*The Honorable John Gleeson, of the United States District

Court for the Eastern District of New York, sitting by designation. 1 06-4358 Stein v. KPMG

UNITED STATES COURT OF APPEALS 1
FOR THE SECOND CIRCUIT 2 August Term, 2006 3 (Argued: November 21, 2006 Decided: May 23, 2007) 4 Docket No. 06-4358-cv 5

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 6 JEFFREY STEIN, MARK WATSON, PHILIP WIESNER, RANDALL BICKHAM, 7 LARRY DELAP, JEFFREY EISCHEID, DAVID GREENBERG, STEVEN 8 GREMMINGER, CARL HASTING, JOHN LANNING, JOHN LARSON, ROBERT 9 PFAFF, GREGG RITCHIE, RICHARD ROSENTHAL, RICHARD SMITH, and CAROL 10 G. WARLEY, 11 12 Plaintiffs-Appellees , 13 14

- v. - 15 16 KPMG, LLP, 17 18 Defendant-Appellant
. 19 20

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 21 22 B e f o r e: WINTER, HALL, Circuit Judges , and GLEESON, * 23 District Judge
. 24 25 Appeal from the exercise of ancillary jurisdiction in a 26 criminal tax fraud prosecution by the United States District 27 Court for the Southern District of New York (Lewis A. Kaplan, 28 Judge ) over a state law contractual claim for attorneys’ fees, 29 and from denial of a motion to compel arbitration under the 302

Federal Arbitration Act. This assertion of jurisdiction was 1 intended to provide a remedy for Fifth and Sixth Amendment 2 violations found by the court. We treat the appeal as a petition 3 for a writ of mandamus and grant the petition. We vacate the 4 order asserting ancillary jurisdiction as beyond the district 5 court's power. 6 SHEILA L. BIRNBAUM, Skadden, Arps, Meagher & 7 Flom LLP, New York, New York (Barbara Wrubel, 8 J. Russell Jackson, Preeta D. Bansal, Haydan 9 A. Coleman, Skadden, Arps, Meagher & Flom 10 LLP, New York, New York, Amy Sabrin, Skadden, 11 Arps, Meagher & Flom LLP, Washington D.C., 12 Charles A. Stillman, Stillman, Friedman & 13 Shechtman, P.C., New York, New York, on the 14 brief), for Defendant Appellant
. 15 16 DAVID SPEARS, Spears & Imes LLP, New York, 17 New York, for Plaintiffs-Appellees Jeffrey 18 Stein and John Lanning
. 19 20 RONALD E. DEPETRIS, DePetris & Bachrach, LLP, 21 New York, New York (Marion Bachrach, on the 22 brief), for Plaintiff-Appellee Richard Smith
. 23 24 John A. Townsend, Townsend & Jones, LLP, 25 Houston, Texas, on the brief, for Plaintiff26 Appellee Carol G. Warley
. 27 28 David C. Scheper, Overland Borenstein Scheper 29 & Kim LLP, Los Angeles, California, on the 30 brief, for Plaintiff-Appellee Robert Pfaff
. 31 32 John F. Kaley, Doar Rieck Kaley & Mack, New 33 York, New York, on the brief, for Plaintiff34 Appellee Steven Gremminger
. 35 36 David C. Smith, McNamara Spira & Smith, Los 37 Angeles, California, on the brief, for 38 Plaintiff-Appellee Gregg Ritchie
. 39 40 Leonard F. Lesser, Simon Lesser P.C., New 41 York, New York, on the brief, for Plaintiff- 423 Appellee David Greenberg
. 1 2 Diana D. Parker, Law Offices of Diana D. 3 Parker, New York, New York, on the brief, for 4 Plaintiff-Appellee Larry DeLap
. 5 6 Michael S. Kim, Kobre & Kim LLP, New York, 7 New York, on the brief, for Plaintiff8 Appellee Mark Watson
. 9 10 Marc A. Fenster, Russ, August & Kabat, Los 11 Angeles, California, on the brief, for 12 Plaintiff-Appellee Randall Bickham
. 13 14 Stanley S. Arkin, Arkin Kaplan Rice LLP, New 15 York, New York, on the brief, for Plaintiff16 Appellee Jeffrey Eischeid
. 17 18 Robert S. Fink, Kostelanetz & Fink, LLP, New 19 York, New York, on the brief, for Plaintiff20 Appellee Richard Smith
. 21 22 Stephen Willey, Savitt & Bruce LLP, Seattle, 23 Washington, on the brief, for Plaintiff24 Appellee John Larson
. 25 26 Susan R. Necheles, Hafetz & Necheles, New 27 York, New York, on the brief, for Plaintiff28 Appellee Richard Rosenthal
. 29 30 Russell M. Gioiella, Litman, Asche & 31 Gioiella, New York, New York, on the brief, 32 for Plaintiff-Appellee Carl Hasting
. 33 34 WINTER, Circuit Judge : 35 This appeal is an offspring of a criminal tax fraud 36 prosecution. In the course of the criminal prosecution, Judge 37 Kaplan asserted ancillary jurisdiction over a state law contract 38 claim brought against KPMG, LLP, by sixteen of the defendants in 39 the criminal case, all former partners and employees of KPMG, 40 seeking to force it to pay their legal expenses. KPMG appeals 414

