The McNulty Memo

On Dec. 12, 2006 the U.S. Justice Department issued new guidance that will require federal prosecutors to seek approval from senior DOJ officials before requesting a waiver of attorney-client privilege and work product protection in corporate criminal investigations. The new guidance supersedes the existing language on waiver in the 'Thompson memo,' issued by then-Deputy Attorney General Larry D. Thompson in January 2003.

The Thompson memo, formally titled 'Principles of Federal Prosecution of Business Organizations,' provided nine factors for prosecutors to consider when deciding whether to bring criminal charges against a corporation. Included among those factors is a consideration of whether the corporation indicated a 'willingness to cooperate' with the investigation by, among other things, disclosing complete results of internal investigations and waiving attorney-client and work product protection.

McNulty Changes

In a speech before a group of lawyers in New York, Deputy Attorney General Paul J. McNulty explained that the new guidance continues to require consideration of the factors from the Thompson memo, but adds new restrictions. Specifically, it requires prosecutors to establish a legitimate need for privileged information and to seek approval before requesting it from the company. To seek privileged attorney-client communications or legal advice, prosecutors must obtain approval directly from the Deputy Attorney General ' currently, McNulty. To seek privileged factual information, such as facts uncovered during a company's own internal investigation of misconduct, the prosecutor must seek the approval of the U.S. Attorney in his or her local district who must, in turn, consult with the Assistant Attorney General of the Criminal Division.

According to McNulty, privileged attorney-client communications 'should be sought only in rare circumstances.' Moreover, if a company decides not to waive privilege, 'prosecutors are directed not to consider that declination against the corporation in their charging decisions.' The guidelines also instruct prosecutors not to 'take into account whether a corporation is advancing attorneys' fees to employees or agents under investigation and indictment,' except in the 'extremely rare case' where the totality of the circumstances shows that the company intended to impede the investigation.

A Step in the Right Direction, But Far Enough?

The response to the Department's sudden change of position by corporate counsels, white-collar practitioners, and Congress appears to be less than enthusiastic. If the goal of the McNulty memo was to provide businesses with a renewed sense of confidence when seeking attorney guidance and counsel in dealing with complex compliance issues, the effort of the Department may have fallen far short.

There should be no doubt that the ultimate goal of the government's policies is to help ensure sound financial markets, safe food and drugs, environmental protection and worker safety. It is a fact that our success in obtaining any of these goals depends on voluntary compliance by regulated businesses. There is little question that even the threat of unrestricted waiver requests chilled the ability of businesses to have legal counsel guide those compliance efforts. The Department itself identifies its policy as an effort to support compliance, which is in effect a recognition that the old policy was hurting efforts to enhance corporate compliance guided by in-house and outside legal counsel and the effective conduct of internal investigations. However, the test for regulated businesses will be how this new guidance is used by the Department. That is, is this truly a new policy, or will it just be a bureaucratic hurdle on the same bad policy path?

Some suggest that McNulty's effort will not resolve the problem in its entirety. They reason that, as long as DOJ is permitted to consider waiver to be an element of cooperation, businesses are still going to have the not-so-subtle pressure to waive privilege, even when it is not specifically asked for by DOJ. In the experience of many white-collar practitioners, companies that have waived privilege in the past few years were never directly asked to do so by DOJ; rather, they proactively chose to do so in order to get cooperation points with DOJ. The solution is to no longer make waiver a consideration in charging decisions, period.

Also disturbing to many is the government's continuing consideration of a company's legal assistance to its employees and directors. The government is left to decide if the company 'shield[ed] ' culpable employees' during an investigation, and sanction accordingly, placing companies in the untenable position of having to predict whom the government will ultimately determine to be 'culpable.' For fear of guessing wrong, companies are encouraged to compromise the rights and interests of their employees.

A Government Position in Conflict with Itself?

