Prosecutorial Discretion in the Context of Corporate Attorney-Client Relations
Released: 2010-03-09T00:00:00

Summary:
The Justice Department enjoys prosecutorial discretion to bring criminal charges against a corporation, its culpable officers or employees, or both. For a corporation, indictment alone can be catastrophic, if not fatal, in some instances. The Thompson Memorandum, since replaced with guidelines in the U. S. Attorneys Manual, described the policy factors to be considered in the exercise of prosecutorial discretion. Two of the factors explicitly mentioned were whether a corporation had waived its privileges and whether it had cut off the payment of attorneys' fees for its officers and employees.
Justice Department policies and practices under the Thompson Memorandum led to constitutional challenges based on the Fifth Amendment's self-incrimination clause, the Amendment's due process clause, and the Sixth Amendment's right to counsel clause. Due process and right to counsel concerns were enough for a federal district court in New York to throw out the indictments of thirteen former partners and employees of an accounting firm, charged with creating and marketing fraudulent tax shelters, United States v. Stein. The Second Circuit affirmed on right to counsel grounds and consequently found it necessary to address the merits of the due process argument.
The House addressed the conflict in attorney-client protective legislation which it passed in the 110th Congress. Soon thereafter, the Department of Justice announced a revised policy concerning the circumstances under which a corporation's failure to waive its attorney-client privilege might influence the decision to prosecute it. The 110th Congress, which had previously amended the Federal Rules of Evidence relating to the inadvertent waiver of the attorney-client privilege, adjourned without taking further action on the House-passed legislation. Similar proposals, however, have been introduced in 111th Congress, H.R. 4326 (Representative Scott); S. 445 (Senator Specter). This report provides a brief discussion of the legislation, the legal background, and a chronology of related issues and events. Also available is an abridged report, stripped of its footnotes and most of its citations to authority (CRS Report RS22588, The McNulty Memorandum In Short: Attorneys' Fees and Waiver of Corporate Attorney-Client and Work Product Protection, by [author name scrubbed]).

subsections: section_title: Introduction
paragraphs: A corporation is subject to civil and criminal liability for the misconduct that its officers, employees, and agents committed for its benefit. Federal authorities may prosecute a corporation; its officers, employees, and agents; or both. For a corporation, however, indictment can be fatal. Commentators point to the experience of the Arthur Andersen accounting firm as evidence that some companies cannot survive the mere accusation of criminal wrongdoing, even if they might have been vindicated ultimately. 
Under most circumstances, corporations and their servants alike enjoy the right to attorney-client privileges and to attorney work product protection in connection with government investigations of possible misconduct. Yet, the Justice Department's federal prosecution policy at one time suggested that a corporation faced an increased risk of prosecution, if it claimed those privileges or if it paid the business-related litigation costs of its officers and employees. 
The federal courts in at least one circuit have concluded that the manner in which the policy (the so-called Thompson Memorandum) was implemented contravened the dictates of the Fifth and Sixth Amendments. 
Both Houses held hearings on the matter during the 109 th Congress and the 110 th Congress. The House Judiciary Committee reported out the Attorney-Client Privilege Protection Act of 2007, which the House passed under suspension of the rules on November 13, 2007. Soon thereafter, the Department of Justice announced a revised policy concerning the circumstances under which a corporation's failure to waive its attorney-client privilege might influence the decision to prosecute it. The 110 th Congress concluded without further action, although a related amendment to the Federal Rules of Evidence did pass. Proposals similar to that passed by the House in the 110 th Congress have been introduced in the 111 th Congress, H.R. 4326 (Representative Scott); S. 445 (Senator Specter).
section_title: Enterprise Liability
paragraphs: At common law, corporations were considered incapable of committing or of being punished for criminal misconduct. That perception has changed, however. Corporate criminal liability is now a matter of legislative choice. And the view of the courts is much the same as it was over a century ago, when the Supreme Court observed:
We see no valid objection in law, and every reason in public policy, why the corporation which profits by the transaction, and can only act through its agents and officers, shall be held punishable by fine because of the knowledge and intent of its agents to whom it has intrusted authority to act in the subject-matter of making and fixing rates of transportation, and whose knowledge and purposes may well be attributed to the corporation for which the agents act. While the law should have regard to the rights of all, and to those of corporations no less than to those of individuals, it cannot shut its eyes to the fact that the great majority of business transactions in modern times are conducted through those bodies, and particularly that interstate commerce is almost entirely in their hands, and to give them immunity from all punishment because of the old and exploded doctrine that corporation cannot commit a crime would virtually take away the only means of effectually controlling the subject-matter and correcting the abuses aimed at. New York Central R.R. v. United States , 212 U.S. 481, 495-96 (1909).
Both as a general matter and within individual criminal statutes, federal law leaves little doubt when a criminal proscription applies to corporate entities. The Dictionary Act provides that "[i]n determining the meaning of any Act of Congress, unless the context indicates otherwise ... the words 'person' or 'whoever' include corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals." With this in mind, criminal statutes ordinarily condemn—"whoever," or any "person" who—engages in the misconduct they proscribe. In some instances, the statute goes a step further and supplies an even more expansive crime-specific definition.
