06-4358
Stein v. KPMG
1 UNITED STATES COURT OF APPEALS
2 FOR THE SECOND CIRCUIT
3 August Term, 2006
4 (Argued: November 21, 2006 Decided: May 23, 2007)
5 Docket No. 06-4358-cv
6 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
7 JEFFREY STEIN, MARK WATSON, PHILIP WIESNER, RANDALL BICKHAM,
8 LARRY DELAP, JEFFREY EISCHEID, DAVID GREENBERG, STEVEN
9 GREMMINGER, CARL HASTING, JOHN LANNING, JOHN LARSON, ROBERT
10 PFAFF, GREGG RITCHIE, RICHARD ROSENTHAL, RICHARD SMITH, and CAROL
11 G. WARLEY,
12
13 Plaintiffs-Appellees,
14
15 - v. -
16
17 KPMG, LLP,
18
19 Defendant-Appellant.
20
21 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
22
23 B e f o r e: WINTER, HALL, Circuit Judges, and GLEESON,*
24 District Judge.
25
26 Appeal from the exercise of ancillary jurisdiction in a
27 criminal tax fraud prosecution by the United States District
28 Court for the Southern District of New York (Lewis A. Kaplan,
29 Judge) over a state law contractual claim for attorneys’ fees,
30 and from denial of a motion to compel arbitration under the
*
The Honorable John Gleeson, of the United States District
Court for the Eastern District of New York, sitting by
designation.
1
1 Federal Arbitration Act. This assertion of jurisdiction was
2 intended to provide a remedy for Fifth and Sixth Amendment
3 violations found by the court. We treat the appeal as a petition
4 for a writ of mandamus and grant the petition. We vacate the
5 order asserting ancillary jurisdiction as beyond the district
6 court's power.
7 SHEILA L. BIRNBAUM, Skadden, Arps, Meagher &
8 Flom LLP, New York, New York (Barbara Wrubel,
9 J. Russell Jackson, Preeta D. Bansal, Haydan
10 A. Coleman, Skadden, Arps, Meagher & Flom
11 LLP, New York, New York, Amy Sabrin, Skadden,
12 Arps, Meagher & Flom LLP, Washington D.C.,
13 Charles A. Stillman, Stillman, Friedman &
14 Shechtman, P.C., New York, New York, on the
15 brief), for Defendant Appellant.
16
17 DAVID SPEARS, Spears & Imes LLP, New York,
18 New York, for Plaintiffs-Appellees Jeffrey
19 Stein and John Lanning.
20
21 RONALD E. DEPETRIS, DePetris & Bachrach, LLP,
22 New York, New York (Marion Bachrach, on the
23 brief), for Plaintiff-Appellee Richard Smith.
24
25 John A. Townsend, Townsend & Jones, LLP,
26 Houston, Texas, on the brief, for Plaintiff-
27 Appellee Carol G. Warley.
28
29 David C. Scheper, Overland Borenstein Scheper
30 & Kim LLP, Los Angeles, California, on the
31 brief, for Plaintiff-Appellee Robert Pfaff.
32
33 John F. Kaley, Doar Rieck Kaley & Mack, New
34 York, New York, on the brief, for Plaintiff-
35 Appellee Steven Gremminger.
36
37 David C. Smith, McNamara Spira & Smith, Los
38 Angeles, California, on the brief, for
39 Plaintiff-Appellee Gregg Ritchie.
40
41 Leonard F. Lesser, Simon Lesser P.C., New
42 York, New York, on the brief, for Plaintiff-
2
1 Appellee David Greenberg.
2
3 Diana D. Parker, Law Offices of Diana D.
4 Parker, New York, New York, on the brief, for
5 Plaintiff-Appellee Larry DeLap.
6
7 Michael S. Kim, Kobre & Kim LLP, New York,
8 New York, on the brief, for Plaintiff-
9 Appellee Mark Watson.
10
11 Marc A. Fenster, Russ, August & Kabat, Los
12 Angeles, California, on the brief, for
13 Plaintiff-Appellee Randall Bickham.
14
15 Stanley S. Arkin, Arkin Kaplan Rice LLP, New
16 York, New York, on the brief, for Plaintiff-
17 Appellee Jeffrey Eischeid.
18
19 Robert S. Fink, Kostelanetz & Fink, LLP, New
20 York, New York, on the brief, for Plaintiff-
21 Appellee Richard Smith.
22
23 Stephen Willey, Savitt & Bruce LLP, Seattle,
24 Washington, on the brief, for Plaintiff-
25 Appellee John Larson.
26
27 Susan R. Necheles, Hafetz & Necheles, New
28 York, New York, on the brief, for Plaintiff-
29 Appellee Richard Rosenthal.
30
31 Russell M. Gioiella, Litman, Asche &
32 Gioiella, New York, New York, on the brief,
33 for Plaintiff-Appellee Carl Hasting.
