Court strikes down DOJ policy on payment of workers' legal fees.

In a decision cheered by groups as different as the U.S. Chamber of Commerce, the Bond Market Association, and the National Association of Criminal Defense Lawyers, a district judge has ruled that a Department of Justice (DOJ) policy that pressures companies to stop paying their employees' legal fees during a criminal investigation is unconstitutional.

In a strongly worded opinion, Judge Lewis Kaplan of the Southern District of New York concluded that the DOJ had violated the plaintiffs' rights to substantive due process. "The determination of guilt or innocence must be made fairly--not in a proceeding in which the government has obtained an unfair advantage long before the trial has even begun," Kaplan wrote. (U.S.v. Stein, 435 F. Supp. 2d 330 (S.D.N.Y. 2006).)

The DOJ policy in question goes back to a 2003 directive known as the Thompson memorandum, named for then-Deputy Attorney General Larry Thompson. It is a reworking of an earlier policy, the Holder memorandum, issued in 1999 by then-Deputy Attorney General Eric Holder, which was meant to guide DOJ employees in investigating corporate crimes. Unlike the earlier memorandum, the Thompson memorandum is binding on all federal prosecutors. Among other things, it states that the DOJ views a company's payment of its employee's attorney fees as an unfriendly act.

A "corporation's promise of support to culpable employees and agents, either through the advancing of attorneys fees, through retaining the employees without sanction for their misconduct, or through providing information to the employees about the government's investigation pursuant to a joint defense agreement, may be considered by the prosecutor in weighing the extent and value of a corporation's cooperation," the memo reads.

"The Thompson memo stands the presumption of innocence on its head," said John Lundquist, a white-collar-defense lawyer in Minneapolis. "It says that corporations should presume their employees are guilty. It is simply unfair. And that's why you have such a wide spectrum of people opposing it, from the right and the left and everybody in between."

The case began in 2004, when KPMG--an international accounting firm based in Montvale, New Jersey, with over 90,000 employees--came under investigation for tax fraud. Until then, the company had a policy of routinely paying its employees' legal fees. Guided by the Thompson memo, KPMG officers elected to limit the legal fees it would pay and to condition payment on the employees' cooperation with the government.

In 2006, several current and former KPMG employees went to court to challenge that policy, swing it violated their right to a fair trial.

Kaplan agreed, saying, "The issue before the court arises at an intersection of three principles of American law": that everyone is entitled to a fair trial, that everyone charged with a crime has the right to counsel, and that workers have a reasonable expectation that their employers will help them if they are sued or charged with a crime as a result of doing their job.

"This third principle," Kaplan wrote, "is not the stuff of television and movie drama. It does not remotely approach Miranda warnings in popular culture. But it is very much a part of American life. Persons in jobs big and small, private and public, rely on it every day. Bus drivers sued for accidents, cops sued for allegedly wrongful arrests, nurses named in malpractice cases, news reporters sued in libel cases, and corporate chieftains embroiled in securities litigation generally have similar rights to have their employers pay their legal expenses if they are sued as a result of doing their jobs. The right is as much a part of the bargain between employer and employee as salary or wages."

Lundquist noted that defending a corporate case can be costly. "It is very difficult to fund a white-collar defense," he said. "So what this policy does is cut off the right to counsel."

The government argued that the KPMG employees had no constitutional right to spend "other people's money" on their defense, an argument Kaplan called "appealing, but... wrong." He said the plaintiffs had reason to believe the company would pay the fees.

"The law protects such interests against unjustified and improper interference. Thus, both the expectation and any benefits that would have flowed from that expectation--the legal fees at issue now--were, in every material sense, [the plaintiffs'] property," Kaplan wrote.

The ruling was a victory for many civil rights activists, who have long opposed elements of the Thompson memorandum as examples of government encroachment on civil liberties.

Kaplan echoed that fear. "Those who commit crimes--regardless of whether they wear white or blue collars--must be brought to justice. The government, however, has let its zeal get in the way of its judgment. It has violated the Constitution it is sworn to defend," he wrote.

Lundquist, who called the decision "huge," said he thought it unlikely to curtail future overreach by the DOJ or the executive branch.

"Will this send a message to the Justice Department? It would be nice to think so," he said, "but, after all, this is a government and a Justice Department that have expanded executive branch powers enormously. They are unlikely to send us a thank-you note saying, 'We appreciate the information.' But we battle on."