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, 

11   (S.D.N.Y. 2006) (Stein I); United States v. Stein (Stein v. KPMG

12   LLP), 

(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, 

  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.   

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 

.   If KPMG performs

 4   its obligations under the agreement, it will escape prosecution.

 5   

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   

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, 

.    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.      

 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.      

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.    

   The district court stated that

17   it would “entertain the claims pursuant to its ancillary

18   jurisdiction over this case.”    

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.    

   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, 

.

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.    

 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.       

  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.”      

  Although the

10   district court stated that KPMG would have “the protections

11   inherent in the Federal Rules of Civil Procedure,” 

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,” 

    It further expressed its intention to

15   apply the Civil Rules only “to the extent they are consistent

16   with the Criminal Rules.”     

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, 

, 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, 

, 373 (2d Cir. 1993); In re Hooker

 3   Investments, Inc., 

, 837 (2d Cir. 1991).   However, we

 4   have generally done so only after finding a lack of appellate

 5   jurisdiction.   Repetitive Stress Injury 

  373; Hooker 

.   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, 

, 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., 

(1st

12   Cir. 1990); Guam v. United States Dist. Court, 

(9th

13   Cir. 1981); Wilk v. Am. Medical Assn., 

, 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 

, 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   

, 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., 

, 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, 

  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

 

, 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, 

, 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.”   

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.”   

Kokkonen v. Guardian Life Ins. Co. of Am., 

,

 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., 

(2d Cir. 1988); Novinger v.

11   E.I. DuPont de Nemours & Co., Inc., 

(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.   

, 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 

.    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, 

  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 

.

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   

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 

, 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   

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 

, 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, 

.    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, 

, 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, 

(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.     

  After the jury

    convicted the former executive, but prior to sentencing, the

    company stopped paying legal expenses.     

  The

    executive, however, argued that he was entitled to coverage of

    expenses through post-conviction motions and sentencing.      

  The question addressed in the ancillary proceeding was the

    legal question of “whether a jury’s guilty verdict constitutes a


                                    23
‘final adjudication.’”    

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.

  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.    

  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 

, 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, 

   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 

(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.




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