The furor surrounding the Department of Justice's (DOJ) decade-long waffling over its policy on waiver of attorney-client privilege in corporate investigations has moved back to Congress. In February, Sen. Arlen Specter, R-Pa., the senior minority member of the Senate Judiciary Committee, reintroduced the Attorney-Client Privilege Protection Act of 2009.

The legislation would prevent executive branch agents conducting corporate investigations from requesting waiver of attorney-client and work-product privilege. It also would preclude the government from linking a company's position on waiver of privilege or payment of individuals' legal fees to prosecutorial charging decisions.

Versions of this bill have been kicking around in the House and Senate since 2006. But the issue drew renewed attention in August 2008 when the 2nd Circuit upheld the dismissal of an indictment against some of the KPMG employees in U.S. v. Stein. The firm's decision to halt payment of legal fees to the accused, the court reasoned, was “a direct consequence of the government's overwhelming influence, and [KPMG's] conduct amounted to state action.” As such, the government had “unjustifiably interfered with the defendants' relationship with counsel and their ability to mount a defense, in violation of the Sixth Amendment.”

That same day, the DOJ attempted to limit the damage when Deputy Attorney General Mark Filip announced changes to the department's Principles of Prosecution of Business Organizations. To critics, however, the moving target that had been the DOJ's policy on waiver of privilege meant that Filip's revisions were considerably more than a day late and a dollar short (see “Memo Madness”).

Filip Facts

The Filip Memo restricts prosecutors' right to consider waiver of privilege and payment of employees' legal fees in deciding whether and how to proceed with charges against corporations. It shifts the emphasis from waiver of privilege to disclosure of “relevant facts.” Otherwise, prosecutors can request privileged notes and other material created by a corporation's lawyers during an internal investigation. The memo also restricts, but does not absolutely prohibit, the government from taking into account a company's decision to pay employees' legal fees.

Still, critics are not satisfied. They argue that the privilege-relevant fact divide is a distinction without a practical difference.

“Company lawyers gather all kinds of information when they interview corporate executives, and tend to do so before the executives have retained their own lawyers,” says Michael Shepard, a former federal prosecutor now with Hogan & Hartson. “These statements are valuable to prosecutors because the one thing they can't get otherwise is an uncounseled, unreflective statement from executives and employees. And the Filip Memo still allows prosecutors to coerce waivers on the theory that they won't get the facts unless they have the witness interviews.”

But the author of the McNulty Memo thinks otherwise.

“The [American Bar Association] might not agree, but I believe it's possible for a corporation to take the position that it will cooperate, provide the necessary facts, and still preserve privilege,” says Paul McNulty, now a partner at Baker & McKenzie.

Likely Legislation

Proponents of legislative action to protect privilege, however, point to other shortcomings of allowing the DOJ to continue making the rules.

“Legislation can go further than DOJ policies in providing certainty and codification,” Shepard says.

It also provides broader coverage.

“DOJ policy doesn't reach other federal agencies that have similar policies, like the SEC or the Commodity Futures Trading Commission,” says Samuel Danon, a litigation partner with Hunton & Williams. “The Specter bill covers everyone.”

McNulty, however, maintains that Congress shouldn't be messing with prosecutorial oversight.

“It's the job of the executive branch to oversee prosecutors,” he says. “The real problem is the extent to which a culture of waiver exists among prosecutors, and both my memo and the Filip revisions address that culture in a significant way.”

Perhaps so. But defense lawyers say the real issue is balance of power between potential defendants and the state.

“Regardless of the DOJ's formal policies, or even legislation or court opinions, pragmatic considerations will continue to have a profound effect on the decision to cooperate,” says Kevin Di Gregory, a former deputy assistant attorney general with the DOJ. Di Gregory is now a partner at Mannat, Phelps & Phillips.

The argument is that the most severe consequences for corporations transpire when a federal investigation becomes public knowledge, not when a company cooperates or the government indicts.

“So my guess is that neither legislation nor DOJ policy will produce a sea change,” Di Gregory says. “Corporations facing investigations will still have to balance the need to protect their rights against the need for a quick resolution of those investigations.”

McNulty agrees. “Nothing's going to stop voluntary waivers,” he says.

That is, unless there are changes to the law of corporate criminal liability–which makes companies responsible for acts committed by individuals in furtherance of their jobs, even if those acts are in express violation of corporate policy.

“The present state of the law means that corporations are sitting ducks even when an individual below C-level has done something wrong,” Shepard explains. “There's incentive to roll over and cooperate by way of allowing the government to get at the actual wrongdoers.”

Acting Up

In other words, the debate over waiver of privilege and payment of legal fees is just a small piece of the overall picture. But that doesn't mean that the Attorney-Client Privilege Act of 2009 won't find its way into law. In 2007 the House passed the Attorney-Client Privilege Protection Act of 2007, which is substantially similar to the Senate version. More importantly, perhaps, nary a voice was raised in opposition. Similarly, Specter's bill enjoys widespread bipartisan support.

The fly in the ointment is Sen. Patrick Leahy, D-Vt., chair of the Senate Judiciary Committee, whose position is unclear.

“When the Filip Memo came out, Leahy expressed regard for the DOJ's willingness to make the changes that it did and questioned whether legislation would be needed,” Di Gregory says.

But it's not as if there's no precedent for such legislation. As Specter's bill notes, Congress recognized that law enforcement can effectively investigate without attorney-client privileged information when it banned prosecutorial demands for privileged materials in the Racketeer Influenced and Corrupt Organizations Act.