34
35 WINTER, Circuit Judge:
36 This appeal is an offspring of a criminal tax fraud
37 prosecution. In the course of the criminal prosecution, Judge
38 Kaplan asserted ancillary jurisdiction over a state law contract
39 claim brought against KPMG, LLP, by sixteen of the defendants in
40 the criminal case, all former partners and employees of KPMG,
41 seeking to force it to pay their legal expenses. KPMG appeals
3
1 from the decision allowing the ancillary proceeding and from the
2 denial of its motion to compel arbitration of the contract claim.
3 Construing KPMG’s appeal as a petition for writ of mandamus, we
4 grant the petition. We vacate the order of the district court
5 asserting ancillary jurisdiction over the contract claim as
6 beyond the district court’s power. The issues regarding KPMG’s
7 motion to compel arbitration are therefore moot.
8 BACKGROUND
9 The full history of the proceedings underlying this appeal
10 is reported in United States v. Stein, 435 F. Supp. 2d 330
11 (S.D.N.Y. 2006) (Stein I); United States v. Stein (Stein v. KPMG
12 LLP), 452 F. Supp. 2d 230 (S.D.N.Y. 2006) (Stein II).
13 Familiarity with these opinions is assumed, and we recount here
14 only those facts pertinent to the disposition of the present
15 appeal.
16 The underlying criminal prosecution is said to be the
17 largest criminal tax case in American history. Stein II, 452 F.
18 Supp. 2d at 237. Nineteen defendants are charged with conspiracy
19 and tax evasion, including the appellees, who are former partners
20 or employees of the accounting firm KPMG. Id. The defendants
21 are alleged to have, inter alia, devised, marketed, and
22 implemented fraudulent tax shelters that caused a tax loss to the
23 United States Treasury of more than $2 billion. In connection
24 with the alleged tax shelters, KPMG entered into a deferred
4
1 prosecution agreement with the government, agreeing to cooperate
2 fully with the government and to pay $456 million in fines and
3 penalties. Stein I, 435 F. Supp. 2d at 349-50. If KPMG performs
4 its obligations under the agreement, it will escape prosecution.
5 Id.
6 The particular dispute giving rise to this appeal concerns
7 policies adopted by the Department of Justice in response to
8 highly visible public concerns over the compliance by business
9 firms with federal and state law. See Leonard Orland, The
10 Transformation of Corporate Criminal Law, 1 Brook. J. Corp. Fin.
11 & Com. L. 45 (2006). The policies were established in the so-
12 called “Thompson Memorandum,” which set out standards to be
13 followed by federal prosecutors in determining whether to bring
14 criminal prosecutions against firms as well as their agents.1
15 See Mem. from Larry D. Thompson, Deputy Attorney General, U.S.
16 Dep’t. Of Justice, to Heads of Department Components, United
17 States Attorneys, re: Principles of Federal Prosecution of
18 Business Organizations (Jan. 20, 2003) (“Thompson Mem.”),
19 http://www.usdoj.gov/dag/cftf/business_ organizations.pdf. One
20 such standard deemed a firm’s voluntary payment of wrongdoing
21 agents' legal expenses a factor favoring prosecution of the firm.
22 Id. at 7-8.
23 During the course of the investigation, and prior to the
24 indictments in this matter, KPMG negotiated with and paid the
5
1 legal fees of some, but not all, of the appellees. Upon
2 indictment, however, KPMG stopped these payments. Stein I, 435
3 F. Supp. 2d at 350. In Stein I, the district court found that
4 the government had used the threat of prosecution to pressure
5 KPMG into cutting off payment of the appellees’ legal fees and
6 thereby violated appellees’ Fifth and Sixth Amendment rights to a
7 fair trial and the effective assistance of counsel. Id. at 382.
