Justices said the former Big Five accounting firm's June 2002 conviction was improper. It said the jury instructions at trial were too vague and broad for jurors to determine correctly whether Andersen obstructed justice.
"The jury instructions here were flawed in important respects," Chief Justice William H. Rehnquist (search) wrote for the court.
The ruling is a setback for the Bush administration, which made prosecution of white-collar criminals a high priority following accounting scandals at major corporations. After Enron's 2001 collapse, the Justice Department went after Andersen first.
Acting assistant Attorney General John C. Richter said the Justice Department was disappointed with the decision and was considering whether to re-try the case.
"The Justice Department's decision to charge Arthur Andersen was based at the time on the determination that the substantial destruction of documents in anticipation of an investigation by the
Enron crashed in December 2001, putting more than 5,000 employees out of work, just six weeks after the energy company revealed massive losses and writedowns.
Subsequently, as the Securities and Exchange Commission (search) began looking into Enron's convoluted finances, Andersen put in practice a policy calling for destroying unneeded documentation.
Government attorneys argued that Andersen should be held responsible for instructing its employees to "undertake an unprecedented campaign of document destruction."
But in his opinion, Rehnquist noted that jurors were instructed to convict Andersen if the accounting firm had an "improper purpose," such as an intent to impede or subvert fact-finding in an "official proceeding." He noted jurors were instructed to convict, even if Andersen mistakenly thought it was acting legally.
Like a mother who advises a son to invoke his right against compelled self-incrimination out of fear he might be convicted, "persuading" an employee to withhold information is not "inherently malign," Rehnquist wrote.
"The instructions also diluted the meaning of 'corruptly' so that it covered innocent conduct," Rehnquist said.
At trial, Andersen argued that employees who shredded tons of documents followed the policy and there was no intent to thwart the SEC investigation.
The probe into Andersen led to just one guilty plea, from the firm's former top Enron auditor, David Duncan. But the conviction of the Chicago firm forced it to surrender its accounting license and stop conducting public audits. Some 28,000 workers had to find other jobs, and the company was left a shell of its former self.
A ruling against Andersen could have had onerous consequences for businesses, whose discarding of files is an everyday occurrence. Experts say companies would have had to keep all files for fear that any disposal, however innocent, could subject them to potential prosecution.
According to Andersen attorneys, notes and drafts of documents were thrown away under the firm's document-retention policy in part because they were preliminary and could have been misconstrued.
Andersen's appeal was backed by the National Association of Criminal Defense Lawyers. It argued in a friend-of-the-court filing that broad characterization of "obstruction" used in the jury instructions would also unfairly punish criminal attorneys who advise their clients to withhold evidence in legal ways.
Such a broad reading could open defense lawyers and others to prosecution if they merely advise clients of their rights to assert legal privileges or review document retention policies, the criminal defense group said.
The case is Andersen v. U.S., 04-368.