely supplied Napster with necessary funding
(serving as a “but for” cause of Napster’s subsequent
activities) . . . plaintiffs have specifically accused
defendants of assuming control over Napster’s oper-
ations and directing the infringing activities that
gave rise to the original Napster litigation. . . . Capi-
tol Records’ complaint alleges essentially identical
facts [as other plaintiffs’]: “At least as early as Sep-
tember 2000, Bertelsmann began preparing to oper-
ate the Napster system, and by at least as early as
October 2000, the Napster system was firmly under
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the control of Bertelsmann. Bertelsmann continued
to operate the Napster system and to allow its users
to copy millions of protected recordings . . . .”
Id. at 412-13 (internal citations omitted). The district court
declined to “pass upon the question of whether mere financial
support of a contributing and vicarious infringer . . . without
more direct involvement” could give rise to liability. Id. at
414.
Pretrial discovery continued after the district court denied
Bertelsmann’s motion to dismiss. On November 8, 2005,
appellees moved to compel Bertelsmann to produce all
attorney-client communications related to a $50 million loan,
convertible to equity, that Bertelsmann made to Napster on
October 30, 2000 while Napster was appealing the initial pre-
liminary injunction. Appellees contended that beginning in
September 2000, when drafting of the loan documents began,
Bertelsmann had engaged in a continuing scheme to defraud
the courts. They argued that the crime-fraud exception to the
attorney-client privilege applied to these communications,
relying on two theories of fraud under California Civil Code
§§ 1709-10 (“Fraudulent Deceit”) (2006).
First, appellees contended that Bertelsmann’s loan to Nap-
ster was not in fact a loan, but was, rather, cash tendered in
exchange for an equity stake in the company. According to
appellees, Bertelsmann used its lawyers to create sham loan
documents that were designed to disguise what was, in fact,
a purchase of control of Napster. Appellees alleged that Ber-
telsmann, anticipating future copyright infringement litiga-
tion, intended to use the sham loan documents to deceive the
courts into concluding that it was not an equity owner and
therefore was not liable for the actions of Napster.
In support of this “sham loan” theory of fraud, appellees
pointed to several pieces of circumstantial evidence. They
cited internal Bertelsmann documents showing that the com-
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pany’s executives and outside counsel sought to structure the
transaction in such a way as to avoid copyright liability. In
one email, counsel for Bertelsmann stated that the “loan has
to look like a loan, otherwise it will be characterized as equity
and [Bertelsmann] may have liability for copyright infringe-
ment in the minds of some lawyers.” Appellees also pointed
to the fact that, by its express terms, the $50 million loan was
convertible to equity in Napster in lieu of repayment once the
licensed digital music distribution system was ultimately
launched. Finally, appellees showed that Bertelsmann used
the loan documents in litigation on three occasions to prove
it did not control Napster. First, Bertelsmann relied on the
loan documents to claim secured creditor status in the Napster
bankruptcy proceeding. Second, Bertelsmann cited the loan
documents in its July 2003 motion to dismiss to demonstrate
that it merely invested in the development of the new licensed
digital music distribution system, and did not control Nap-
ster’s existing operations. Third, Bertelsmann used the loan
documents in a 2005 discovery dispute to show that its inter-
ests were not adverse to those of its subsidiary BMG, which
was suing Napster at the time the loan was made.
Under their second fraud theory, appellees contended that
Bertelsmann, through its lawyers, attempted to defraud the
courts by omitting from the loan documents a side agreement
that allowed Napster to channel some of the $50 million into
Napster’s litigation expenses. Appellees argued that Bertels-
mann would benefit if continuing litigation allowed Napster’s
existing service to stay operational until the anticipated new
system was in place, thereby avoiding dispersion of the cus-
tomer base. Appellees contended that Bertelsmann believed
that lending funds to Napster for use as litigation expenses
might expose Bertelsmann to vicarious and contributory
copyright infringement liability. Thus, according to appellees,
Bertelsmann doctored the loan documents to hide the side
agreement from the courts.
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Appellees pointed to three pieces of direct evidence sup-
porting this second theory of fraud. First, they pointed to an
October 25, 2000 email sent by Napster CEO Hank Barry to
Napster’s counsel at the law firms of Boies, Schiller & Flex-
ner LLP and Wilson Sonsini Goodrich & Rosati (“Wilson
Sonsini”). In the email, Barry described an October 24 meet-
ing at which he and Napster director John Hummer discussed
the terms of the $50 million loan with four Bertelsmann repre-
sentatives: Thomas Middelhoff, Bertelsmann’s CEO; Andreas
Schmidt, head of Bertelsmann’s eCommerce Group; Oliver
Schusser, Schmidt’s assistant; and Aydin Caginalp, Bertels-
mann’s outside counsel. Barry’s email stated that two “[s]ide
deals . . . will not be in the papers. These are the subjects of
handshakes between Thomas and me, witnessed yesterday by
Hummer, Andreas, Aydin Caginalp and Andreas’ assistant
Oliver.” According to Barry’s email, one of the side deals
allowed Napster to use loan proceeds for litigation expenses:
“[T]he papers will say that the $50M is to be used for devel-
opment and overhead and g and a [general and administrative
expenses] related to that. We have an agreement that up to
$10M may be used for litigation expenses.”1
Second, appellees pointed to a memorandum written on
October 27, 2000 by Carol Timm, a Wilson Sonsini associate,
in which Timm described a phone conversation in which she
and Barry had “discussed the terms of the use of the [loan]
proceeds.” According to the memorandum, Barry told Timm
the Memorandum of Terms of the loan would provide that
“ ‘[t]he loan proceeds will be used to fund the development
of the business model outlined above as well as general,
administrative and overhead expenses associated with such
development.’ ” Further, Barry “informed” Timm that
“[a]lthough not expressed in the Memorandum of Terms or
the transaction documents, . . . the parties had verbally agreed
that Napster could use up to 20% of the proceeds [i.e., $10
million] toward litigation expenses.” According to Barry,
1The other side agreement is not at issue in this appeal.
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“[t]his agreement and the handshake” was between Andreas
Schmidt and him, and was witnessed by John Hummer, Aydin
Caginalp, and Oliver Schusser.
Third, appellees pointed to Barry’s September 28, 2005
deposition testimony in which he described the October 24,
2000 meeting:
[T]he discussion at the Morgan Hotel went on for a
long time. There came a time in the discussion when
I said that I consider overhead and GNA [general
and administrative expenses] to include litigation
expenses.
