The 2nd U.S. Circuit Court of Appeals told the judge, Lewis A. Kaplan, that he has the authority to toss out conspiracy and tax evasion charges if he believes federal prosecutors deprived the workers of their constitutional rights by pressuring KPMG to stop paying legal fees.

The appeals court said Kaplan erred when he encouraged some of the 19 people indicted in the case to file civil breach of contract claims against KPMG to force it to pay their legal expenses. Seventeen former KPMG employees were indicted and one pleaded guilty to charges.

Kathleen Fitzgerald, a KPMG spokeswoman, said: "We respect the court's ruling and believe it is appropriate under the circumstances."

Yusill Scribner, a spokeswoman for federal prosecutors, said the government had no comment.

The legal dispute over fees has put a hold on the progress of the criminal case, which sprang from a government investigation of what it described as a tax shelter fraud that helped the wealthy escape $2.5 billion in U.S. taxes.

KPMG LLP has signed a deal admitting its role in the tax shelter scheme. It avoided criminal prosecution as it agreed to continue cooperating and to pay a $456 million fine, including $128 million in forfeited fees from sales of the shelters.

Kaplan found in June 2006 that the government violated the constitutional rights of the former KPMG employees charged in the case by threatening the company with indictment and destruction as it demanded the firm depart from its prior practice of paying legal fees for its workers.

The judge had concluded KPMG would have paid the legal expenses if the government had not acted improperly.

In a footnote, the appeals court cited several facts that leave it "hardly a foregone conclusion" that the former KPMG workers will succeed in their claims that they are owed legal fees.

For one, the appeals court wrote, KPMG's alleged "uniform practice" of paying legal fees for indicted employees and partners 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, it pointed out, most of the former KPMG workers signed fee letters acknowledging that KPMG would not pay post-indictment fees.

The appeals ruling, however, did not address whether the government played a role in getting the company to persuade employees to sign the fee letters as a condition of having legal fees paid for or to encourage cooperation between employees and the government.