In his important new book on corporate criminal liability, Professor William Laufer of the Wharton School sees an inherent contradiction in the federal government's policy on corporate criminal cases. In Corporate Bodies and Guilty Minds, Professor Laufer observes that the Sentencing Guidelines seek to have corporations 'face the threat of significant punishment and, at the same time, the possibility of ' leniency ' ' by providing for significant penalties but mitigating those penalties if, among other things, the company agrees to cooperate with the government's investigation. Similarly, the Thompson memo regarding charging decisions and plea negotiations, urged aggressive prosecution of corporations while at the same time offering leniency or absolution for companies that accept responsibility and do so by agreeing to cooperate with the government's investigation.

Professor Laufer believes that, in the circumstances of today, these twin approaches of prosecution and punishment for past acts, and leniency for subsequent cooperative behavior, undermine the use of criminal liability as 'the ultimate lever that empowers less formal social controls, such as self-regulation ' ' Whether or not one agrees with this analysis, there is no question that the government's policy of conditioning leniency on cooperation led to a battle between the Department of Justice and a remarkable coalition of business and civil liberties groups opposed to the provisions of the Sentencing Guidelines and the Thompson memo that made waiver of the attorney-client privilege a measure of cooperation.

On April 5, 2006, the Sentencing Commission voted to remove the language from the corporate sentencing guidelines that identified waiver of the attorney-client privilege as a part of meaningful cooperation with a government investigation or prosecution. The Commission did so in the face of opposition to this change by the Department of Justice.

Inside Baseball

So what changed and led to DOJ's abrupt reversal? The turnabout has been labeled a 'lesson in how to construct a model lobbying effort,' by The Legal Times [a sister publication of this newsletter]. The efforts brought together unlikely allies, including the American Bar Association, the American Civil Liberties Union, the American Chemistry Council and the Association of Corporation Counsel.

These groups joined an advocacy avalanche that included the Conference of Chief Justices and a letter from former DOJ officials from different administrations who usually only come together at funerals. In the words of the former Justice officials (contained in a Sept. 5, 2006 letter to Attorney General Alberto Gonzales) the Department's position on waiver of attorney-client privilege was 'seriously flawed'; they urged the Department to revise its policy to 'state affirmatively that waiver of the attorney-client privilege or work-product protections should not be a factor in determining whether a company has cooperated with the government in an investigation.'

But perhaps the signal moment came during a House of Representatives hearing when Associate Attorney General Robert D. McCallum sought to defend the Department's position at a House Judiciary subcommittee meeting on March 7, 2006. In attendance were Reps. William Delahunt (D-MA) and Dan Lungren (R-CA), generally polar opposites on almost every issue. As Associate Attorney General, McCallum was seeking to defend the department's position, Representative Delahunt interjected the following:

Mr. Delahunt: ' And, you know, I think that you can probably sense by the questions that have been posed, as well as observations by individual Members, that there is a real concern here. And you don't want someone like Lungren from California, you know a far-right conservative Republican, and Delahunt, this Northeast liberal, filing legislation on this because I think that is the order of magnitude that is being expressed here. So respectfully, that is a message that I think you can bring back to Justice, is that there is concern about the Thompson/McCallum Memorandum. Okay?

Mr. McCallum: I will certainty take that message back, Mr. Delahunt.

Then, in September 2006, Reps. Lungren and Delahunt published an Op-Ed in The Hill, in which they asked the Department of Justice to 'not consider any company or other entity to be 'non-cooperative' for protecting its right to consult confidentially with its attorneys,' and said that if they 'refuse to do so, Congress should act.'

Shortly prior to the adjournment of the 109^th Congress, Sen. Arlen Specter (R-PA), the outgoing chairman of the Senate Judiciary Committee, introduced legislation designed to protect the attorney-client privilege by broadly prohibiting prosecutors from determining that a target is not cooperating with a government investigation based on a valid assertion of privilege. While the bill had no chance of passing before the end of the term, it did serve as a warning that Congress was prepared to act. A mere five days later, the McNulty memo was issued by the department.

Will Congress Still Act?