from the decision allowing the ancillary proceeding and from the 1 denial of its motion to compel arbitration of the contract claim. 2 Construing KPMG’s appeal as a petition for writ of mandamus, we 3 grant the petition. We vacate the order of the district court 4 asserting ancillary jurisdiction over the contract claim as 5 beyond the district court’s power. The issues regarding KPMG’s 6 motion to compel arbitration are therefore moot. 7
BACKGROUND 8 The full history of the proceedings underlying this appeal 9 is reported in United States v. Stein, 435 F. Supp. 2d 330 10 (S.D.N.Y. 2006) ( Stein I ); United States v. Stein (Stein v. KPMG 11 LLP) , 452 F. Supp. 2d 230 (S.D.N.Y. 2006) ( Stein II ). 12 Familiarity with these opinions is assumed, and we recount here 13 only those facts pertinent to the disposition of the present 14 appeal. 15 The underlying criminal prosecution is said to be the 16 largest criminal tax case in American history. Stein II , 452 F. 17 Supp. 2d at 237. Nineteen defendants are charged with conspiracy 18 and tax evasion, including the appellees, who are former partners 19 or employees of the accounting firm KPMG. Id. The defendants 20 are alleged to have, inter alia, devised, marketed, and 21 implemented fraudulent tax shelters that caused a tax loss to the 22 United States Treasury of more than $2 billion. In connection 23 with the alleged tax shelters, KPMG entered into a deferred 245

prosecution agreement with the government, agreeing to cooperate 1 fully with the government and to pay $456 million in fines and 2 penalties. Stein I , 435 F. Supp. 2d at 349-50. If KPMG performs 3 its obligations under the agreement, it will escape prosecution. 4
Id. 5 The particular dispute giving rise to this appeal concerns 6 policies adopted by the Department of Justice in response to 7 highly visible public concerns over the compliance by business 8 firms with federal and state law. SeeLeonard Orland, The 9 Transformation of Corporate Criminal Law, 1 Brook. J. Corp. Fin. 10 & Com. L. 45 (2006). The policies were established in the so11 called “Thompson Memorandum,” which set out standards to be 12 followed by federal prosecutors in determining whether to bring 13 criminal prosecutions against firms as well as their agents. 1 14
SeeMem. from Larry D. Thompson, Deputy Attorney General, U.S. 15 Dep’t. Of Justice, to Heads of Department Components, United 16 States Attorneys, re: Principles of Federal Prosecution of 17 Business Organizations (Jan. 20, 2003) (“Thompson Mem.”), 18 http://www.usdoj.gov/dag/cftf/business_ organizations.pdf. One 19 such standard deemed a firm’s voluntary payment of wrongdoing 20 agents' legal expenses a factor favoring prosecution of the firm. 21
Id. at 7-8. 22 During the course of the investigation, and prior to the 23 indictments in this matter, KPMG negotiated with and paid the 246