When a federal criminal statute applies to corporations, the courts have generally said that a corporation is liable for the violations committed for its benefit by its officers, employees, or agents acting, within the apparent scope of their authority, even if the corporation has either generally or specifically prohibited the misconduct in question. Of course, the officers, employees, or agents whose misconduct is imputed to the corporation are usually subject to criminal liability as well. It is a matter of prosecutorial discretion whether to prosecute an apparently culpable corporation, or its apparently culpable agents, employees, and officers, or both the corporation and the individuals through whom it has acted. Because their interests are intertwined, corporations often bear the legal costs of defending their agents, employees, and officers in litigation arising out of conduct within the apparent scope of their employment. The corporation in such cases, however, is generally entitled to reimbursement should its agent, officer or employee be convicted or otherwise found at fault.
section_title: Attorney-Client Privilege and Work Product Protection
paragraphs: The attorney-client privilege and work product protection are federal evidentiary privileges, which means they are "governed by the principles of the common law as ... interpreted by the courts of the United States in light of reason and experience," F.R.Evid. 501, unless altered by rule or statute.
subsections: section_title: Attorney-Client
paragraphs: The attorney-client privilege is one of the oldest common law privileges. The purpose of the privilege is to encourage "full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and the administration of justice." It protects confidential communications with an attorney made in order to obtain legal advice or assistance.
It is available to corporations as well as to individuals. In the case of a corporation, it now seems beyond dispute that the privilege applies to the confidential communications from its officers, agents, and employees to its attorney for the purpose of supplying the corporation with legal advice or assistance. At one time, however, some courts believed the privilege should be limited to the communications of the "control group of the corporation," those ultimately responsible for corporate policy. The Supreme Court in Upjohn found this reading too limited.
The case began when officials at Upjohn became concerned that some of its officers or employees might have been involved in the business-related bribery of foreign officials. Upjohn's general counsel was instructed to conduct an investigation. Following the internal investigation, Upjohn reported suspicious payments to the Securities and Exchange Commission (SEC) and the Internal Revenue Service (IRS). The company also identified which of its officers and employees had been interviewed or had submitted responses to questionnaires as part of the internal investigation. Then the IRS issued a summons demanding that Upjohn turn over all its files on the internal investigation including responses to its general counsel's questionnaires and memoranda and to notes of the investigation's interviews conducted under his supervision. Upjohn refused to comply, claiming attorney-client and attorney work product privileges, and the IRS sought judicial enforcement of its summons.
The Sixth Circuit Court of Appeals rejected Upjohn's attorney-client claim on the grounds that the communications sought were not those of Upjohn's control group, thus not those of the client, and therefore not privileged. The Supreme Court found this control group test insufficiently protective. The test failed to recognize the importance of the attorney's fact gathering communications with the corporation's employees conducted in order to provide the corporate client with legal advice or assistance. In doing so, it frustrated the very purpose of the privilege by discouraging full and frank disclosures by those associated with the company who were in a position to expose it to civil and criminal liability, thereby denying counsel the basis for sound legal advice and assistance. Moreover, it chilled communications between counsel and company employees designed to ensure company compliance with the law.
In a situation like the one in Upjohn , the attorney represents the corporation, the privilege that envelops the communications with the attorney belongs to the corporation, and may be waived by the corporation. Although disclosure ordinarily waives the privilege, the circuits are divided over whether the privilege may survive disclosure for limited selective purposes (selective waiver) such as the disclosures in Upjohn to government investigators or regulators.
The prospect of selective waiver was apparently first raised in Diversified Industries v. Meredith , where the Eighth Circuit held voluntary disclosure to the Securities and Exchange Commission (SEC) did not constitute a waiver of the privilege for subsequent purposes. To one extent or another, the District of Columbia, First, Second, Third, Fourth and Tenth Circuits have declined to accept the Eighth Circuit suggestion that the attorney-client privilege may be claimed following a selective disclosure to a governmental agency.
The existence of either a common interest or joint defense attorney-client privilege further complicates matters, for either may arise in the course of an investigation of allegations of corporate misconduct. The common interest privilege is created when an attorney simultaneously represents more than one client based on their common interest in the same matter. Under such circumstances, "communications between each of the clients and the attorney are privileged against third parties, and it is unnecessary that there be actual litigation in progress for this privilege to apply." Moreover, two or more clients represented by individual attorneys may agree to work jointly in a common defense of a particular suit or case. In such circumstances, "many courts have held that the attorney-client privilege gives rise to a concomitant 'joint defense privilege' which serves to protect the confidentiality of communications, passing from one party to the attorney for another party where a joint defense effort or strategy has been decided upon and undertaken by the parties and their respective counsel." The courts have generally held—although not universally so—that communications or attorney work product protected by a joint or common defense privileges can only be waived with the consent of all parties.
section_title: Attorney Work Product
paragraphs: At least since the Supreme Court announced its decision in Hickman v. Taylor , the federal courts have recognized that an attorney's work product gathered or created in anticipation of litigation enjoys qualified disclosure protection. The protection has been reenforced by rule both on the civil side and in criminal cases.
"At its core, the work-product doctrine shelters the mental processes of the attorney providing a privileged area within which he can analyze and prepare his client's case.... It is therefore necessary that the doctrine protect material prepared by agents of the attorney as well as those prepared by the attorney himself."
The protection can be waived, but here too the circuits are divided on the question of whether it can survive a selective waiver in the form of disclosure to a government investigator or regulator. The Fourth Circuit and Federal Circuit have been unwilling to say that the protection afforded attorney opinion work product (work containing the attorney's analysis of the law, facts, and strategy reflecting the attorney's mental impressions) is lost simply because it has been disclosed to governmental entities. On the other hand, the Third Circuit has said without equivocation that the same standard used in the case of attorney-client waivers should apply; that is, disclosure to a governmental entity constitutes complete waiver. The other circuits that have considered the question have assumed positions at various points between the two.
section_title: Deputy Attorney General Memoranda and Related Matters
paragraphs: Five Deputy Attorneys General have issued memoranda to guide the exercise of prosecutorial discretion on the question of whether criminal charges should be brought against a corporation. Each includes provisions concerning the waiver of attorney-client and attorney work product protection, and all but one address employee legal costs and joint defense agreements as well. They are the memoranda of: Deputy Attorney Generals Holder, Thompson, McNulty, and Filip and Acting Deputy Attorney General McCallum.
subsections: section_title: Holder Memorandum
paragraphs: Signed on June 19, 1999, the Holder Memorandum was designed to provide prosecutors with factors to be considered when determining whether to charge a corporation with criminal activity. It emphasized that "[t]hese factors are, however, not outcome-determinative and are only guidelines."
