Deputy Attorney General Paul McNulty recently revised Department of Justice (DOJ) guidelines concerning the federal prosecution of business organizations (the "McNulty Memorandum"). The McNulty Memorandum replaces DOJ’s prior guidelines, which were issued in 2003 by then Deputy Attorney General Larry Thompson (the "Thompson Memorandum"). Notwithstanding the McNulty Memorandum, companies under investigation will still face the same pressures that they faced under the Thompson Memorandum, which linked a determination of whether a company was "cooperative" to whether that company waived the attorney-client privilege, work product protections, and whether that company refused to advance legal fees to its employees. As a result, the McNulty Memorandum does far too little to correct any prosecutorial overreaching arising from the Thompson Memorandum.

The Thompson Memorandum’s Guidelines and the Ensuing Controversy

In 2003, in response to the WorldCom and Enron scandals, the President created a Corporate Fraud Task Force to enhance DOJ’s prosecution of corporate entities. Pursuant to this initiative, DOJ issued the Thompson Memorandum, which updated DOJ policies and guidelines for corporate prosecutions.

The Thompson Memorandum required prosecutors to consider, among other factors, whether or not the corporation "appears to be protecting its culpable employees and agencies." Prosecutors were instructed to examine the completeness of the corporation’s disclosure, including, "a waiver of the attorney-client privilege and work product protections" and whether the corporation was advancing attorney fees. Relying on the Thompson Memorandum, prosecutors generally expected a company seeking leniency from the government to, among other things:

  • conduct a rigorous internal investigation;
  • disclose to the government the results of the internal investigation, including attorney-client privileged material and attorney work product; and
  • deny payments of attorneys’ fees to employees under investigation.

The Thompson Memorandum caused a "culture of waiver," placing corporations in a precarious catch-22. A corporation could conduct its own investigation, disclose the results of that otherwise privileged investigation to DOJ, provide the government with a road map for an effective prosecution, and also expose itself to the risk of additional litigation without the benefit of any protection from prosecution or derivative third-party claims. Alternatively, the corporation could risk being labeled uncooperative, which invariably increased the likelihood of being indicted.

The Thompson Memorandum created significant controversy. Most recently, Senator Arlen Specter (R-Pa.), outgoing chairman of the Senate Judiciary Committee, introduced a bill entitled "Attorney-Client Privilege Protection Act of 2006." The bill prohibits federal prosecutors from using, in part, the legitimate assertion of the attorney-client privilege or work product doctrine or the payment of an employee’s legal fees as factors in determining whether a corporation is cooperating. If passed, this law would essentially override the Thompson Memorandum.

Moreover, U.S. District Court Judge Lewis Kaplan of the Southern District of New York issued two opinions finding unconstitutional DOJ’s pressuring a company not to pay employees’ legal fees and not to employ individuals who failed to cooperate with a government investigation, both of which were authorized, as a matter of DOJ policy, under the Thompson Memorandum.

The McNulty Memorandum

In announcing the revised policy, the McNulty Memorandum acknowledged that the Thompson Memorandum "may be discouraging full and candid communications between corporate employees and legal counsel." In response, the McNulty Memorandum implemented a series of rules and procedures intended to regulate how prosecutors solicit corporate waivers of privileged material. "Prosecutors may only request waiver of attorney-client or work product protections when there is a legitimate need for the privileged information to fulfill their law enforcement obligations." If a "legitimate need" exists, prosecutors must then follow specific procedures depending on the "category" of information in which the requested materials fall.

Category I materials include factual information such as key documents, witness statements or purely factual interview memoranda. Before requesting a waiver for Category I information, the line prosecutor must seek approval from the United States Attorney, who must, in turn, consult with the Assistant Attorney General for the Criminal Division. DOJ may consider a corporation’s response to a request for Category I information in deciding whether to indict.

Category II materials include attorney-client communications, legal advice or nonfact attorney work product. Before seeking a waiver for Category II information, the United States Attorney must obtain written approval from the Deputy Attorney General. These procedures do not apply if the company is relying on an advice of counsel defense or if the legal advice falls within the crime fraud exception to the attorney-client privilege. In contrast to Category I demands, a corporation’s response to a request for Category II information may not be considered in deciding whether to charge the corporation.

Moreover, with respect to legal fees, the McNulty Memorandum generally eliminates the payment or reimbursement of legal fees as a factor that the prosecutor may consider in deciding whether to indict. However, the McNulty Memorandum includes an exception where, "in extremely rare cases," the "totality of the circumstances show that [payment of fees] was intended to impede a criminal investigation."

