MATTER OF GRAND JURY IMPANELED JAN. 21, 1975, 541 F.2d 373 (3rd Cir. 1976)

IN THE MATTER OF GRAND JURY IMPANELED JANUARY 21, 1975 (TWO CASES). APPEAL OF ABRAHAM E. FREEDMAN, IN NO. 76-1248. APPEAL OF AMERICO V. CORTESE, IN NO. 76-1276.

Nos. 76-1248, 76-1276.United States Court of Appeals, Third Circuit.Argued May 24, 1976.
Decided August 10, 1976.

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[EDITORS’ NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.]

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Jonathan L. Goldstein, U.S. Atty., John J. Barry, Asst. U.S. Atty., Newark, N. J., for appellee.

Howard Gittis, Alan J. Davis, Mark A. Aronchick, Philadelphia, Pa., Richard A. Levin, Amster Levin, Millburn, N. J., Wolf, Block, Schorr Solis-Cohen, for Abraham E. Freedman.

Jonathan Vipond, III, Michael L. Seabolt, Philadelphia, Pa., for Americo V. Cortese.

Appeal from the United States District Court for the District of New Jersey.

Before SEITZ, Chief Judge, ADAMS and HUNTER, Circuit Judges.

JAMES HUNTER, III, Circuit Judge:

[1] The primary issue presented by these appeals is whether retainer agreements filed by a law firm with the Prothonotary of the Court of Common Pleas of Philadelphia County pursuant to Rule 202 of that court are privileged so as to defeat a subpoena for such agreements issued by a federal grand jury. The district court held that the agreements were not privileged and enforced the subpoena. We agree and accordingly affirm.

I.
[2] On December 10, 1975, a subpoena duces tecum was served on the Honorable Americo V. Cortese, Prothonotary of the Court of Common Pleas of Philadelphia County, directing him to produce “any and all retainer agreements filed by the law firm of Freedman, Borowsky and Lorry for the period January 1, 1968 to the present.” App. at 2a. The subpoena was issued by a federal grand jury sitting in Newark, New Jersey in connection with its investigation of possible criminal violations by the National Maritime Union, its officers and employees. At the time the subpoena was served, attorneys in Philadelphia County were required by Rule 202 of the Court of Common Pleas of that county (“Local Rule 202”) to file a copy of all contingent fee agreements with the Prothonotary.[1] Section (f) of Rule 202 provided that the filed agreements “shall be

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impounded subject to inspection only by Order of the Court, by the client or by the Disciplinary Board of the Supreme Court of Pennsylvania.”

[3] On January 19, 1976, the Prothonotary filed a motion to quash the subpoena in the district court. Also, Abraham E. Freedman, for the law firm of Freedman, Borowsky Lorry, moved to intervene and to quash the subpoena. The Prothonotary argued that he was not the proper person on whom to serve the subpoena. Both Freedman and the Prothonotary contended that the retainer agreements were privileged by virtue of section (f) of Local Rule 202 and that the district court, as a matter of comity, should defer enforcement of the subpoena pending the filing and disposition of an appropriate petition to the Court of Common Pleas for release of the agreements in question.

[4] A hearing was held on the motions on January 20, 1976. No testimony was taken, but certain exhibits and affidavits were introduced by the parties.[2] Just prior to the hearing, a representative of the Prothonotary’s office had appeared before the grand jury and had refused to produce the subpoenaed records on the grounds asserted in the motion to quash.

[5] On January 23, 1976, the district court, by oral opinion, ruled that Freedman had standing to intervene but rejected Freedman’s and the Prothonotary’s objections to the subpoena. A formal written order was entered on February 4, 1976, granting Freedman’s motion to intervene, denying the motions to quash by the Prothonotary and Freedman, directing the Prothonotary to produce the records forthwith and staying enforcement pending appeal. App. at 89a-90a.

[6] Freedman filed a notice of appeal in the district court on January 23, 1976. Id. at 91a. On February 9, 1976, the Prothonotary moved for certification of the February 4, order under 28 U.S.C. § 1292(b), which motion was granted by the district court. Id. at 92a-96a. We granted the Prothonotary’s petition for appeal pursuant to Federal Rule of Appellate Procedure 5 on March 1, 1976, and stayed further proceedings in the district court pending disposition of the appeal. Id. at 109a.