Mr. Schmidt said, it’s my recollection, Mr.
Schmidt said, “Well, let’s have it in a side letter.”
Aydin Caginalp said, “No, we’re not having any
side letters. The agreement is what it is.”
And I said, “Okay. I just want everyone to under-
stand that, that I believe that GNA and overhead
includes litigation expenses.” And literally, that was
the, that was the entire conversation. It went on for
two minutes.
At the end of the meeting, I said to Mr. Middel-
hoff, “I will endeavor to keep the litigation expenses
under $10 million. I just want you to know that.”
And that was maybe, that was a period of time after
we had had the discussion about whether GNA and
overhead included litigations [sic] expenses.
Q. Did anyone at that meeting express the view to
you that your understanding regarding litigation
expenses was inconsistent with their understanding?
A. No.
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In addition to these three pieces of direct evidence, appel-
lees relied on the circumstantial evidence that Bertelsmann
changed the loan terms between September 7, 2000, when an
initial Memorandum of Terms was drafted, and October 30,
2000, when the final loan documents were signed. The Sep-
tember 7 memorandum stated that “[t]he loan proceeds will
be used for general working capital purposes, primarily to
fund the development of the subscription service as outlined
above. . . . Up to $5M of the proceeds may be used for litiga-
tion expenses, but none for settlement purposes.” An amended
October 25 version provided that “[t]he loan proceeds will be
used to fund the development of the service as outlined above
as well as general, administrative and overhead associated
with such development.” The final version — a Secured
Promissory Note, dated October 30 — stated that “[t]he pro-
ceeds of this Note shall be used solely to fund the develop-
ment of a new model for Company’s service as outlined in the
Umbrella Agreement and overhead costs associated with such
development.”
Appellees also pointed to what they contended were lax
auditing procedures required by the loan documents. They
showed through deposition testimony that Napster had in fact
used a portion of the $50 million loan proceeds for litigation
expenses, and that, when it learned of this use, Bertelsmann
failed to take any action to prevent it. Finally, appellees again
pointed to Bertelsmann’s use of the loan documents in the
bankruptcy proceeding and in the present litigation.
In its opposition, Bertelsmann argued that evidence that it
structured a corporate transaction to limit its liability did not
prove either that the loan documents were a sham or that they
were intended to defraud the courts. Bertelsmann further con-
tended that no secret side agreement about litigation expenses
existed. It pointed to depositions of meeting attendees Aydin
Caginalp, Thomas Middelhoff, Oliver Schusser, and John
Hummer. All four attendees stated that they did not recall par-
ticipating in a handshake agreement, though Hummer testified
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that Barry told him several days after the meeting that he
understood Napster could use some of the loan proceeds for
litigation expenses. Bertelsmann also pointed to a file memo-
randum prepared on October 25, 2000 by Caginalp that
referred to one side deal referenced in Barry’s October 25,
2000 email but that did not mention litigation expenses. Cagi-
nalp wrote that Barry did not want this side deal spelled out
in the agreement because “[h]e wanted to avoid adverse pub-
licity at the time the new service is announced.”
Bertelsmann also pointed to statements of Bertelsmann
executives Siegfried Luther, Erik Peper, and Michael Dorne-
mann, who did not attend the meeting, but testified in their
depositions that they did not learn of any side agreement
about litigation expenses afterward. In addition, Bertelsmann
cited the deposition testimony of Steven Bochner, a partner at
Wilson Sonsini who was Napster’s lead counsel on the deal
and Timm’s supervisor, in which Bochner denied any aware-
ness of a side agreement. Bertelsmann argued, further, that in
his deposition Barry backed away from his earlier email
account of a handshake agreement about litigation expenses.
Bertelsmann contended that changes in the language of the
loan documents resulted from the course of negotiations, as
each party tried to obtain terms favorable to its respective
interests. Bertelsmann pointed to Timm’s deposition, in which
she testified that Napster was “trying to find language that
would give [it] some flexibility or wiggle room, in terms of
its ultimate use of the loan proceeds.” Bertelsmann argued
that its own executives were attempting to negotiate the loan
“to accommodate” the concerns of its subsidiary BMG, which
was suing Napster, and to “stay true to Bertelsmann’s core
purpose in making the loan,” that is, development of a
licensed music distribution system. Any discrepancy between
the parties’ interpretation of general loan terms like “overhead
costs,” Bertelsmann argued, amounted at most to evidence of
a contract dispute, not of a cover-up intended to defraud the
courts. Finally, Bertelsmann maintained that even if it had
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agreed to fund Napster’s litigation expenses, this was not
grounds for copyright infringement liability, and that Bertels-
mann executives and lawyers would not have viewed it as
such in 2000, when the loan was made. Therefore, Bertels-
mann argued, appellees failed to prove either the materiality
or intent elements of fraud on the court.
On April 20, 2006, the district court issued an order com-
pelling Bertelsmann to disclose all attorney-client communi-
cations “related to the creation of the loan document and to
the submission of that loan document in the bankruptcy pro-
ceedings and to this court.” The district court held that appel-
lees had made the “prima facie case” showing of the crime-
fraud exception that is required in this circuit, characterizing
this requirement as “quite lenient.” The district court further
concluded that, in determining whether the crime-fraud
exception applied, it “need only consider the evidence offered
by the moving party,” and that it need not “consider conflict-
ing evidence offered by the party seeking to uphold the privi-
lege.”
The district court specifically credited three pieces of direct
evidence: Barry’s October 25, 2000 email; Timm’s October
27, 2000 memorandum; and Barry’s September 28, 2005
deposition testimony. It also noted appellees’ circumstantial
evidence of Bertelsmann’s interest in keeping Napster afloat,
and of Bertelsmann’s knowledge of Napster’s use of loan pro-
ceeds for litigation expenses. According to the district court,
this evidence established that “Bertelsmann executives and
Bertelsmann’s outside counsel . . . cooperated in documenting
the investment in Napster in a manner contrary to the parties’
actual understanding,” and then “submitted the loan docu-
ment, through its lawyers, both in the bankruptcy litigation
and in the litigation before this court.”
The district court stated that it would reach the same result
even if it considered Bertelsmann’s countervailing evidence.