8 The merits of that ruling are not before us on this appeal.
9 The district court suggested that the constitutional
10 violation could be rendered harmless if the appellees could
11 successfully force KPMG to re-commence -- or, for some of the
12 appellees, commence -- paying their legal expenses. Id. at 373,
13 376-78. The court sua sponte instructed the clerk of the
14 district court to open a civil docket number for an expected
15 contract claim by the appellees against KPMG for advancement of
16 their defense costs. Id. at 382. The district court stated that
17 it would “entertain the claims pursuant to its ancillary
18 jurisdiction over this case.” Id.
19 The district court acknowledged a more obvious remedy for
20 the constitutional violations it had found -- dismissal of the
21 indictment -- and explicitly left that possibility open as an
22 incentive for the government to strongarm KPMG to advance
23 appellees' defense costs. Id. at 380. In short, having found
24 that the government violated appellees' constitutional rights by
6
1 threatening to bring one indictment, the district court sought to
2 remedy the violation by threatening to dismiss another.
3 Following this invitation, the appellees filed the
4 anticipated complaints against KPMG. In the complaints, fifteen
5 of the sixteen appellees relied primarily on an “implied-in-fact”
6 contract with KPMG based on KPMG’s alleged history of paying its
7 employees’ legal expenses. The sixteenth appellee, Jeffrey
8 Stein, relied on an express breach of his written separation
9 agreement with KPMG. In response, KPMG moved to dismiss for lack
10 of subject matter jurisdiction and on the merits. It also argued
11 that the case should be referred to arbitration under arbitration
12 agreements between KPMG and the various appellees. The district
13 court denied KPMG’s motions in Stein II, 452 F. Supp. 2d 230.
14 The Stein II opinion contained three principal holdings:
15 (i) a reaffirmation of the court's earlier holding that ancillary
16 jurisdiction existed over the contractual fee dispute between
17 appellees and KPMG; (ii) a rejection of KPMG’s argument that the
18 “implied-in-fact” contract claims of all of the appellees, save
19 Stein, were foreclosed by written agreements containing merger
20 clauses; and (iii) a finding that enforcement of any applicable
21 arbitration clause would be against public policy. The court
22 concluded that arbitration might interfere with the district
23 court’s ability to ensure a speedy trial, could lead to a
24 dismissal of possibly meritorious criminal charges, would
7
1 endanger the appellees’ rights to a fair trial, and would risk
2 imposing unnecessary costs on taxpayers if the appellees should
3 become indigent. Id. at 238-39.
4 The opinion closed by setting the trial of appellees’
5 advancement claim for six weeks later, October 17, 2006,
6 following an abbreviated period of limited discovery. Id. at
7 275. The procedural rules governing the trial were left to the
8 future, the district court noting that “[i]t is not now entirely
9 clear exactly how this will play out.” Id. at 274. Although the
10 district court stated that KPMG would have “the protections
11 inherent in the Federal Rules of Civil Procedure,” id. at 275,
12 the court elsewhere stated that the advancement claim, although
13 civil in nature, “is a criminal case to which the Civil Rules do
14 not apply,” id. at 260. It further expressed its intention to
15 apply the Civil Rules only “to the extent they are consistent
16 with the Criminal Rules.” Id. at 269.
17 On appeal, KPMG argues that the district court lacks subject
18 matter jurisdiction over appellees’ advancement claims and also
19 that, if jurisdiction exists, the district court further erred by
20 refusing to compel arbitration.
21 DISCUSSION
22 a) Appeal or Mandamus
23 Appellees argue that we have no appellate jurisdiction to
24 review the district court’s assertion of ancillary jurisdiction
8
1 because the denial of KPMG’s motion to dismiss appellees’
2 advancement complaint was an unappealable interlocutory order in
3 a criminal case. KPMG responds that we have jurisdiction under
4 the Federal Arbitration Act (the “FAA”)to review the district
5 court’s refusal to compel arbitration, and that we may then
6 exercise pendent jurisdiction over the question of ancillary
7 jurisdiction.
8 These arguments in turn spawn a tangle of counter- and
9 counter-counter-arguments. Section 16 of the FAA provides for
10 interlocutory appeal from a refusal to stay an action under
11 Section 3 of the FAA, or of a refusal to compel arbitration under
12 Section 4. 9 U.S.C. § 16(a)(1). KPMG, however, did not ask for
13 a stay under Section 3 anywhere in its notice of motion to
14 dismiss, and Section 4 applies only to orders by “any United
15 States district court which, save for [the arbitration]
16 agreement, would have jurisdiction under Title 28 . . . .” 9
17 U.S.C. § 4. However, the district court does not have
18 jurisdiction over the advancement claim under Title 28.