II.
[7] At the outset, we are met with government objections to Freedman’s appeal and standing to intervene below. Freedman’s notice of appeal was filed on January 23, 1976, twelve days prior to entry of the court’s written order on February 4, 1976. Although the appeal was technically

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premature,[3] we will not dismiss. The court’s order is appealable,[4] and the government has not been prejudiced by the prematurity. Hodge v. Hodge, 507 F.2d 87, 89 (3d Cir. 1975); Hamilton v. Stillwell Van Storage Co., 343 F.2d 453, 455 (3d Cir. 1965); see Foman v. Davis, 371 U.S. 178, 181, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962). We are also of the opinion that Freedman had standing to intervene below and challenge the subpoena on the basis of his claim of privilege. Perlman v. United States, 247 U.S. 7, 12, 38 S.Ct. 417, 62 L.Ed. 950 (1918); see United States v. Nixon, 418 U.S. 683, 94 S.Ct. 3090, 41 L.Ed.2d 1039 (1974); Couch v. United States, 409 U.S. 322, 93 S.Ct. 611, 34 L.Ed.2d 548 (1973); Schwimmer v. United States, 232 F.2d 855, 860 (8th Cir.), cert. denied, 352 U.S. 833, 77 S.Ct. 48, 1 L.Ed.2d 52 (1956).

[8] The Prothonotary contends initially that the subpoena was not appropriately directed to him because his function is ministerial and he lacks legal authority to produce the records sought, absent an order of the Court of Common Pleas. In our view, the subpoena was properly directed to the Prothonotary. He is the custodian of the retainer agreements and had actual possession of them at the time the subpoena was issued. See Schwimmer v. United States, supra, 232 F.2d at 860; In re New York State Sales Tax Records, 382 F. Supp. 1205, 1206 (W.D.N.Y. 1974); cf Fisher v. United States, 425 U.S. 391, 96 S.Ct. 1569, 48 L.Ed.2d 39 (1976), aff’g 500 F.2d 683 (3d Cir. 1974) (en banc) Couch v. United States, supra, 409 U.S. at 330-35, 93 S.Ct. 611. The grand jury’s subpoena supplies the legal authority for the Prothonotary’s production of the records.

[9] Both the Prothonotary and Freedman urged the district court, as a matter of comity, to defer enforcement of the subpoena pending an appropriate application to the Court of Common Pleas for release of the retainer agreements. While recognizing that the state’s interest was “not without substance,” the district court nevertheless held that deference would be inappropriate in this case. “To hold otherwise,” the court stated, “would do violence to the integrity of the grand jury as an arm of the federal judiciary.” App. at 84a. Appellants contend that in refusing to stay its hand, the district court “failed to accommodate and needlessly disrupted a state regulatory system of paramount public importance.”

[10] As did the district court, we recognize that the state interests involved in this case are not insubstantial. And perhaps as a matter of comity, if not prudence and orderly procedure, the United States might well have first sought an order of the Court of Common Pleas: the instant litigation, and resultant expenditure of time and energy by the parties and the judiciary, might then have proved unnecessary.[5] But the district court did not err in declining to defer enforcement in this case. The ultimate question of privilege presented in this action is, of course, one of federal, not state law, pp. 8-1 infra, and accordingly is appropriate for decision by a federal court. The district court had before it and considered the views of President Judge Bradley of the Court of Common Pleas and thus was not uninformed as to the state’s interests in and interpretation of Local Rule 202. App. at 22a-24a. The court could well have concluded that interference with and delay of the grand jury’s investigative functions outweighed any interests in comity. See Bellotti v. Baird, ___ U.S. ___, ___, 96 S.Ct. 2857, 49 L.Ed.2d 844 (1976); Lake Carriers Ass’n v. MacMullen, 406 U.S. 498, 509, 92 S.Ct. 1749, 32 L.Ed.2d 257 (1972); England v. Medical Examiners, 375 U.S. 411, 418, 84 S.Ct. 461, 11 L.Ed.2d 440 (1964).