First, it noted that although Napster’s activities had not yet
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been held illegal on appeal when it was structuring the alleged
loan, Bertelsmann did not have “no reason to be concerned
about its liability.” Because Bertelsmann submitted the loan
note as evidence in the district court proceedings, and because
the district court might have “somehow concluded based on
the loan document that, as a matter of law, Bertelsmann had
no financial stake in Napster[ ],” the district court concluded
the “secret agreement” was material to the litigation. Finally,
the district court accorded “some weight” to the deposition
testimony of the two Wilson Sonsini attorneys, of Napster
director Hummer, and of the Bertelsmann executives. But it
found that the executives’ corroboration of Bertelsmann’s
position was “unsurprising,” and it held that the whole of Ber-
telsmann’s countervailing evidence was insufficient to rebut
appellees’ showing.
Bertelsmann timely appeals from the district court’s order
(No. 06-15886), and, in the alternative, petitions for a writ of
mandamus (No. 06-72515).
II. Appellate Jurisdiction
[1] Under 28 U.S.C. § 1291, courts of appeals have juris-
diction over all “final” district court decisions. However, we
also have jurisdiction under § 1291 over a “narrow class of
decisions that do not terminate the litigation, but must, in the
interest of achieving a healthy legal system, nonetheless be
treated as final.” Digital Equip. Corp. v. Desktop Direct, Inc.,
511 U.S. 863, 867 (1994) (internal quotation marks and cita-
tion omitted). In order to be reviewable under the “collateral
order doctrine,” a decision must “[1] conclusively determine
the disputed question, [2] resolve an important issue com-
pletely separate from the merits of the action, and [3] be
effectively unreviewable on appeal from a final judgment.”
Coopers & Lybrand v. Livesay, 437 U.S. 463, 468 (1978)
(bracketed numbers added).
The first and third prongs of the collateral order test, as
articulated in Coopers & Lybrand, are easily satisfied in this
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case. We have repeatedly held that where, as here, a district
court holds, following full development of the issues by the
parties, that a privilege has been vitiated, its order constitutes
a conclusive determination. See United States v. Griffin, 440
F.3d 1138, 1141 (9th Cir. 2006) (holding order vitiating mari-
tal privilege is conclusive); Agster v. Maricopa County, 422
F.3d 836, 838 (9th Cir. 2005) (same, peer review privilege);
United States v. Austin, 416 F.3d 1016, 1020 (9th Cir. 2005)
(same, joint defense privilege); see also Bittaker v. Woodford,
331 F.3d 715, 718 (9th Cir. 2003) (en banc) (reviewing scope
of protective order concerning attorney-client communica-
tions in ineffective assistance of counsel habeas petition). We
have also recognized that once privileged materials are
ordered disclosed, the practical effect of the order is often “ir-
reparable by any subsequent appeal.” Griffin, 440 F.3d at
1142 (internal quotation marks omitted). This case is one of
those in which “[o]nce ‘[t]he cat is already out of the bag,’ it
may not be possible to get back in.” Agster, 422 F.3d at 838
(quoting Bittaker, 331 F.3d at 718) (first brackets added).
Therefore, we hold that the district court’s order requiring
Bertelsmann to produce attorney-client communications rep-
resents a conclusive determination that is effectively unre-
viewable on appeal from final judgment.
[2] The only debatable issue is whether the second prong
has been satisfied. The Capitol Records appellees concede
that it has been. The Leiber appellees, however, disagree.
They contend that the attorney-client privilege issue now on
appeal is not sufficiently separate from the issues to be
resolved in the underlying lawsuit against Bertelsmann. In
support of this contention, the Leiber appellees point out that
the application of the crime-fraud exception to the attorney-
client privilege depends upon the characterization of Bertels-
mann’s “loan” to Napster, that the outcome of the underlying
suit may depend on this characterization, and that the content
of the attorney-client communications may be relevant to the
characterization question. Despite the concession of the Capi-
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tol Records appellees that the second prong has been satisfied,
we regard it as a somewhat close question.
[3] The Coopers & Lybrand articulation of the collateral
order doctrine is a gloss on the doctrine as originally articu-
lated in Cohen v. Beneficial Industrial Loan Corp., 337 U.S.
541 (1949). The Court wrote in Cohen, “This decision
appears to fall in that small class which finally determine
claims of right separable from, and collateral to, rights
asserted in the action, too important to be denied review and
too independent of the cause itself to require that appellate
consideration be deferred until the whole case is adjudicat-
ed.” Id. at 546 (emphasis added). Where an interlocutory
appeal concerns the protection of the attorney-client privilege,
we have held that the second prong of the Coopers & Lybrand
test is satisfied even where there is some potential overlap
between questions in the interlocutory appeal and those
involved in the underlying suit. That is, we have held in such
cases that the second prong is satisfied because, in the words
of Cohen, the “claim of right” is “too important to be denied
review and too independent of the cause itself” to require that
we wait until the underlying dispute is fully resolved.
For example, in Bittaker v. Woodford the underlying suit
was a federal habeas petition brought by a prisoner under sen-
tence of death. The prisoner sought to use attorney-client
communications to show ineffective assistance of trial coun-
sel, but he was afraid that if his habeas petition was successful
the State would use these same attorney-client communica-
tions against him on retrial. Bittaker, 331 F.3d at 716. The
federal district court entered a protective order prohibiting the
State from using the attorney-client communications for any
purpose other than the pending habeas litigation. Id. at 717.
The State brought an interlocutory appeal, contending that by
introducing his attorney-client communications in the district
court the federal habeas petitioner had waived the attorney-
client privilege for all purposes, including his possible crimi-
nal retrial. Id. We held that the second prong of Coopers &
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Lybrand had been satisfied even though the content of the
attorney-client communications was directly relevant to the
underlying habeas proceeding and might well be relevant (if
admissible) on retrial. Id. at 717-18; see also Osband v.
Woodford, 290 F.3d 1036, 1040 (9th Cir. 2002) (allowing
interlocutory appeal of district court protective order: “The
many federal habeas petitioners who each year raise claims of
ineffective assistance of counsel (and the concomitant issue of
waiver of privilege) need to know the implications of making
such claims, as does the petitioner in this case.”).
[4] The issue in this interlocutory appeal is whether Bertel-
smann’s attorney-client privilege may be vitiated because
Bertelsmann used, or intended to use, its counsel to commit
a fraud on the courts. The issue in the underlying case is
whether Bertelsmann is liable for copyright infringement by
Napster and/or Napster’s users. See Griffin, 440 F.3d at 1142.