legal fees of some, but not all, of the appellees. Upon 1 indictment, however, KPMG stopped these payments. Stein I , 435 2 F. Supp. 2d at 350. In Stein I , the district court found that 3 the government had used the threat of prosecution to pressure 4 KPMG into cutting off payment of the appellees’ legal fees and 5 thereby violated appellees’ Fifth and Sixth Amendment rights to a 6 fair trial and the effective assistance of counsel. Id. at 382. 7 The merits of that ruling are not before us on this appeal. 8 The district court suggested that the constitutional 9 violation could be rendered harmless if the appellees could 10 successfully force KPMG to re-commence -- or, for some of the 11 appellees, commence -- paying their legal expenses. Id. at 373, 12 376-78. The court sua sponteinstructed the clerk of the 13 district court to open a civil docket number for an expected 14 contract claim by the appellees against KPMG for advancement of 15 their defense costs. Id. at 382. The district court stated that 16 it would “entertain the claims pursuant to its ancillary 17 jurisdiction over this case.” Id. 18 The district court acknowledged a more obvious remedy for 19 the constitutional violations it had found -- dismissal of the 20 indictment -- and explicitly left that possibility open as an 21 incentive for the government to strongarm KPMG to advance 22 appellees' defense costs. Id. at 380. In short, having found 23 that the government violated appellees' constitutional rights by 247

threatening to bring one indictment, the district court sought to 1 remedy the violation by threatening to dismiss another. 2 Following this invitation, the appellees filed the 3 anticipated complaints against KPMG. In the complaints, fifteen 4 of the sixteen appellees relied primarily on an “implied-in-fact” 5 contract with KPMG based on KPMG’s alleged history of paying its 6 employees’ legal expenses. The sixteenth appellee, Jeffrey 7 Stein, relied on an express breach of his written separation 8 agreement with KPMG. In response, KPMG moved to dismiss for lack 9 of subject matter jurisdiction and on the merits. It also argued 10 that the case should be referred to arbitration under arbitration 11 agreements between KPMG and the various appellees. The district 12 court denied KPMG’s motions in Stein II , 452 F. Supp. 2d 230. 13
The Stein IIopinion contained three principal holdings: 14 (i) a reaffirmation of the court's earlier holding that ancillary 15 jurisdiction existed over the contractual fee dispute between 16 appellees and KPMG; (ii) a rejection of KPMG’s argument that the 17 “implied-in-fact” contract claims of all of the appellees, save 18 Stein, were foreclosed by written agreements containing merger 19 clauses; and (iii) a finding that enforcement of any applicable 20 arbitration clause would be against public policy. The court 21 concluded that arbitration might interfere with the district 22 court’s ability to ensure a speedy trial, could lead to a 23 dismissal of possibly meritorious criminal charges, would 248

endanger the appellees’ rights to a fair trial, and would risk 1 imposing unnecessary costs on taxpayers if the appellees should 2 become indigent. Id. at 238-39. 3 The opinion closed by setting the trial of appellees’ 4 advancement claim for six weeks later, October 17, 2006, 5 following an abbreviated period of limited discovery. Id. at 6 275. The procedural rules governing the trial were left to the 7 future, the district court noting that “[i]t is not now entirely 8 clear exactly how this will play out.” Id. at 274. Although the 9 district court stated that KPMG would have “the protections 10 inherent in the Federal Rules of Civil Procedure,” id. at 275, 11 the court elsewhere stated that the advancement claim, although 12 civil in nature, “is a criminal case to which the Civil Rules do 13 not apply,” id. at 260. It further expressed its intention to 14 apply the Civil Rules only “to the extent they are consistent 15 with the Criminal Rules.” Id. at 269. 16 On appeal, KPMG argues that the district court lacks subject 17 matter jurisdiction over appellees’ advancement claims and also 18 that, if jurisdiction exists, the district court further erred by 19 refusing to compel arbitration. 20
DISCUSSION 21 a) Appeal or Mandamus 22 Appellees argue that we have no appellate jurisdiction to 23 review the district court’s assertion of ancillary jurisdiction 249

because the denial of KPMG’s motion to dismiss appellees’ 1 advancement complaint was an unappealable interlocutory order in 2 a criminal case. KPMG responds that we have jurisdiction under 3 the Federal Arbitration Act (the “FAA”)to review the district 4 court’s refusal to compel arbitration, and that we may then 5 exercise pendent jurisdiction over the question of ancillary 6 jurisdiction. 7 These arguments in turn spawn a tangle of counter- and 8 counter-counter-arguments. Section 16 of the FAA provides for 9 interlocutory appeal from a refusal to stay an action under 10 Section 3 of the FAA, or of a refusal to compel arbitration under 11 Section 4. 9 U.S.C. § 16(a)(1). KPMG, however, did not ask for 12 a stay under Section 3 anywhere in its notice of motion to 13 dismiss, and Section 4 applies only to orders by “any United 14 States district court which, save for [the arbitration] 15 agreement, would have jurisdiction under Title 28 . . . .” 9 16 U.S.C. § 4. However, the district court does not have 17 jurisdiction over the advancement claim under Title 28. 18 Moreover, even if KPMG is deemed to have constructively 19 petitioned for a stay under Section 3, an exercise of pendent 20 jurisdiction would require us to find that the issue of ancillary 21 jurisdiction is “‘inextricably intertwined’ with an issue over 22 which the court properly has appellate jurisdiction,” as where 23 “the same specific question underl[ies] both the appealable order 2410