The factors consisted of: "1. The nature and seriousness of the offense. . . 2. The pervasiveness of wrongdoing within the corporation. . . 3. The corporation's history of similar conduct. . . 4. The corporation's timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents. . . 5. The existence and adequacy of the corporation's compliance program. . . 6. The corporation's remedial actions. . . 7. Collateral consequences ... and 8. The adequacy of non-criminal remedies. . . ."
In the section devoted to cooperation and voluntary disclosure, the Memorandum stated that "In gauging the extent of the corporation's cooperation, the prosecutor may consider the corporation's willingness ... to waive the attorney-client and work product privileges." As the Comment that followed explained:
One factor the prosecutor may weigh in assessing the adequacy of a corporation's cooperation is the completeness of its disclosure including, if necessary, a waiver of the attorney-client and work product protections, both with respect to its internal investigation and with respect to communications between specific officers, directors, and employees and counsel. Such waivers permit the government to obtain statements of possible witnesses, subjects, and targets, without having to negotiate individual cooperation or immunity agreements. In addition, they are often critical in enabling the government to evaluate the completeness of a corporation's voluntary disclosure and cooperation. Prosecutors, may, therefore, request a waiver in appropriate circumstances. [This waiver should ordinarily be limited to the factual internal investigation and any contemporaneous advice given to the corporation concerning the conduct at issue. Except in unusual circumstances, prosecutors should not seek a waiver with respect to communications and work product related to advice concerning the government's criminal investigation.] The Department does not, however, consider waiver of a corporation's privileges an absolute requirement, and prosecutor should consider the willingness of a corporation to waive the privileges when necessary to provide timely and complete information as only one factor in evaluating the corporation's cooperation. Holder Memorandum, VI. B. (Memorandum's footnote appears in brackets).
The Memorandum also addressed the adverse weight that might be given a corporation's participation in a joint defense agreement with its officers or employees and its agreement to pay their legal fees:
Another factor to be weighed by the prosecutor is whether the corporation appears to be protecting its culpable employees and agents. Thus, while cases will differ depending on the circumstances, a corporation's promise of support to culpable employees and agents either through the advancing of attorneys' fees,[*] through retaining the employees without sanction for their misconduct, or through providing information to the employees about the government's investigation pursuant to a joint defense agreement, may be considered by the prosecutor in weighing the extent and value of a corporation's cooperation. By the same token, the prosecutor should be wary of attempts to shield corporate officers and employees from liability by a willingness of the corporation to plead guilty. [Some states require corporations to pay the legal fees of officers under investigation prior to a formal determination of their guilt. Obviously, a corporation's compliance with governing law should not be considered a failure to cooperate.] Holder Memorandum, VI. B. (Memorandum's footnote in brackets at the asterisk above).
Although several academics and defense counsel expressed concern over the possible impact of the waiver feature of the Holder Memorandum, a survey of United States Attorneys conducted in late 2002 indicated that waivers were rarely requested.
section_title: Thompson Memorandum
paragraphs: On January 30, 2003, the Thompson Memorandum superseded the Holder Memorandum in a manner which hardly seemed designed to the meet the concerns of its critics. The Thompson Memorandum appeared to call for a more aggressive stance. The Thompson Memorandum was essentially a reissuance of its predecessor. Little of the text was new. That portion of the Memoranda devoted to the waiver of attorney-client and work product protections, and cooperation and voluntary disclosure in general—Part VI—was the same in both except for a new paragraph added in the Thompson Memorandum. The addition said nothing about waivers per se, but made clear the risks that a corporation ran if it failed to be forthcoming early on or continued to support those officers or employees that prosecutors thought culpable:
Another factor to be weighed by the prosecutor is whether the corporation, while purporting to cooperate, has engaged in conduct that impedes the investigation (whether or not rising to the level of criminal obstruction). Examples of such conduct include overly broad assertions of corporate representation of employees or former employees; inappropriate directions to employees or their counsel, such as directions not to cooperate openly and fully with the investigation including, for example, the direction to decline to be interviewed; making presentations or submissions that contain misleading assertions or omissions; incomplete or delayed production of records; and failure to promptly disclose illegal conduct known to the corporation. Thompson Memorandum, VI. B.
Yet, this is one of the few amendments to the Holder Memorandum. To some, the whole scale adoption of language from the earlier Memorandum suggested a Justice Department perception that the problem with the Holder Memorandum was not its content, but rather its application. The Thompson Memorandum's description of the changes might be read to confirm this impression:
The main focus of the revisions is increased emphasis on and scrutiny of the authenticity of a corporation's cooperation. Too often business organizations, while purporting to cooperate with a Department investigation, in fact take steps to impede the quick and effective exposure of the complete scope of wrongdoing under investigation. The revisions make clear that such conduct should weigh in favor of a corporate prosecution. Thompson Memorandum, [Preamble].