19 Moreover, even if KPMG is deemed to have constructively
20 petitioned for a stay under Section 3, an exercise of pendent
21 jurisdiction would require us to find that the issue of ancillary
22 jurisdiction is “‘inextricably intertwined’ with an issue over
23 which the court properly has appellate jurisdiction,” as where
24 “the same specific question underl[ies] both the appealable order
9
1 and the non-appealable order, or where resolution of the non-
2 appealable order [is] subsidiary to resolution of the appealable
3 order.” Stolt-Nielsen SA v. Celanese AG, 430 F.3d 567, 576 (2d
4 Cir. 2005) (citations omitted).
5 To undertake pendent jurisdiction, therefore, we would have
6 to find that the issue of ancillary jurisdiction is inextricably
7 intertwined with the denial of the motion to compel arbitration,
8 presumably on the grounds that the district court’s reasons for
9 asserting ancillary jurisdiction and for finding that arbitration
10 would be against public policy were the same, i.e., the need to
11 afford an adequate and timely remedy for the constitutional
12 violations. See Stein I at 377 (ancillary proceeding needed
13 "[i]n order to guarantee [appellees'] right to choose their own
14 counsel . . ."); Stein II at 245 (having found the constitutional
15 violations, "the overreaching issue is what to do about it"), and
16 254 (need to promptly vindicate appellees' Fifth and Sixth
17 Amendment rights are factors rendering arbitration clauses
18 contrary to public policy).
19 We decline to resolve the question of appellate
20 jurisdiction. We suggested at oral argument that it might be
21 more appropriate to exercise our mandamus power. The parties
22 were invited to file supplemental briefs on the issue, and Judge
23 Kaplan himself filed a submission on the issue.
24 We have in the past treated an appeal as a petition for
10
1 leave to file a writ of mandamus. In re Repetitive Stress Injury
2 Litigation, 11 F.3d 368, 373 (2d Cir. 1993); In re Hooker
3 Investments, Inc., 937 F.2d 833, 837 (2d Cir. 1991). However, we
4 have generally done so only after finding a lack of appellate
5 jurisdiction. Repetitive Stress Injury Litigation, 11 F.3d at
6 373; Hooker Investments, 937 F.2d at 837. There has been
7 criticism of the practice of resorting to mandamus without first
8 resolving the issue of appellate jurisdiction, ACF Indus., Inc.
9 v. EEOC, 439 U.S. 1081, 1085 (1979) (Powell, J., dissenting from
10 denial of certiorari), but there is nevertheless precedent for
11 doing so, see, e.g., In re Globe Newspaper Co., 920 F.2d 88 (1st
12 Cir. 1990); Guam v. United States Dist. Court, 641 F.2d 816 (9th
13 Cir. 1981); Wilk v. Am. Medical Assn., 635 F.2d 1295, 1298 (7th
14 Cir. 1980); see also Wright, Miller & Cooper, 16 Fed. Prac. &
15 Proc. Juris.2d § 3932.1. While the practice of resorting to
16 mandamus only in the absence of jurisdiction may be of value in
17 alerting courts to the danger of allowing mandamus to become a
18 substitute for an appeal and thus to swallow the rule against
19 interlocutory appeals, ACF Indus., 439 U.S. at 1085, the
20 circumstances here fully justify the exercise of mandamus power
21 without deciding whether we have appellate jurisdiction.
22 In turning to mandamus, we simply recognize that "[t]he
23 traditional use of the writ in the aid of appellate jurisdiction
24 both [at] common law and in the federal courts has been to
11
1 confine an inferior court to a lawful exercise of its
2 prescribed jurisdiction . . . ." Roche v. Evaporated Milk Ass’n,
3 319 U.S. 21, 26 (1943). Because the actions of the district
4 court were well outside its subject matter jurisdiction, our
5 resort to mandamus does not in any way expand the potential use
6 of that writ and avoids our unnecessarily addressing complex
7 jurisdictional issues.
