Client Alert
DOJ Revises Guidelines to Limit Demands that Corporations Waive Attorney-Client Privilege or Not Advance Employees’ Legal Fees as a Condition of 'Cooperating' with a Government Investigation
Client Alert
September 8, 2008
On August 28, 2008, the Department of Justice (DOJ) announced that it had revised its Principles of Federal Prosecution of Business Organizations—the guidelines that govern how federal prosecutors investigate, charge and prosecute corporate crimes — to limit the circumstances in which corporations, in order to receive “credit” for cooperating with a federal investigation, would have to agree to waive their corporate attorney-client privilege or refuse to advance their employees’ legal fees.1
The revised guidelines were authored by Deputy Attorney General Mark Filip. The “Filip Guidelines” represent a significant shift from prior DOJ policy, which was increasingly subject to criticism that it gave federal prosecutors unwarranted and unchecked power to pressure corporations and their employees to waive certain privileges and protections during federal investigations in order to receive “cooperation credit.” However, the practical impact that the Filip Guidelines will have on governmental investigations cannot yet be determined.
Background — The Thompson Memorandum
In 1999, the DOJ, via then Deputy Attorney General Eric Holder, first promulgated guidance to its prosecutors concerning factors to consider when making charging decisions against companies suspected of wrongdoing.2 In late 2002, in the wake of corporate scandals such as Enron and Worldcom, the DOJ increasingly took the view that business organizations, though purporting to cooperate with governmental investigations, were in fact taking steps to impede the efficient and complete exposure of corporate wrongdoing. Accordingly, on January 20, 2003, then Deputy Attorney General Larry Thompson issued his own memorandum — the “Thompson Memorandum” — which directed prosecutors to increase scrutiny on the “authenticity” of companies’ cooperation with criminal investigations.3
Most notably, the Thompson Memorandum intimated that corporations, in order to establish their cooperation with a government investigation, should waive applicable attorney-client privileges and work-product protections, produce the results of their internal investigations, and deny payments of attorneys’ fees to employees under investigation. Similarly, around that same time, the Securities and Exchange Commission (SEC) issued the Seaboard Report, which likewise suggested that corporations could demonstrate their cooperation with SEC investigations by waiving privilege.4
The Thompson Memorandum was heavily criticized by numerous organizations, including the American Bar Association, who asserted that it improperly forced companies to waive privileges they were entitled to assert under the law, and for pressuring companies to contravene corporate charters and state laws that required them to pay their employees’ legal fees. The Thompson Memorandum also received heavy criticism from the judiciary as well as from Congress. In 2006, in two widely reported opinions in United States v. Stein (the criminal prosecution of former KPMG employees for selling allegedly illegal tax shelters), the federal district court in the Southern District of New York declared unconstitutional the portion of the Thompson Memorandum that led government prosecutors to pressure KPMG not to pay the legal fees of its employees, contrary to KPMG’s standard practice.5 The Stein decisions were followed by Senate Judiciary Committee hearings on the Thompson Memorandum. After those hearings, legislation was introduced by Senator Arlen Specter to negate the Thompson Memorandum and place on government agencies “clear and practical limits designed to preserve 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.”6
DOJ’s Response — The McNulty Memorandum
In the face of these rulings, and with the looming prospect of federal legislation that would have nullified significant portions of the Thompson Memorandum, then Deputy Attorney General Paul McNulty issued his own memorandum, dated December 12, 2006, scaling back some of the more controversial portions of the Thompson Memorandum.7 In particular, and in apparent recognition that prosecutors were demanding waivers of privilege as standard practice during corporate investigations, the “McNulty Memorandum” required prosecutors to obtain prior senior supervisory approval—starting at the level of the United States Attorney and rising to the Deputy Attorney General—before making a waiver demand.