and the non-appealable order, or where resolution of the non1 appealable order [is] subsidiary to resolution of the appealable 2
order.” Stolt-Nielsen SA v. Celanese AG, 430 F.3d 567, 576 (2d 3 Cir. 2005) (citations omitted). 4 To undertake pendent jurisdiction, therefore, we would have 5 to find that the issue of ancillary jurisdiction is inextricably 6 intertwined with the denial of the motion to compel arbitration, 7 presumably on the grounds that the district court’s reasons for 8 asserting ancillary jurisdiction and for finding that arbitration 9 would be against public policy were the same, i.e., the need to 10 afford an adequate and timely remedy for the constitutional 11 violations. See Stein Iat 377 (ancillary proceeding needed 12 "[i]n order to guarantee [appellees'] right to choose their own 13 counsel . . ."); Stein IIat 245 (having found the constitutional 14 violations, "the overreaching issue is what to do about it"), and 15 254 (need to promptly vindicate appellees' Fifth and Sixth 16 Amendment rights are factors rendering arbitration clauses 17 contrary to public policy). 18 We decline to resolve the question of appellate 19 jurisdiction. We suggested at oral argument that it might be 20 more appropriate to exercise our mandamus power. The parties 21 were invited to file supplemental briefs on the issue, and Judge 22 Kaplan himself filed a submission on the issue. 23 We have in the past treated an appeal as a petition for 2411

leave to file a writ of mandamus. In re Repetitive Stress Injury 1 Litigation, 11 F.3d 368, 373 (2d Cir. 1993); In re Hooker 2 Investments, Inc. , 937 F.2d 833, 837 (2d Cir. 1991). However, we 3 have generally done so only after finding a lack of appellate 4 jurisdiction. Repetitive Stress Injury Litigation, 11 F.3d at 5 373; Hooker Investments , 937 F.2d at 837. There has been 6 criticism of the practice of resorting to mandamus without first 7 resolving the issue of appellate jurisdiction, ACF Indus., Inc. 8
v. EEOC, 439 U.S. 1081, 1085 (1979) (Powell, J. , dissenting from 9 denial of certiorari), but there is nevertheless precedent for 10 doing so, see, e.g. , In re Globe Newspaper Co. , 920 F.2d 88 (1st 11 Cir. 1990); Guam v. United States Dist. Court, 641 F.2d 816 (9th 12 Cir. 1981); Wilk v. Am. Medical Assn. , 635 F.2d 1295, 1298 (7th 13 Cir. 1980); see alsoWright, Miller & Cooper, 16 Fed. Prac. & 14 Proc. Juris.2d§ 3932.1. While the practice of resorting to 15 mandamus only in the absence of jurisdiction may be of value in 16 alerting courts to the danger of allowing mandamus to become a 17 substitute for an appeal and thus to swallow the rule against 18 interlocutory appeals, ACF Indus. , 439 U.S. at 1085, the 19 circumstances here fully justify the exercise of mandamus power 20 without deciding whether we have appellate jurisdiction. 21 In turning to mandamus, we simply recognize that "[t]he 22 traditional use of the writ in the aid of appellate jurisdiction 23 both [at] common law and in the federal courts has been to 2412

confine an inferior court to a lawful exercise of its 1 prescribed jurisdiction . . . ." Roche v. Evaporated Milk Ass’n, 2 319 U.S. 21, 26 (1943). Because the actions of the district 3 court were well outside its subject matter jurisdiction, our 4 resort to mandamus does not in any way expand the potential use 5 of that writ and avoids our unnecessarily addressing complex 6 jurisdictional issues. 7 The jurisdictional issues are complex, but largely because, 8 as we explain below, the proceeding challenged on this appeal -- 9 a state law contract action against a non-party within a federal 10 criminal proceeding -- is well outside the subject matter 11 jurisdiction conferred by Congress on the federal courts. It is 12 hardly surprising, therefore, that there is no statute or body of 13 caselaw that clearly affords or clearly precludes appellate 14 review of the commencement of such a proceeding. For example, 15 the failure of Congress to mention Title 18 as well as Title 28 16 in Section 4 of the FAA is not evidence of an intent to preclude 17 interlocutory appeals from orders refusing to compel arbitration 18 in criminal cases. Rather, it is evidence that Congress did not 19 expect such issues ever to arise in criminal cases. Indeed, the 20 complexities surrounding our appellate jurisdiction underline the 21 paucity of grounds supporting the district court’s assertion of 22 ancillary jurisdiction. 23 Were we to opine on the various arguments over appellate 2413

