The McNulty Memorandum: New DOJ Policies On Attorney-Client Privilege And Attorney Work Product Protections

Thursday, February 1, 2007 - 01:00

On Tuesday, December 12, 2006, Deputy Attorney General Paul McNulty released revised Department of Justice guidelines regarding federal prosecution of business organizations. The revised policies, which are embodied in an internal Department of Justice memorandum (the "McNulty Memorandum"), supercede and replace earlier guidelines issued in 2003 by then-Deputy Attorney General Larry Thompson (the "Thompson Memorandum").

The Justice Department's most recent efforts to reconfigure its policies and procedures governing corporate prosecutions arise in the context of mounting judicial and congressional pressure, and amid a sustained chorus of criticism from the U.S. business and legal communities. Nevertheless, the McNulty Memorandum appears to be a limited response calculated to do just enough to appease critics and forestall further judicial and congressional action, and fails to incorporate the fundamental reevaluation of corporate criminal liability that many critics have requested, and that is indeed warranted.

The Thompson Memorandum And The Government's Evaluation Of Corporate "Cooperation"

In the wake of Enron and other high-profile corporate scandals, the Department of Justice reexamined its policies for levying criminal charges against corporations, as well as the tactical application of those policies. The Thompson Memorandum restated the Department's existing policy of evaluating business organizations no more or less leniently because of their artificial nature, and identified the factors to be considered by prosecutors when making charging determinations, including the prevalence of wrongdoing within the organization, the seniority of the employees involved, the response of management once the conduct was discovered, prior corporate misconduct, and the organization's level of cooperation. As the Thompson Memorandum made clear, corporations perceived as having not fully cooperated with a government investigation would be more likely to face criminal indictment, prosecution, and potentially crippling criminal sanctions.

In assessing cooperation, the Thompson Memorandum instructed prosecutors to consider, among other things, whether or not the business entity "appears to be protecting its culpable employees and agents." The factors in this analysis were: (1) whether the corporation was advancing legal fees or otherwise indemnifying its culpable employees; and (2) whether the corporation waived the protections afforded by the attorney-client privilege and attorney work product doctrine for materials related to any internal investigation, including notes of otherwise privileged interviews of company personnel.

Accordingly, interference with the advancement of legal fees and compelled waiver of the attorney-client privilege and attorney work product doctrine have become routine federal law enforcement tactics in pursuing potential white-collar crime. Today, prosecutors routinely condition mitigation and leniency for corporations and other business entities on the performance of a thorough internal investigation and the disclosure to law enforcement of investigatory materials -including attorney-client privileged information and attorney work product. Often, such waiver requests are made verbally without a written record at the initiation of criminal investigations.

These practices have ignited widespread criticism from courts, congress, the corporate defense bar, and the U.S. business community. For months, critical commentary from a wide array of organizations and individuals, including my own congressional testimony, warned of the corrosive nature of government tactics on the attorney-client relationship and the chilling effect of compelled waivers on communications between employees and corporate counsel. Moreover, in a series of decisions denouncing aggressive law enforcement tactics authorized by the Thompson Memorandum, Judge Lewis Kaplan of the Southern District of New York held that both government interference with corporate decisions to advance legal fees to employees, and government efforts to condition such fee advancements on employees' participation in interviews (i.e., proffer sessions) with investigators, were impermissible and unconstitutional. Most recently, Senator Arlen Specter introduced the Attorney-Client Protection Act of 2006, which, if enacted, would prohibit federal prosecutors from seeking access to attorney-client communications and attorney work product.

The McNulty Memorandum

In most respects, the revised charging guidelines released this week by Deputy Attorney General Paul McNulty follow prior Department of Justice policies regarding corporate criminal prosecutions. Under the McNulty Memorandum, the Department of Justice, despite acknowledging a corporation's artificial nature and while proclaiming its goal of protecting investors, continues to insist on treating corporations and other business entities similar to individual defendants.

Notably, the McNulty Memorandum deviates from the Thompson Memorandum and earlier Department policies in only two substantive respects. The McNulty Memorandum sets forth new procedures for seeking corporate waivers of attorney-client privilege and attorney work product protection, and bars prosecutors, except in exceptional circumstances, from considering corporate payment or advancement of attorney fees in evaluating corporate cooperation.

Waiver Of Attorney-Client Privilege And Attorney Work Product Protections

Under the McNulty Memorandum, the Department's practice of requesting and evaluating corporate waivers of attorney-client privilege and attorney work product will continue. Rather than eliminating waiver requests, the McNulty Memorandum provides a multi-tiered procedure for requesting business entities to disclose protected materials. Pursuant to this new approach, requests for protected materials will only be made where there is a "legitimate need" for privileged information, to be determined by: (i) the likelihood and degree to which the privileged information will benefit the government's investigation; (ii) whether the information can be obtained in a timely and complete fashion by using alternative means that do not require waiver; (iii) the completeness of a voluntary disclosure already provided; and (iv) the collateral consequences to a corporation resulting from a waiver.