Moreover, where the Holder Memorandum seemed to bespeak guidance, the Thompson Memorandum appeared to sound a command. The Holder Memorandum's preamble provided that, "These factors are, however, not outcome-determinative and are only guidelines. Federal prosecutors are not required to reference these factors in a particular case...." The remarks might have suggested that prosecutors enjoyed some significant degree of flexibility as to whether and how to apply the standards it announced. The Thompson Memorandum seemed to speak with a much more commanding tone; its introductory remarks stated that, "prosecutors and investigators in every matter involving business crimes must assess the merits of seeking the conviction of the business entity itself." Thompson Memorandum, [Preamble] (emphasis added).
section_title: Comparable Policies Elsewhere
paragraphs: Nevertheless, the policies articulated in the Holder and Thompson Memoranda are similar to the enforcement policies announced by a substantial number of federal regulatory agencies that call for voluntary corporate disclosure of statutory or regulatory violations. Some specifically mention the waiver of the attorney-client or work product protection, while others seem to speak with sufficient generality to justify consideration on enforcement and sanction questions.
section_title: Sentencing Guidelines
paragraphs: In May of 2004, the United States Sentencing Commission amended Commentary in the Sentencing Guidelines that some read as an endorsement of this new, more aggressive approach. The change explicitly described the circumstances under which a corporation's failure to waive could have sentencing consequences: "Waiver of attorney-client privilege and of work product protections is not a prerequisite to a reduction in culpability score under subdivisions (1) and (2) of subsection (g) unless such waiver is necessary in order to provide timely and thorough disclosure of all pertinent information known to the organization."
Although apparently crafted at least in part to ease corporate anxiety, it seemed to have the opposite effect. The following August, the American Bar Association voted to recommend that the Commentary be changed to state that waiver should not be considered a sentencing factor. The Commission instead removed from the Commentary the language quoted above that it had added in 2004.
section_title: McCallum Memorandum
paragraphs: Then on October 21, 2005 came the McCallum Memorandum. It made no revision in the Thompson Memorandum, but briefly addressed the manner in which the Thompson Memorandum's policy on waiver was to be implemented. The various United States Attorneys were instructed to prepare written guidelines for supervisory approval of requests for corporate waivers. The effort did little to assuage critics.
section_title: Proposed Rules of Evidence
paragraphs: In January, 2006, the then Chairman of the House Judiciary Committee asked the Judicial Conference to consider a rule which would protect against inadvertent waiver of the attorney-client privilege, and which would permit protective court orders to limit the consequences of disclosure of privileged material during discovery, and selective waivers in the case of governmental investigations. On May 15, 2006, the Federal Advisory Committee on Evidence opened for comment a proposed evidentiary rule amendment crafted, among other things, to resolve the split in the circuits and to afford corporations some relief in the form of selective waivers. The proposed new Federal Rule of Evidence, proposed Rule 502, would have provided that disclosure of protected attorney-client or work product information to governmental investigators or regulators would not constitute a waiver of those protections with respect to third parties.
The selective waiver feature of the rule, however, proved to be highly controversial and was dropped from the proposed rule the Judicial Conference recommended to the Congress. Congress ultimately accepted the recommendation and enacted a rule with only inadvertent waiver and protective order components.
section_title: Constitutional Concerns
paragraphs: In ther summer of 2006, a court in the Southern District of New York held that implementation of the Thompson Memorandum's policy with regard to a corporation's reimbursement of the attorneys' fees of its employees and pressure on them to make incriminating statements violated the Fifth Amendment substantive due process rights of the employees, their Fifth Amendment privilege against self-incrimination, as well as their Sixth Amendment right to the assistance of counsel.
The case began with the criminal tax investigation of an accounting firm and its employees. After issuing subject letters to more than twenty of the firm's officers and employees, prosecutors met with the firm's attorneys. At the meeting, the firm indicated that it intended to "clean house;" that it had already taken some personnel actions; that it meant to cooperate fully with the government's investigation; and that its objective was to avoid indictment of the firm and the fate of Arthur Andersen by acting so as to protect the firm and not the employees and officers targeted. The firm indicated that it had been its practice to cover the litigation costs of its employees, but that it would not pay the fees of employees who refused to cooperate with the government's investigation or who invoked their Fifth Amendment privilege. Prosecutors referred to the Thompson Memorandum and the Sentencing Guidelines and indicated they would take into account any instances where the firm was legally obligated to pay attorneys' fees. They also indicated, however, that misconduct should not be rewarded and that prosecutors would examine "under a microscope" the payment of any fees that were not legally required.
In consultation with prosecutors, the firm sent the subjects of the investigation form letters informing them that attorneys' fees would be capped at $400,000 and that fees would be cut off for any employee charged with criminal wrongdoing. Thereafter, prosecutors advised the firm's attorney when one of the firm's employees proved uncooperative; the firm then advised the employees that they would be fired and their attorneys' fees cut off if they did not cooperate; and did so in cases of those employees who remained recalcitrant. The firm then entered into a deferred prosecution agreement with prosecutors for the eventual dismissal of charges under which it agreed to waive indictment; pay a $456 million fine; accept restrictions on its practice; waive all privileges including but not limited to attorney-client and attorney work product; and provide the government with extensive cooperation in its investigation and prosecution of the firm's former officers and employees.
The by-then indicted former officers and employees moved to have their indictments dismissed on constitutional grounds. The court agreed that constitutional violations had occurred, but declined at least temporarily to dismiss the indictments under the understanding that the government had agreed that it would accept, without prejudice to the firm in its deferred prosecution agreement or otherwise, any fee arrangement that the firm should come to with its former officers and employees. It subsequently dismissed the indictment against 13 of the defendants, but declined to do so with respect to three others who had left the firm sometime previously and therefore had not been the victims of the misconduct the court perceived.
subsections: section_title: Substantive Due Process
paragraphs: With regard to the constitutional provisions implicated in the Stein decision, the Fifth Amendment guarantees that "No person shall ... be deprived of life, liberty, or property, without due process of law," nor "be compelled in any criminal case to be a witness against himself," U.S.Const. Amend. V. The Sixth Amendment promises that "[i]n all criminal prosecutions, the accused shall enjoy the right ... to have the Assistance of Counsel for his defence," U.S.Const. Amend. VI.