jurisdiction, we would have to address issues involving the FAA 1 and pendent jurisdiction that arise only because of the 2 happenstances of this unique case. There is no need for a 3 precedent regarding appellate jurisdiction in this context 4 because our issuance of the writ disposes of this matter and 5 renders the existence of future such cases unlikely. However, 6 opining on the jurisdictional issues does risk the making of 7 statements that might be misleading in future cases in a 8 different context. We therefore turn to the mandamus remedy 9 without deciding the jurisdictional issues. 10 b) The Merits 11 As discussed above, mandamus is available to confine courts 12 to their designated jurisdiction. Other “touchstones” of 13 mandamus review are “usurpation of power, clear abuse of 14 discretion and the presence of an issue of first impression.” 15 Steele v. L.F. Rothschild & Co., Inc. , 864 F.2d 1, 4 (2d Cir. 16 1988) (internal quotation marks omitted). Three conditions must 17 be satisfied before the writ may issue: first, the party seeking 18 relief must have “no other adequate means to attain the relief he 19 desires,” second, the petitioner must show that his right to the 20 writ is “clear and indisputable,” and third, the issuing court 21 must be satisfied that the writ is appropriate under the 22 circumstances. Cheney v. United States Dist. Court , 542 U.S. 23 367, 380-81 (2004) (internal quotation marks and citations 2414

omitted). The writ is, of course, to be used sparingly. In 1 addition to avoiding its use as a substitute for an appeal, 2 discussed above, “the principal reasons for our reluctance to 3 condone use of the writ [are] the undesirability of making a 4 district court judge a litigant and the inefficiency of piecemeal 5 appellate litigation.” Mallard v. United States Dist. Court, 490 6 U.S. 296, 309 (1989). In the present matter, all of the standard 7 requirements for granting mandamus relief are met, while the 8 reasons underlying the traditional reluctance to resort to the 9 writ are either not present or favor granting the writ. 10 Appellees argue that KPMG’s right to relief is not “clear 11 and indisputable” because the proper scope of ancillary 12 jurisdiction is not well-settled by our caselaw. To be sure, 13 “[t]he boundaries of ancillary jurisdiction are not easily 14 defined and the cases addressing it are hardly a model of 15 clarity.” Garcia v. Teitler, 443 F.3d 202, 208 (2d Cir. 2006). 16 However, because ancillary jurisdiction cannot be limitless and 17 still be ancillary, boundaries there must be, and the exercise of 18 ancillary jurisdiction here is clearly outside those boundaries. 19
As Garciastated, “ancillary jurisdiction is aimed at 20 enabling a court to administer justice within the scope of its 21 jurisdiction.” Id. (internal quotation marks omitted). 22 Ancillary jurisdiction is intended “to permit disposition of 23 claims that are, in varying respects and degrees, factually 2415

interdependent by a single court, and . . . to enable a court to 1 function successfully, that is, to manage its proceedings, 2 vindicate its authority, and effectuate its decrees.” Id. 3 (quoting Kokkonen v. Guardian Life Ins. Co. of Am. , 511 U.S. 375, 4 379-80 (1994)). 5 The most common exercise of ancillary jurisdiction is, 6 probably, to resolve fee disputes between a party and its 7 attorney arising in litigation in which the attorney represented 8 the party. See, e.g. , Cluett, Peabody & Co., Inc. v. CPC 9 Acquisition Co., Inc. , 863 F.2d 251 (2d Cir. 1988); Novinger v. 10 E.I. DuPont de Nemours & Co., Inc. , 809 F.2d 212 (3d Cir. 1987). 11
In Garcia, for example, we upheld the exercise of ancillary 12 jurisdiction to compel an attorney to return a retainer obtained 13 to represent a party in the underlying litigation after the 14 district court had ordered the attorney to withdraw as counsel 15 because of misconduct. Garcia, 443 F.3d at 208, 211-12. 16 Exercise of ancillary jurisdiction over a fee dispute between a 17 party and an attorney functioning as an officer of the court in 18 litigation over which a court has jurisdiction is, however, a 19 world away from the exercise of ancillary jurisdiction in a 20 criminal proceeding to adjudicate a contract dispute between the 21 defendants and a non-party former employer. 22 When a court undertakes to resolve claims arising from a 23 relationship between a party to an action and the party’s 2416