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The grand jury possesses broad investigative powers.[6]
Here, its term and the statute of limitations may be running daily and there was no basis for the district court to assume that the Court of Common Pleas would release the subpoenaed records.[7] Finally, unlike many of the cases cited by appellants,[8] the significant interests in comity that are raised when a federal court’s action interferes with a pending state court proceeding are not present here.

III. A.
[11] We come now to the primary issue presented by this appeal. The Prothonotary and Freedman argue that the contingent fee agreements under subpoena are privileged and thus cannot be obtained by grand jury subpoena. They assert that under “well-established principles of federal common law, which have been adopted in rule 501 of the Federal Rules of Evidence,” a person filing records under a state “required records” law has a privilege against use of those records in any phase of a federal criminal proceeding. Local Rule 202 is such a required records rule, in their view. The government’s rejoinder is two-pronged. First, it claims that even if Local Rule 202 creates a required reports privilege as a matter of state law, a federal court need not and should not recognize that privilege as a matter of federal common law in a federal grand jury investigation or criminal proceeding. Alternatively, it contends that Local Rule 202 does not, even as a matter of state law, cloak the subpoenaed retainer agreements with a privilege against their use in a grand jury investigation or criminal proceeding; it is merely a “limited access rule.”

[12] Preliminarily, we decline the government’s invitation to divine how the Pennsylvania courts would interpret Local Rule 202. That determination is better left to the state courts as the scope of the privilege, if any, created by Local Rule 202 is unnecessary to our decision.[9] Thus, we assume for purposes of this appeal only that as a matter of Pennsylvania law, retainer agreements filed under Local Rule 202 are privileged from use in any phase of a criminal proceeding.[10]

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[13] As the Supreme Court has stated a federal grand jury “`has a right to every man’s evidence,’ except for those persons protected by a constitutional, common-law, or statutory privilege.” Branzburg v. Hayes, 408 U.S. 665, 688, 92 S.Ct. 2646, 2660, 33 L.Ed.2d 626 (1972); see United States v. Nixon, 418 U.S. 683, 709, 94 S.Ct. 3090, 41 L.Ed.2d 1039 (1974); United States v. Bryan, 339 U.S. 323, 331, 70 S.Ct. 724, 94 L.Ed. 884 (1950). In 1975, Congress enacted the Federal Rules of Evidence, rule 501 of which governs evidentiary privileges in the federal courts. It provides as follows:

Except as otherwise required by the Constitution of the United States or provided by Act of Congress or in rules prescribed by the Supreme Court pursuant to statutory authority, the privilege of a witness, person, government, State, or political subdivision thereof shall be governed by the principles of the common law as they may be interpreted by the courts of the United States in the light of reason and experience. However, in civil actions and proceedings, with respect to an element of a claim or defense as to which State law supplies the rule of decision, the privilege of a witness, person, government, State, or political subdivision thereof shall be determined in accordance with State law.

[14] The legislative history of rule 501 indicates clearly that the rule was intended, in federal question and criminal cases, to leave the federal law of privileges in its current posture, to be developed by the judiciary by resort to the “principles of the common law as . . . interpreted . . . in the light of reason and experience.”[11] Thus, we must decide whether as a matter of federal common law, as interpreted in light of reason and experience, a privilege exists against the use in federal grand jury proceedings of retainer agreements filed under Local Rule 202.[12]

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B.
[15] A brief review of the required reports privilege and of current federal court experience with that privilege is necessary to our decision.

