McNulty Memo on Attorney-Client Privilege Blasted for Lack of Change

Critics say result will be silent pressure by Justice; Congress expected to seek bans on waiver demands

By Pamela A. MacLean

The National Law Journal

January 26, 2007

Revision of the Justice Department’s much maligned guidelines for seeking corporate waivers of attorney-client privilege in white-collar investigations has been likened to a “don’t ask, don’t tell” policy that will drive prosecution waiver demands underground.

And few believe that what has been dubbed the McNulty memorandum, issued on Dec. 12 by Deputy U.S. Attorney General Paul McNulty, will resolve the simmering anger among corporate counsel over what has been called a “culture of waiver.”

Now that Congress has returned this month, it is expected to renew a call for a legislative ban on federal prosecutors and regulatory agencies demanding waivers. And a federal rules reform advisory committee has proposed a change in Rule 502 of the Federal Rules of Evidence to codify “limited waiver” of attorney-client privilege, despite wide federal and state court rejection of the concept.

Selective waivers, essentially confidentiality agreements, would allow prosecutors access to internal company investigations, but would seal them from plaintiffs attorneys engaged in civil suits.

McNulty said the department supports the recognition of limited waiver. The danger of waiver exposing corporations to third-party lawsuits and shareholder suits “is a significant concern,” McNulty said in a recent interview. “That is why we are supportive of the effort to create a limited waiver and to amend federal rules to allow it to occur. We would like to see some way forward to make it possible for limited waiver,” he said.

A DEPARTURE

His comment is a departure from a June decision by the 10th U.S. Circuit Court of Appeals rejecting a partial waiver sought by Qwest Communications International Inc. The decision noted that rather than support Qwest’s request for adoption of selective waiver of privilege, the government “carefully took no position,” and declined to participate in oral argument. In re Qwest Communications Securities Litigation, 450 F.3d 1179 (2006).

As for Congress stepping in to ban all but voluntary waivers, McNulty said, “I am hopeful the Senate and the House will give the new guidance a chance to work and see how it plays out in our corporate fraud work. I am confident that if they do give it a chance there will be no need for legislation and there will be no need for further guidance.”

But efforts at cooperation may not be so amicable in the new year. Critics, who complain that McNulty’s 21-page memo fails to provide sufficient protection against government coercion, have started lining up to push for tougher legislation to curb prosecution waiver demands and to oppose legitimizing “partial waivers.”

At a Jan. 12 meeting in Phoenix, a subcommittee of the Standing Committee on Rules of Practice and Procedure of the Judicial Conference of the United States heard public comments on proposed Rule 502 changes.

A 2003 memo by former Deputy Attorney General Larry D. Thompson, which told prosecutors considering whether to charge a corporation criminally to take its cooperation into account, turned the waiver controversy into a subject of national debate. Waiver of attorney-client or work-product privileges was considered a sign of cooperation. Companies failing to cooperate could be indicted along with suspect executives.

The Justice Department was tampering with a privilege that has existed in common law for more than 400 years of balancing the courts’ search for truth with a need to protect defendants’ right to counsel, according to Steven K. Hazen, an advisor to the American Bar Association task force on Rule 502 and the State Bar of California Business Law Section. “Confidentiality is like toothpaste, once it is out of the tube it is out for good,” he said.

A survey earlier this year by the Association of Corporate Counsel, representing 19,000 public companies, found that nearly 75 percent of inside and outside counsel said government agencies expect a company under investigation to waive legal privileges. In addition, it found that in the last five years, 51 percent of outside counsel and 30 percent of in-house counsel reported the government expected waivers in order to be eligible for leniency.

“It is chilling the relationship with employees and impacts whether people report misconduct,” said Susan Hackett, a spokeswoman for the association.

The McNulty memo didn’t resolve the conflict. “We’re thrilled the Department of Justice has taken this step forward after two years of begging. But this proposal is no solution. It not only doesn’t go far enough, it still misses the point. They still think DOJ gets to decide whether corporate counsel they are prosecuting have a right to counsel or not,” Hackett said.

“One bone dangled before counsel is a confidentiality agreement [partial waiver],” she said. “We don’t support the rule change. There is still a fundamental constitutional problem of right to counsel. Only a court can decide that right.”

The McNulty memo converts the Thompson memo’s upfront requests for waiver to a “don’t ask, don’t tell policy,” complained Judson W. Starr, head of environmental defense for Venable in Washington. “The government raises the prospect of getting information but doesn’t ask for it. You still have every bit as much pressure to waive,” said Starr.

“In environmental cases it is on the table in every case,” he said. “If you refuse to waive, it becomes part of the conspiracy.”

McNulty disputed the notion that his changes would turn government waiver requests into an unspoken wink and nod. “Practically speaking, if someone engaged in some subtle process of seeking waiver without following the procedure, it would come out quickly,” he said.

“If a corporation came back and said √ęthere was a method or tone we picked up, that gave the impression it would be bad if we didn’t volunteer to waive,’ I would want to know a lot more about the facts of that,” McNulty said.

Jim Parkman, who successfully defended HealthSouth Corp. CEO Richard M. Scrushy, said, “I am not for giving any waivers of any kind.” In the HealthSouth prosecution, said Parkman of The Cochran Firm’s Birmingham, Ala., office, “we knew they signed an agreement and provided the government everything. We tried to obtain the agreement. The court ordered we get it, but we never did.”

ABA task force advisor Hazen added that there’s a danger of “commoditizing” waivers by making them bargaining chips to be traded for something of value.

But most troubling, the McNulty memo “leaves the impression something significant has been done when it hasn’t,” Hazen said. “Comparing the McNulty memo line by line with the Thompson memo, there is almost no change. It is very subtle.” Hazen also said the Justice Department “institutionalize[s] artificially the entire attorney work-product protection area as trivial.”

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