We conclude that the attorney-client privilege issue presented
in this interlocutory appeal is “completely separate from the
merits of the action” in the sense intended in Coopers &
Lybrand. 437 U.S. at 468. That is, the issue is “too important
to be denied review and too independent of the cause itself to
require that appellate consideration be deferred until the
whole case is adjudicated.” Cohen, 337 U.S. at 546.
[5] Because all three prongs of the collateral order test are
satisfied, we hold that we have jurisdiction over Bertels-
mann’s interlocutory appeal from the district court’s final pro-
duction order. Because we have jurisdiction over
Bertelsmann’s appeal, we need not reach the questions pres-
ented by its petition for a writ of mandamus.
III. Standard of Review
Several of our sister circuits review district court orders
vitiating attorney-client privilege under the crime-fraud
exception for abuse of discretion rather than de novo. See
United States v. Laurins, 857 F.2d 529, 541 (9th Cir. 1988);
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see also In re Grand Jury Proceedings, 87 F.3d 377, 380 (9th
Cir. 1996). However, we have held that “rulings on the scope
of the privilege,” including the crime-fraud exception, “in-
volve mixed questions of law and fact and are reviewable de
novo, unless the scope of the privilege is clear and the deci-
sion made by the district court is essentially factual; in that
case only clear error justifies reversal.” Laurins, 857 F.2d at
541 (citing United States v. Zolin, 809 F.2d 1411, 1417 (9th
Cir. 1987), vacated in part on other grounds, 842 F.2d 1135
(9th Cir. 1988)); see also In re Grand Jury Subpoena 92-
1(SJ), 31 F.3d 826, 829 (9th Cir. 1994) (stating that in the
crime-fraud context “[w]e review de novo ‘whether an evi-
dentiary showing is sufficient . . . .’ ”) (quoting In re Grand
Jury Investigation, 974 F.2d 1068, 1071 (9th Cir. 1992)).
IV. The Crime-Fraud Exception
The attorney-client privilege is the oldest and arguably
most fundamental of the common law privileges recognized
under Federal Rule of Evidence 501. See United States v.
Zolin, 491 U.S. 554, 562 (1989). The assurance of confidenti-
ality promotes open attorney-client communications, which
are “central to the legal system and the adversary process.”
United States v. Hodge & Zweig, 548 F.2d 1347, 1355 (9th
Cir. 1977); see also Zolin, 491 U.S. at 562. The attorney-
client privilege protects fundamental liberty interests by
allowing individuals to seek the legal advice they need “to
guide them through [the] thickets” of complex laws. United
States v. Chen, 99 F.3d 1495, 1499 (9th Cir. 1996).
[6] Notwithstanding its importance, the attorney-client
privilege is not absolute. The “crime-fraud exception” to the
privilege protects against abuse of the attorney-client relation-
ship. Hodge & Zweig, 548 F.2d at 1355. As the Supreme
Court wrote in Clark v. United States, 289 U.S. 1 (1933),
“The privilege takes flight if the relation is abused. A client
who consults an attorney for advice that will serve him in the
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commission of a fraud will have no help from the law. He
must let the truth be told.” Id. at 15.
[7] A party seeking to vitiate the attorney-client privilege
under the crime-fraud exception must satisfy a two-part test.
First, the party must show that “the client was engaged in or
planning a criminal or fraudulent scheme when it sought the
advice of counsel to further the scheme.” In re Grand Jury
Proceedings, 87 F.3d at 381 (internal quotation marks omit-
ted). Second, it must demonstrate that the attorney-client com-
munications for which production is sought are “sufficiently
related to” and were made “in furtherance of [the] intended,
or present, continuing illegality.” Id. at 382-83 (internal quo-
tation marks omitted) (emphasis added); see also In re Rich-
ard Roe, Inc., 68 F.3d 38, 40 (2d Cir. 1995).
The attorney need not have been aware that the client har-
bored an improper purpose. Because both the legal advice and
the privilege are for the benefit of the client, it is the client’s
knowledge and intent that are relevant. In re Grand Jury Pro-
ceedings, 87 F.3d at 381-82; see also Chen, 99 F.3d at 1504.
The planned crime or fraud need not have succeeded for the
exception to apply. The client’s abuse of the attorney-client
relationship, not his or her successful criminal or fraudulent
act, vitiates the privilege. In re Grand Jury Proceedings, 87
F.3d at 382.
In determining the proper procedures for deciding whether
the crime-fraud exception applies, we bear in mind the impor-
tance of the attorney-client privilege and the potentially irrep-
arable consequences of disclosure. See Bittaker, 331 F.3d at
718 (stating that invalid disclosure may create “serious preju-
dice” even at retrial). At the same time, however, we bear in
mind that the party challenging the privilege may lack suffi-
cient evidence to prove crime or fraud to a liability standard,
particularly given the fact that the best evidence is likely to
be in the hands of the party invoking the privilege. See Zolin,
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491 U.S. at 569 (discussing challenges of proving crime-
fraud).
Despite the fundamental importance and long history of the
attorney-client privilege and the crime-fraud exception, the
procedures for preserving the privilege against a crime-fraud
challenge are surprisingly unclear. In United States v. Zolin,
decided eighteen years ago, the Court explained the proper
course for a district court addressing a crime-fraud challenge
in deciding whether to review attorney-client communications
in camera and whether, after in camera review, to order that
the communications be disclosed. The Court in Zolin recog-
nized that even after its explanation, important questions were
left unanswered.
Among them were, first, what procedures are to be fol-
lowed when an order to compel outright disclosure rather than
in camera review is at stake? Second, what is the burden of
proof on the party seeking to compel outright disclosure under
the crime-fraud exception? As to the second question, the
Court wrote in Zolin, with some understatement:
We note . . . that this Court’s use in Clark v. United
States, [289 U.S. 1, 14 (1933),] . . . of the phrase
“prima facie case” to describe the showing needed to
defeat the privilege has caused some confusion. In
using the phrase in Clark, the Court was aware of
scholarly controversy concerning the role of the
judge in the decision of such preliminary questions
of fact. The quantum of proof needed to establish
admissibility was then, and remains, subject to ques-
tion. In light of the narrow question presented here
for review, this case is not the proper occasion to
visit these questions.