[16] Several thousand statutes and regulations in the United States provide for non-disclosure of certain records and reports which citizens are compelled by law to submit to federal, state or local governments. See generally 8 J. Wigmore, Evidence § 2377, at 780 (McNaughton rev. 1961); Comment, The Required Report Privileges, 56 Nw.V.L.Rev. 283 (1961). These required report privilege statutes vary greatly in form and substance; they are generally tailored to a particular regulatory area and extend to such diverse areas as income tax returns, census reports, selective service records, public health records and accident reports, among others.[13] Id. at 285 (statutes cited therein); 2 Weinstein’s Evidence, supra note 10, ¶ 502[02], at 502-5; 8 J. Wigmore, supra § 2377, at 781-91 (statutes cited therein). The purpose generally underlying the grant of such a privilege is to encourage persons to report voluntarily certain potentially self-damaging information that is needed for effective governmental functioning.[14] As Judge Weinstein has stated, “By self-reporting, the government is able to obtain full and accurate information directly from the persons possessing the information, in order to better conduct its different functions, and also is saved the expenditure of time and money in not having to require investigation by its own agencies.” 2 Weinstein’s Evidence, supra ¶ 502[02], at 502-4 n. 1; see Comment Federal Rules of Evidence and the Law of Privileges, 15 Wayne L.Rev. 1287, 1303 (1969); 8 J. Wigmore, supra § 2377, at 781.

[17] The required reports privilege is in general a statutory creation. We have not been directed to or in our research found any decision of this court that has recognized a state statutory required reports privilege as a matter of federal common law.[15] Nor have we been cited to or found a decision of any federal court which has explicitly adopted such a state statute in a federal criminal proceeding as a matter of federal common law. Both In re Reid, 155 F. 933 (E.D.Mich. 1906) and In re Valecia Condensed Milk Co., 240 F. 310 (7th Cir. 1917), cited by appellants, did recognize state statutory required reports privileges in bankruptcy proceedings. But both cases were decided at a time when federal courts considered themselves bound to follow state evidentiary rules, even in federal question cases.[16] That proposition was clearly laid to

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rest with regard to federal criminal proceedings in 1933 and 1934 in Funk v. United States, 290 U.S. 371, 54 S.Ct. 212, 78 L.Ed. 369 (1933) and Wolfle v. United States, 291 U.S. 7, 54 S.Ct. 87, 78 L.Ed. 539 (1934). Both the Prothonotary and Freedman rely heavily on Herman Brothers Pet Supply, Inc. v. NLRB, 360 F.2d 176 (6th Cir. 1966) in support of the application of a state required reports privilege as a matter of federal common law. In that case, Herman Pet Supply obtained a subpoena duces tecum from the NLRB and through it sought to obtain from the Michigan Employment Security Commission certain records of unemployment compensation claims made by employees involved in the case. An NLRB Trial Examiner, on motion of the Commission, quashed the subpoena on the ground that under Michigan law the records were confidential. The Herman court did not discuss, and apparently assumed, the propriety of recognizing a state statutory required reports privilege. The question decided by that court was whether the Michigan statute, as a matter of state law, was intended to prohibit use of the records in a trial, and was not whether such a statute should be recognized as a matter of federal common law in a federal question case. Whatever can be said of that decision, it is scant authority indeed for the proposition that a federal court must always recognize a state statutory required reports privilege as a matter of federal common law in a federal criminal proceeding or grand jury investigation.[17]

[18] We are aware that the Advisory Committee on Rules of Evidence proposed and the Supreme Court promulgated a rule similar to that advocated by appellants.[18] However, Congress did not enact the proposed rule 502. See note 11 supra. In light of the legislative history of the privilege article of the federal rules, id., we interpret the refusal to adopt rule 502 as indicating neither Congressional approval nor disapproval of a federal common law required reports privilege. We do note, however, that the Advisory Committee Note to proposed rule 502, relies primarily on In re Reid, supra, In re Valecia Condensed Milk Co., supra, and Herman Brothers Pet Supply, Inc., supra,
as support for recognition of such a privilege. See pp. 380-38 supra. Also, at least one commentator has stated that adoption of proposed rule 502 “may substantially alter

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practice predating the adoption of the federal rules.”[19]

C.
[19] Thus, the precise question presented appears to be one of first impression. It is not, as appellants argue, a well-established principle of federal common law that records required to be filed by state law under assurances of confidentiality are privileged against use in federal grand jury proceedings. We may nevertheless adopt such a rule in light of reason and experience See United States v. Allery, 526 F.2d 1362, 1366 (8th Cir. 1975).