The Fifth Amendment due process clause and its twin in the Fourteenth Amendment contain both procedural and substantive components. The courts have said that the substantive due process component of the due process clauses provides protection against the denial of any fundamental right to life, liberty, or property by "oppressive," "egregious or arbitrary" governmental action. Given its sweeping potential breadth, the courts have been reluctant to recognize new claims to its safeguards. They have noted that the component affords no protection against private deprivations, imposes no affirmative duties upon government entities, and protects only legally recognized entitlements not expectations or anticipated benefits. Moreover, when "a particular Amendment provides an explicit textual source of constitutional protection against a particular sort of government behavior, that Amendment, not the more generalized notion of substantive due process, must be the guide for analyzing these claims."
When substantive due process is found to include a particular fundamental right, infringement by government action may only survive if it is narrowly tailored to serve a compelling governmental interest. Faced with the question of whether a particular type of government action is oppressive, egregious or arbitrary for substantive due process purposes, courts have often referred to the Rochin standard: government action cannot be said to violate substantive due process unless it first shocks the conscience of the court.
The Stein court concluded that a criminal defendant has a substantive due process right "to obtain and use in order to prepare a defense resources lawfully available to him or her, free of knowing or reckless government interference." It also found that the Thompson Memorandum and the pressure the prosecutors exerted upon the accounting firm to cut off the payment of attorneys' fees for the firm's former employees impinged upon the right. While the court conceded that the government had a compelling interest in investigating and prosecuting crime and in preventing obstruction of those efforts, it felt the means chosen to serve its interests were insufficiently tailored to satisfy strict scrutiny:
The first difficulty is that the Thompson Memorandum does not say that payment of legal fees may cut in favor of indictment only if it is used as a means to obstruct an investigation. Indeed, the text strongly suggests that advancement of defense[] costs weighs against an organization independent of whether there is any circling of the wagons... If the government means to take the payment of legal fees into account in making charging decisions only where the payments are part of an obstruction scheme—and thereby narrowly tailor its means to its ends—it would be easy enough to say so. But that is not what the Thompson Memorandum says.
The concerns do not end here. The argument that payment of legal fees to employees and former employees is relevant to gauging the extent of a company's cooperation also is problematic. . . [I]t simply cannot be said that payment of legal fees for the benefit of employees and former employees necessarily or even usually is indicative of an unwillingness to cooperate fully. This is especially unlikely after employees have been indicted and fired, as is the situation here. Id. at 363-64 (emphasis in the original).
The Stein district court initially deferred dismissing the indictments in the hopes that an alternative remedy would develop. When it took up the case again, it supplemented its earlier due process analysis with an assessment of whether the circumstances met the "shock" standard for substantive due process. It concluded that the "government's actions with respect to legal fees were at least deliberately indifferent to the rights of the defendants and others. In all the circumstances, this behavior shocks the conscience in the constitutional sense whether prosecutors were merely deliberately indifferent to the KPMG Defendants' rights or acted more culpably."
section_title: Self-Incrimination
paragraphs: The court resolved the self-incrimination issue in a separate decision following defendants' suppression motions. Here the government was a bit more successful, for, although the court found a violation in some instances, it declined to do so in others.
As a general rule, statements secured under governmental threat of job termination are inadmissible in subsequent criminal proceedings. During the course of the Stein case investigation, several employees had initially refused to talk to authorities. Prosecutors then brought the matter to the attention of the firm's attorneys and employees were told to cooperate or payment of their attorneys' fees would be discontinued and if still employed they would be fired. In some cases, the coercion resulted in involuntary statements; in others, the employees made voluntary statements for reasons of their own notwithstanding the pressure.
To the government's argument that no Fifth Amendment consequences flowed from the conduct of the firm, a private non-governmental actor, the court found the firm's conduct attributable to the government. Yet in the end, only two of the nine challenged statements were suppressed.
On appeal, the Second Circuit found it unnecessary to address either Fifth Amendment issue because of its treatment of the Assistance of Counsel issue.
section_title: Assistance of Counsel
paragraphs: The Sixth Amendment assures the criminally accused the right to assistance of counsel "in all criminal prosecutions." It is said the right generally attaches once "prosecution has been commenced, that is, at or after the initiation of adversary judicial criminal proceedings—whether by way of formal charge, preliminary hearing, indictment, information, or arraignment." Once attached, the right includes the right to counsel of the defendant's choosing, subject to several limitations. Among those limitations is the fact that an accused has no right to secure counsel of his choice using funds subject to confiscation, or as the Supreme Court stated, "[a] defendant has no Sixth Amendment right to spend another person's money for services rendered by an attorney, even if those funds are the only way that that defendant will be able to retain the attorney of his choice."
The government contended that its conduct could not constitute a violation of the Sixth Amendment because (1) it had occurred before indictment and thus before the right to counsel had attached and (2) the employees had no Sixth Amendment right to pay for their counsel of choice with someone else's money. Attachment was no obstacle, replied the court, when the motive or at least the clearly foreseeable result was to impede the employees criminal defense after they were indicted. As for the Supreme Court's someone else's money comment, it referred to defendants using the government's money, money to which they had neither right nor expectation. Here, the court said the defendants had every reason to expect that the firm would have assumed their legal expenses, but for the government's intervention.
In the eyes of the district court, the government's conduct so struck at the heart of the adversarial nature of the criminal justice system that it commanded redress without reference to proof of actual prejudice to its victims, and warranted the rarely granted dismissal of the indictments.