8 The jurisdictional issues are complex, but largely because,
9 as we explain below, the proceeding challenged on this appeal --
10 a state law contract action against a non-party within a federal
11 criminal proceeding -- is well outside the subject matter
12 jurisdiction conferred by Congress on the federal courts. It is
13 hardly surprising, therefore, that there is no statute or body of
14 caselaw that clearly affords or clearly precludes appellate
15 review of the commencement of such a proceeding. For example,
16 the failure of Congress to mention Title 18 as well as Title 28
17 in Section 4 of the FAA is not evidence of an intent to preclude
18 interlocutory appeals from orders refusing to compel arbitration
19 in criminal cases. Rather, it is evidence that Congress did not
20 expect such issues ever to arise in criminal cases. Indeed, the
21 complexities surrounding our appellate jurisdiction underline the
22 paucity of grounds supporting the district court’s assertion of
23 ancillary jurisdiction.
24 Were we to opine on the various arguments over appellate
12
1 jurisdiction, we would have to address issues involving the FAA
2 and pendent jurisdiction that arise only because of the
3 happenstances of this unique case. There is no need for a
4 precedent regarding appellate jurisdiction in this context
5 because our issuance of the writ disposes of this matter and
6 renders the existence of future such cases unlikely. However,
7 opining on the jurisdictional issues does risk the making of
8 statements that might be misleading in future cases in a
9 different context. We therefore turn to the mandamus remedy
10 without deciding the jurisdictional issues.
11 b) The Merits
12 As discussed above, mandamus is available to confine courts
13 to their designated jurisdiction. Other “touchstones” of
14 mandamus review are “usurpation of power, clear abuse of
15 discretion and the presence of an issue of first impression.”
16 Steele v. L.F. Rothschild & Co., Inc., 864 F.2d 1, 4 (2d Cir.
17 1988) (internal quotation marks omitted). Three conditions must
18 be satisfied before the writ may issue: first, the party seeking
19 relief must have “no other adequate means to attain the relief he
20 desires,” second, the petitioner must show that his right to the
21 writ is “clear and indisputable,” and third, the issuing court
22 must be satisfied that the writ is appropriate under the
23 circumstances. Cheney v. United States Dist. Court, 542 U.S.
24 367, 380-81 (2004) (internal quotation marks and citations
13
1 omitted). The writ is, of course, to be used sparingly. In
2 addition to avoiding its use as a substitute for an appeal,
3 discussed above, “the principal reasons for our reluctance to
4 condone use of the writ [are] the undesirability of making a
5 district court judge a litigant and the inefficiency of piecemeal
6 appellate litigation.” Mallard v. United States Dist. Court, 490
7 U.S. 296, 309 (1989). In the present matter, all of the standard
8 requirements for granting mandamus relief are met, while the
9 reasons underlying the traditional reluctance to resort to the
10 writ are either not present or favor granting the writ.
11 Appellees argue that KPMG’s right to relief is not “clear
12 and indisputable” because the proper scope of ancillary
13 jurisdiction is not well-settled by our caselaw. To be sure,
14 “[t]he boundaries of ancillary jurisdiction are not easily
15 defined and the cases addressing it are hardly a model of
16 clarity.” Garcia v. Teitler, 443 F.3d 202, 208 (2d Cir. 2006).
17 However, because ancillary jurisdiction cannot be limitless and
18 still be ancillary, boundaries there must be, and the exercise of
19 ancillary jurisdiction here is clearly outside those boundaries.
20 As Garcia stated, “ancillary jurisdiction is aimed at
21 enabling a court to administer justice within the scope of its
22 jurisdiction.” Id. (internal quotation marks omitted).
23 Ancillary jurisdiction is intended “to permit disposition of
24 claims that are, in varying respects and degrees, factually
14
1 interdependent by a single court, and . . . to enable a court to
2 function successfully, that is, to manage its proceedings,
3 vindicate its authority, and effectuate its decrees.” Id.
4 (quoting Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375,
5 379-80 (1994)).
6 The most common exercise of ancillary jurisdiction is,
7 probably, to resolve fee disputes between a party and its
8 attorney arising in litigation in which the attorney represented
9 the party. See, e.g., Cluett, Peabody & Co., Inc. v. CPC
10 Acquisition Co., Inc., 863 F.2d 251 (2d Cir. 1988); Novinger v.
11 E.I. DuPont de Nemours & Co., Inc., 809 F.2d 212 (3d Cir. 1987).
12 In Garcia, for example, we upheld the exercise of ancillary
13 jurisdiction to compel an attorney to return a retainer obtained
14 to represent a party in the underlying litigation after the
15 district court had ordered the attorney to withdraw as counsel
16 because of misconduct. Garcia, 443 F.3d at 208, 211-12.