Like its predecessor, however, the McNulty Memorandum was heavily criticized for placing undue burdens on companies. Specifically, under the McNulty Memorandum, prosecutors were still permitted to consider whether a company had turned over the results of its internal investigations when making cooperation determinations (whether or not those investigations were considered protectable work-product), and to make waiver demands in situations where companies had agreed to plead guilty and cooperate with the government. Moreover, prosecutors could still under limited circumstances penalize companies for advancing attorneys’ fees to employees under investigation, even if the companies were required to do so under their corporate charters or state law. For these and other reasons, Senator Specter re-introduced his legislation to Congress, urging that prosecutors should not have the power to “undermine the adversarial system of justice, [by] encouraging organizations to waive attorney-client privilege and work product protections to avoid indictment or other sanctions.”8
The Changes Made by the New Filip Guidelines
Recognizing the flaws in the McNulty Memorandum, and once again faced with the possibility that Congress might attempt to override the DOJ guidelines through Senator Specter’s Attorney-Client Privilege Protection Act, the newly issued Filip Guidelines seek to end the DOJ’s practice of requiring, as evidence of cooperation, waiver and other acts that strip business organizations of their legal privileges and protections. The Filip Guidelines specifically recognize that “the attorney-client privilege and attorney work product production are essential and long-recognized components of the American legal system” and seek to curtail prior DOJ practices by establishing that:
- Credit for cooperation will not depend on whether a corporation has waived attorney-client privilege or work-product protection, or produced materials protected by attorney-client or work-product protections. Rather, it will depend on the disclosure of facts.
- Prosecutors are prohibited from requesting that companies disclose non-factual attorney-client privileged communications or attorney work product, such as legal advice, except in the limited circumstances when either (a) a company is asserting an advice-of-counsel defense against criminal charges or (b) the communications between the company and its attorneys were made in furtherance of a crime or fraud.
- Prosecutors cannot consider whether a company has advanced attorneys’ fees to its employees, officers, or directors when evaluating cooperativeness. A company’s payment or advancement of attorneys’ fees to its employees will be relevant only in the rare situation where it, combined with other circumstances, would rise to the level of criminal obstruction of justice.
- Prosecutors may not consider whether a company has entered into a joint defense agreement in evaluating whether to give the company credit for cooperating.
- Prosecutors may not consider whether a company disciplined or terminated employees for the purpose of evaluating cooperation. Prosecutors may only consider whether a company has disciplined employees that the company identifies as culpable, and only for the purpose of evaluating the company’s remedial measures or compliance program.
Implications of the Filip Guidelines
Unlike the prior guidelines, the Filip Guidelines, which are effective immediately, will be incorporated into the United States Attorneys Manual, which is binding on all federal prosecutors. While the Filip Guidelines, on paper, appear on their face to significantly alter the manner in which companies under investigation interact with federal prosecutors, there are reasons why the Filip Guidelines may not ultimately redefine the dynamic between prosecutors and the companies they are investigating.
First, because cooperation determinations are based on the disclosure by companies of relevant facts, when those facts can only be provided by waiving privileges and similar protections companies may remain under the same pressure to waive.10 Second, while prosecutors can no longer consider payments of attorneys’ fees and indemnification agreements in determining “cooperation credits”, they can still inquire about them — which may lead companies, in an effort to appease prosecutors, to limit or terminate those agreements (which is exactly what happened in the Stein case). Third, because prosecutors have a concern about sensitive information being disclosed concerning investigations, they still can inquire into the existence of joint defense agreements, and request that companies limit their applicability. Fourth, while the retention or termination of employees cannot be considered in evaluating cooperation, those facts can be used in evaluating the extent to which the corporation has engaged in remediation — meaning that companies could ultimately be in the same position under the Filip Guidelines vis-à-vis those employees as they were under the McNulty Memorandum.
Finally, it should be noted that the Filip Guidelines simply are internal policy. Accordingly, as the United States Attorney’s Manual makes clear, the guidelines do not “create any rights, substantive or procedural, enforceable at law by any party in any matter civil or criminal.”11 And, as policy, the Filip Guidelines can be altered or reversed at any time by the Attorney General.