The court of appeals agreed. It held (1) that "KPMG's adoption and enforcement of a policy under which it conditioned, capped and ultimately ceased advancing legal fees to defendants followed as direct consequence of the government's overwhelming influence;" (2) that "KPMG's conduct therefore amounted to state action;" (3) that " the government thus unjustifiably interfered with defendants' relationship with counsel and their ability to mount a defense in violation of the Sixth Amendment;" and (4) that "the government did not cure the violation."
section_title: Legislative Activity in the 109th Congress
paragraphs: Both the House and Senate Judiciary Committees held hearings on the policy reflected in the Thompson Memorandum during the 109 th Congress. They heard contentions from some witnesses that:
The policy represented a departure from past practices, since historically, Justice Department requests for waivers of corporate attorney-client and work product protection were unheard of. "A culture of waiver has evolved in which government agencies believe it is reasonable and appropriate to them to expect a company under investigation to broadly waive." Although characterized as "voluntary disclosures" or "waivers," in reality a company faced with a Justice Department request often has no alternative but to comply. Company officials responsible for regulatory compliance are less likely to seek the advice of counsel if they believe those communications unprotected. "[D]uring an investigation, if employees suspect that anything they say to their attorneys can be used against them, they won't say anything." Even if a company should prove innocent of any criminal or regulatory wrongdoing, it may have lost the privilege against third party civil plaintiffs by virtue of its disclosure to the government.
The Justice Department's perspective was a bit different. Its officials responded that:
The Holder and Thompson Memoranda emerged in an environment of corporate scandal. Congress suggested, and the Department agreed, that enormous companies and their executives simply because of their wealth, position and influence should not be considered above the law, but should instead be held accountable if they engage in criminal conduct. The Memoranda reflected an articulation of the principles that good prosecutors had long used in the context of a potential corporate prosecution. The Department believed that waivers need not be, and had not been, routinely sought. The Memoranda balance "the legitimate interests furthered by the privilege, and the societal benefits of rigorous enforcement of the laws supporting ethical standards of conduct." Waiver was one, but only one, factor considered in the exercise of prosecutorial discretion. The Department would support establishment of a selective waiver provision that would allow companies to continue to claim the attorney-client and work product protection against third parties notwithstanding disclosure to the government.
In the final days of the 109 th Congress, Senator Specter introduced S. 30 which, among other things, would have prohibited federal authorities from requesting a waiver of organizational attorney-client or work product protection or predicating the adverse exercise of prosecutorial discretion on the absence of such a waiver or the payment of attorneys' fees for their employees or officers.
section_title: McNulty Memorandum
paragraphs: The McNulty Memorandum, announced December 12, 2006, superseded the Thompson and McCallum Memoranda. While it incorporated a great deal of the substance of its predecessors, the McNulty Memorandum rewrote the principles and commentary that addressed corporate attorney-client and work product protection waivers as well as those covering the payment of employee litigation costs.
It dropped the specific reference to the waivers from the general statement of factors to be weighed when considering whether to charge a corporation.
Earlier Memoranda stated that waiver was not an "absolute" requirement for the favorable exercise of prosecutorial discretion, suggesting to some that it was a requirement under most circumstances. The McNulty Memorandum suggested that prosecutors' waiver requests were to be considered the exception rather than the rule:
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. A legitimate need for the information is not established by concluding it is merely desirable or convenient to obtain privileged information. The test requires a careful balancing of important policy considerations underlying the attorney-client privilege and work product doctrine and the law enforcement needs of the government's investigation.
Whether there is a legitimate need depends upon:
(1) the likelihood and degree to which the privileged information will benefit the government's investigation;
(2) whether the information sought can be obtained in a timely and complete fashion by using alternative means that do not require waiver;
(3) the completeness of the voluntary disclosure already provided; and
(4) the collateral consequences to a corporation of a waiver. McNulty Memorandum, VII. B. 2.
Moreover, the McNulty Memorandum divided attorney-client and work product material into two categories. Category I consisted of factual information. Category II material was described in much the same manner as opinion work product material (It "might include the protection of attorney notes, memoranda or reports containing counsel's mental impressions, conclusions legal determinations reached as a result of an internal investigation, or legal advice given to corporation"), McNulty Memorandum, VII. B.2. The Memorandum cautioned prosecutors that only in rare circumstances should they seek the waiver of Category II material, id. A request for Category I had to be approved by the United States Attorney in consultation with the head of the Department's Criminal Division; a request for Category II information required prior approval of the Deputy Attorney General, id. A corporation's refusal to waive could not be considered in the exercise of prosecutorial discretion, id.
It also added an explicit provision concerning attorneys' fees, declaring that, "Prosecutors generally should not take into account whether a corporation is advancing attorneys' fees to employees or agents under investigation and indictment," id. at VII.B.3. On the other hand, it noted that, "In extremely rare cases, the advancement of attorneys' fees may be taken into account when the totality of the circumstances show that it was intended to impede a criminal investigation ... approval must be obtained from the Deputy Attorney General before prosecutors may consider this factor in their charging decisions," id. at VII.B.3. n.3.
section_title: Legislative Activity in the 110th Congress
paragraphs: The House and Senate Judiciary Committees held hearings during the 110 th Congress which focused on the McNulty Memorandum and upon related legislative proposals. Senator Specter introduced the Attorney-Client Privilege Protection Act of 2007 ( S. 186 ) early in the 110 th Congress, which reappeared in revised form later in the Congress ( S. 3217 ). S. 186 as introduced was identical to S. 30 (109 th Cong.) that the Senator introduced at the end of the earlier Congress. It was also identical to H.R. 3013 offered in the House by Representative Scott and virtually identical to the version of that bill passed by the House. In their final versions, they were much like their successors in the 111 th Congress. 