Commentary on the McNulty Memorandum

The McNulty Memorandum strongly suggests that a line prosecutor will no longer be able to solicit a waiver if the information being sought is available through some nonprivileged means. Under the revised standards, a prosecutor should be hard-pressed to satisfy the "legitimate need" test if counsel makes relevant witnesses available for interviews by the government. The McNulty Memorandum may also contribute to greater national consistency among the various United States Attorneys Offices regarding requests for attorney-client and work product waivers. Finally, results of internal investigation, including memoranda of witness interviews, should be afforded greater protection against disclosure to the government if informed counsel drafts such memoranda to include counsel’s mental impressions and legal strategy.

However, the McNulty Memorandum does far too little to rectify DOJ’s dubious practice of coercing waivers of attorney-client privilege and work product protection. Under the new policy, cooperation with the government is continuously linked with waiver of the privilege. This is even true of Category II information. For example, if Company A waives its privilege with respect to Category II information while Company B does not, it is not likely that Company A and Company B will be treated the same. As a result, companies facing the specter of an indictment will feel circumstantially coerced to waive the same kind of information as before the McNulty Memorandum, even if the line prosecutor does not make an explicit request for it to do so. Moreover, companies may feel even greater pressure than before to make an expeditious waiver that avoids subjecting the line prosecutor to the more cumbersome process of placing a formal request with a DOJ official.

In this way, the McNulty Memorandum actually formalizes the erosion of the attorney-client privilege. Because the attorney-client privilege and work product protections belong to the company, it is simply inappropriate for prosecutors to determine when a company should waive its privilege, whether or not the request is in writing and originates from a centralized process. Moreover, the McNulty Memorandum’s focus on a greater justification for a waiver of nonfactual privileged information misses the point: DOJ should never approve a request for attorney work product waiver. Weakened attorney-client privilege and work product protection discourage company employees from consulting with company counsel. As a result, DOJ’s policies and procedures, even under the revised McNulty Memorandum, impede the efficacy of internal compliance programs.

Similarly, the McNulty Memorandum may not change how DOJ penalizes companies that advance legal fees to its corporate agents. The McNulty Memorandum is silent on what type of evidence can be used to show an intent to obstruct. As a result, the McNulty Memorandum does nothing to eliminate any negative scrutiny associated with the signing of a joint defense agreement (JDA), the sharing of critical documents between the company and its employees, and a company’s continued employment of an employee under government investigation. In deciding whether to charge a company, a prosecutor may still consider indemnification of legal fees as an adverse factor if the company is paying the fees for an employee who:

  • signs a JDA with the company;
  • exercises a constitutional right not to speak with the government; and/or
  • continues to be employed by the company.

As a result, corporate counsel should resist any indemnification-related questions from the prosecutor, particularly those that disclose the existence of a JDA with a corporate employee.

In sum, the McNulty Memorandum may treat some of the symptoms but fails to address the underlying cause for "the culture of waiver." Fearing the death knell of an Andersen-type indictment, a corporation will generally be overly incentivized to cooperate with the government, even if the conduct at issue is localized to a few of its employees. The McNulty Memorandum should have leveled the playing field between the government and any corporation facing a government investigation by more closely tying the exercise of a prosecutor’s charging discretion to an effective corporate compliance program. This more rigorous standard would have held companies accountable if they had failed to exercise due diligence to prevent and detect misconduct by its employees. A heightened reliance on an effective compliance program would have served the purposes of the criminal law and of the Thompson Memorandum by incentivizing companies to identify and prevent crime. Moreover, it would have restrained the government’s unfettered discretion to prosecute a company for the conduct of certain employees based on some elastic theory of vicarious liability.

As a practical matter, the McNulty Memorandum may reduce formal waiver demands from prosecutors. What remains unclear however is whether reduced waiver demands will, in fact, reduce waivers and the concomitant erosion of the attorney-client privilege and work product protections. The McNulty Memorandum fails to provide substantive change in the investigatory practice of government enforcement actions and continues to rely on overly broad and antiquated notions of corporate criminal liability. As a result, the McNulty Memorandum may only serve as a symbolic retreat, potentially forestalling more draconian change being offered by critics of DOJ but barely impacting how business ventures must analyze the question of whether to waive privilege or advance legal fees.

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