Conclusion
The Filip Guidelines appear to be a good-faith effort on the part of the DOJ to remedy the problems created by the Thompson Memorandum and the McNulty Memorandum. However, at this juncture it is less than certain that the Filip Guidelines will effectively eliminate the pressure on companies under government investigation to waive privileges and protections. The pressures may continue to be significant especially when the relevant factual information the government is seeking is subject to those privileges and protections.
Moreover, the Filip Guidelines are only applicable to the DOJ, thus leaving other federal enforcement agencies (e.g., the SEC) potentially free to employ Thompson Memorandum-style tactics of their own against corporations. For this reason, some in Congress have suggested that only a general legislative solution will provide corporations with the needed protections.12 These issues are thus likely to remain a subject of debate in the coming months despite whatever improvements have been achieved by the Filip Guidelines.
1. See Department of Justice, Principles of Federal Prosecution of Business Organizations (Aug. 28, 2008), available at http://www.usdoj.gov/opa/documents/corp-charging-guidelines.pdf
2. See Memorandum from Eric H. Holder, Deputy Attorney General, to Heads of Department Components and United States Attorneys (June 16, 1999), available at http://www.usdoj.gov/criminal/fraud/docs/reports/1999/chargingcorps.html
3. See Memorandum from Larry D. Thompson, Deputy Attorney General, to Heads of Department Components and United States Attorneys (Jan. 20, 2003), available at http://www.usdoj.gov/dag/cftf/corporate_guidelines.htm
4. Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, Exchange Act Rel. No. 34-44969 (Oct. 23, 2001), available at http://www.sec.gov/litigation/investreport/34-44969.htm
5. See United States v. Stein, 435 F. Supp. 2d 330 (S.D.N.Y. 2006); 440 F. Supp. 2d 315 (S.D.N.Y. 2006). In what appears to be a sheer coincidence, on the same day that the Filip Guidelines were issued, the Second Circuit affirmed the district court’s rulings in Stein. See United States v. Stein, No. 07-3042-cr, 2008 WL 3982104 (2d Cir. Aug. 28, 2008).
6. See Attorney-Client Privilege Protection Act of 2006, S. 30, 109th Cong. § 2 (2006). While Senator Specter’s bill was stalled in the Senate, on November 30, 2007, virtually identical legislation was passed in the House of Representatives. See Attorney-Client Privilege Protection Act of 2007, H.R. 3013, 110th Cong. (2007).
7. Memorandum from Paul J. McNulty, Deputy Attorney General, to Heads of Department Components and United States Attorneys (Dec. 12, 2006), available at http://www.usdoj.gov/dag/speeches/2006/mcnulty_memo.pdf
8. See Attorney-Client Privilege Protection Act of 2008, S. 3217, 110th Cong. § 2 (2008).
9. See United States Attorney’s Manual § 9-28.000 et seq., available at http://www.usdoj.gov/usao/eousa/foia_reading_room/usam/
10. Because the Filip Guidelines focus the cooperation analysis on companies’ disclosure of facts to investigators (irrespective of whether that disclosure would require a waiver of privilege), some have speculated that companies may begin to shy away from employing attorneys to conduct investigations, so as to avoid the potential problem of having to produce privileged or protected materials. However, it is possible that the Filip Guidelines actually might result in companies seeking to employ attorneys earlier and more often in investigations in order to cloak more materials in privilege — knowing that the government’s guidelines prohibit prosecutors from seeking, or even inquiring into, privileged materials.
11. See supra n.9 at § 1-1.100
12. See, e.g., Letter from Arlen Specter to Mark Filip, Deputy Attorney General (July 10, 2008), available at: http://specter.senate.gov/public/index.cfm?FuseAction=NewsRoom.NewsReleases&ContentRecord_id=09EE0CFC-978B-D2CB-C6E6-511BEC8EA4EA (Noting that legislation may be appropriate because, inter alia, “[a] Department of Justice statement of Principles would not bind any other federal agencies such as the SEC and IRS. Similarly, any Department of Justice statement of Principles would be subject to modification by subsequent Attorneys-General unlike legislation.”)
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