attorney in that action and involving the attorney’s conduct of 1 that litigation, the parties to the ancillary proceeding are 2 already before the court as a litigant and officer of the court; 3 the relevant facts are generally more accessible to that court 4 than to another; and the ability of the court to conduct and 5 dispose of the underlying litigation may turn on, or at least be 6 greatly facilitated by, resolution of the issues raised in the 7 ancillary proceeding. However, when a non-party to the primary 8 proceeding is sought to be joined as a defendant in the ancillary 9 proceeding, the need for the ancillary proceeding and the 10 efficiencies provided by it must be both sufficiently great to 11 outweigh the prejudice to the non-party and to be consistent with 12 the limited jurisdiction of federal courts. 13 An ancillary proceeding may subject the non-party to what 14 may be a different forum and different procedural or even 15 substantive rules than would normally be involved in disposing of 16 the claim at issue. In addition, the assertion of ancillary 17 jurisdiction over matters that are otherwise outside the 18 jurisdiction conferred by the Constitution and the Congress can 19 be justified only by compelling needs arising in the exercise of 20 the jurisdiction that is conferred. While we do not exclude the 21 possibility of a legitimate ancillary proceeding involving a non22 party to the primary litigation, we believe that the requisite 23 compelling circumstances will be rare, as the need for such a 2417

proceeding generally will be far less pressing than in cases 1 involving parties already before the court. 2 2 In the present matter, the prejudice to KPMG is clear, and 3 the need for the ancillary proceeding is entirely speculative. 4 The claims to be resolved in the ancillary proceeding sound in 5 contract, i.e. appellees claim that KPMG impliedly -- in one case 6 expressly -- promised to pay their expenses in defending the 7 present criminal charges. The prejudice to KPMG in having these 8 claims resolved in a proceeding ancillary to a criminal 9 prosecution in the Southern District of New York is clear. At 10 stake are garden variety state law claims, albeit for large sums. 11 KPMG believed that contractual disputes between it and the 12 appellees would be resolved by arbitration. Instead, KPMG is 13
faced with a federal trial of more than a dozen individuals’ 14 multi-million dollar “implied-in-fact” contract claims. 15 Moreover, because such a proceeding is governed by no express 16 statutory authority, the district court has indicated its 17 intention to apply to this expedited undertaking an ad hocmix of 18 the criminal and civil rules of procedure determined on the fly, 19 as it were. See Stein II , 452 F. Supp. 2d at 274-75. The 20 resolution of the contract claims against KPMG is thus to occur 21 in an entirely sui generisproceeding even though it may require 22 the scrutinizing of decades of KPMG’s conduct, determining the 23 states of mind of dozens of individuals, applying the findings 2418

from those inquiries to the particular circumstances of each 1 appellee, and resolving multiple questions of the law of several 2 states. Waiting to appeal from a final judgment in this sort of 3 proceeding can hardly be described as an “adequate means” of 4 relief eliminating the need for mandamus. See Cheney, 542 U.S. 5 at 380 (internal quotation marks omitted). This is especially 6 the case where, as here, KPMG may have a contractual right to 7 resolve these questions through arbitration and avoid such a 8 proceeding altogether, as the FAA’s provision for interlocutory 9 appeals from refusals to stay an action or compel arbitration was 10 intended precisely to avoid such outcomes. 11 The need for the particular ancillary proceeding is also far 12 less pressing than contemplated by the district court. First, 13 the interrelationship of the factual issues underlying the 14 finding of constitutional violations and the asserted contract 15 claims is marginal. The Fifth and Sixth Amendment violations 16 were found to be the government’s implementation of the policy 17 stated in the Thompson Memorandum with regard to decisions to 18 indict or not indict firms. Stein I , 435 F. Supp. 2d at 367. 19 One aspect of that policy was to take into account whether the 20 firm was voluntarilypaying the legal expenses of members or 21 employees who had been indicted, seeThompson Mem. at 7-8, a 22 factor deemed to favor indictment under the Thompson Memorandum. 23
Id. That document gave no such weight to payments required by 2419

