DOJ Issues New Guidelines Protecting Attorney-Client and Work Product Privileges; Filip Replacing McNulty Memo

In an effort to counter impending legislation, the Department of Justice has revised the McNulty Memorandum to enhance protection of the attorney client and work product privileges in federal prosecutions for securities and other white collar crimes. The new guidelines are designed to provide the corporate community more comfort in the areas of attorney-client privilege and joint defense agreements. DOJ also said that in the 18-month existence of the McNulty Memo it has not approved one request from prosecutors to obtain from companies core attorney-client communications or non-factual attorney work product. The new guidance, announced by Deputy Attorney General Mark Filip, comes against the backdrop of the bi-partisan Attorney-Client Privilege Protection Act, sponsored by Judiciary Committee Ranking Member Arlen Specter. The House passed a companion bill (HR 3013) last year.

The new guidelines also urge companies, as part of their compliance programs, to conduct internal investigations and disclose the relevant facts to the SEC, which has a formal voluntary disclosure program in which self-reporting, coupled with remediation and additional criteria, may qualify the company for amnesty or reduced sanctions. Even in the absence of a formal program, prosecutors may consider a company’s timely and voluntary disclosure in evaluating the adequacy of its compliance program and the commitment of its management to that program.
Noting that many companies operate in complex regulatory environments outside the normal experience of criminal prosecutors, DOJ also said that it would consult with the SEC when evaluating company compliance programs designed to detect securities misconduct most likely to occur in the company’s line of business.

Broadly, the guidelines praise the attorney-client privilege and the attorney work product protection for serving an extremely important function in the US legal system. Specifically, DOJ made five substantive changes to the principles. First, cooperation with an investigation will be measured by the extent to which a company discloses relevant facts about the misconduct and not by any waiver of its attorney-client or work product privileges. Under the new rubric, companies that timely disclose relevant facts may receive due credit for cooperation, regardless of whether they waive attorney-client privilege or work product protection in the process. Companies that do not disclose relevant facts typically may not receive such credit, just like any other defendant.

Second, federal prosecutors will not demand the disclosure of McNulty Category II information as a condition for cooperation credit. Category II information is non-factual attorney work product and core attorney-client privileged communications, such as an attorney's mental impressions or legal theories. But DOJ emphasized that attorney-client communications made in furtherance of a crime or fraud, or that relate to an advice-of-counsel defense, are excluded from the privilege by well-settled case law.

Occasionally a company or one of its employees may assert an advice-of-counsel
defense based upon communications with in-house or outside counsel that took place prior to or contemporaneously with the underlying conduct. In such situations, the defendant must tender a legitimate factual basis to support the assertion of the defense. DOJ reasoned that it cannot fairly be asked to simply accept on faith an otherwise unproven assertion that an attorney, perhaps even an unnamed attorney, approved potentially unlawful practices. Thus, when an advice-of-counsel defense has been asserted, prosecutors may ask for the disclosure of the communications allegedly supporting it.
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Third, federal prosecutors will not consider whether the company has advanced attorney fees to its employees in evaluating its cooperation. Under the earlier guidance, DOJ had reserved the right to consider such payments negatively in deciding whether to assign cooperation credit to a company. That is no longer the case. A company’s payment of or advancement of attorneys’ fees to its employees will be relevant only in the rare situation where it, combined with other circumstances, would rise to the level of criminal obstruction of justice.

Fourth, federal prosecutors will not consider whether the company has entered into a joint defense agreement when evaluating corporate cooperation. The government may, however, request that a company refrain from disclosing to others sensitive information about the investigation that the government provides in confidence to the company, and may consider if the company has abided by this request. But the mere participation in a joint defense agreement will not be taken into account for the purpose of evaluating cooperation.

Fifth, federal prosecutors will not consider if the company has retained or sanctioned employees in evaluating cooperation. But, how and whether a company disciplines culpable employees may bear on the quality of its remedial measures or its compliance program.

Senator Arlen Specter said that, while the revised guidelines are a step in the right direction, there are still many problems unresolved. Thus, his legislation will still be necessary. For example, there is no change in the benefit to companies to waive the privilege by giving facts obtained by the corporate attorneys from the individuals in order to escape prosecution or to have a deferred prosecution agreement. The new guidelines expressly encourage corporations to comply with the waiver and disclosure programs of the SEC. The legislation would bind all federal agencies and could not be changed except by Congress.