491 U.S. at 563 n.7 (internal citations omitted). Despite con-
tinuing confusion in the lower courts, the Court has not revis-
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ited the crime-fraud exception to the attorney-client privilege
since Zolin.
The district court tried conscientiously to follow applicable
precedent, both of the Supreme Court and of this court. Given
the lack of clarity of that precedent, we intend no criticism of
the district court when we say that we disagree with its under-
standing of the applicable law. The two questions relevant to
this appeal are subsets of the questions, noted above, that
were left unanswered by Zolin. First, in a civil case, should
the district court consider not only the evidence adduced by
the party seeking to vitiate the attorney-client privilege by
invoking the crime-fraud exception, but also the evidence
adduced by the party seeking to preserve the privilege? Sec-
ond, in a civil case, what is the burden of proof for the party
seeking to establish the crime-fraud exception? We address
these questions in turn.
A. Consideration of Evidence
We begin our analysis with Zolin, in which the Internal
Revenue Service sought to vitiate the attorney-client privilege
under the crime-fraud exception. The question in Zolin was
whether a party seeking to establish that the crime-fraud
exception applies must rely entirely on sources independent of
the disputed attorney-client communications, or whether a
district court “may ever honor” a request that it conduct in
camera review of some of the communications to assist in the
determination that the privilege has been vitiated. 491 U.S. at
560-61, 565 (emphasis in original). The Court first looked to
Federal Rule of Evidence 104(a), which provides that
“ ‘[p]reliminary questions concerning . . . the existence of a
privilege . . . shall be determined by the court . . . . In making
its determination it is not bound by the rules of evidence
except those with respect to privileges.’ ” Zolin, 491 U.S. at
565 (emphasis in Zolin).
[8] The Court held that Rule 104(a) did not bar in camera
inspection of the attorney-client communications by the dis-
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trict court. Id. at 568. It further held that because in camera
review “does not have the legal effect of terminating the privi-
lege,” and is thus “a smaller intrusion” on the attorney-client
privilege than outright disclosure, a “lesser evidentiary show-
ing is needed to trigger in camera review” than would be nec-
essary “ultimately to overcome the privilege.” Id. at 568, 572
(internal quotation marks omitted). The Court concluded that
the district court needs only to “require a showing of a factual
basis adequate to support a good faith belief by a reasonable
person . . . that in camera review of the materials may reveal
evidence to establish the claim that the crime-fraud exception
applies.” Id. at 572 (internal quotation marks and citation
omitted). “Once that showing is made, the decision whether
to engage in in camera review rests in the sound discretion of
the district court.” Id.
[9] There is nothing in Zolin specifically indicating whether
the party seeking to preserve the attorney-client privilege has
the right to present countervailing evidence before the district
court decides whether to conduct an in camera review of the
attorney-client communications. It has been assumed by a
number of courts of appeal, including our own, that while
nothing forbids the district court from asking for or receiving
such countervailing evidence, there is also nothing requiring
the district court to do so. See, e.g., In re Grand Jury Sub-
poena 92-1(SJ), 31 F.3d at 829-30 (following Haines v. Lig-
gett Group Inc., 975 F.2d 81 (3d Cir. 1992)); In re Gen.
Motors Corp., 153 F.3d 714, 716 (8th Cir. 1998). But the pro-
cedural posture and consequences of an in camera inspection
of the disputed communications are fundamentally different
from those of an order requiring their outright disclosure. As
the Third Circuit wrote in Haines v. Liggett Group Inc., “[I]n
camera examination of documents by the court . . . is a com-
paratively non-dispositive procedural way station.” 975 F.2d
at 96. By contrast, an order requiring outright disclosure to the
adverse party “break[s] the seal of a highly protected privi-
lege.” Id. Accordingly, we explained in In re Grand Jury
Investigation that the threshold for in camera review is “con-
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siderably lower” than that “for fully disclosing documents.”
974 F.2d at 1073. Neither the appellees nor the appellant in
this case requested that the district court conduct in camera
review of the disputed communications.
[10] We have never squarely ruled on the question whether
a party in a civil case, seeking to preserve the attorney-client
privilege against a crime-fraud challenge, has the right to
present countervailing evidence when the district court is
deciding whether to order outright disclosure. The case most
closely on point is United States v. Laurins, where a criminal
defendant argued that the district court had improperly held
that the crime-fraud exception applied, and had therefore
improperly admitted privileged attorney-client communica-
tions into evidence. 857 F.2d at 540. We wrote that “[t]he evi-
dence presented by the government met [the] standard” for a
prima facie case sufficient to justify vitiating the privilege. Id.
at 541. While we noted that the district court had made its rul-
ing “[f]ollowing a hearing,” we did not discuss whether the
district court had considered, or was required to consider,
countervailing evidence produced by the non-moving party.
Id. at 540; see also Chen, 99 F.3d at 1499 (noting that the dis-
trict court vitiated privilege “[a]fter considering all the evi-
dence,” including that produced by the non-moving party). It
appears to be an open question in this circuit whether in a
civil case a party seeking to preserve the attorney-client privi-
lege against a crime-fraud challenge has the right to introduce
countervailing evidence when the question is not whether to
order in camera review but rather whether to order outright
disclosure.
[11] We hold that in civil cases where outright disclosure
is requested the party seeking to preserve the privilege has the
right to introduce countervailing evidence. In so holding, we
agree with the well-reasoned decision of Judge Aldisert for
the Third Circuit in Haines. That court wrote:
Deciding whether the crime-fraud exception applies
is another matter [from deciding whether to conduct
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in camera review]. If the party seeking to apply the
exception has made its initial showing, then a more
formal procedure is required than that entitling plain-
tiff to in camera review. The importance of the privi-
lege, as we have discussed, as well as fundamental
concepts of due process require that the party
defending the privilege be given the opportunity to
be heard, by evidence and argument, at the hearing
seeking an exception to the privilege.
Haines, 975 F.2d at 96-97; see also In re Gen. Motors Corp.,
153 F.3d at 716; In re Feldberg, 862 F.2d 622, 625-26 (7th
Cir. 1988). We are not convinced that in all cases it is neces-
sary for the district court to conduct a live hearing with oral
argument; in appropriate cases, the court may decide the mat-
ter on the papers. But we are convinced, as was the court in
Haines, that in a civil case the party resisting an order to dis-
close materials allegedly protected by the attorney-client priv-
ilege must be given the opportunity to present evidence and
argument in support of its claim of privilege. See also Laser
Indus., Ltd. v. Reliant Techs., Inc., 167 F.R.D. 417, 427-28
(N.D. Cal. 1996) (discussing and relying on Haines).