The McNulty revisions to the Thompson memo seem to have done little to assuage congressional concerns. On Jan. 4, Specter reintroduced his bill (S. 186), the Attorney-Client Privilege Protection Act of 2007. The bill amends Title 18 of the U.S. Code by adding a new section, ' 3014, prohibiting any agent or attorney of the U.S. government in any criminal or civil case to demand, request or condition treatment on the disclosure of any communication protected by the attorney-client privilege or attorney work product. Nor can charges or treatment be conditioned on whether the organization pays attorneys' fees for its employees or signs a joint defense agreement.

In a statement on the Senate floor, Specter thanked the Department for its effort in issuing revisions to the Thompson memo, but declared that effort insufficient. 'The new memorandum is inadequate in its protection of the attorney-client privilege,' he said. He acknowledged that the McNulty memo 'makes some improvements,' but added that 'the revision continues to erode the attorney-client relationship by allowing prosecutors to request privileged information backed by the hammer of prosecution if the request is denied.'

Specter said his bill was designed to 'force the Department of Justice to issue a meaningful change to its corporate charging policies beyond the changes in the McNulty Memorandum, which came 'a day late and a dollar short.” The memo, he said, 'continues to threaten the viability of the attorney-client privilege in business organizations by allowing prosecutors to request privilege waiver upon a finding of 'legitimate need' ' a standard that should guide the most basic of prosecutorial requests, not sensitive requests for privileged information.'

The Senator was also critical of the memo for discouraging corporate employees from having frank discussions with lawyers in furtherance of compliance efforts. 'The Department of Justice will not prevent corporate misconduct if it continues to inadvertently discourage the types of internal investigations and dialogues corporate officials need to detect and prevent corporate fraud,' he said.

As a former prosecutor, Specter said he was 'acutely aware of the enormous power and tools a prosecutor has at his or her disposal,' even without 'the coercive tools of the privilege waiver' as embodied in the McNulty memo. 'Cases should be prosecuted based on their merits, not based on how well an organization works with the prosecutor,' he remarked.

Steven P. Solow is a partner in the Washington office of Hunton & Williams LLP. He was chief of the Environmental Crimes Section in the Department of Justice from 1997 to 2000. His practice focuses on business crimes, internal investigations, corporate compliance and security programs, and environmental civil and criminal litigation. He can be reached at [email protected].

On Dec. 12, 2006 the U.S. Justice Department issued new guidance that will require federal prosecutors to seek approval from senior DOJ officials before requesting a waiver of attorney-client privilege and work product protection in corporate criminal investigations. The new guidance supersedes the existing language on waiver in the 'Thompson memo,' issued by then-Deputy Attorney General Larry D. Thompson in January 2003.

The Thompson memo, formally titled 'Principles of Federal Prosecution of Business Organizations,' provided nine factors for prosecutors to consider when deciding whether to bring criminal charges against a corporation. Included among those factors is a consideration of whether the corporation indicated a 'willingness to cooperate' with the investigation by, among other things, disclosing complete results of internal investigations and waiving attorney-client and work product protection.

McNulty Changes

In a speech before a group of lawyers in New York, Deputy Attorney General Paul J. McNulty explained that the new guidance continues to require consideration of the factors from the Thompson memo, but adds new restrictions. Specifically, it requires prosecutors to establish a legitimate need for privileged information and to seek approval before requesting it from the company. To seek privileged attorney-client communications or legal advice, prosecutors must obtain approval directly from the Deputy Attorney General ' currently, McNulty. To seek privileged factual information, such as facts uncovered during a company's own internal investigation of misconduct, the prosecutor must seek the approval of the U.S. Attorney in his or her local district who must, in turn, consult with the Assistant Attorney General of the Criminal Division.

According to McNulty, privileged attorney-client communications 'should be sought only in rare circumstances.' Moreover, if a company decides not to waive privilege, 'prosecutors are directed not to consider that declination against the corporation in their charging decisions.' The guidelines also instruct prosecutors not to 'take into account whether a corporation is advancing attorneys' fees to employees or agents under investigation and indictment,' except in the 'extremely rare case' where the totality of the circumstances shows that the company intended to impede the investigation.

A Step in the Right Direction, But Far Enough?