[20] Unlike many rules of evidence, evidentiary privileges are designed to exclude relevant information from the fact-finder. The granting or withholding of an evidentiary privilege requires a balancing of competing policies. United States v. Nixon, 418 U.S. 683, 709, 94 S.Ct. 3090, 41 L.Ed.2d 1039 (1974); Carr v. Monroe Manufacturing Co., 431 F.2d 384, 388 (5th Cir. 1970) cert. denied, 400 U.S. 1000, 91 S.Ct. 456, 27 L.Ed.2d 451 (1971); 8 J. Wigmore, supra, § 2285, at 527-28. On the one hand, there is the state’s interest in fostering certain relationships, such as husband-wife, attorney-client, or in encouraging the voluntary filing of certain records, as here. On the other hand, the two-fold aim of criminal justice — “that guilt shall not escape or innocence suffer”[20] — demands that every relevant fact be developed and presented to the fact-finder. This interest is particularly compelling in the context of a grand jury, for “its task is to inquire into the existence of possible criminal conduct and to return only well-founded indictments” and therefore “its investigative powers are necessarily broad.” Branzburg v. Hayes, 408 U.S. 665, 688, 92 S.Ct. 2646, 2660, 33 L.Ed.2d 626 (1972). Moreover, because privileges are in derogation of the search for truth, “these exceptions to the demand for every man’s evidence are not lightly created nor expansively construed.” United States v. Nixon, supra 418 U.S. at 710.[21] Privileges apply only to the extent necessary to achieve their purpose. Fisher v. United States, 425 U.S. 391, 403, 96 S.Ct. 1569, 48 L.Ed.2d 39 (1976).

[21] We hold that any presumed privilege created by Local Rule 202 must yield here to the public’s interest in law enforcement and in ensuring effective grand jury proceedings. The avowed purpose of cloaking the retainer agreements with a privilege is to ensure voluntary compliance with the filing requirements. As stated by President Judge Bradley in his affidavit:

It is the provision for confidentiality that was guaranteed subject only to the above limitation which assured the likelihood of a broader and more frequent compliance with this Rule by the attorneys in question.
If the Rule and the provided-for confidentiality is in any way broadened or breached, it is my opinion that it could very well frustrate the operation and effectiveness of Rule 202(f) since it is quite likely and expectable that many attorneys would not comply with the Rule if the data required was not protected and its release restricted as set forth in the Rule.

[22] App. at 23a. In our view the state’s interest in voluntary compliance will not be seriously impaired by enforcing the instant grand jury subpoena. We note initially

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that a federal grand jury’s demand for such documents must meet the standards of jurisdiction, relevancy and lack of an improper purpose adopted by this court in Schofield I[22] an II.[23] There are also, in our view, other effective means for ensuring compliance with the filing requirements that would not require the kind of extensive enforcement efforts necessary in the case of motor vehicle accident or public health reports. Disciplinary proceedings and judicial refusal to enforce unfiled agreements are but two at the disposal of the Court of Common Pleas. The Philadelphia bar is a relatively small and well defined group unlike the situation presented where accident or health reports must be filed. Finally, this is not a case where the subpoenaed records would not be available but for the statute requiring their filing.[24] Under Rule 202 of the Pennsylvania Supreme Court, the client, and the law firm[25] or attorney must have copies of the agreement. On balance, we think that any incidental and speculative effect enforcement of the subpoena would have on voluntary compliance with the filing requirements of Local Rule 202 is outweighed by the grand jury’s need for this evidence in order effectively to conduct its investigation. See Patterson v. Norfolk W. Ry., 489 F.2d 303, 307 (5th Cir. 1973).

[23] Our decision today is not intended to interfere with the Court of Common Pleas’ commendable regulatory system or to denigrate that court’s reasons for seeking to afford the retainer agreements confidentiality. But where important federal interests are concerned we will not accept blindly and without examination the state’s policy of confidentiality. See United States v. Allery, 526 F.2d 1362, 1366 (8th Cir. 1975). We also have not decided that a federal court will never recognize a state required reports privilege as a matter of federal common law in a federal grand jury investigation. Perhaps there may be instances that will present compelling justifications for denying a federal grand jury relevant information; such justifications were not presented here.

IV.
[24] For the reasons stated above, the judgment of the district court shall be affirmed.