The testimony of some of the hearing witnesses and the views of some commentators applauded the changes in the McNulty Memorandum and questioned the justification for the legislative proposals on several grounds, e.g.:
the McNulty Memorandum changes the tone of the policy, abandoning the aggressive implications of the Thompson Memorandum in favor of statements that confirm the Department's recognition and respect for the importance of the attorney-client privilege; the Memorandum establishes a strict procedure for waiver requests and generally bars prosecutors from holding against a company its payment the legal expenses of an employee; the Memorandum strikes the proper balance between the public's interest in vigorous investigation and prosecute white collar crime and fairness to corporations and their officers and employees; experience since the issuance of the McNulty Memorandum refute the suggestion of widespread prosecutorial abuse; "legislative action is simply not needed;" although the bills have no explicit enforcement mechanism and the courts are generally reluctant to impose sanctions in the absence of statutory authority, the bills' proposals are likely to bring forth a "cottage industry of prosecutorial abuse claims" that may deter the prosecution of worthy cases; even if the Memorandum fosters an environment in which employees must waive their Fifth Amendment privilege or be fired, it results in no more than a situation in which the guilty suffer; the legislative proposals will make prosecution of white collar crime more difficult because they reduce the incentive for corporate cooperation and thereby encourage "stonewalling."
Others found the McNulty Memorandum troubling and applauded the legislative proposals for several reasons of their own, e.g.:
the McNulty Memorandum will continue to result in routine compelled waiver of the attorney-client privilege and the work product protection; the policy improvements contained in the McNulty Memorandum are not binding and lack an enforcement mechanism; the Memorandum continues to allow prosecutors to encourage companies to fire employees who fail to waive their Fifth Amendment rights; the Memorandum affords inadequate, partial attorney-client and attorney work product protection by assigning less stringent approval levels for waivers involving "factual" information which reveal client statements and attorney strategy; the Memorandum addresses only Justice Department investigation and prosecution practices, whereas the legislative proposals reach the practices of other agencies as well; the legislative proposals would not unduly impinge upon the prerogatives of federal prosecutors; to a limited extent, they bar interference with the attorney-client privilege, a mainstay of the Anglo-American system of justice since Elizabethan times and one whose presence has not heretofore been considered an unwarranted impediment to prosecution; the proposals would "uphold the finest traditions of the DoJ by allowing it to strike harsh blows but fair ones in combating corporate crime."
Senator Specter addressed some of these observations in S. 3217 . S. 3217 expressly excluded from its protections certain terrorists organizations, illicit drug cartels, and crime-for-profit entities. Where the earlier bar applied to federal criminal and civil matters and investigations alone, S. 3217 covered administrative adjudications and proceedings as well. Where the earlier bills condemned governmental demands that an organization abandon its privileges, S. 3217 also removed any claim of those privileges from the permissible array of prosecutorial considerations. Where the earlier bills permitted authorities to request information that they might reasonably consider beyond the scope of the privileges, S. 3217 also permitted them to seek information otherwise within the reach of a federal grand jury subpoena, privilege considerations notwithstanding, or to seek information whose privilege status was unknown to them.
S. 3217 would have carried forward, with some modification, the subsections added to the House bill just before its passage there. The exception it afforded to instances, in which a statute "that may authorize" authorities to compel disclosure of privileged material, was revised to cover statutes "that authorize" compulsory access.
Following House passage of H.R. 3013 , then Deputy Attorney General Mark Filip issued a superseding memorandum accompanied by a revised chapter of the U.S. Attorneys Manual. The 110 th Congress adjourned without further action of the proposals.
section_title: Filip Memorandum
paragraphs: The Filip Memorandum dates from August 28, 2008. Following the pattern of earlier Memoranda, much of what appears in the U.S. Attorneys Manual is a verbatim recitation of the McNulty Memorandum. Some things, however, are new. The Filip Memorandum revisions "concern what measures a business entity must take to qualify for the long-recognized 'cooperation' mitigating factor, as well as how payment of attorneys' fees by a business organization for its officers or employees, or participation in a joint defense or similar agreement, will be considered in the prosecutive analysis."
Thus, the Memorandum declares that "a corporation remains free to convey non-factual or 'core' attorney-client communications or work product—if and only if the corporation voluntarily chooses to do so—prosecutor should not ask for waivers and are directed not to do so." Nevertheless, "cooperation is a potential mitigating factor, by which a corporation . . . can gain credit in a case that otherwise is appropriate for indictment and prosecution." The entity's receipt of credit for its cooperation turns on its timely disclosure of information relating to the government's investigation, regardless of whether the entity acquired or maintains information under circumstances that entitle it to claim attorney-client or attorney work product protection. Nor does a corporation's payment of its employees' attorneys' fees or its entry into a joint defense agreement preclude credit for cooperation.
On the other hand, "[i]f the payment of attorney fees were used in a manner that would otherwise constitute criminal obstruction of justice—for example, if fees were advanced on the condition that an employee adhere to a version of the facts that the corporation and the employee knew to be false—these Principles would not (and could not) render inapplicable such criminal prohibitions."
This represents a substantial modification of the previous standard in the McNulty Memorandum which explicitly permitted prosecutors to weigh negatively any number of specifically identified impediments—some well short of a criminal obstruction of justice.
section_title: Legislative Activity in the 111th Congress
paragraphs: Early in the 111 th Congress, Senator Specter introduced the Attorney-Client Privilege Protection Act of 2009 ( S. 445 ), for himself and Senators Landrieu, Carper, Kerry, McCaskill, and Cochran. It is essentially the same as the later Specter proposal in the 110 th Congress ( S. 3217 ). Towards the end of the first session, Representative Scott (Va.) introduced a similarly styled Attorney-Client Privilege Protection Act of 2009 ( H.R. 4326 ), for himself and Representatives Conyers, Smith (Tex.), Nadler, Delahunt, Coble, and Lungren. It is a replica of the bill which the House passed in the 110 th Congress ( H.R. 3013 ). 