If prosecutors determine that such a legitimate need exists, they are instructed to seek information through the least intrusive manner possible. For these purposes, privileged materials and attorney work product are divided into two categories.

Category I information consists of factual information relating to the alleged misconduct and consists of materials including witness statements, factual interview memoranda, and factual materials (for example chronologies and organization charts) prepared by or at the request of counsel. Prosecutors are instructed to first request purely factual information, which may or may not be privileged, relating to the underlying misconduct. Before requesting waiver of attorney-client or work product protections for Category I information, prosecutors must obtain written authorization from the United States Attorney who, prior to authorizing the request, must provide a copy of the request to, and consult with, the Assistant Attorney General for the Criminal Division. If authorized, the United States Attorney must communicate the request in writing to the corporation. A corporation's response to the government's request for waiver of privilege and work product protection for Category I information may be considered in evaluating its cooperation and in making charging determinations.

In the "rare circumstances" where Category I information is viewed by prosecutors as providing an incomplete basis to conduct a thorough investigation, they are authorized to seek access to Category II information, which is defined under the McNulty Memorandum as attorney-client communications and opinion attorney work product. The McNulty Memorandum explicitly states that Category II information includes "legal advice given to the corporation before, during, and after the underlying misconduct occurred" as well as "attorney notes, memoranda or reports . . . containing counsel's mental impressions and conclusions, legal determinations reached as a result of an internal investigation, or legal advice" Requests for Category II information must be authorized in writing by the Deputy Attorney General and communicated in writing to the corporation by the U.S. Attorney. Unlike cases involving Category I information, however, prosecutors are instructed not to consider a business entity's refusal to provide Category II information in charging decisions.

Indemnification And Advancement Of Attorneys Fees

In a clear shift from earlier Department policy, the McNulty Memorandum instructs prosecutors that, as a general matter, they cannot consider a business organization's indemnification or advancement of attorneys fees to individual employees when evaluating corporation cooperation. The memorandum provides a limited exception in the "extremely rare" cases where "the totality of circumstances show that [indemnification or the advancement of attorneys' fees is] intended to impede a criminal investigation." The McNulty Memorandum provides that, in such cases, the fee arrangement will be considered as a factor in making a determination that the corporation is acting improperly. Where prosecutors determine such circumstances do exist, approval must be obtained from the Deputy Attorney General before prosecutors may consider this factor for charging purposes.

Rethinking Corporate Criminal Liability

The McNulty Memorandum simply does not proceed far enough in its reconsideration of the Department of Justice's policies for investigating and charging business organizations. The revisions contained in the McNulty Memorandum attempt to address only specific judicial and congressional criticisms, and offer little meaningful procedural change. The Memorandum sets forth non-binding internal guidelines that seem to merely entrench and even expand an internal deliberative process predisposed to request attorney-client privileged information and attorney work product.

Time will determine whether the requirements of high-level authorization and written requests will curb the frequency with which waivers are sought. It is alarming, however, that the Department is no longer restricting its waiver requests to merely factual information. The McNulty Memorandum formalizes procedures for penetrating the most sacrosanct of attorney-client communications and attorney opinion work product. In so doing, the Department is in fact inviting further erosion of the attorney-client privilege and attorney work product protections.

Regrettably, the McNulty Memorandum represents a missed opportunity to conduct a broad re-assessment of the policies and procedures relating to the criminal prosecution of business organizations. Old, largely recycled rationales for corporate criminal liability no longer carry the same weight. The proliferation of e-mail and corporate controls means that, far more often than not, corporate misconduct leaves a well documented paper trail through which culpable individuals can be held directly responsible for their conduct. No public interest is served by holding an entire organization and its innocent shareholders accountable for the misconduct of identifiable individuals. Moreover, it is unclear what is gained by sanctioning business entities with steep criminal fines. In many cases, misconduct giving rise to criminal fines also compels substantial civil-administrative penalties and the prospect of civil class-action and derivative lawsuits. The goal of a criminal prosecution should be to punish responsible individuals and not to hold an entire organization accountable for the acts of a few. Consistent with this goal, criminal prosecution of business organizations should be an exceedingly rare undertaking.

Ultimately, the McNulty Memorandum's piecemeal revisions may in the short term appease some critics and forestall imminent judicial and congressional action, but they do not demonstrate an earnest re-evaluation of Department policies regarding corporate criminal enforcement, and fail to provide meaningful procedural change.

William M. Sullivan, Jr. is a litigation partner at Winston & Strawn's Washington, DC office. He concentrates in corporate internal investigations, trial practice, white-collar criminal defense, as well as civil and securities litigation.

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