The furor surrounding the Department of Justice's (DOJ) decade-long waffling over its policy on waiver of attorney-client privilege in corporate investigations has moved back to Congress. In February, Sen. Arlen Specter, R-Pa., the senior minority member of the Senate Judiciary Committee, reintroduced the Attorney-Client Privilege Protection Act of 2009.

The legislation would prevent executive branch agents conducting corporate investigations from requesting waiver of attorney-client and work-product privilege. It also would preclude the government from linking a company's position on waiver of privilege or payment of individuals' legal fees to prosecutorial charging decisions.

Versions of this bill have been kicking around in the House and Senate since 2006. But the issue drew renewed attention in August 2008 when the 2nd Circuit upheld the dismissal of an indictment against some of the KPMG employees in U.S. v. Stein. The firm's decision to halt payment of legal fees to the accused, the court reasoned, was “a direct consequence of the government's overwhelming influence, and [KPMG's] conduct amounted to state action.” As such, the government had “unjustifiably interfered with the defendants' relationship with counsel and their ability to mount a defense, in violation of the Sixth Amendment.”

That same day, the DOJ attempted to limit the damage when Deputy Attorney General Mark Filip announced changes to the department's Principles of Prosecution of Business Organizations. To critics, however, the moving target that had been the DOJ's policy on waiver of privilege meant that Filip's revisions were considerably more than a day late and a dollar short (see “Memo Madness”).

Filip Facts

The Filip Memo restricts prosecutors' right to consider waiver of privilege and payment of employees' legal fees in deciding whether and how to proceed with charges against corporations. It shifts the emphasis from waiver of privilege to disclosure of “relevant facts.” Otherwise, prosecutors can request privileged notes and other material created by a corporation's lawyers during an internal investigation. The memo also restricts, but does not absolutely prohibit, the government from taking into account a company's decision to pay employees' legal fees.

Still, critics are not satisfied. They argue that the privilege-relevant fact divide is a distinction without a practical difference.

“Company lawyers gather all kinds of information when they interview corporate executives, and tend to do so before the executives have retained their own lawyers,” says Michael Shepard, a former federal prosecutor now with Hogan & Hartson. “These statements are valuable to prosecutors because the one thing they can't get otherwise is an uncounseled, unreflective statement from executives and employees. And the Filip Memo still allows prosecutors to coerce waivers on the theory that they won't get the facts unless they have the witness interviews.”

But the author of the McNulty Memo thinks otherwise.

“The [American Bar Association] might not agree, but I believe it's possible for a corporation to take the position that it will cooperate, provide the necessary facts, and still preserve privilege,” says Paul McNulty, now a partner at Baker & McKenzie.

Likely Legislation

Proponents of legislative action to protect privilege, however, point to other shortcomings of allowing the DOJ to continue making the rules.

“Legislation can go further than DOJ policies in providing certainty and codification,” Shepard says.

It also provides broader coverage.

“DOJ policy doesn't reach other federal agencies that have similar policies, like the SEC or the Commodity Futures Trading Commission,” says Samuel Danon, a litigation partner with Hunton & Williams. “The Specter bill covers everyone.”

McNulty, however, maintains that Congress shouldn't be messing with prosecutorial oversight.

“It's the job of the executive branch to oversee prosecutors,” he says. “The real problem is the extent to which a culture of waiver exists among prosecutors, and both my memo and the Filip revisions address that culture in a significant way.”

Perhaps so. But defense lawyers say the real issue is balance of power between potential defendants and the state.

“Regardless of the DOJ's formal policies, or even legislation or court opinions, pragmatic considerations will continue to have a profound effect on the decision to cooperate,” says Kevin Di Gregory, a former deputy assistant attorney general with the DOJ. Di Gregory is now a partner at Mannat, Phelps & Phillips.

The argument is that the most severe consequences for corporations transpire when a federal investigation becomes public knowledge, not when a company cooperates or the government indicts.

“So my guess is that neither legislation nor DOJ policy will produce a sea change,” Di Gregory says. “Corporations facing investigations will still have to balance the need to protect their rights against the need for a quick resolution of those investigations.”

McNulty agrees. “Nothing's going to stop voluntary waivers,” he says.

That is, unless there are changes to the law of corporate criminal liability–which makes companies responsible for acts committed by individuals in furtherance of their jobs, even if those acts are in express violation of corporate policy.

“The present state of the law means that corporations are sitting ducks even when an individual below C-level has done something wrong,” Shepard explains. “There's incentive to roll over and cooperate by way of allowing the government to get at the actual wrongdoers.”

Acting Up

In other words, the debate over waiver of privilege and payment of legal fees is just a small piece of the overall picture. But that doesn't mean that the Attorney-Client Privilege Act of 2009 won't find its way into law. In 2007 the House passed the Attorney-Client Privilege Protection Act of 2007, which is substantially similar to the Senate version. More importantly, perhaps, nary a voice was raised in opposition. Similarly, Specter's bill enjoys widespread bipartisan support.

The fly in the ointment is Sen. Patrick Leahy, D-Vt., chair of the Senate Judiciary Committee, whose position is unclear.

“When the Filip Memo came out, Leahy expressed regard for the DOJ's willingness to make the changes that it did and questioned whether legislation would be needed,” Di Gregory says.

But it's not as if there's no precedent for such legislation. As Specter's bill notes, Congress recognized that law enforcement can effectively investigate without attorney-client privileged information when it banned prosecutorial demands for privileged materials in the Racketeer Influenced and Corrupt Organizations Act.