INTRODUCTION I. INDEMNIFICATION AND GOVERNMENTAL CONSTRAINTS A. The Financial Burden of Government Investigations B. Corporate Indemnification Policies 1. Justifications for Indemnification 2. Authority for Indemnification a. Types of Indemnification b. Limitations on Indemnification Powers C. Government Anti-Indemnification Policies 1. DOJ Policy a. The Thompson and McNulty Memoranda b. The Backlash 2. SEC Policy 3. The Government's Justifications for Restricting Indemnification II. TRADITIONAL CONSTITUTIONAL ANALYSIS OF ANTI-INDEMNIFICATION POLICIES A. Procedural Due Process 1. "Deprivation". 2. Right to Choice of Counsel 3. Right to Adequate Representation B. Sixth Amendment 1. The Attachment of Sixth Amendment Rights 2. Right to Effective Assistance of Counsel 3. Right to Choice of Counsel C. Substantive Due Process 1. Use of the Glucksberg Analysis 2. Evaluation of Executive Actions III. ACCESS TO THE COURTS A. The Right of Access to the Courts B. Development of the Right C. Exceptions to the Right D. Analyzing the McNulty Memorandum Under the Access-to-Courts Doctrine IV. AN EFFECTIVE AND CONSTITUTIONAL POLICY A. A Blanket Prohibition B. Post judgment Restrictions CONCLUSION INTRODUCTION
Until recently, high-level employees (1) under investigation by the government were often reimbursed by their employers for the attorneys' fees they incurred and the disgorgement and penalties they agreed to pay. This changed over the last several years as government agencies increasingly conditioned settlements (2) with companies on an agreement that the companies withhold such indemnification. Most prominently, the Thompson Memorandum required Department of Justice (DOJ) prosecutors to consider whether a company reimbursed its employees' attorneys' fees in deciding whether to indict the company. (3) The Securities and Exchange Commission (SEC) also developed anti-indemnification policies, (4) but it focused on whether companies were indemnifying their employees' penalties.
As the DOJ began to enforce the Thompson Memorandum's indemnification policy more aggressively, a backlash developed among advocacy groups, courts, and legislators. At the core of their criticism was the argument that the policy infringed on the right to counsel. But by focusing on the traditional roots of this right--procedural due process, the Sixth Amendment, and (perhaps less traditionally) substantive due process--critics phrased the constitutional concerns in a manner that does not sufficiently protect defendants' access to counsel. Even after the Thompson Memorandum was replaced by the McNulty Memorandum, (5) observers have continued to express reservations about the DOJ's policy, while also raising the concern that similar policies could be adopted by other agencies, such as the SEC. It is thus essential that the discussion of these policies' constitutional ramifications be framed more effectively.
Unfortunately, the threshold conditions of the Fifth and Sixth Amendment rights do not mesh well with the realities of white-collar investigations. Most significantly, the rights are at their weakest during the investigatory stage, when governmental pressure and the need for qualified counsel are nonetheless very strong. Even when these constitutional guarantees do apply, they do so with very little force, inadequately protecting a white-collar defendant whose access to high-quality legal advice is disrupted by the government.
The Fifth and Sixth Amendments are therefore not up to the task of protecting individual rights in this context, but another doctrine is--the right of access to the courts, which protects litigants' right to legal advice free from government intervention. (6) When viewed under this framework, it becomes more apparent that even after recent revisions, DOJ policy is unconstitutional and in need of further change. The DOJ should continue to constrain indemnification, but it should do so by limiting the indemnification of financial sanctions rather than of attorneys' fees, looking to the SEC's existing policy as a useful model.
This Comment proceeds in four parts. Part I explains the background of indemnification agreements, the government's reaction to them, and the resulting backlash. Part II evaluates the constitutionality of the anti-indemnification policies under the doctrines commonly invoked by their critics--procedural due process, the Sixth Amendment, and substantive due process--and examines why these doctrines do not adequately protect the right to counsel. Part III then explains why the policies should instead be evaluated under the access-to-courts doctrine. Finally, Part IV discusses how the DOJ's policy could be modified to accomplish important policy goals within constitutional boundaries.