contract. As a result, the constitutional issues before the 1 district court went solely to what pressure the government put on 2 KPMG not to pay fees voluntarily and to what KPMG’s response was. 3
See Stein I , 435 F. Supp. 2d at 366, 343-49. A trial of claims 4 to expenses based on contract -- especially implied contract -- 5 will go over very different factual ground. 6 Second, while the ancillary proceeding is a major 7 undertaking, its contribution to the efficient conclusion of the 8 criminal proceeding is entirely speculative. Even if the holding 9 that the government violated the Fifth and Sixth Amendments is 10 correct -- an issue on which we express no opinion -- the 11 ancillary proceeding will provide a "remedy" only if KPMG loses, 12 hardly a foregone conclusion on the present record. 3But even if 13 there are constitutional violations and even if KPMG was 14 contractually obligated to pay appellees’ expenses, the ancillary 15 proceeding is not an indispensable remedy and may not even 16 constitute a full remedy. Dismissal of an indictment for Fifth 17 and Sixth Amendment violations is always an available remedy. 18 Moreover, if it violates the Fifth and Sixth Amendments for the 19 government to coerce an employer to decline to pay expenses on a 20 voluntary basis, it may well be a similar violation to coerce the 21 employer to breach a contract to pay such expenses, thereby 22 compelling the employees to pay the substantial costs of 23 enforcing the contract in a civil action. Either way, the 2420

government has used coercion to raise the costs of the defendants 1 to obtain counsel of their own choosing. The ancillary 2 proceeding may not, therefore, render any constitutional 3 violation harmless. 4 Third, even if there were constitutional violations and even 5 if KMPG is contractually obligated to advance appellees' 6 attorneys' fees and costs, creating an ancillary proceeding to 7 enforce that obligation was not the proper remedy. If the 8 government's coercion of KMPG to withhold the advancement of fees 9 to its employees' counsel constitutes a substantive due process 10 violation, or has deprived appellees of their qualified right to 11 counsel of choice, more direct (and far less cumbersome) remedies 12 are available. Assuming the cognizability of a substantive due 13 process claim and its merit here, dismissal of the indictment is 14 the proper remedy. As for the Sixth Amendment deprivation, if it 15 turns out that the government's conduct separates appellees from 16 their counsel of choice (an event that has not yet occurred), 17 appellees may seek relief on appeal if they are convicted. We do 18 not mean to exclude the possibility of other forms of relief. 19 If, for example, a Sixth Amendment violation is the result of 20 ongoing government conduct, the district court of course may 21 order the cessation of such conduct. Having said that, we hold, 22 however, that the remedies available to the district court in the 23 circumstances presented here did not include its novel exercise 2421

of ancillary jurisdiction. The "summary advancement proceeding," 1 id. at 381, it created may have been intended only as a vehicle 2 for the government and KPMG to act on their "incentives" to 3 somehow get appellees' counsel funded and thereby "avoid any risk 4 of dismissal of [the indictment of the appellees] or other 5 unpalatable relief." Stein Iat 380. Or, as Stein IIsuggests, 6 it might also have been envisioned as an uncharted hybrid legal 7 proceeding for the expeditious resolution of numerous high-dollar 8 and potentially complex contract claims. Either way, it was not 9 an available remedy for either constitutional violation. 10 Finally, on the present record, a proceeding ancillary to a 11 criminal prosecution was not necessary either to avoid perceived 12 deficiencies in ordinary civil contract actions to enforce the 13 alleged advancement contracts or to remove some barrier to the 14 appellees’ bringing of such actions. The fee issue has been 15 known since the criminal investigation began and, unlike the 16 situation in Weissman, see Note 2 supra, did not suddenly arise 17 at an awkward period in the case. Many of the appellees were in 18 negotiation with KPMG during the investigation period. Some 19 sixteen months before the indictment, most of the appellees 20 signed a letter that clearly indicated their knowledge of KPMG’s 21 intent not to pay post-indictment fees and could -- arguably must 22 -- be read as a waiver of any right to such fees. Stein II , 452 23 F. Supp. 2d at 240-41. Nevertheless, appellees took none of the 2422