17 Exercise of ancillary jurisdiction over a fee dispute between a
18 party and an attorney functioning as an officer of the court in
19 litigation over which a court has jurisdiction is, however, a
20 world away from the exercise of ancillary jurisdiction in a
21 criminal proceeding to adjudicate a contract dispute between the
22 defendants and a non-party former employer.
23 When a court undertakes to resolve claims arising from a
24 relationship between a party to an action and the party’s
15
1 attorney in that action and involving the attorney’s conduct of
2 that litigation, the parties to the ancillary proceeding are
3 already before the court as a litigant and officer of the court;
4 the relevant facts are generally more accessible to that court
5 than to another; and the ability of the court to conduct and
6 dispose of the underlying litigation may turn on, or at least be
7 greatly facilitated by, resolution of the issues raised in the
8 ancillary proceeding. However, when a non-party to the primary
9 proceeding is sought to be joined as a defendant in the ancillary
10 proceeding, the need for the ancillary proceeding and the
11 efficiencies provided by it must be both sufficiently great to
12 outweigh the prejudice to the non-party and to be consistent with
13 the limited jurisdiction of federal courts.
14 An ancillary proceeding may subject the non-party to what
15 may be a different forum and different procedural or even
16 substantive rules than would normally be involved in disposing of
17 the claim at issue. In addition, the assertion of ancillary
18 jurisdiction over matters that are otherwise outside the
19 jurisdiction conferred by the Constitution and the Congress can
20 be justified only by compelling needs arising in the exercise of
21 the jurisdiction that is conferred. While we do not exclude the
22 possibility of a legitimate ancillary proceeding involving a non-
23 party to the primary litigation, we believe that the requisite
24 compelling circumstances will be rare, as the need for such a
16
1 proceeding generally will be far less pressing than in cases
2 involving parties already before the court.2
3 In the present matter, the prejudice to KPMG is clear, and
4 the need for the ancillary proceeding is entirely speculative.
5 The claims to be resolved in the ancillary proceeding sound in
6 contract, i.e. appellees claim that KPMG impliedly -- in one case
7 expressly -- promised to pay their expenses in defending the
8 present criminal charges. The prejudice to KPMG in having these
9 claims resolved in a proceeding ancillary to a criminal
10 prosecution in the Southern District of New York is clear. At
11 stake are garden variety state law claims, albeit for large sums.
12 KPMG believed that contractual disputes between it and the
13 appellees would be resolved by arbitration. Instead, KPMG is
14 faced with a federal trial of more than a dozen individuals’
15 multi-million dollar “implied-in-fact” contract claims.
16 Moreover, because such a proceeding is governed by no express
17 statutory authority, the district court has indicated its
18 intention to apply to this expedited undertaking an ad hoc mix of
19 the criminal and civil rules of procedure determined on the fly,
20 as it were. See Stein II, 452 F. Supp. 2d at 274-75. The
21 resolution of the contract claims against KPMG is thus to occur
22 in an entirely sui generis proceeding even though it may require
23 the scrutinizing of decades of KPMG’s conduct, determining the
24 states of mind of dozens of individuals, applying the findings
17
1 from those inquiries to the particular circumstances of each
2 appellee, and resolving multiple questions of the law of several
3 states. Waiting to appeal from a final judgment in this sort of
4 proceeding can hardly be described as an “adequate means” of
5 relief eliminating the need for mandamus. See Cheney, 542 U.S.
6 at 380 (internal quotation marks omitted). This is especially
7 the case where, as here, KPMG may have a contractual right to
8 resolve these questions through arbitration and avoid such a
9 proceeding altogether, as the FAA’s provision for interlocutory
10 appeals from refusals to stay an action or compel arbitration was
11 intended precisely to avoid such outcomes.
12 The need for the particular ancillary proceeding is also far
13 less pressing than contemplated by the district court. First,
14 the interrelationship of the factual issues underlying the
15 finding of constitutional violations and the asserted contract
16 claims is marginal. The Fifth and Sixth Amendment violations
17 were found to be the government’s implementation of the policy
18 stated in the Thompson Memorandum with regard to decisions to
19 indict or not indict firms. Stein I, 435 F. Supp. 2d at 367.
20 One aspect of that policy was to take into account whether the
21 firm was voluntarily paying the legal expenses of members or
22 employees who had been indicted, see Thompson Mem. at 7-8, a
23 factor deemed to favor indictment under the Thompson Memorandum.