INDEMNIFICATION AND GOVERNMENTAL CONSTRAINTS
The Financial Burden of Government Investigations
Companies are asked to indemnify their employees for three main categories of expenses during white-collar investigations and litigation: attorneys' fees, penalties, and disgorgement. These expenses can amount to millions of dollars for a single employee.
The complexity of modern white-collar cases can lead to substantial attorneys' fees, in part because these cases often involve parallel civil and criminal proceedings with extensive discovery during both the investigation and litigation. Moreover, attorneys may perceive relatively little need to contain the buildup of fees because they expect to be paid by companies rather than the employees themselves. (7) Indeed, recent high-profile cases have generated staggering legal fees. For instance, in a case brought by the SEC that settled shortly before trial, (8) four KPMG accountants together incurred over $20 million in legal fees. (9) Other KPMG employees defending an unrelated DOJ prosecution incurred an average of $1.7 million each in pretrial legal expenses before the case was dismissed. (10) Trials naturally generate even larger costs--senior executives in high-profile securities fraud trials have incurred attorneys' fees ranging from $15 to $70 million. (11) Whereas indemnification can enable defendants to hire top-flight firms, withdrawal of those funds can eliminate that option even for wealthy defendants. (12)
The financial sanctions--penalties and disgorgement--in such cases can also be considerable. Penalties in recent cases have often reached hundreds of thousands of dollars. (13) Disgorgement and restitution, which are based on the theory that an employee wrongfully received compensation by participating in illegal activity, can also be substantial. (14) For instance, when an employee is accused of accounting manipulations that inflated her employer's stock price, the government will often seek disgorgement of profits from stock sales or performance-based compensation such as options and bonuses, causing disgorgement awards to reach millions of dollars. (15)
Corporate Indemnification Policies
Justifications for Indemnification
Indemnification agreements and the statutes that permit or require them are driven by a number of important policy concerns. (16) Companies and legislatures are concerned that the threat of personal liability may discourage officers, directors, and employees from serving in important positions. (17) By neutralizing these individuals' financial exposure, corporations can remove this disincentive. Coupled with this is a concern that courts may not evaluate corporate conduct fairly, which could result in unfair judgments. (18) Indemnification may also encourage directors and employees to actively contest frivolous litigation (rather than settling early to avoid large legal bills) with the assurance that the company will compensate them for attorneys' fees incurred in the process. (19) Finally, indemnification is seen as protecting directors' and employees' freedom to act in the corporation's interest without undue fear of litigation. (20)
Companies under investigation by federal authorities today must weigh these benefits of indemnification against the substantial disadvantages of refusing government demands. As discussed in detail below, companies refusing DOJ and SEC demands face substantial risk, regardless of how the merits of the government's case are ultimately decided. Complying with the government's demands can help companies avoid indictment by the DOJ or civil charges by the SEC, preliminary steps that themselves can have severe effects on companies. (21)
Authority for Indemnification
Types of Indemnification
Indemnification has become common in American companies. By the time a government investigation begins, companies are often legally obligated to indemnify their employees for expenses incurred in connection with the investigation. Even if indemnification is not legally required, it may still be expected because of longstanding practice. Every state has statutes that allow or require indemnification under various circumstances. (22) For the sake of simplicity, this discussion will focus on the provisions of Delaware corporate law, (23) which applies to the bulk of large American corporations." (24)
There are two categories of indemnification--mandatory and permissive. Under Delaware law, mandatory indemnification only applies to directors and officers. Corporations are required to indemnify their present and former directors and officers (but not other employees) against "expenses (including attorneys' fees) actually and reasonably incurred" (25) in connection with "any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative." (26)
The scope of permissive indemnification is even broader. Companies are permitted to indemnify both present and former employees for both "judgments" and "fines" incurred in civil, criminal, administrative, and investigative proceedings. (27) Companies can also agree to more expansive indemnification than that discussed in...