Pressuring Companies to Cut Off Employee Indemnification: Good Faith Cooperation or a Violation of Constitutional Rights?

The defense bar has been closely watching several recent, high-profile investigations in which the government has successfully pressured companies to jettison certain employees and to refuse to indemnify those employees for their legal representation—even though they have not been convicted of a crime. The Department of Justice’s Thompson Memorandum (Thompson Memo) explicitly sanctions and even encourages this tactic as part of the government’s evaluation of the extent of a company’s cooperation. Corporate counsel and the white collar crime defense bar, however, have expressed grave concern with the government’s position on the grounds that in complex white collar matters the refusal to indemnify employees for their legal fees is tantamount to a denial of the right to effective assistance of counsel. Some courts have agreed. In fact, a federal judge recently held that the Thompson Memo and the manner in which the government used it to discourage KPMG from paying the legal fees of its former employees was unconstitutional.

The Thompson Memo, issued in January 2003, outlined the criteria federal prosecutors would use when determining whether to indict a corporation. 1 It, like the United States Securities and Exchange Commission’s (SEC’s) Seaboard Report, 2 emphasizes the importance of timely and extensive cooperation in seeking a favorable outcome for the corporation. Under the memo, federal prosecutors must scrutinize the depth and quality of a company’s actions to gauge the extent of its cooperation. Prosecutors may consider whether the corporation “appears to be protecting its culpable employees and agents,” including whether the corporation is advancing attorneys’ fees. 3 Although the memo recognizes that some corporations are required under state law to pay for the legal fees of officers under investigation, unless and until a formal determination of their guilt, it is silent as to whether a corporation’s permissive indemnification of employees under governing law will be considered a failure to cooperate.

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