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In re Grand Jury Proceedings

decided: September 3, 1982.

IN THE MATTER OF GRAND JURY PROCEEDINGS, MILLER BREWING COMPANY, APPEALS OF MILLER BREWING COMPANY, HARLAN WOYAHN, THOMAS HOOVER, JAMES DOHERTY AND ERNEST ANSCHUTZ; AND UNITED STATES OF AMERICA


Appeal from the United States District Court for the Eastern District of Wisconsin. Misc. No. 80-40 -- Myron L. Gordon, Judge.

Wood, Circuit Judge, Fairchild, Senior Circuit Judge, and Roszkowski, District Judge.*fn*

Author: Wood

WOOD, Circuit Judge.

All parties appeal from the decision and order of the United States District Court for the Eastern District of Wisconsin. In two written opinions, the district court held, inter alia, that 1) the Miller Brewing Company ("Miller") was not entitled to an adversary hearing regarding the government's use of the grand jury; 2) since Miller did not demonstrate particularized need, its counsel could not inspect certain grand jury documents; 3) the government demonstrated particularized need for the requested grand jury documents and therefore, disclosure of the requested documents to the civil division of the Internal Revenue Service ("IRS") was proper; 4) the government did not demonstrate particularized need to permit the court to disclose certain grand jury transcripts; and 5) the proper procedure regarding the requested grand jury transcripts was to transfer the transcripts to the "court before which the tax litigation [would] proceed" to facilitate that court's in camera inspection in light of any renewed petition for disclosure. Petition of the United States for the Disclosure of Grand Jury Matters (Miller Brewing Company), 510 F. Supp. 585 (" Miller I "); 518 F. Supp. 163 (E.D. Wis. 1981) (" Miller II "). We affirm, in part; reverse, in part; and remand for further proceedings consistent with this opinion.

I. Background

In 1979, the government began a grand jury investigation into the tax affairs of Miller. The grand jury subpoenaed documents from Miller and others, and took the testimony of numerous witnesses. In June, 1980, the government terminated the grand jury investigation without the return of an indictment.

In October, 1980, the United States petitioned the United States District Court for the Eastern District of Wisconsin to disclose certain grand jury materials to the IRS for civil tax investigation purposes.*fn1 Fed. R. Crim. P. 6(e). These materials included seven categories of documents and notes subpoenaed by the grand jury and an eighth category including transcripts of the testimony of four grand jury witnesses who are current or former employees of Miller. Disclosure was sought "solely for furthering said civil tax examination of the Miller Brewing Company, a subsidiary of Philip Morris, Inc."

Miller moved to intervene in the disclosure proceedings. It also petitioned for an order allowing its counsel to inspect some of the requested grand jury materials,*fn2 alleging that inspection was necessary to demonstrate "that the grand jury proceeding was not conducted solely for the purpose of a good faith criminal tax investigation." Four grand jury witnesses whose testimony was recorded in the requested transcripts also moved to intervene. The witnesses opposed both Miller's request to inspect the transcripts and the government's disclosure petition.

In March, 1981, the district court addressed the government's petition, as well as the motions to intervene and inspect. Miller I, 510 F. Supp. 585. First, the court permitted Miller and the four grand jury witnesses whose testimony was recorded in the requested transcripts to intervene in the proceeding.*fn3 State of Illinois v. Sarbaugh, 552 F.2d 768, 772-73 (7th Cir.), cert. denied, 434 U.S. 889, 98 S. Ct. 262, 54 L. Ed. 2d 174 (1977). Second, the district court denied Miller's motion to inspect the grand jury materials, without prejudice to Miller's right to raise its allegations regarding the government's abuse of the grand jury investigation for the court's consideration in reaching a decision on the merits. Third, the district court postponed its decision regarding disclosure to the IRS, in order to give Miller a chance to respond to the government's position. Fourth, the district court rejected the government's contention that Miller should have addressed the propriety of the government's use of the grand jury at the time of the grand jury proceedings, or at a future time when the government attempts to introduce any disclosed material into evidence at a subsequent judicial proceeding. The district court found that the government was "required to demonstrate its bona fides prior to obtaining a Rule 6(e) . . . order . . . particularly . . . where a grand jury fails to return an indictment." Miller I, 510 F. Supp. at 589 (citing In re Grand Jury Subpoenas, April, 1978, at Baltimore, 581 F.2d 1103, 1110 (4th Cir. 1978), cert. denied, 440 U.S. 971, 99 S. Ct. 1533, 59 L. Ed. 2d 787 (1979)). The district court requested to view in camera the items which the government was seeking to disclose to the IRS. Finally, the court reserved ruling on the need for an evidentiary hearing on the issue of grand jury abuse.