B. Burden of Proof
The Court in Zolin adhered to the cryptic statement made
more than fifty years earlier in Clark that the burden of proof
on the party seeking to vitiate a privilege was to make “a
showing of a prima facie case sufficient to satisfy the judge
that the light should be let in.” Clark, 289 U.S. at 14.
Although the Court specified the burden of proof for cases in
which in camera review is at issue, and although it stated that
“a lesser evidentiary showing is needed to trigger in camera
review than is required ultimately to overcome the privilege,”
Zolin, 491 U.S. at 572, the Court specifically declined to clar-
ify the meaning of a “prima facie case” where outright disclo-
sure is sought and to specify the burden of proof applicable
to such cases. Id. at 563 n.7.
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[12] Both before and after Zolin, the lower courts have
struggled with the meaning of “prima facie case” in cases in
which outright disclosure of attorney-client communications
has been sought. In cases in which disclosure of communica-
tions to a grand jury has been at issue, the courts of appeals
have devised various standards, including “probable cause to
believe,” In re John Doe, Inc., 13 F.3d 633, 637 (2d Cir.
1994) (internal quotation marks omitted); “some foundation
in fact,” In re Grand Jury Subpoenas, 144 F.3d 653, 660
(10th Cir. 1998); “reasonable basis,” In re Grand Jury Pro-
ceedings, 417 F.3d 18, 23 (1st Cir. 2005); “evidence such as
will suffice until contradicted and overcome by other evi-
dence,” In re Grand Jury Subpoena, 419 F.3d 329, 336 (5th
Cir. 2005) (internal quotation marks omitted); and “evidence
which, if believed by the fact-finder, would be sufficient to
support a finding that the elements of the crime-fraud excep-
tion were met,” In re Grand Jury Investigation, 445 F.3d 266,
274 (3d Cir. 2006) (internal quotation marks omitted). These
standards, and the differences between them, are not entirely
free from confusion. See, e.g., In re Sealed Case, 107 F.3d 46,
49-50 (D.C. Cir. 1997).
The standard in our circuit for grand jury cases is “ ‘reason-
able cause to believe’ that the attorney’s services were ‘uti-
lized . . . in furtherance of the ongoing unlawful scheme.’ ”
In re Grand Jury Proceedings, 87 F.3d at 381 (quoting In re
Grand Jury Proceedings (John Doe), 867 F.2d 539, 541 (9th
Cir. 1989) (ellipsis in original)). We have explained our “rea-
sonable cause to believe” standard as follows: “Reasonable
cause is more than suspicion but less than a preponderance of
evidence.” Chen, 99 F.3d at 1503 (explicating In re Grand
Jury Proceedings, 87 F.3d at 381, which stated the standard
as less than “beyond a reasonable doubt” but more than “a
sneaking suspicion”).
In Laser Industries, Ltd. v. Reliant Technologies, Inc.,
Judge Brazil concluded, after a thorough and thoughtful dis-
cussion, that not only the procedures involving presentation of
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evidence, but also the burden-of-proof standard, may appro-
priately be different in civil and grand jury cases. 167 F.R.D.
at 426-27. Other courts of appeal have noted that “the need
for speed and simplicity at the grand jury stage” weighs
against a crime-fraud standard that requires courts to “hear
testimony or to determine facts from conflicting evidence”
before making a crime-fraud determination. In re Sealed
Case, 676 F.2d 793, 815 n.88 (D.C. Cir. 1982); see also In re
Grand Jury Investigation, 842 F.2d 1223, 1226 (11th Cir.
1987) (“If courts always had to hear testimony and conflicting
evidence . . . , the rationale behind the prima facie standard
— the promotion of speed and simplicity at the grand jury
stage — would be lost.”); In re Antitrust Grand Jury, 805
F.2d 155, 167 (6th Cir. 1986). The Third Circuit, which
requires that both parties be heard in civil but not in grand
jury cases, has explained that “the rules of the game are dif-
ferent” in grand jury proceedings because of the particular
“importance of secrecy” and of speedy resolution, which
might be impeded by adversarial hearings on privilege. In re
Grand Jury Subpoena, 223 F.3d 213, 218 (3d Cir. 2000). We
express no opinion about whether a district court may con-
sider only the evidence of the moving party in deciding
whether to allow presentation of attorney-client communica-
tions to a grand jury. See Haines, 975 F.2d at 97 n.8; Laser
Indus., 167 F.R.D. at 426-27. But we agree with the statement
in Laser Industries that, with respect to burden of proof, “dif-
ferent standards may well be appropriate.” Id. at 438.
[13] We have never squarely addressed the question
whether our “reasonable cause to believe” standard, applica-
ble in grand jury cases, is also applicable in civil cases. In
Laurins, a criminal appeal rather than a grand jury case, we
wrote without elaboration: “All the government needed to
show was evidence that if believed by the jury would estab-
lish the elements of an ongoing violation.” 857 F.2d at 541.
In United States v. Chen, a grand jury case, we cited this lan-
guage from Laurins, but only after quoting and discussing our
established “reasonable cause to believe” standard applicable
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in grand jury cases. 99 F.3d at 1503. The “evidence that if
believed” language of Laurins can be read to mean evidence
giving “reasonable cause to believe,” but the two phrases are
not necessarily synonymous. Moreover, even if the phrases
are synonymous (which we tend to think they are not), neither
Laurins nor Chen was a civil case.
[14] For several reasons, we conclude that in a civil case
the burden of proof that must be carried by a party seeking
outright disclosure of attorney-client communications under
the crime-fraud exception should be preponderance of the evi-
dence.
First, requiring a moving party to establish the existence of
the crime-fraud exception by a preponderance of the evidence
is consonant with the importance of the attorney-client privi-
lege. As we recognized in United States v. Hodge & Zweig,
this privilege is “central to the legal system and the adversary
process” and thus deserving of “unique protection in the
courts.” 548 F.2d at 1355. It would be very odd if in an ordi-
nary civil case a court could find such an important privilege
vitiated where an exception to the privilege has not been
established by a preponderance of the evidence. See United
States v. Mett, 178 F.3d 1058, 1065 (9th Cir. 1999) (“[W]here
attorney-client privilege is concerned, hard cases should be
resolved in favor of the privilege, not in favor of disclosure
. . . . ‘[A]n uncertain privilege, or one which purports to be
certain but results in widely varying applications by the
courts, is little better than no privilege at all.’ ” (quoting
Upjohn Co. v. United States, 449 U.S. 383, 393 (1981)).