The response to the Department's sudden change of position by corporate counsels, white-collar practitioners, and Congress appears to be less than enthusiastic. If the goal of the McNulty memo was to provide businesses with a renewed sense of confidence when seeking attorney guidance and counsel in dealing with complex compliance issues, the effort of the Department may have fallen far short.

There should be no doubt that the ultimate goal of the government's policies is to help ensure sound financial markets, safe food and drugs, environmental protection and worker safety. It is a fact that our success in obtaining any of these goals depends on voluntary compliance by regulated businesses. There is little question that even the threat of unrestricted waiver requests chilled the ability of businesses to have legal counsel guide those compliance efforts. The Department itself identifies its policy as an effort to support compliance, which is in effect a recognition that the old policy was hurting efforts to enhance corporate compliance guided by in-house and outside legal counsel and the effective conduct of internal investigations. However, the test for regulated businesses will be how this new guidance is used by the Department. That is, is this truly a new policy, or will it just be a bureaucratic hurdle on the same bad policy path?

Some suggest that McNulty's effort will not resolve the problem in its entirety. They reason that, as long as DOJ is permitted to consider waiver to be an element of cooperation, businesses are still going to have the not-so-subtle pressure to waive privilege, even when it is not specifically asked for by DOJ. In the experience of many white-collar practitioners, companies that have waived privilege in the past few years were never directly asked to do so by DOJ; rather, they proactively chose to do so in order to get cooperation points with DOJ. The solution is to no longer make waiver a consideration in charging decisions, period.

Also disturbing to many is the government's continuing consideration of a company's legal assistance to its employees and directors. The government is left to decide if the company 'shield[ed] ' culpable employees' during an investigation, and sanction accordingly, placing companies in the untenable position of having to predict whom the government will ultimately determine to be 'culpable.' For fear of guessing wrong, companies are encouraged to compromise the rights and interests of their employees.

A Government Position in Conflict with Itself?

In his important new book on corporate criminal liability, Professor William Laufer of the Wharton School sees an inherent contradiction in the federal government's policy on corporate criminal cases. In Corporate Bodies and Guilty Minds, Professor Laufer observes that the Sentencing Guidelines seek to have corporations 'face the threat of significant punishment and, at the same time, the possibility of ' leniency ' ' by providing for significant penalties but mitigating those penalties if, among other things, the company agrees to cooperate with the government's investigation. Similarly, the Thompson memo regarding charging decisions and plea negotiations, urged aggressive prosecution of corporations while at the same time offering leniency or absolution for companies that accept responsibility and do so by agreeing to cooperate with the government's investigation.

Professor Laufer believes that, in the circumstances of today, these twin approaches of prosecution and punishment for past acts, and leniency for subsequent cooperative behavior, undermine the use of criminal liability as 'the ultimate lever that empowers less formal social controls, such as self-regulation ' ' Whether or not one agrees with this analysis, there is no question that the government's policy of conditioning leniency on cooperation led to a battle between the Department of Justice and a remarkable coalition of business and civil liberties groups opposed to the provisions of the Sentencing Guidelines and the Thompson memo that made waiver of the attorney-client privilege a measure of cooperation.

On April 5, 2006, the Sentencing Commission voted to remove the language from the corporate sentencing guidelines that identified waiver of the attorney-client privilege as a part of meaningful cooperation with a government investigation or prosecution. The Commission did so in the face of opposition to this change by the Department of Justice.

Inside Baseball

So what changed and led to DOJ's abrupt reversal? The turnabout has been labeled a 'lesson in how to construct a model lobbying effort,' by The Legal Times [a sister publication of this newsletter]. The efforts brought together unlikely allies, including the American Bar Association, the American Civil Liberties Union, the American Chemistry Council and the Association of Corporation Counsel.

These groups joined an advocacy avalanche that included the Conference of Chief Justices and a letter from former DOJ officials from different administrations who usually only come together at funerals. In the words of the former Justice officials (contained in a Sept. 5, 2006 letter to Attorney General Alberto Gonzales) the Department's position on waiver of attorney-client privilege was 'seriously flawed'; they urged the Department to revise its policy to 'state affirmatively that waiver of the attorney-client privilege or work-product protections should not be a factor in determining whether a company has cooperated with the government in an investigation.'