The two 111 th Congress proposals are much the same, although with occasional differences. They espouse a common purpose: "to place on each agency clear and practical limits designed to serve the attorney-client privilege and work product protections available to an organization and preserve the constitutional rights and other legal protections available to employees of such an organization." 
They would define "attorney-client privilege" as currently understood under the federal law, that is as "the attorney-client privilege as 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, and the principles of article V of the Federal Rules of Evidence." They would adopt an equally contemporaneous definition of "attorney work product," i.e., "materials prepared by, or at the direction of an attorney in anticipation of litigation, particularly any such materials that contain a mental impression, conclusion, opinion, or legal theory of that attorney." 
The Specter bill ( S. 445 ) alone would insert a definition of "organization." The definition would foretell the scope of the bill, since the bill's commands speak to how federal prosecutors and investigators may deal with organizations. The bill's definition has two distinct components—what is an organization and what is not for purposes of the bill. It describes organizations as persons other than human beings and expressly includes state, local, and municipal governmental entities. The absence of similar definition in the Scott bill ( H.R. 4326 ) leaves open the question whether federal, state, local, and municipal entities fall within the scope of its provisions. The omission of federal and tribal governmental entities from the Specter bill's definition suggests that they would not be considered organizations for purposes of the bill.
The Specter bill ( S. 445 ) would exclude from the definition of organization, drug cartels (continuing criminal enterprises (21 U.S.C. 848(c))); designated foreign terrorist organizations (18 U.S.C. 2339B(g)(6)); and entities charged under the RICO provisions. The RICO exemption may raise questions. Common business organizations do not ordinarily include drug cartels or designated foreign terrorists organizations, but they are infrequently associated with RICO prosecutions. Federal racketeer influenced and corrupt organization (RICO) provisions proscribe, among other things, the patterned commission of two or more other federal or state offenses in order to conduct the affairs of an enterprise whose activities affect interstate or foreign commerce, 18 U.S.C. 1962(c). Depending upon the circumstances, an organization might either be an offender or the victimized intestate enterprise, 18 U.S.C. 1961(3), (4). Since the bill uses the phrase "entity charged," it might be thought to apply only to offending organizations and only after they are indicted. Such a reading, however, may be more narrow than its sponsors intend.
In somewhat different terms, the two bills would bar the Justice Department and other federal investigative, regulatory, or prosecutorial agencies from demanding that an organization:
waive its attorney-client privilege or attorney work product protection; decline to pay the legal expenses of an employee; avoid joint defense, information sharing or common interest agreements with its employees; refrain from disclosing information concerning an investigation or enforcement action to employees; or terminate or discipline an employee for the employee's exercise of a legal right or prerogative with respect to a governmental inquiry. They would also preclude using such organizational activity as the basis in whole or in part for a civil or criminal charge against the organization. Only the Specter bill ( S. 445 ) would also prohibit the government from rewarding an organization for waiving its attorney-client privilege or work product protection. The provision may be a response to criticism some commentators have leveled against the Filip Memorandum:
The problem is rooted in the fact that indictments are fatal to major corporations. This means that from the beginning of the process, a corporation is compelled to follow the prosecutor's instructions on how to avoid indictment. Under the Filip revisions, like it was under the Thompson Memorandum, the way to avoid indictment is by cooperating with the government. Now, the government will not view negatively a corporation's refusal to give privileged information. It will, however, still give credit for that privileged information. Under the Filip revisions the compelling is done differently, almost passively—allowing the implied threat of indictment to do the work.
Both bills would allow the government to request information it believes is beyond the scope of the attorney-client privilege or the attorney work product protection. And they would not prevent an organization, on its own initiative, from sharing the results of an internal investigation with authorities, although the Specter bill ( S. 445 ) would preclude the government from considering such a waiver positively.
Each of the bills declares that its proposals are not intended to apply to situations when the government is statutorily authorized to demand a waiver. It is not entirely clear what subsection 3014(e) intended to preserve when it referred to "any other federal statute that may authorize[s], in the course of an examination or inspection, an agent or attorney of the United States to require or compel the production of attorney-client privilege material." Many federal statutes authorize the examination or inspection of corporate records and other materials. Few, if any, federal statutes state in so many words that federal inspectors may examine otherwise privileged attorney-client or work product material. In fact, if privilege is mentioned at all, the statute is likely to preserve the privileged material against inspection.
Use of the phrase in the Scott bill ( H.R. 4326 ) that "any other federal statute that may authorize" may indicate that the authors of the subsection were referring to statutes which grant general authority that on a given occasion "may" extend to compelled access to privileged material. The absence of the word "may" in the Specter bill ( S. 445 )may be intended to limit the exception to instances of explicit statutory authority to demand. 
The term "in the course of an examination or inspection" suggests that the exception likely would not extended to situations where the material was sought through an administrative or grand jury subpoena or through a civil investigative demand. Finally, reference to "privileged" material narrows the category further and belies any intent to include material which on its face seems "privileged" but which because of the "crime or fraud" or some other exception cannot be classified as such. It is difficult to see what remains.
Finally, both bills would permit federal prosecutors, in determining whether to bring criminal charges against a corporation, to consider the fact the corporation had provided counsel for an employee, entered into a joint defense agreement with an employee, or shared information relating to investigation with an employee—but only when those activities are themselves federal crimes. 
Commentators who support the proposals argue that they are necessary (1) to overcome the "culture of waiver" produced by the Thompson Memorandum; (2) to establish consistent policy not only for the Department of Justice but for all federal investigative agencies; and (3) to provide stability and certainty that regularly shifting Justice Department policy statements cannot provide. Others contend that the proposals "would only frustrate the DOJ corporate charging policy, likely without altering the occurrence of waiver, but at the same time, rendering prosecutions needlessly complex."
As of February 2010, neither House had held hearings on the proposals during the 111 th Congress.