Will regulators be able to access all your documents?

In March the Munich offices of international law firm Jones Day, were raided by prosecutors in the VW emissions investigation. This breach of the law firm citadel has shone a bright light on the confidentiality of documentation and the importance of legal privilege. Privilege protections are specific in each jurisdiction, and in England apply to advice between lawyer and client (legal advice privilege) and to a broader range of documents produced to defend litigation (litigation privilege).

The alarm bells are not limited to the most high profile of cases, or to Germany. In May, the High Court delivered a judgment in which it found that litigation privilege in respect of criminal proceedings will only be a real prospect once a client believes prosecution is highly likely. This presents challenges in the context of pollution events, which will often trigger immediate investigation. Even if the dominant purpose of the investigation is to defend against potential prosecution, the High Court is saying that the prosecution itself may not be sufficiently likely at that stage to meet the litigation privilege test. By pushing the tipping point for litigation privilege forward to some future time, such as the date of charge, it leaves only legal advice privilege to protect confidential documents prepared in the immediate aftermath of an environmental incident. Crucially then, as reports prepared by third parties will not attract legal advice privilege, it is important to evaluate existing practices of investigation and advice.

The Direction of the Serious Fraud Office v Eurasian Natural Resources Corporation Ltd [1]

In Eurasian Natural Resources Corporation Ltd (ENRC) Mrs Justice Andrews considered whether litigation privilege or legal advice privilege could attach to certain documents created by ENRC, its solicitors or forensic accountants. ENRC sought to claim privilege over documents that were generated during internal investigations relating to allegations of fraud, bribery and corruption in Kazakhstan and Africa.

The decision crucially draws a distinction between criminal and civil proceedings; civil litigation could be commenced by a counterparty with minimal prospect of success or even no basis for a claim, whereas a prosecutor must satisfy himself that there is sufficient evidence to make a conviction likely. This distinction is significant as it relates directly to the likelihood of litigation in the immediate aftermath of an environmental incident. Of course, the decisions in late 2016 in both Astex Therapeutics v Astrazeneca2and The RBS Rights Issue Litigation3, applying a narrow definition of client for the purposes of legal advice privilege, had already sharpened focus on the conduct of incident investigations. Now though clients are faced with express judgments in relation to both legal advice privilege and litigation privilege.

We understand the decision is going to be appealed. However, before any appeal is decided, all businesses should review their emergency response processes and the potential for a regulator to be able to demand those documents.

Litigation privilege

Crucially the court in ENRC found that the fact a criminal investigation is contemplated or in progress does not mean that criminal litigation is contemplated. It is only a prosecution, rather than an investigation, which would fulfil the requirement for litigation. The court did not accept that the circumstances of a whistleblower and an SFO investigation rendered litigation as a real likelihood rather than a mere possibility.4

Documents which are prepared in order that a party can obtain legal advice as to how to avoid ligation are not covered by litigation privilege, with the court emphasising the requirement for the dominant purpose to be the conduct of litigation.

ENRC had difficulty in demonstrating at which point it regarded criminal prosecution as likely. The court said it would expect to see a record of when the company regarded itself as being likely to have committed an offence. There may well be an important distinction at this point between a possible fraud and an environmental incident. Many environmental breaches will be strict liability and the impacts will be immediately obvious. It is arguable then that the point at which a company recognises that it has committed an offence is likely to be much earlier in the overall timeline of the investigation.

That said, in the present case, if ENRC had managed to prove that litigation was contemplated at the time the documents were created, then the documents which were the subject of this application would still have failed to have been protected by privilege, as the court found they had not been created for the dominant purpose of litigation. The dominant purpose of the documents created, and the investigation managed by the solicitors, was to determine if there was any truth in criminal allegations put forward by a whistleblower. The court found that dominant purpose test requires the document to have been created for the conduct of litigation, and applied a narrow interpretation of conduct.

Applying this principle to investigations of environmental incidents, it suggests that a document which is prepared for the purpose of being shown to the regulator cannot be covered by legal privilege. The challenge for a company is how to balance the desire to persuade the regulator not to prosecute, with the need to protect itself should a prosecution be brought. Frequently, presentations, submissions and documents are created to assist the regulator and protect a company's position, but the consequences of this must be carefully thought through.

Legal Advice Privilege

The court reinforced the position taken in The RBS Rights Issue Litigation, which was seen as a narrowing of legal advice privilege.

In order for an employee to be regarded as the client, and have communications covered by legal advice privilege, the employee "must be authorised to seek/obtain the legal advice that is the reason for the communication, so… they are to be regarded as standing in the shoes of the client for the purposes of obtaining the legal advice".

ENRC argued that if a lawyer is retained by a company to carry out investigations and provide legal advice, then communications with persons other than those directly instructing him are covered by legal advice privilege. This was rejected by the court as "wholly artificial", and that those employees cannot be said to be standing in the shoes of the client for the purposes of obtaining legal advice. By simply being authorised to hand over information, the employee doesn't become part of the confidential lawyer/client relationship and the information cannot be treated as a communication for the purpose of seeking or receiving legal advice.

Practical Steps

Following the three decisions in the last few months which have appeared to refine the application of privilege, it is possible that this appeal may be seen as an opportunity by the Supreme Court to clarify the application of privilege.

Regardless, companies need to be looking at revaluating their incident response processes now, to ensure they are prepared to protect themselves when an incident occurs.

The commentary raises some material considerations as to how to conduct post incident investigations.

  • In order to claim litigation privilege, any company will need to be able to demonstrate the date when it first considered prosecution to be likely. This can be difficult to pinpoint, as even when a company knows it has committed a strict liability offence, this does not mean that litigation is regarded as likely.
  • A sharp focus must be maintained on the dominant purpose of documents which are being created after litigation is considered (and evidenced) as likely.
  • If the view is taken that litigation is not reasonably likely in the immediate aftermath of an incident, any investigation report prepared by a third party will not be privileged. In these circumstances, any third party report that is considered necessary should be restricted to a factual report with no interpretation or opinion. Alternatively, subject to following the RBS precedent, clients may consider internal reports, or reports prepared by their lawyers, as a means to keep the documents within the scope of legal advice privilege.
  • Be very careful about what is recorded and in what form. When advising, lawyers will have to be careful about what they record and what they share with the client other than as part of their legal advice. Clearly, the more complicated the investigation the more difficult this becomes.
  • When taking information down from employees, having a lawyer involved in that process will not be enough to cloak the information in privilege. The note must be part of providing legal advice to attract legal advice privilege.

In the recent case where a record breaking fine was handed down to Thames Water (our article is available here), the conduct of the investigation by Thames Water was heavily criticised. The refusal of staff to answer questions and the need to check with the company was seen as sufficiently obstructive so as to constitute an aggravating factor.

In light of both Thames Water and ENRC, companies would be advised to revisit their post incident investigation plans to ensure adequate protection in case of further action from the regulator, and that staff are properly briefed as to their roles, both in cooperating with any regulatory visit and in the production of documentation.