The McNulty Memorandum: Much Ado About Nothing
By N. Richard Janis

For the past several years there has been a crescendo of criticism directed at the Department of Justice’s January 20, 2003, “Principles of Federal Prosecution of Business Organizations” issued by then–deputy attorney general Larry Thompson.[1] I am among those who have expressed strong criticism.[2]

The Department of Justice typically responded to this criticism by asserting that its critics were exaggerating the claim that the Thompson Memorandum had created a “culture of waiver” in which business organizations felt compelled routinely to waive their attorney–client privilege and attorney work product protection, and that requests for such waivers by the Department of Justice were the rare exception and not the rule. The empirical evidence has suggested otherwise, as revealed in a survey conducted by the Association of Corporate Counsel (ACC) and the National Association of Criminal Defense Lawyers (NACDL) and presented in March 2006 to Congress and the United s Sentencing Commission.[3]

Indeed, former deputy attorney general Eric Holder Jr., who first formulated the department’s attorney–client waiver policies (in the “Holder Memorandum”),[4] which were expanded upon in the Thompson Memorandum, was recently quoted in the Wall Street Journal as stating: “Today, it’s maddening. You’ll go into a prosecutor’s office . . . and fifteen minutes into our first meeting they say, ‘Are you going to waive?’”[5]

At its annual meeting in August 2005, the American Bar Association’s House of Delegates addressed the policy articulated in the Thompson Memorandum and unanimously adopted Resolution 111, which states:

As a result of these actions, and in response to complaints from a broad coalition of business and legal organizations (including the American Chemistry Council, the American Civil Liberties Union, the Association of Corporate Counsel, Business Civil Liberties, Inc., the Business Roundtable, the Frontiers of Freedom, the National Association of Criminal Defense Lawyers, the National Association of Manufacturers, the National Defense Industrial Association, the Retail Industry Leaders Association, the U.S. Chamber of Commerce, and the Washington Legal Foundation), the Senate Committee on the Judiciary held hearings on the Thompson Memorandum on September 12, 2006. Thereafter, Senator Arlen Specter of Pennsylvania, on December 7, introduced legislation, the Attorney–Client Privilege Protection Act of 2006, which provides in pertinent part:

As a result of these pressures, and undoubtedly in an effort to forestall congressional action, the Department of Justice, with great fanfare, on December 12, 2006, replaced the Thompson Memorandum with the McNulty Memorandum,[6] which it trumpeted in a press release as being issued “after careful review and numerous meetings with those in the business and legal communities who raised concerns about the Department’s guidance,” and characterized as adding “new restrictions for prosecutors seeking privileged information from companies” and creating “new approval requirements that federal prosecutors must comply with.”

On the day the McNulty Memorandum was released, the department’s Office of Public Affairs issued the “Transcript of Background Briefing on Revised Charging Guidelines for Prosecuting Corporate Fraud,” which contained statements from a “senior department official” (presumably U.S. Deputy Attorney General Paul McNulty). The official said: “Now we, I think, have some dispute and don’t concede that our practices have been accurately described, but we certainly recognize that folks maintain that that is the perception,” and “while we don’t agree with the characterization of our practices previously to the degree there has been some perception however that prosecutors have sort of routinely and informally and very early on in investigations made it a regular practice to seek this kind of material.” (Emphasis added.) The official also noted that the McNulty Memorandum “addresses the principal concern we have heard, again, that there’s this perception about our practices and that that perception in some way chills communications between attorneys and their clients. . . .” (Emphasis added.)

Perhaps most striking when comparing the McNulty Memorandum with the Thompson Memorandum is the fact that the Thompson Memorandum has been adopted virtually verbatim in the McNulty Memorandum. The only significant revisions are reflected in part VII (“Charging a Corporation: The Value of Cooperation”), comment B.2 (“Waiving Attorney–Client and Work Product Protections”).

As an initial matter, the McNulty Memorandum, like the Thompson Memorandum, reserves for the Department of Justice, rather than the organization under investigation, the right to determine when it is appropriate for the organization to waive the attorney–client privilege and the work product protection. Moreover, the McNulty Memorandum makes it clear that such waivers will still be an important factor in assessing cooperation:

Waiver of attorney–client and work product protections is not a prerequisite to a finding that a company has cooperated in the government’s investigation. However, a company’s disclosure of privileged information may permit the government to expedite its investigation. In addition, the disclosure of privileged information may be critical in enabling the government to evaluate the accuracy and completeness of the company’s voluntary disclosure.[7]

The McNulty Memorandum then asserts that “[p]rosecutors 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,” adding that “[a] legitimate need for the information is not established by concluding it is merely desirable or convenient to obtain privileged information.”[8] The McNulty Memorandum then sets out factors to be applied, by the prosecutors themselves, to conduct a “careful balancing of important policy considerations” to determine whether a “legitimate need” exists. However, an examination of those factors makes it clear that it would be easy for a prosecutor to determine that there is a legitimate need in virtually any and every case.