available steps to enforce their alleged contracts with KPMG 1 until well after the indictment when the district court raised 2 the possibility of an ancillary proceeding and indicated its 3 willingness to exercise jurisdiction over it. 4 The traditional factors weighing against mandamus –- the 5 undesirability of casting a judge as a litigant and the 6 desirability of avoiding piecemeal appeals -- also weigh in favor 7 of mandamus in this case. The district judge is not a party, 8 and, by granting the writ, we avoid an unnecessary, potentially 9 costly, and time-consuming procedure that would certainly be 10 vacated on appeal. The district court has acknowledged that the 11 proceedings before him “would be facilitated by prompt review of 12 the merits of the challenged order.” The same considerations -- 13 the magnitude and importance of the ongoing criminal proceedings 14 -- also argue for swift review to avoid further delay of the 15 underlying criminal proceedings. For all of the foregoing 16 reasons, the three requirements of Cheney v. United States Dist. 17
Court, 542 U.S. 367, 380-81 (2004), are met here. 18
CONCLUSION 19 We treat the appeal as a petition for writ of mandamus. We 20 grant the petition, vacate the orders below to the extent that 21 they find jurisdiction over the complaint against KPMG and 22 dismiss appellees’ complaint against KPMG. 23 2423

1. The Thompson Memorandum has been superseded by the “McNulty
Memorandum.” SeeMem. From Paul J. McNulty, Deputy Attorney General, U.S. Dep’t of Justice, to Heads of Department Components, United States Attorneys, re: Principles of Federal Prosecution of Business Organizations, http://www.usdoj.gov/dag/speech/2006/mcnulty memo.pdf.

2. In United States v. Weissman, 1997 WL 334966 (S.D.N.Y. June 16, 1997), a district court asserted ancillary jurisdiction over a dispute concerning the advancement of legal fees by a former employer to a criminal defendant. In Weissman, a former Empire Blue Cross/Blue Shield executive had his defense costs advanced pursuant to a corporate by-law stipulating that the company would cover all legal costs unless “a judgment or other final adjudication” established that the officer had acted in bad faith or used deliberate dishonesty. Id. at *1. After the jury convicted the former executive, but prior to sentencing, the company stopped paying legal expenses. Id. at *2. The executive, however, argued that he was entitled to coverage of expenses through post-conviction motions and sentencing. Id. at *11. The question addressed in the ancillary proceeding was the legal question of “whether a jury’s guilty verdict constitutes a FOOTNOTES 1 2 324

‘final adjudication.’” Id. The court acknowledged that it could find no other example of a court in a criminal case exercising ancillary jurisdiction over an employer in an advancement case. Id. at *5. The Weissmancourt further noted that the “argument that complex questions of state law are implicated” in the dispute was the “most powerful challenge” to the court's ancillary jurisdiction. Id. at *8. We need intimate no view on the merits of Weissmanbecause it is somewhat different from the present matter. On the one hand, in Weissman, the issue of the employer refusing to advance expenses arose at a time when no disposition of the issue could be reasonably obtained in another forum. On the other hand, there was no perceived Sixth Amendment violation by the government in need of a remedy.

3. That KPMG should lose on the merits is far from certain. KPMG’s alleged “uniform practice,” Stein I , 435 F. Supp. 2d at 356, of paying the legal fees for indicted employees and partners -- seemingly an indispensable element of an “implied-in-fact” contract -- appears to consist of a single instance in which KPMG paid the legal fees of two partners indicted and convicted in a 1974 criminal case, id. at 340. In addition, as a condition of having their pre-indictment legal fees paid by KPMG, most of the appellees signed fee letters acknowledging that KPMG would not pay post-indictment fees and -- on the most straight-forward25

reading -- waiving any right to such fees. Stein II , 452 F. Supp. 2d at 240-41. What is more, when the appellees moved to dismiss the indictment on Sixth Amendment grounds, they took the position that the payment of legal fees was a matter of KPMG’s freedom of choice, stipulating with the government that “it had been the longstanding voluntarypractice of KPMG to advance and pay legal fees . . . .” Stein I , 435 F. Supp. 2d at 340 (emphasis added). Arguably, the appellees would be estopped from now arguing that KPMG had a contractual obligation -- implied or otherwise -- to pay post-indictment legal fees. Finally, we note that some of the district court’s “public policy” reasons for refusing to compel arbitration -- i.e., that arbitration would interfere with the appellees’ rights to counsel of their choice and risk the need for the government to provide counsel to indigent defendants -- seem to assume that KPMG would win any arbitration proceeding.