But perhaps the signal moment came during a House of Representatives hearing when Associate Attorney General Robert D. McCallum sought to defend the Department's position at a House Judiciary subcommittee meeting on March 7, 2006. In attendance were Reps. William Delahunt (D-MA) and Dan Lungren (R-CA), generally polar opposites on almost every issue. As Associate Attorney General, McCallum was seeking to defend the department's position, Representative Delahunt interjected the following:

Mr. Delahunt: ' And, you know, I think that you can probably sense by the questions that have been posed, as well as observations by individual Members, that there is a real concern here. And you don't want someone like Lungren from California, you know a far-right conservative Republican, and Delahunt, this Northeast liberal, filing legislation on this because I think that is the order of magnitude that is being expressed here. So respectfully, that is a message that I think you can bring back to Justice, is that there is concern about the Thompson/McCallum Memorandum. Okay?

Mr. McCallum: I will certainty take that message back, Mr. Delahunt.

Then, in September 2006, Reps. Lungren and Delahunt published an Op-Ed in The Hill, in which they asked the Department of Justice to 'not consider any company or other entity to be 'non-cooperative' for protecting its right to consult confidentially with its attorneys,' and said that if they 'refuse to do so, Congress should act.'

Shortly prior to the adjournment of the 109^th Congress, Sen. Arlen Specter (R-PA), the outgoing chairman of the Senate Judiciary Committee, introduced legislation designed to protect the attorney-client privilege by broadly prohibiting prosecutors from determining that a target is not cooperating with a government investigation based on a valid assertion of privilege. While the bill had no chance of passing before the end of the term, it did serve as a warning that Congress was prepared to act. A mere five days later, the McNulty memo was issued by the department.

Will Congress Still Act?

The McNulty revisions to the Thompson memo seem to have done little to assuage congressional concerns. On Jan. 4, Specter reintroduced his bill (S. 186), the Attorney-Client Privilege Protection Act of 2007. The bill amends Title 18 of the U.S. Code by adding a new section, ' 3014, prohibiting any agent or attorney of the U.S. government in any criminal or civil case to demand, request or condition treatment on the disclosure of any communication protected by the attorney-client privilege or attorney work product. Nor can charges or treatment be conditioned on whether the organization pays attorneys' fees for its employees or signs a joint defense agreement.

In a statement on the Senate floor, Specter thanked the Department for its effort in issuing revisions to the Thompson memo, but declared that effort insufficient. 'The new memorandum is inadequate in its protection of the attorney-client privilege,' he said. He acknowledged that the McNulty memo 'makes some improvements,' but added that 'the revision continues to erode the attorney-client relationship by allowing prosecutors to request privileged information backed by the hammer of prosecution if the request is denied.'

Specter said his bill was designed to 'force the Department of Justice to issue a meaningful change to its corporate charging policies beyond the changes in the McNulty Memorandum, which came 'a day late and a dollar short.” The memo, he said, 'continues to threaten the viability of the attorney-client privilege in business organizations by allowing prosecutors to request privilege waiver upon a finding of 'legitimate need' ' a standard that should guide the most basic of prosecutorial requests, not sensitive requests for privileged information.'

The Senator was also critical of the memo for discouraging corporate employees from having frank discussions with lawyers in furtherance of compliance efforts. 'The Department of Justice will not prevent corporate misconduct if it continues to inadvertently discourage the types of internal investigations and dialogues corporate officials need to detect and prevent corporate fraud,' he said.

As a former prosecutor, Specter said he was 'acutely aware of the enormous power and tools a prosecutor has at his or her disposal,' even without 'the coercive tools of the privilege waiver' as embodied in the McNulty memo. 'Cases should be prosecuted based on their merits, not based on how well an organization works with the prosecutor,' he remarked.

Steven P. Solow is a partner in the Washington office of Hunton & Williams LLP. He was chief of the Environmental Crimes Section in the Department of Justice from 1997 to 2000. His practice focuses on business crimes, internal investigations, corporate compliance and security programs, and environmental civil and criminal litigation. He can be reached at [email protected].