24 Id. That document gave no such weight to payments required by
18
1 contract. As a result, the constitutional issues before the
2 district court went solely to what pressure the government put on
3 KPMG not to pay fees voluntarily and to what KPMG’s response was.
4 See Stein I, 435 F. Supp. 2d at 366, 343-49. A trial of claims
5 to expenses based on contract -- especially implied contract --
6 will go over very different factual ground.
7 Second, while the ancillary proceeding is a major
8 undertaking, its contribution to the efficient conclusion of the
9 criminal proceeding is entirely speculative. Even if the holding
10 that the government violated the Fifth and Sixth Amendments is
11 correct -- an issue on which we express no opinion -- the
12 ancillary proceeding will provide a "remedy" only if KPMG loses,
13 hardly a foregone conclusion on the present record.3 But even if
14 there are constitutional violations and even if KPMG was
15 contractually obligated to pay appellees’ expenses, the ancillary
16 proceeding is not an indispensable remedy and may not even
17 constitute a full remedy. Dismissal of an indictment for Fifth
18 and Sixth Amendment violations is always an available remedy.
19 Moreover, if it violates the Fifth and Sixth Amendments for the
20 government to coerce an employer to decline to pay expenses on a
21 voluntary basis, it may well be a similar violation to coerce the
22 employer to breach a contract to pay such expenses, thereby
23 compelling the employees to pay the substantial costs of
24 enforcing the contract in a civil action. Either way, the
19
1 government has used coercion to raise the costs of the defendants
2 to obtain counsel of their own choosing. The ancillary
3 proceeding may not, therefore, render any constitutional
4 violation harmless.
5 Third, even if there were constitutional violations and even
6 if KMPG is contractually obligated to advance appellees'
7 attorneys' fees and costs, creating an ancillary proceeding to
8 enforce that obligation was not the proper remedy. If the
9 government's coercion of KMPG to withhold the advancement of fees
10 to its employees' counsel constitutes a substantive due process
11 violation, or has deprived appellees of their qualified right to
12 counsel of choice, more direct (and far less cumbersome) remedies
13 are available. Assuming the cognizability of a substantive due
14 process claim and its merit here, dismissal of the indictment is
15 the proper remedy. As for the Sixth Amendment deprivation, if it
16 turns out that the government's conduct separates appellees from
17 their counsel of choice (an event that has not yet occurred),
18 appellees may seek relief on appeal if they are convicted. We do
19 not mean to exclude the possibility of other forms of relief.
20 If, for example, a Sixth Amendment violation is the result of
21 ongoing government conduct, the district court of course may
22 order the cessation of such conduct. Having said that, we hold,
23 however, that the remedies available to the district court in the
24 circumstances presented here did not include its novel exercise
20
1 of ancillary jurisdiction. The "summary advancement proceeding,"
2 id. at 381, it created may have been intended only as a vehicle
3 for the government and KPMG to act on their "incentives" to
4 somehow get appellees' counsel funded and thereby "avoid any risk
5 of dismissal of [the indictment of the appellees] or other
6 unpalatable relief." Stein I at 380. Or, as Stein II suggests,
7 it might also have been envisioned as an uncharted hybrid legal
8 proceeding for the expeditious resolution of numerous high-dollar
9 and potentially complex contract claims. Either way, it was not
10 an available remedy for either constitutional violation.
11 Finally, on the present record, a proceeding ancillary to a
12 criminal prosecution was not necessary either to avoid perceived
13 deficiencies in ordinary civil contract actions to enforce the
14 alleged advancement contracts or to remove some barrier to the
15 appellees’ bringing of such actions. The fee issue has been
16 known since the criminal investigation began and, unlike the
17 situation in Weissman, see Note 2 supra, did not suddenly arise
18 at an awkward period in the case. Many of the appellees were in
19 negotiation with KPMG during the investigation period. Some
20 sixteen months before the indictment, most of the appellees
21 signed a letter that clearly indicated their knowledge of KPMG’s
22 intent not to pay post-indictment fees and could -- arguably must
23 -- be read as a waiver of any right to such fees. Stein II, 452
24 F. Supp. 2d at 240-41. Nevertheless, appellees took none of the
21
1 available steps to enforce their alleged contracts with KPMG
2 until well after the indictment when the district court raised
3 the possibility of an ancillary proceeding and indicated its
4 willingness to exercise jurisdiction over it.