The first factor is “the likelihood and degree to which the privileged information will benefit the government’s investigation.” It is hard to imagine any case involving the investigation of an organization and its employees in which the privileged information would not meet that threshold. Certainly the results of the company’s internal investigation and its interviews of employees are “likely” to be of “benefit” to the government’s investigation.

The second factor is “whether the information sought can be obtained in a timely and complete fashion by using alternative means that do not require waiver.” (Emphasis added.) It takes little imagination to foresee a prosecutor putting a check next to that box on the grounds that some or all of the most knowledgeable employees are asserting their Fifth Amendment privilege and are thus “unable.” Moreover, the prosecutor will undoubtedly conclude that providing immunity or designating employees as witnesses after receiving proffers will not only slow down the investigation, but require him or her to forgo important prosecutions; thus any “alternative means” would be deemed neither timely nor suitable.

The third factor is “the completeness of the voluntary disclosure already provided.” However, a few paragraphs earlier the McNulty Memorandum provides the easy answer for prosecutors when “balancing” that factor, since it asserts that a company’s “disclosure of privileged information may be critical in enabling the government to evaluate the accuracy and completeness of the company’s voluntary disclosure.”[9].

The fourth factor is “the collateral consequences to a corporation of waiver.” This has never been a deterrent to the Department of Justice in the past, and there is no reason to believe that it will suddenly act as one in the future. (It is also worth noting that this only highlights my belief that adoption of a “selective waiver” rule will simply increase the pressure on companies to provide waivers, since the Department of Justice will argue that now the companies have nothing to be concerned about.)

After setting the “legitimate need” bar very low indeed, the McNulty Memorandum then divides requests into two categories. Category I is described as “purely factual information, which may or may not be privileged, relating to the underlying misconduct.”[10] “Examples of Category I information could include, without limitation, copies of key documents, witness statements, or purely factual interview memoranda regarding the underlying misconduct, organization charts created by company counsel, factual chronologies, factual summaries, or reports (or portions thereof) containing investigative facts documented by counsel.”[11] All of these highlighted materials fall squarely within the central zone of the attorney–client privilege and the work product protection. The McNulty Memorandum then goes on to require that before requesting Category I information, assistant United States attorneys must get written authorization from the United States attorney, who must “provide a copy” of the request and “consult” with the assistant attorney general, or, in the case of prosecutors at the Department of Justice, get approval in the first instance from the assistant attorney general.

Apart from the fact that because the bar is set so low, U.S. attorneys are unlikely to deny such requests—indeed, they are often pressing their assistants aggressively to seek such materials—it is hard to imagine the “review” process at the assistant attorney general level will be anything but perfunctory. I have talked with former high-ranking department officials who share that view. I would expect the review process to be no more rigorous than the review and approval by the assistant attorney general of requests by line prosecutors to provide statutory immunity to witnesses. Such requests are routinely rubber-stamped. Indeed, approval by the assistant attorney general is not even required for Category I requests made by assistant U.S. attorneys—only “consultation” is mandated.

Furthermore, the McNulty Memorandum states that “[a] corporation’s response to the government’s request for waiver of privilege for Category I information may be considered in determining whether a corporation has cooperated in the government’s investigation.”[12] Couple this with the very important dictate that “[f]ederal prosecutors are not required to obtain authorization if the company voluntarily offers privileged documents without a request by the government,”[13] and it seems to me that we are right back where we started under the Thompson Memorandum.

These provisions of the McNulty Memorandum not only are inconsistent with established American Bar Association (ABA) policy (Resolution 111), but simply institutionalize the “culture of waiver.” As experienced defense attorneys know, and as the ACC and NACDL survey has confirmed, in these circumstances prosecutors will not have to demand or even “request” waivers. (They may not even have to follow the lead of many prosecutors today who, as Eric Holder has noted, ask at one of the first meetings what the company is willing to do by way of showing that it is cooperating.) Companies will feel constrained to offer such waivers out of fear that to do otherwise will result in being considered uncooperative. Thus, even the perfunctory review process established for Category I information will not be required in most instances.