Second, the phrase “prima facie case,” used by the Court
in Clark and then fifty years later in Zolin, is not inconsistent
with a preponderance of the evidence standard. “Prima facie
case” is “among the most rubbery of all legal phrases.” In re
Grand Jury Proceedings, 417 F.3d at 22. As it relates to the
crime-fraud exception, “[t]he prima facie standard has always
been poorly defined, inconsistently interpreted and generally
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misunderstood.” Paul R. Rice, Attorney-Client Privilege in the
United States § 8.6, at 44 (2d ed. 1999). In Clark itself, the
“prima facie case” standard was not used to decide a question
of attorney-client privilege. Rather, it was used to decide
whether inquiry could be made into the actual facts of jury
deliberations despite the “privilege which protects from
impertinent exposure the arguments and ballots of a juror
while considering his verdict.” 289 U.S. at 13-14. It is not at
all clear what the Court in Clark would have said if the
attorney-client privilege had been at stake rather than the priv-
ilege of jury privacy.
Third, as interpreted by the Supreme Court, Federal Rule of
Evidence 104(a), which governs preliminary questions of fact
concerning privileges, requires a preponderance of the evi-
dence standard. Although the Court, in Clark, recognized the
existence of a jury privilege as a “preliminary question[ ],”
the Federal Rules of Evidence had not been promulgated
when that case was decided. 289 U.S. at 14 n.1. Federal Rule
of Evidence 104(a) now provides that “[p]reliminary ques-
tions concerning the . . . existence of a privilege . . . shall be
determined by the court . . . . In making its determination it
is not bound by the rules of evidence except those with
respect to privileges.” In Bourjaily v. United States, 483 U.S.
171 (1987), a case involving the admissibility of an alleged
co-conspirator’s statement, the Supreme Court held that “pre-
liminary factual questions” under Rule 104(a) must be “estab-
lished by a preponderance of proof.” Id. at 175; see also id.
at 176 (“preponderance of the evidence”). In Zolin, the Court
discussed the “except . . . with respect to privileges” clause of
Rule 104(a) at length, but did not reach the question of the
burden of proof applicable to a decision to order outright dis-
closure of attorney-client communications. 491 U.S. at 565-
68. Zolin is therefore not directly on point, but we believe that
it signals that preliminary questions concerning the existence
or non-existence of the attorney-client privilege — including
whether the crime-fraud exception “terminate[s] the privi-
lege,” id. at 568 — must be established under Rule 104(a).
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And we know from Bourjaily that preliminary questions of
fact under Rule 104(a) must be established by a preponder-
ance of the evidence.
Finally, the problem of limited access to proof by the party
seeking to vitiate the attorney-client privilege is mitigated by
the possibility of in camera review of the communications by
the district court under the far less demanding standard of
Zolin. We do not regard in camera review as a panacea, for
a “blanket rule allowing in camera review . . . would place the
policy of protecting open and legitimate disclosure between
attorneys and clients at undue risk”; raise “possible due pro-
cess implications”; and place significant burdens upon the dis-
trict courts “without open adversarial guidance by the
parties.” Zolin, 491 U.S. at 571. For these reasons, the Court,
in Zolin, was very careful to leave the decision whether to
conduct an in camera review within “the sound discretion of
the district court.” Id. at 572. But judicious use of in camera
review, combined with a preponderance burden for terminat-
ing privilege, strikes a better balance between the importance
of the attorney-client privilege and deterrence of its abuse
than a low threshold for outright disclosure.
V. Merits
[15] Even though it thought it was not required to do so, the
district court did consider the countervailing evidence pres-
ented by Bertelsmann in support of the attorney-client privi-
lege. But the district court did not apply the preponderance of
the evidence standard that we today hold is applicable to a
civil case in which outright disclosure of attorney-client com-
munications is sought under the crime-fraud exception. Look-
ing at the evidence presented in this case under the
preponderance standard, we hold that even if all of the evi-
dence proffered by appellees is believed, there is an insuffi-
cient basis to hold that the attorney-client privilege may be
vitiated under the crime-fraud exception.
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Appellees contend that there has been “fraudulent deceit”
under California Civil Code §§ 1709 and 1710. Such fraud
comprises five elements: “(a) misrepresentation . . . ; (b)
knowledge of falsity (or scienter); (c) intent to defraud, i.e.,
to induce reliance; (d) justifiable reliance; and (e) resulting
damage.” Small v. Fritz Cos., Inc., 65 P.3d 1255, 1258 (Cal.
2003) (internal quotation marks omitted). But appellees do
not merely allege garden variety fraud. They allege fraud on
the court. Fraud on the court “embrace[s] only that species of
fraud which does or attempts to, defile the court itself, or is
a fraud perpetrated by officers of the court.” Appling v. State
Farm Mut. Auto. Ins. Co., 340 F.3d 769, 780 (9th Cir. 2003)
(quoting In re Levander, 180 F.3d 1114, 1119 (9th Cir.
1999)). A party’s failure to disclose information, or even a
party’s perjury, does not ordinarily constitute fraud on the
court. Id.
[16] As discussed above, appellees rely on two theories of
fraud on the court. The first is that the entire loan was a sham
intended for use in future legal proceedings as a means of dis-
guising Bertelsmann’s purchase of control of Napster. The
strongest evidence that appellees have that Bertelsmann
sought to purchase an equity stake in Napster is the right of
Bertelsmann to convert the loan to equity once the licensed
music distribution system was launched. But that right, given
by the express terms of the loan documents, could hardly have
been fraudulently procured, given that it was stated expressly.
Nor does it tend to prove that the entire loan was a sham. The
only other evidence appellees have offered in support of this
theory are documents showing that Bertelsmann’s counsel
and executives attempted to structure its deal with Napster to
limit its potential liability. These documents do not prove
fraud. If a party could establish the crime-fraud exception
simply by showing that an opponent structured a business
transaction to limit its liability, the attorney-client privilege
would be worth little, for under this standard many commer-
cial disputes could be recast as fraud on the court. Such a
standard would defeat a primary purpose of the attorney-client
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privilege, which is to encourage individuals to seek legal
counsel “to guide them through [the] thickets” of complex
laws. Chen, 99 F.3d at 1499.
