Pressure is mounting on the U.S. Department of Justice to rethink its increasingly notorious "Thompson memo," which has caught the ire of the legal and business communities because, many say, it pushes companies to waive attorney-client privilege when prosecutors target them for investigation.

Even Congress is in on the act, with a House Judiciary Committee exploring the issue during a hearing in March. And the U.S. Sentencing Commission has abandoned its policy that encouraged prosecutors to seek the privilege waivers. (See "Privilege Waiver Policy Dumped," April 14.)

Now the third branch is weighing in, this time on a different portion of the memo that some say discourages companies from advancing legal fees to employees who are under federal investigation.

U.S. District Judge Lewis A. Kaplan in New York City has scheduled a May 8 hearing to hash out defense lawyers’ complaints that federal prosecutors in New York are interfering with their clients’ right to counsel. The defense says prosecutors pressured accounting giant KPMG to cut off legal fees for its former employees facing trial for their alleged role in questionable tax shelters. United States v. Jeffrey Stein, No. S1 05 Cr. 888.

So far, the ABA is officially mum on the legal fees issue, though high-ranking members say they are closely following the KPMG case and others, specifically United States v. Shanahan, No. 04 CR 126, in New Hampshire, where the Thompson memo is believed to have resulted in prosecutors discouraging companies from paying or advancing legal fees contrary to long-standing business policies.

"Traditionally the ABA has been a strong voice protecting the right to counsel," says Miami lawyer Michael S. Pasano, who chairs the ABA Criminal Justice Section. He expects the topic to be addressed this weekend at the section’s spring meeting in Napa, Calif.

Indeed, the ABA is actively lobbying the Justice Department to rewrite the Thompson memo, named for then-Deputy Attorney General Larry D. Thompson, who issued it in 2003. The ABA is seeking specifically to remove the privilege waiver as an incentive for cooperation with the government. ABA President Michael S. Greco is preparing a letter suggesting a rewrite to Attorney General Alberto Gonzales and a related letter to bar groups to encourage them to do the same with their local U.S. attorneys.

But Pasano and past ABA President R. William Ide III, who chairs the ABA Task Force on the Attorney-Client Privilege, say they will likely ask the House of Delegates to develop policy on the legal fees issue as well because, like the waiver issue, it strikes at a core legal value, the right to counsel.

"I don’t think the enforcement community had ever used this device before," says Ide of Atlanta. "Now that they are, [they’re] hitting a very core principle with the tactics [they’re] using."

The Justice Department is listening. In October, then-acting Deputy Attorney General Robert McCallum sent a letter to U.S. attorneys asking them to adopt "a written waiver review process."

But that directive doesn’t go far enough for many interest groups, including the U.S. Chamber of Commerce, the Association of Corporate Counsel and the National Association of Criminal Defense Lawyers, which have formed a coalition to push for a comprehensive rewrite of the Thompson memo. The chamber and the ACC met with McCallum two weeks ago.

There are nine criteria that can be considered in order to determine a company’s level of cooperation in an investigation, according to the Thompson memo, but the focus has been on only a few of them.

"Quite honestly, the only ones that really matter when we talk to folks are whether [companies] are going to have to waive [privilege] and how willing they are to throw employees under the bus so the Justice Department doesn’t have to work as hard to prosecute them," says Susan Hackett, senior vice president and general counsel for the ACC.

The reason a broader coalition formed is that the memo is influencing core business policies as well, the groups say.

"I think we’re at the point where the groups—the business groups, the bar groups, and all of the people concerned about the practices in the Thompson memo—feel there is no room for compromise," says Stephanie Martz, who directs the White Collar Crime Project of the National Association of Criminal Defense Lawyers. "It is no business of the government if the corporation, pursuant to a policy or established practice, decided to pay" legal fees for its employees.

Indemnification agreements are common in the business world, with all states allowing for them. Some states, including Delaware, where KPMG is incorporated, mandate that companies offer such agreements. Some companies require employees who are convicted of a crime to reimburse legal fees.

But defense lawyers for the former KPMG employees say there were no such provisions and, before the tax shelter case, none of the recently imposed conditions in KPMG’s policy.

KPMG entered a deferred prosecution agreement with the government in August 2005, agreeing to pony up some $456 million. The agreement was widely viewed as the only way the firm could avoid a criminal indictment, which proved to be a death sentence in 2002 for rival firm Arthur Andersen. But several former employees are facing trial, accused of defrauding the government by creating fraudulent tax shelters for wealthy clients.

At issue for Judge Kaplan is whether prosecutors pressed KPMG to cut off legal support for the employees. It’s a tactic federal prosecutors deny encouraging, although lead prosecutor Justin S. Weddle acknowledges he raised the issue with KPMG in early 2004. According to an affidavit filed with the court, Weddle says he merely inquired about KPMG’s obligations to pay fees and "indicated that if it was within KPMG’s discretion whether to pay fees, KPMG would not pay fees for individuals who do not cooperate."

KPMG ultimately decided to cap the legal fees it offered employees and cease payment if those employees don’t cooperate fully with the investigation.

Kaplan seemed concerned whether even asking the question was appropriate for prosecutors. "Against the background of the Thompson memorandum, the inquiry itself arguably was a signal to KPMG as to actions that would promote its chances of avoiding prosecution," Kaplan wrote in a memorandum and order setting the hearing date and briefing schedule. Briefs on a possible remedy were due on Thursday.

Kaplan’s resolution to this may have a far-reaching impact. And many say the fact that he’s holding a hearing is significant.

"I think this really does strike a chord in corporate legal circles," says Washington, D.C., white-collar crime lawyer Stephen Cannon, a onetime prosecutor and former general counsel for Circuit City. "Essentially, you have an employee who has an expectation: The company will advance legal costs unless and until that employee acted outside [the employee’s] authority," Cannon says. "That’s an expectation. To make a unilateral decision not to honor that agreement will strike a lot of people as not exactly fair."

The U.S. Attorney's Office in New York City declined to comment for this article. The Justice Department in Washington did not respond to requests for comment.