The McNulty Memorandum then turns to Category II information, which it defines as “attorney–client communications or non-factual attorney work product,” including “legal advice given to the corporation before, during, and after the underlying misconduct occurred.”[14] This would appear to be an expansion on the Thompson Memorandum, which stated that waivers “should ordinarily be limited to the factual internal investigation and any contemporaneous advice given to the corporation concerning the conduct at issue,” and “[e]xcept 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.”[15] The McNulty Memorandum observes that “[t]his category of privileged information might include the production of attorney notes, memoranda or reports (or portions thereof) containing counsel’s mental impressions and conclusions, legal determinations reached as a result of an internal investigation, or legal advice given to the corporation.”[16] Category II requests “should only be sought in rare circumstances” and require written authorization from the deputy attorney general.[17]

The McNulty Memorandum proclaims that “[i]f a corporation declines to provide a waiver for Category II information after a written request from the United States Attorney, prosecutors must not consider this declination against the corporation in making a charging decision.”[18] However, “[p]rosecutors may always favorably consider a corporation’s acquiescence to the government’s waiver request in determining whether a corporation has cooperated in the government’s investigation.”[19]

Apart from the fact that this statement, too, is inconsistent with established ABA policy (Resolution 111), as the ABA, the Chamber of Commerce, the Association of Corporate Counsel, the National Association of Criminal Defense Lawyers, and other organizations have recognized, the granting of such a benefit creates an inherently coercive environment in which companies and directors will feel no choice but to waive when they are told by a prosecutor (with a straight face), “We are not penalizing a company that doesn’t waive, but of course, when assessing who will get credit and who will not, we will certainly give more credit to a company that waives than to a company that doesn’t.” Moreover, the pressure on organizations to “volunteer” such information, even without a “request,” will continue to be enormous, particularly in light of the provision in the McNulty Memorandum that “[f]ederal prosecutors are not required to obtain authorization if the corporation voluntarily offers privileged documents without a request by the government.”[20]

The McNulty Memorandum leaves intact most of what the Thompson Memorandum contained regarding “culpable employees and agents,” although it does have enough sense to take out the blatant statement in the Thompson Memorandum of the department’s real purpose for securing waivers, that “[s]uch waivers permit the government to obtain statements of possible witnesses, subjects, and targets, without having to negotiate individual cooperation or immunity agreements.”[21] (Though no longer so bluntly stated, this still remains one of the principal driving forces behind the Department of Justice’s policy.) However, it has added a new statement regarding an organization paying the legal fees of its employees and agents:

This formulation of the new policy is particularly troublesome. The language implies that payment of legal fees by the organization should “generally” not be taken into account, as long as the organization is obligated to do so by state law or a specific contractual agreement. In most cases, the organization is permitted, but not obligated, to pay the legal fees and expenses of its employees and agents. The organization pays the fees and expenses because its bylaws permit it, not because the organization has a specific written contractual agreement with the employee.

For instance, in the KPMG case now pending before Judge Lewis A. Kaplan in the Southern District of New York, KPMG had a written contractual obligation to pay the legal fees of only one of the employees.[23] However, KPMG had a longstanding practice to advance and pay legal fees, without a preset cap or conditions and without regard to cost, in any cases (including criminal cases) involving activities of its employees arising within the scope of the individual’s duties at KPMG.[24] In his opinion, Judge Kaplan found that, with respect to those employees for whom KPMG did not have a written contractual obligation, the government had nonetheless violated their Fifth and Sixth Amendment rights by following the Thompson Memorandum and causing KPMG to cut off the payment of their legal fees and other defense costs.[25]

Further exacerbating the problem, the McNulty Memorandum states that “[r]outine questions regarding the representation status of a corporation and its employees, including how and by whom attorneys’ fees are paid, frequently arise in the course of an investigation,” and “[s]uch questions are appropriate and this guidance is not intended to prohibit such inquiry.”[26] It is hard not to appreciate the chilling effect that such inquiries will have.

The McNulty Memorandum also leaves in place another troublesome aspect of the Thompson Memorandum:

Finally, the McNulty Memorandum does not address at all most of the serious problems identified by the ABA in Resolution 302B, passed unanimously last summer, about government actions that have the effect of eroding the constitutional and other legal rights of employees, including actions by the government intended to prevent or discourage decisions by an organization to enter into or continue operating under a joint defense and information-sharing agreement; to share information with employees and agents relating to the matters under investigation by the government; or to choose to retain or decline to sanction an employee who exercised his or her Fifth Amendment rights in response to a government request for an interview, testimony, or other information. On the contrary, the McNulty Memorandum continues to emphasize:

The fundamental problem with the Holder Memorandum, the Thompson Memorandum, and the McNulty Memorandum is that they all reflect a basic misunderstanding about the nature, purpose, and sanctity of the attorney–client privilege, as well as of the role that attorneys should play as counselors and advocates in an adversary system of justice. Inherent in all of these iterations of Department of Justice policy is the commoditization of the attorney–client privilege as something to be bought, sold, or bartered in return for “favorable treatment.” In the process, the department’s policy—and in particular its “new” policy—creates a situation in which organizations, their employees, and their attorneys will not know if their communications will remain privileged or whether they will fall into some special category of communications that a prosecutor will later determine (as he or she balances various interests) requires disclosure. As the Supreme Court said in Upjohn Co. v. United States, “[a]n uncertain privilege . . . is little better than no privilege at all.”[29]

At best, as Karen Mathis, president of the American Bar Association, stated in a press release on December 12, 2006, “[t]he Justice Department’s new corporate charging guidelines for federal prosecutors fall far short of what is needed to prevent further erosion of fundamental attorney–client privilege, work product, and employee protections during government investigations,” and “falls far short of the comprehensive and effective remedies outlined in Sen. Specter’s bill,” which “the ABA urges Congress to promptly consider and pass . . . once it reconvenes in January.”

In my view, the “new” Department of Justice policy is simply a dressed-up version of the “old” Department of Justice policy, and little more than a public relations ploy. By announcing with great fanfare a “revision” of its policy, which implements a superficial (but virtually meaningless) system of checks and balances, the department is purposely doing as little as possible to revise its policies while creating the perception that something meaningful has been undertaken, and to mislead Congress into believing that Senator Specter’s legislation is not necessary. I believe this only highlights the department’s unwillingness to revise its policies, and that legislative action must be aggressively pursued.

Notes
[1] Memorandum from Larry D. Thompson, Deputy Attorney General, U.S. Department of Justice, to Heads of Department Components, United States Attorneys, Principles of Federal Prosecution of Business Organizations 1 (Jan. 20, 2003) [hereinafter Thompson Memorandum], available at http://www.usdoj.gov/dag/cftf/business_organizations.pdf.
[2] See N. Richard Janis, Deputizing Company Counsel as Agents of the Federal Government: How Our Adversary System of Justice Is Being Destroyed, Wash. Law., March 2005, at 32.
[3] This detailed survey, containing responses from over 1,200 in-house and outside corporate counsel, is available online at http://www.acca.com/Surveys/attyclient2.pdf.
[4] Memorandum from Eric H. Holder Jr., Deputy Attorney General, U.S. Department of Justice, to All Component Heads and United States Attorneys, Bringing Criminal Charges Against Corporations 1 (June 16, 1999) [hereinafter Holder Memorandum], available at http://www.usdoj.gov/criminal/
fraud/policy/ Chargingcorps.html.
[5] Posting of Peter Lattman to Wall Street Journal law blog, The Holder Memorandum and Its Progeny, http://blogs.wsj.com/law/2006/12/13/the-holder-memo (Dec. 13, 2006, 8:47 EST).
[6] Memorandum from Paul J. McNulty, Deputy Attorney General, U.S. Department of Justice, to Heads of Department Components, United States Attorneys, Principles of Federal Prosecution of Business Organizations 1 (Dec. 12, 2006) [hereinafter McNulty Memorandum], available at http://www.usdoj.gov/dag/cftf/corporate_guidelines.htm.
[7] Id. at 8 (emphasis added).
[8] Id. at 8–9 (emphasis added).
[9] Id. at 8.
[10] Id.
[11] Id. (emphasis added).
[12] Id. at 9.
[13] Id. at 11.
[14] Id. at 10 (emphasis added).
[15] Thompson Memorandum at 7 n.3.
[16] McNulty Memorandum at 10.
[17] Id.
[18] Id.
[19] Id. (emphasis added).
[20] Id. at 11.
[21] Thompson Memorandum at 7.
[22] McNulty Memorandum at 11–12 (footnotes omitted) (emphasis added).
[23] United States v. Stein, S1 05 0888 (LAK) (S.D.N.Y. June 26, 2006), at 8–9.
[24] Id. at 9–10.
[25] Id. at 39–60.
[26] McNulty Memorandum at 12 n.4.
[27] Id. at 19.
[28] Id. at 11.
[29] 449 U.S. 383, 393 (1981).

N. Richard Janis, a founding partner of Janis, Schuelke & Wechsler, serves on the American Bar Association’s Presidential Task Force on the Attorney Client Privilege. The views expressed herein are presented by the author individually and not as a spokesperson for the ABA or the task force.