[17] Appellees’ second theory is that Bertelsmann under-
took a scheme to defraud the courts by hiding a side agree-
ment that allowed Napster to use a portion of the loan
proceeds to pay its litigation expenses. Even if we credit the
Barry email, the Timm memorandum, and the Barry deposi-
tion testimony relied on by the district court, and even if we
conclude that Bertelsmann agreed with Napster that the term
“overhead costs” in the loan documents would include litiga-
tion expenses, we would not conclude that this evidence
establishes an intentional, material misrepresentation directly
“aimed at the court.” Appling, 340 F.3d at 780.
First, according to appellees’ evidence, both Barry and
Timm characterized the side agreement about litigation
expenses as a refinement rather than misrepresentation of the
terms of the loan documents. At his deposition, Barry
explained that he believed that “we had an agreement that
GNA and overhead included litigation expenses.” When
asked if the loan documents were “false” because they stated
that the loan proceeds could be used solely for the new model
and associated overhead costs, Barry answered “No.” Timm’s
memorandum also treated litigation expenses as a subset of
the “general, administrative and overhead expenses” clause in
the loan documents.
[18] Bertelsmann’s evidence only reinforces our conclusion
that the loan terms did not constitute a fraudulent misrepre-
sentation. At her deposition, Timm testified that she consid-
ered “overhead” to be a broad “word that would give my
client more freedom on how to spend [the] money.” Timm
stated that she did not view the alleged verbal agreement
about litigation expenses as “inconsistent with the express
terms that were being used in the transaction documents.”
Timm’s supervisor, Bochner, testified at his deposition that
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“the terminology ‘working capital and overhead expenses’ —
are not precise. So I don’t think it is odd for the parties to fur-
ther refine what they mean by terms like that, in a legally-
binding way; in a non-legally binding way. And this appears
to be a conversation that was had.” Taken either alone or
along with Bertelsmann’s evidence, appellees’ evidence does
not establish that the loan terms constituted a fraud. Rather,
the evidence shows routine wrangling over contract terms and
a lawyerly attempt to make inconspicuous the fact that some
of the money could be used for litigation expenses. Cf.
Laurins, 857 F.2d at 534, 536, 540-41 (evidence directly
established that, after receiving IRS summons, Laurins
instructed his employee to box up summoned records and
then removed them; his lawyer told the IRS Laurins did not
have the records; and the FBI seized the records from
Laurins’ house).
Second, even if we were to conclude that the written terms
of the loan misrepresented the parties’ agreement to allow
some of the funds to be used for litigation expenses, appel-
lees’ evidence nowhere suggests that Bertelsmann selected
these terms with the intent to defraud the courts. Cf. Chen, 99
F.3d at 1497-98 (privilege holder’s sister and former
employee gave affidavit stating he directed her to take steps
to help him defraud the government). The fact that a party has
taken steps to structure a business transaction to limit its lia-
bility does not suffice, without more, to establish that the
crime-fraud exception applies. See In re BankAmerica Corp.
Sec. Litig., 270 F.3d 639, 643-44 (8th Cir. 2001). Further,
there is little or no indication that in 2000 Bertelsmann antici-
pated that liability might attach based merely on its funding
of some of Napster’s litigation expenses. When asked at his
deposition why Bertelsmann did not want an express side
agreement about litigation expenses, Barry stated that he
assumed Bertelsmann was trying to appease its music subsid-
iary BMG, which was then suing Napster. Barry explained,
“Bertelsmann, knowing that they were going to continue, that
the litigation would continue with BMG as a plaintiff, didn’t
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want . . . BMG and Bertelsmann didn’t want the fact of our
using that money for litigation purposes to be public.”
In evidence submitted by appellees, former BMG Vice
President Kevin Conroy confirmed in his deposition that there
had been tension between Bertelsmann and its subsidiary
BMG as a result of its loan to Napster. Conroy acknowledged
that BMG, Bertelsmann’s subsidiary, worried that “[w]e will
be perceived as having betrayed the entire music industry,
recording and publishing, as well as other copyright organiza-
tions due to the precedential nature of this lawsuit.” On the
evidence before us, we cannot credit the view that Bertels-
mann structured its agreement with Napster with a view to
deceive the courts in suits that had not been filed and to avoid
liability based on legal theories not yet advanced, rather than
to serve its more immediate goals with respect to its subsid-
iary BMG.
Third, even assuming, arguendo, that Bertelsmann’s failure
to spell out in the loan documents that “overhead costs”
included litigation expenses was an intentional misrepresenta-
tion, we do not see how it could have deceived a court into
concluding that Bertelsmann provided no financial support to,
or had no financial stake in, the existing Napster company.
See UMG Recordings, 222 F.R.D. at 414. Although the loan
documents did not clarify what were “overhead costs associ-
ated with” “the development of a new model for Company’s
services,” the Umbrella Agreement expressly defined the
“New System” that was being financed as “the version of the
[existing] Napster System that achieves Acceptance” from the
music industry. The new model was being developed within
the existing Napster, a small start-up company, apparently
using the same facilities, employees, servers, and software as
the existing, allegedly infringing model. As Conroy testified
at his deposition, it was not “a binary thing, . . . it was all one
entity.” If funding Napster’s litigation may have helped to
prolong Napster’s existence, so, too, did injecting any cash
into Napster. Any “financial stake” that Bertelsmann had in
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Napster and in “the outcome of [its] litigation against the
record labels” was inherent in the loan itself, regardless of
whether “overhead costs” included litigation expenses or sim-
ply rent, salary, servers, and software. As Barry bluntly put it
in his deposition testimony, “If there is no company, there is
no new model.”
Conclusion
[19] For the foregoing reasons, in a civil case in which out-
right disclosure of attorney-client communications is sought
under the crime-fraud exception, we hold that (1) both parties
have a right to present evidence to the district court, and (2)
the party seeking disclosure must prove by a preponderance
of the evidence that the exception applies. We further hold
that on the facts of this case the crime-fraud exception has not
been established. We therefore reverse the order of the district
court requiring the disclosure of the attorney-client communi-
cations at issue. We remand for further proceedings consistent
with this opinion.
REVERSED and REMANDED.
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