12.19.2006

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Updates

The Department of Justice recently announced that it will revise some controversial policies outlined in a document known as the Thompson Memorandum. The new policies will place procedural limits on attempts by the Department of Justice to require companies under investigation to waive the attorney-client privilege. The policies will also bar federal prosecutors from considering as a factor in charging decisions whether a company is advancing attorneys' fees to employees or other corporate agents. These widely anticipated changes respond to strong criticism of the Thompson Memorandum from many sources and are designed to preempt legislation introduced by Arlen Specter, the outgoing chair of the Senate Judiciary Committee.

What Is the Thompson Memorandum?

In January 2003, Deputy Attorney General Larry D. Thompson issued a memorandum setting forth the factors that federal prosecutors generally should consider when deciding whether to seek criminal charges against a company. The most controversial factors related to the prosecutors' determination of whether a company has "cooperated" with the government’s investigation.

How Does the Government Decide Whether to Indict a Company?

The Thompson Memorandum lists nine factors for prosecutors to consider when deciding whether to indict a company ranging from the nature and gravity of the alleged wrongdoing to the company's history of similar conduct, and whether civil or regulatory actions will adequately deter or punish the company. One especially controversial factor (which is the fourth factor listed) related to whether the company was willing to waive the attorney-client privilege and produce to the government results of its internal investigation and whether the company was advancing attorneys' fees to officers and employees involved in the investigation. In assessing cooperation, the Thompson Memorandum directed prosecutors to

    • consider the company’s prompt, voluntary disclosure of the alleged wrongdoing and its willingness to cooperate in the investigation of its agents, including the waiver of corporate attorney-client privilege and work product protection, and  
    • judge a company’s cooperativeness by, among other factors, whether the company provides attorneys’ fees or other defense support to individual employees. 

Public Criticism of the Thompson Memorandum

This "voluntary disclosure" factor cited in the Thompson Memorandum has drawn criticism from courts and commentators because it requires a company to give up important rights and expose employees to potentially crushing legal fees to avoid having the prosecutor label the company "uncooperative."

Critics argue that this fourth factor requires companies to choose between polar opposite responses to investigations:

    • abandon all potentially liable employees and waive attorney-client privilege or
    • shore up and prepare a hardy defense to any indictment. 

Critics claim that requiring quick and absolute cooperation fundamentally interferes with the attorney-client relationship, precluding the company from obtaining frank advice, and paralyzes employees who are obligated to respond to allegations of wrongdoing. Without these important protections, officers and directors may be fearful of making strategic moves that would be in the best interests of the shareholders because of the chance that a subsequent government investigation might force the company to abandon the directors, allowing criminal juries to examine their strategic decisions after the fact.

The congressional Committee on Capital Markets Regulation (popularly known as the Paulson Committee) recommended that the Department of Justice prohibit prosecutors from requiring companies to waive the attorney-client privilege or to refuse to provide attorneys’ fees to employees.

Judicial Scrutiny of the Thompson Memorandum

At least one court has also recognized the dangers of allowing prosecutors to wield these types of coercive tools. In a tax fraud case, accounting firm KPMG refused to pay the legal costs of its former employees to avoid the prosecutorial “uncooperative” label. Judge Lewis A. Kaplan of the U.S. Southern District Court of New York ruled that this application of the fourth factor in the Thompson Memorandum violated the defendants' constitutional rights. This case is currently under review by the Second Circuit.

Congressional Action Against the Thompson Memo

On the legislative front, Senator Specter on November 30, 2006 threatened to introduce legislation that would preclude the application of some of the Thompson Memorandum’s harshest provisions if the Department of Justice did not revise the policy within a week.

True to his word, on December 7, 2006, Senator Specter introduced legislation banning the controversial practices promoted in the Thompson Memorandum. The bill, entitled the "Attorney-Client Privilege Protection Act of 2006," makes it unlawful for prosecutors to:

    • “[D]emand, request, or condition treatment on” a company’s disclosure of information protected by the attorney-client privilege or the work-product doctrine;  
    • condition their indictment decision on whether the company waives the attorney-client privilege or work-product doctrine; and  
    • condition their indictment decision on whether the company provides attorneys’ fees or sanctions or shares information with employee-defendants. 

The Department of Justice Abandons the Thompson Memorandum’s Controversial Provisions

Reacting to this criticism, the Department of Justice announced on December 12, 2006 that it was revising the Thompson Memorandum factors. According to a Department of Justice news release, federal prosecutors must obtain written approval from a Deputy Attorney General before requesting attorney-client communications. The new Department of Justice guidance, in a memorandum authored by Deputy Attorney General Paul J. McNulty, states that prosecutors should seek such approval only in rare circumstances. In addition, federal prosecutors must obtain written approval from their U.S. Attorney or from the Deputy Attorney General (depending on the nature of the documents sought) before requesting privileged information from a company. The new guidelines also prohibit prosecutors from considering a company’s payment of attorneys’ fees to employees in deciding whether to charge a company unless a Deputy Attorney General decides that “extraordinary instances” indicate that the payment was intended to impede a government investigation.

Although the new McNulty Memorandum represents a significant change in policy, the Deputy Attorney General indicated in his remarks that, to some extent, a company's willingness to provide privileged information will be considered by the Department:

Now this is not meant to say that if the company decides to give us the information, we will not consider it favorably. The government wants to encourage cooperation and the production of information where requested. Certainly a company would want to receive credit for its production of privileged materials if the decision is made to waive the privilege.

We will have to wait and see whether in practice the favorable consideration that will accompany a "voluntary" waiver will result in undue pressure on the company to produce such information to the government. We will also see whether Senator Specter will withdraw the Attorney-Client Privilege Protection Act in light of the Department's adoption of these new policies.

As a result of these changes, companies may face less of a threat if they choose to withhold privileged documents from investigators. Companies should also have renewed confidence in their right to provide defense costs to employee-defendants without fear of increasing the chance of an indictment. Companies should contact their attorneys if a prosecutor hints that a charging decision will be based on any of these prohibited factors.

Additional Information

You can find a copy of the full text of the Thompson Memorandum here.

You can find the full text of the Department of Justice press release here.

You can find the full text of the Attorney-Client Privilege Protection Act of 2006 here.


 

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