5 The traditional factors weighing against mandamus –- the
6 undesirability of casting a judge as a litigant and the
7 desirability of avoiding piecemeal appeals -- also weigh in favor
8 of mandamus in this case. The district judge is not a party,
9 and, by granting the writ, we avoid an unnecessary, potentially
10 costly, and time-consuming procedure that would certainly be
11 vacated on appeal. The district court has acknowledged that the
12 proceedings before him “would be facilitated by prompt review of
13 the merits of the challenged order.” The same considerations --
14 the magnitude and importance of the ongoing criminal proceedings
15 -- also argue for swift review to avoid further delay of the
16 underlying criminal proceedings. For all of the foregoing
17 reasons, the three requirements of Cheney v. United States Dist.
18 Court, 542 U.S. 367, 380-81 (2004), are met here.
19 CONCLUSION
20 We treat the appeal as a petition for writ of mandamus. We
21 grant the petition, vacate the orders below to the extent that
22 they find jurisdiction over the complaint against KPMG and
23 dismiss appellees’ complaint against KPMG.
24
22
1 FOOTNOTES
2
3 1. The Thompson Memorandum has been superseded by the “McNulty
Memorandum.” See Mem. From Paul J. McNulty, Deputy Attorney
General, U.S. Dep’t of Justice, to Heads of Department
Components, United States Attorneys, re: Principles of Federal
Prosecution of Business Organizations,
http://www.usdoj.gov/dag/speech/2006/mcnulty memo.pdf.
2. In United States v. Weissman, 1997 WL 334966 (S.D.N.Y.
June 16, 1997), a district court asserted ancillary jurisdiction
over a dispute concerning the advancement of legal fees by a
former employer to a criminal defendant. In Weissman, a former
Empire Blue Cross/Blue Shield executive had his defense costs
advanced pursuant to a corporate by-law stipulating that the
company would cover all legal costs unless “a judgment or other
final adjudication” established that the officer had acted in bad
faith or used deliberate dishonesty. Id. at *1. After the jury
convicted the former executive, but prior to sentencing, the
company stopped paying legal expenses. Id. at *2. The
executive, however, argued that he was entitled to coverage of
expenses through post-conviction motions and sentencing. Id. at
*11. The question addressed in the ancillary proceeding was the
legal question of “whether a jury’s guilty verdict constitutes a
23
‘final adjudication.’” Id. The court acknowledged that it could
find no other example of a court in a criminal case exercising
ancillary jurisdiction over an employer in an advancement case.
Id. at *5. The Weissman court further noted that the “argument
that complex questions of state law are implicated” in the
dispute was the “most powerful challenge” to the court's
ancillary jurisdiction. Id. at *8. We need intimate no view on
the merits of Weissman because it is somewhat different from the
present matter. On the one hand, in Weissman, the issue of the
employer refusing to advance expenses arose at a time when no
disposition of the issue could be reasonably obtained in another
forum. On the other hand, there was no perceived Sixth Amendment
violation by the government in need of a remedy.
3. That KPMG should lose on the merits is far from certain.
KPMG’s alleged “uniform practice,” Stein I, 435 F. Supp. 2d at
356, of paying the legal fees for indicted employees and partners
-- seemingly an indispensable element of an “implied-in-fact”
contract -- appears to consist of a single instance in which KPMG
paid the legal fees of two partners indicted and convicted in a
1974 criminal case, id. at 340. In addition, as a condition of
having their pre-indictment legal fees paid by KPMG, most of the
appellees signed fee letters acknowledging that KPMG would not
pay post-indictment fees and -- on the most straight-forward
24
reading -- waiving any right to such fees. Stein II, 452 F.
Supp. 2d at 240-41. What is more, when the appellees moved to
dismiss the indictment on Sixth Amendment grounds, they took the
position that the payment of legal fees was a matter of KPMG’s
freedom of choice, stipulating with the government that “it had
been the longstanding voluntary practice of KPMG to advance and
pay legal fees . . . .” Stein I, 435 F. Supp. 2d at 340
(emphasis added). Arguably, the appellees would be estopped from
now arguing that KPMG had a contractual obligation -- implied or
otherwise -- to pay post-indictment legal fees. Finally, we note
that some of the district court’s “public policy” reasons for
refusing to compel arbitration -- i.e., that arbitration would
interfere with the appellees’ rights to counsel of their choice
and risk the need for the government to provide counsel to
indigent defendants -- seem to assume that KPMG would win any
arbitration proceeding.
25