After the district court's first decision and while the government's petition for disclosure was still pending, the IRS issued a statutory notice of deficiency, for the years 1971 through 1976, against Philip Morris, Inc., Miller's parent corporation. Miller then urged the district court to dismiss the government's petition on the ground that disclosure could no longer be for "a continuing tax investigation" as stated in the petition since the civil tax investigation ended when the government issued its notice of deficiency.

In June, 1981, the district court rendered its decision and order which is the subject of this appeal. Miller II, 518 F. Supp. 163. The district court found that there was no abuse of the Miller grand jury, and ordered disclosure of the requested documents to IRS personnel, to be designated by the government, for use in connection with litigation relating to Miller's civil tax liabilities. The court, however, denied disclosure of the requested transcripts without prejudice to a renewed petition for disclosure upon a showing of particularized need. The district court ordered transfer of the transcripts to "the court before which the tax litigation shall proceed"*fn4 to facilitate that court's determination on any future petition for disclosure. Id. at 170. The transferee court turned out to be a tax court, rather than another district court. In July, 1981, the government designated IRS District Counsel, Manhatten, to receive the documents for use in "the Miller audit and/or any legal proceedings had in conjunction therewith."

All parties appeal from the district court's decision and order.*fn5 Miller appeals from all portions of the decision and order, while the four intervenors only appeal from that part which would transfer the transcripts of their grand jury testimony to the tax court. The United States filed a cross-appeal from that part of the district court's order which denies disclosure of the requested transcripts.

II. Appealability

Although not raised as an issue by the parties, there is the threshold question as to whether this is an appealable order. Some courts have found that an order granting or denying disclosure, or directing transfer of federal grand jury materials to another court, relates only to pretrial discovery and is interlocutory and nonappealable. See, e.g., In re 1975-2 Grand Jury Investigation of Associated Milk Producers, Inc., 566 F.2d 1293 (5th Cir.), cert. denied, 437 U.S. 905, 57 L. Ed. 2d 1135, 98 S. Ct. 3092 (1978); Baker v. United States Steel Corp., 492 F.2d 1074 (2d Cir. 1974). But see In re Grand Jury Proceedings (Alpha Portland Industries, Inc.), 649 F.2d 387 (6th Cir.), cert. dismissed, 453 U.S. 946, 102 S. Ct. 17, 69 L. Ed. 2d 1033 (1981). The courts' reasoning is that a party can challenge admission of improperly obtained evidence after final judgment. Moreover, releasing materials to another court is merely a mechanical step and not an order of disclosure.

Where litigation of the disclosure motion is the only pending federal proceeding, however, an order granting or denying the motion is appealable. See In re Grand Jury Investigation, 630 F.2d 996 (3d Cir. 1980), cert. denied, 449 U.S. 1081, 101 S. Ct. 865, 66 L. Ed. 2d 805 (1981); United States v. Sobotka, 623 F.2d 764 (2d Cir. 1980). The court where the current tax litigation is proceeding would have no authority to review a discretionary action by a federal district court judge. Therefore, the only opportunity for review would be an appeal of the district court order to this court. Moreover, review is necessary in light of the damage which may be created by unwarranted breaches of secrecy and the cost of relitigating trials tainted by admission of grand jury transcripts later held to have been improperly disclosed.*fn6 8 J. MOORE, MOORE'S FEDERAL PRACTICE, P 6.05[7][c] (2d ed. 1981). The disclosure and transfer order here is a "final decision." See In re Grand Jury Investigation No. 78-184 (Sells), 642 F.2d 1184, 1187 (9th Cir. 1981), cert. granted sub nom. United States v. Sells Engineering, Inc., 456 U.S. 960, 102 S. Ct. 2034, 72 L. Ed. 2d 483 (1982).

III. Adversary Hearing

Miller argues that it "raised substantial questions regarding the good faith of the grand jury investigation"*fn7 and that an evidentiary or oral hearing is necessary to allow it to demonstrate that the grand jury investigation was conducted in bad faith.*fn8 The government suggests that Miller should have addressed this issue at the time of the grand jury investigation or at a future time when the government attempts to introduce any disclosed material into evidence at a subsequent judicial proceeding. The district court determined that it was an appropriate forum in which to assess the government's use of the grand jury. Miller I, 510 F. Supp. at 589.

It is unclear whether Miller is requesting a hearing at a time when the court considers Miller's allegations of grand jury abuse and/or at a time when the court considers a Rule 6(e) disclosure order to the government. The two hearings are related, and in some cases would be the same, since any grand jury abuse would bear heavily on the district court's decision whether to disclose. United States v. Procter & Gamble, 356 U.S. 677, 683, 2 L. Ed. 2d 1077, 78 S. Ct. 983 (1958); In re April 1956 Term Grand Jury, 239 F.2d 263 (7th Cir. 1956). In In re Grand Jury Subpoenas, April, 1978, at Baltimore, 581 F.2d at 1110 & n.15, the court recognized two procedures, finding that Congress intended that the government's application for a disclosure order would be ex parte in the interests of grand jury secrecy, but that the district court was not precluded from holding as extensive a hearing as required to satisfy itself that the government's use of the grand jury process had been proper. Although the district court did not distinguish between the two types of hearings, we will examine the propriety of an adversary hearing at both points in time.

A. Hearing Regarding Allegations of Grand Jury Abuse

A grand jury investigation is not conducted in good faith unless it is used to conduct investigations that are in their inception exclusively criminal. Procter & Gamble, 356 U.S. at 683; In re April 1956 Term Grand Jury, 239 F.2d at 272; United States v. Doe, 341 F. Supp. 1350, 1352 (S.D.N.Y. 1972). There is no evidence of bad faith from the mere fact that the government conducted a grand jury proceeding without returning an indictment and later seeks to use the material in a civil investigation. A grand jury investigation used to investigate alleged criminal violations may uncover civil violations as well. Procter & Gamble, 356 U.S. at 683-84. Moreover, there was no intent in the legislative history of Rule 6(e) to generally preclude the use of grand jury developed evidence for civil law enforcement purposes, "assuming that the grand jury was utilized for the legitimate purpose of a criminal investigation." S. Rep. No. 95-354, 95th Cong., 1st Sess. 8, reprinted in 1977 U.S. Code Cong. & Ad. News 527, 532.

The court properly considered Miller's allegations of abuse, and required the government to demonstrate its bona fides prior to obtaining a Rule 6(e) order. Sells, 642 F.2d at 1192; In re Grand Jury Subpoenas, April, 1978, at Baltimore, 581 F.2d at 1110; Robert Hawthorne, Inc. v. Director of Internal Revenue, 406 F. Supp. 1098, 1118 (E.D. Pa. 1975) (amended 1976). The government filed several affidavits of individuals involved in the investigation, as well as materials which included reasons why the grand jury investigation was necessary. Miller also filed an affidavit and set out arguments in a brief. After inspecting the requested documents in camera and finding that the "questions . . . raised [by Miller could] be answered by direct reference to the materials," the district court concluded that the government set forth adequate reasons for its conduct and that there was nothing to suggest that the grand jury process was abused. Therefore, the court denied Miller an evidentiary hearing.*fn9 Miller I, 510 F. Supp. at 585. Since the district court carefully viewed Miller's allegations in light of the requested documents, we find that the court did not abuse its discretion and affirm its finding.

B. Hearing Regarding Disclosure to the IRS

Congress did not intend to preclude the use of grand jury developed evidence for civil law enforcement purposes. In fact, Congressman Wiggins of the House Judiciary Committee noted that when the grand jury uncovers violations of civil laws, it is the duty of the attorney for the government to turn that information over to the appropriate governmental agency after successfully seeking an order of the court. 123 Cong. Rec. 15196 (1977) (emphasis added). In determining whether to grant disclosure pursuant to Rule 6(e), however, it is unclear whether the court's hearing should be ex parte or adversary.*fn10 See generally Preliminary Draft of Proposed Amendments to the Federal Rules of Criminal Procedure, Committee on Rules of Practice and Procedure of the Judicial Conference of the United States, at 3-5, 11-17, reprinted in 660 F.2d 1, 15-17, 23-29 (advance sheets) (October 1981); Kirkland, "Administrative Agency Access to Grand Jury Material Under Amended Rule 6(e)," 29 Case W. L. Rev. 295, 320 n.157 (1978) (hereinafter cited as "Administrative Agency Access").

The legislative history of Rule 6(e) is equivocal. The rule was modified by Congress in 1976. These modifications were intended to reaffirm the long-established policy of grand jury secrecy while at the same time providing a procedure to facilitate the appropriate release of grand jury material. The Senate Report states a preference for ex parte proceedings "so as to preserve, to the maximum extent possible, grand jury secrecy." S. Rep. No. 95-354, 95th Cong., 1st Sess. 8, reprinted in 1977 U.S. Code Cong. & Ad. News 527, 532; cf. Preliminary Draft to Proposed Amendments, at 3 (if government seeks disclosure for its own use, hearing shall be ex parte). In contrast, Representative Mann noted that ...


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